1Q:05 Large Joint Review: Knees Remain Strong while Hips Weaken
BY JOHN CHOPACK, MAY 9, 2005
With most of the major large joint market share leaders reporting their 1Q:05 financials, we examine the strength of the market. At first glance revenue growth of hip products seems to be slowing while knee growth accelerates.
Hips
We estimate that the growth of the hip market has fallen below 10% for the first time in five quarters and now stands at 9%. Zimmer and Stryker, the #1 and #2 hip market share holders (approximately 50% of the market) reported a 3% and 6% constant currency increase, respectively. This was the two lowest hip revenue growth rates reported during the 1Q:05. Somewhat surprising to us was the strength in DePuy's hip product sales which increased by 15% on a constant currency basis which was five times the rate of growth experienced by Zimmer. DePuy currently holds the third position in the market and seems to be gaining share from the rest of the players. However, it is worth noting that DePuy had the easiest comparable with 1Q:04 when they posted a meager 6% growth in hip revenues.
Stryker stated that the slowdown of its hip product line was attributed to tougher comparisons with the same period in 2004. We believe that the recently introduced Trident ceramic-on-ceramic hip which was a significant driver of revenue growth in 2004 has fully penetrated the current Stryker accounts.
1Q:05 Large Joint Constant Currency Growth Rates
Source: Company Reports
Zimmer commented that the overall hip market declined by 1% during the 1Q:05. They stated that while there was a decline in the growth of hip revenues it wasn't as a consequence of a decline in unit demand but rather a lack of positive shift in product mix. The Company is anticipating a resurgence in the growth in hip revenues during the second half of 2005.
We believe that hip growth will continue to be driven by product mix shifts during 2005 including the introduction of new alternative bearings previously not offered by a specific manufacturer. Late this year or the beginning of next year we anticipate the FDA approval of metal-on-metal total hip resurfacing implants will kick start the slowing market. These implants will be geared toward a younger patient population which previously went untreated for approximatley 5-10 years until they were ready for a total hip arthroplasty.
Knees
The growth in knee revenues seemed to accelerate during the 1Q:05 which is surprising when compared to the lack of growth of hip revenues. We estimate that the knee market is now growing by approximately 15-16% on a year-over-year basis. DePuy, similar to the knee market, posted the best quarter with growth of 20% during the 1Q:05. We believe that DePuy continues to benefit from being the only FDA approved mobile-bearing knee on the market. The Company has been promoting its mobile-bearing knees via a national television advertising campaign which we suspect is helping to drive revenue growth.
Smith & Nephew posted a 17% increase in knee revenues during the 1Q:05. The clear driver of knee revenues continues to be further penetration of its Oxinium femoral total and unicompartmental knee components.
Zimmer's 17% growth in knee revenues was driven by an 89% increase in NexGen LPS Flex Knee sales which continues to be the product of choice for both the MIS Mini and Quad Sparing procedures. We believe that future growth will come from a product mix shift to highly cross-linked polyethylene cruciate retaining and posterior stabilized tibial inserts.
Although DePuy has been able to monopolize the mobile bearing knee market for approximately 25 years, we anticipate that several players could be in the market in the next year or two depending on the timing of the potential downclassification by the FDA of the device. The panel recommended a downclassification but the FDA is calling for more data to be presented. Even without a downclassification several manufacturers are conducting clinical trials which should provide approvals in the next two years. We believe the potential downclassification, or FDA approval, will accelerate growth for the entire market except for DePuy.
