2006 Orthopedic Industry Forecast - Strong Growth to Continue
BY EDITOR, MARCH 21, 2006
Our current forecast for the orthopedic industry projects continued long term growth of 15%. For 2006, we expect growth to be slightly below this trend, at 12%. Despite continued strength in other segments of the industry, hip and knee reconstruction is still the largest segment, and due to well known pricing issues, we expect growth in large joint reconstruction to range between 7%-8% in 2006. We predict pricing will be flat for the year in this segment.
Although pricing will not be as large of a contributor to revenue growth, in the next 5 years baby boomers will start to approach their 60's. As this group reaches the typical age for a large joint reconstruction, hip and knee volume is expected to accelerate. In addition, the combination of a loss of bone mass, strength and balance that will begin to afflict this cohort will keep growth high in fixation, fracture repair and related areas of orthopedics.
Fear of declining implant prices, especially in the hip and knee sector, has driven valuations down in the orthopedic sector. In late 2005 and early 2006, the pessimism abated as feedback surrounding gainsharing and volume pricing indicated that neither would have the effect the industry had anticipated.
Our recent analysis of orthopedic M&A activity between 1997 and 2005 provided some interesting results. First, the number of orthopedic transactions has significantly increased during 2004 and 2005. Between 1997 and 2003 there were approximately 7 acquisitions per year. This increased to 25 transactions in 2004 and 16 significant acquisitions in 2005. Secondly, there is a negative correlation (r2 = 0.32) between implant price increases and acquisitions the following year. For example, in 1998 there were 6 acquisitions for an aggregate transaction value of $9.23 billion which followed a year in which pricing declined by 3%. In contrast, in 2000 implant prices increased by 13% and the following year's M&A activity totaled just $20 million.
Year to date, we have already witnessed five acquisitions within orthopedics: Stryker bought PlasmaSol, Kyphon acquired InnoSpine, J&J purchased Hand Innovations, Ossur bought Innovative Sports, and dj Orthopedics acquired Aircast. We believe that with a year of lower pricing and revenue growth in front of us, consolidation within the orthopedic industry could increase. We believe that the number and size of the orthopedic transactions could increase at least through 2006 as orthopedic companies attempt to offset slowing revenue growth and as diversified medical devices companies seek to enter the orthopedic market.
