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Has the Total Hip Market Slowed? What are the Drivers Looking Ahead? BY JOHN CHOPACK, JUNE 1, 2006

There has been a significant amount of discussion by Wall Street analysts regarding a slowdown in the total hip arthroplasty market. While we agree that there has been a slowdown, we believe it is more moderate than the rest of industry experts and believe an increase in right around the corner.

Many industry analysts focus on reported revenue growth rates which in our opinion is a poor analytical technique, misleading and inaccurate. The correct technique is to base investment decisions and market trends on constant currency growth rates which eliminate all effects of foreign currency translation. Currency is a macroeconomic factor which masks true market growth rates.

As the table below shows, constant currency growth rates have not fallen as drastically as some analysts have depicted. In fact, the 1Q:06 hip growth rate of 7% was in-line with the 4Q:05 growth rate of 6.7% and 3% below the 1Q:05 growth rate of 10.2%. Some analysts have stated that the reconstructive hip market is growing at approximately 3%. We believe this in inaccurate and being masked by currency effects.

Total Hip Arthroplasty Constant Currency Growth Rates

Additionally, we are more optimistic than most analysts that the hip reconstructive market will experience an up-tick in revenue growth in the near future. Since the introduction of ceramic-on-ceramic hips in 2002, the hip market has not had any significant technology introductions.

This changed in May 2006 when Smith & Nephew received FDA approval for its total resurfacing device called the Birmingham Resurfacing Hip System. The device is the first total hip resurfacing to gain approval. Previously surgeons could only use hemi resurfacing devices which only replaced the femoral head and left the acetabulum untreated. The device will first target patients suffering from avascular necrosis (a condition which causes the femoral head to die) but we suspect that the product will quickly gain interest by surgeons looking for a less invasive surgical treatment than a total hip arthroplasty for younger arthritic patients.

Wright Medical's Conserve Plus and Corin's Cormet on the coattails of the Birmingham and are expected to gain FDA approval in the near-future. We feel that these approvals will likely drive future revenue growth within the reconstructive hip market.