A Wild Ride for Orthopedics in 2011

Maria Shepherd, Data Decision Group

Last year certainly was another rocky year for all medical device companies, driven by the double whammy of a poor global economy and an uncertain U.S. healthcare environment. The

issues that emerged in 2009 and 2010continued in 2011.

Price, reimbursement and procedure volume pressures are here to stay. And, healthcare reform, an elevated regulatory involvement at the U.S. Food and Drug Administration, and a looming 2.3 percent excise tax on medical devices all tighten the noose a little more. Is there anything good to say about the prospects for our industry?

Plenty.

The Bright Lightat the End of Ortho’s Tunnel

Healthcare job growth rates continue to rise and the rate of acquisition activity in orthopedics is strong, which is an indicator of a dynamic industry seeking improved financial performance. In addition, orthopedic industry leadership continues to evaluate new strategic options for the business.

Healthcare Job Growth

Across all industries in the United States, unemployment is down from the highest point of 10.1 percent in 2009 to 8.5 percent in December last year and isexpected to continue to decline.¹ More important to the orthopedic deviceindustry is that according the U.S. Bureau of Labor Statistics, healthcare employment continues to expand, with growth in jobs in ambulatory surgical centers (ASC) up by 2.8 percent in November 2011, and in hospitals up by 1.4 percent in September.When hospitals and ASCs hire, this means procedure volumes are expected to go up.

Show Me the Money:The Acquisition Market

Orthopedic companies are sensitive to the weak economic recovery and may have limited organic growth due to layoffs and other factors. For those with the cash, a shining star is to turn to mergers and

acquisitions to achieve growth targets. A good example is Stryker Corp.

Growth in Global &Emerging Markets for Ortho

Tough times drive new strategies. Theorthopedic device industry faces a number of challenges moving forward, including a soft economy, increases in the uninsured population due to high unemployment rates, poor foreign exchange rates andinternational market pressures.

Medtronic’s CEO Omar Ishrak is responding aggressively. In a recent interview, he claimed there are about 200,000 to 300,000 people in India’s middle class who can afford many of Medtronic's existing technologies.⁴ His goal is to help build the healthcare infrastructure around those patients, which could lead to millions more. Ishrak believes the same scenario is true in China, where he indicated that the market could be larger than that in the United States by the end of the decade.

In the same article, Smith & Nephew was reported to launch a plan in July, 2011 to realign the entire company to focus growth by investing $300 million in research and development targeted toward developing products to grow sales in the Brazil, Russia, India and China (the “BRIC” countries) from $120 million to $500 million within the next five years.

Several other growth catalysts exist for the orthopedic industry in 2012. New products, aging populations, geographic expansion, the penchant for minimally-invasive techniques and emerging markets will all help as growth drivers. Persistent issues from 2008-2011 are expected to continue, but good strategy and action plans will address and mitigate them as our industry moves toward the lighter end of the tunnel.

References:

1. www.bls.gov/news.release/empsit.nr0.htm

2. www.bls.gov/iag/tgs/iag622.htm, http://www.bls.gov/iag/tgs/iag62.htm

3. www.zachs.com, Brokerage Research Digest, November 29, 2011. AccessedJan. 4, 2012.

4. www.massdevice.com/news/medtronic-ceo-emerging-markets-could-be-safer-bet-developing-products-us

Editor’s note: Readers are invited to submit market data and trend questions to Maria Shepherd. Periodically, selected questionswill be presented in this column, with answers from the author. Send your questions tomshepherd@ddecisiongroup.com.

Maria Shepherd, founder of Data Decision Group, has 20 years of leadership experience in medical device and life-sciences marketing in small startups and top-tier companies. Her firm quantitatively and qualitatively sizes opportunities, evaluates new technologies, and assesses prospective acquisitions for medtech companies. Shepherd recently was appointed to the board of the MSBiV Medtech Investment Committee. She can be reached at (617) 548-9892 and online at mshepherd@ddecisiongroup.com or www.ddecisiongroup.com.