“There, as it seemed to me from listening, Were lamentations none, but only sighs, That tremble made the everlasting air,” Alighieri wrote of the general ambiance in Limbo.
A similar mood exists in the orthopedic industry where, more than 500 years after Alighieri’s fictional descent into the Underworld, surgeons are experiencing a real-life version of Limbo Hell as they wait for the sector to heal from the most destructive recession since the Great Depression. Pricing pressures, flat procedure volumes, shrinking reimbursement rates and high-profile implant failures have teamed up with a spasmodic economy to dampen hopes for a long-term, sustainable recovery.
For a brief time (mostly near the end of 2011), the orthopedic industry had high hopes for deliverance from Limbo Land. The nation’s unemployment rate was steadily declining, government job growth accelerated and inflation-adjusted gross domestic product (GDP) expanded more than it had all year (at 3 percent). Consumer spending, the economy’s single-largest component, improved in the waning weeks of 2011, as did the U.S. equity market, which ended the year 8.4 percent over 2010 levels. Similarly, consumer spending improved 2 percent in the quarter to finish 2011 roughly 1.5 percent over pre-recession levels.
Companies contributed to the cautious optimism as well by reporting better-than-anticipated fourth-quarter earnings. Adjusted net earnings at Washington, D.C.-based Danaher Corporation jumped 26.5 percent to $577 million and sales skyrocketed 37.5 percent to $4.7 billion, according to the company’s Q4 earnings report. Core revenues increased 4 percent in the fourth quarter compared with the same period in 2011. Stryker Corp. mimicked that growth with a 36 percent increase in net earnings ($401 million) and a 47.3 percent rise in neurotechnology and spinal product sales.
Biomet Inc., meanwhile, reported a respectable 5 percent increase in large joint reconstruction sales and a 13 percent spike in sports/extremities/trauma device sales during its second fiscal quarter of 2012, ended Nov. 30.
Indeed, the orthopedic market seemed poised for recovery at the start of the year. But when the economy sputtered again during Q1, slowing both job growth and GDP and triggering a drop-off in business spending, implant manufacturers lost any remaining hopes they harbored of ending their exile in Limbo before 2013. Or later.
Consequently, orthopedic companies should probably get used to living within the first circle of the Inferno—industry statistics suggest they could be there quite a while. A survey of 76 orthopedic surgeons concluded that the market—while stable—is showing few signs of improvement. In fact, most physicians reported unchanged wait times for surgery (a measure of backlog) and only modest expectations in their next 12-month procedure growth forecasts. Higher-volume surgeons were more optimistic about the prospects for procedural volume growth over the next year: They forecast a 6 percent increase in the number of hip and knee replacements performed compared with an anticipated 0.1 percent rise in replacement procedures from low- and mid-volume physicians. Survey analysts, however, warn against using the high-volume surgeons’ forecast as a barometer of future activity, claiming most hip and knee replacements are performed by low- and mid-volume doctors. “In recent years we believe there has been a wave of patients gravitating toward ‘centers of excellence’ and this may create a steadier patient flow for higher profile/ businer practices,” states the survey from investment bank Leerink Swann. “As a result, we are inclined to focus more on low/mid-volume docs, comprising more than 50 percent of the survey population... Certainly, flattish growth is better than negative growth. Still, the low/mid-volume data may suggest that a procedure volume growth ‘inflection point’ is farther off than anticipated.”
The data also indicate an equally distant market rebound. Price declines and reimbursement rate cuts, which significantly have impacted company margins in recent years, continue to dog orthopedic manufacturers, according to the survey, released in mid-April. Forty percent of respondents
involved in implant pricing discussions reported price declines over the last six months as hospitals either more aggressively fight for cheaper joint replacement components or negotiate new vendor agreements. Based on historical data, survey authors Richard Newitter and Rick Wise (both Leerink Swann analysts) forecast a 2.2 percent decrease this year in the average selling price of hip and knee implants, though the pair expect the decline to partially be offset by a boost in new product sales.
Despite the price decline and health insurer “pushback” (as reported by 21 percent of surgeons, most of whom work in the Midwest or South), Newitter and Wise increased their 2012 growth forecast for the orthopedic sector from zero to about 2 percent. They stayed tepid, however, on major orthopedic company stocks.
“With orthopedic stocks up on average 12 percent year to date, we question whether ‘stable’ hip/knee trends will be enough to move the stocks sustainably higher from current levels,” Newitter and Wise wrote. “Still, the stable physician feedback, coupled with the generally stable-to-improving hip/knee trends from Biomet’s F3Q results does leave us feeling slightly less anxious about the 2012 hip/knee market growth outlook.”
Anti-anxiety medication also came from Stryker and Zimmer Holdings Inc., both of which reported improved hip and knee implant sales during the first quarter, ended March 31.
Kalamazoo, Mich.-based Stryker experienced a 5.2 percent increase in reconstructive product net sales, with hip implant sales climbing 3.3 percent to $312 million and artificial knees sales jumping 5.1 percent to $352 million after four consecutive quarters of losses. Executives attributed the spike in hip sales to better market penetration of the ADM X3 and MDM X3 Mobile Bearing Hip Systems, which together accounted for roughly 21 percent of the company’s U.S. hip cup procedures during the first three months of 2012, up from 17 percent at the end of 2011. Knee sales growth, on the other hand, came from the solid “traction” of its OtisMed custom cutting guide portfolio. Stryker inherited the guides during its purchase of Alameda, Calif.-based OtisMed Corporation more than two years ago but only received U.S. Food and Drug Administration (FDA) approval for the products last spring.
While the uptick in hip and knee sales is encouraging, Stryker management still is not convinced it signals the start of a rebound.
“I would say we’re cautiously optimistic, but [it’s] too soon to say that we’ve seen a meaningful improvement or even a modest improvement in volume trends right now. And partly, it’s because of the historic Q4 to Q1 seasonality anomaly that it’s just—it’s tough to know,” Katherine A. Owen, Stryker’s vice president of strategy and investor relations, told analysts during an April 17 earnings conference call. “It certainly feels very stable from a volumes perspective, and perhaps the trend arrow is pointing upward. But we’ll feel better when we see the results in the next quarter and how they play out for the year. We’re having a little bit less of a negative impact from a price-mix perspective as it relates to hips and knees, particularly on the hip side ... As it relates to our hip and knee pricing trend, during Q1, U.S. pricing remained negative in the low single-digits and was largely offset by favorable mix, particularly within our hip segment. Although the overall trend improved again this quarter, our forecasts do not assume a meaningful change in the pricing environment, and we continue to assume pricing as modestly negative and partly offset by mix.”
Zimmer executives are taking a similar wait-and-see approach to hip and knee implant sales increases. In Q1, the Warsaw, Ind.-based company reported a 2 percent rise in reconstructive product sales, with hips garnering $344 million for the firm and knees earning $471 million. Large joint sales grew most significantly in the Asia/Pacific region (7 percent on a constant currency basis) despite a biannual price decrease that took effect in Japan on April 1. While the decrease certainly impacted Zimmer’s Japanese sales, CEO David Dvorak expects it to add only a “modest headwind” to reconstructive product pricing this year. Overall, prices are forecast to be down about 200 basis points from 2011. Nevertheless, Dvorak is confident his company can overcome the pricing pressures with new product rollouts.
During the first quarter, Zimmer debuted patient specific instruments for its unicompartmental High Flex Knee, an implant designed for patients with unresolved medial or lateral compartmental arthritis. The company also intends to introduce its FDA-cleared Next Generation Knee System on a limited basis this year and aggressively market VIVACIT-E, a new Vitamin E highly crosslinked polyethylene recently approved by European regulators. “We are fully confident in our ability to offset the [pricing] pressure with positive revenue contributions from other sources,” Dvorak said during an April 26 earnings conference call.
Smith & Nephew plc may not be as fortunate. The London, United Kingdom-based implant behemoth reported a 2 percent slip in artificial hip revenue and a 1 percent slide in trauma product sales during the first quarter of 2012. To a certain extent though, the decreases were beyond the company’s control: Executives partially blamed the trauma franchise’s poor performance on an unusually mild winter, and noted the Birmingham Hip Resurfacing System—despite its strong safety record—continues to suffer from guilt by association, falling victim to the negative controversy surrounding metal-on-metal hip implants.
That culpability, however, was somewhat offset by a 6 percent increase in global knee implant sales. Revenue grew most overseas (9 percent), boosted by a strong showing in Australia and New Zealand. While Smith and Nephew executives—like their rivals—certainly are heartened by improved reconstructive product sales in the first quarter, they are not yet convinced the increases signify a turnaround in the orthopedic market.
“We see, in this [first] quarter, that there’s been an acceleration in the overall reconstructive market,” Smith & Nephew Chief Financial Officer Adrian Hennah recently told analysts. “Do we see this is as the start of a trend? We certainly do see that when you look at our results and the results of our competitors that there has been a slight increase in the rate of growth in the reconstructive market, particularly in the United States. Do we see this as the start of a material trend or a bounce back? We’re a little more cautious on that, frankly. You do see quarterly variations. As we’ve said repeatedly over many quarters, it is very hard to identify the drivers on quarter-by-quarter variation within the U.S. or within Europe. So we note that there’s been a small increase. We are not extrapolating from that ourselves.”