Medical Device Link.

Market Outlook

The worldwide orthopedic device industry has been growing consistently during the past 20 years or so, in concert with growth in overall healthcare expenditures. Historically, it has been recessionproof with positive year-over-year price growth, even during periods of economic decline.

This is not to say that the industry will emerge unscathed from the next year or so, because the depth of the current recession is plainly much greater than those since World War II. However, the drivers of past growth appear undiminished.

The industry’s growth has been sustained by technological innovation and increasing specialization among surgeons. Such innovation has stimulated unit sales increases of hip, knee, and spinal implants, and more recently, treatments for the smaller bones and joints in the extremities. In addition, prices and reimbursement levels for these devices have also defied gravity, registering increases in the 5–10% range during the past three recessions with a cumulative growth of more than 150% since 1990 (see Figure 1).

How will the current recession affect this pattern of growth? There will be some fallout in the areas of innovation and integration of new technologies, funded with venture capital, that have helped to transform the industry. However, demand for clinically proven surgical implants and other treatments for musculoskeletal disease and trauma is likely to accelerate rather than slow (see Figure 2).

Simply put, the aging population and the growing insistence to preserve the physical form and functionality is irresistible. People want to work and play longer, but the human body is not built to last as long as people are now living. As a result, virtually everyone who lives into old age will suffer some form of orthopedic injury or disease such as arthritis.

For example, the Centers for Disease Control and Prevention is monitoring the total economic impact of arthritis, estimating its cost at $128 billion annually in 2003. Another disease that is already epidemic is diabetes. When left untreated, the condition results in more than 75,000 lower-limb amputations a year. The technology already exists not only to prevent the need for such radical surgery but also to restore limb functionality and better quality of life for those patients.

The twin threats of constant growth and the global spread of arthritis and diabetes are unlikely to abate, because they share an intrinsic link to economic advances. This is particularly true in the world’s most populous nations—China and India. As people live longer and consume more calories, they are more likely to be affected by these conditions.

This trend is also illustrated by the increasing share of sales by major orthopedic device manufacturers outside the United States. In 2008, the hips and knees sector saw revenue growth of more than 17% outside the United States. According to figures published by the major implant manufacturers, this was more than double the amount of growth within the United States.

The Future Outlook

Having said so much about how bright things look in orthopedic devices, it would be remiss not to mention that stock valuations of the major manufacturers have suffered out of proportion. Depending on which index is read, Viscogliosi Bros estimated that the median drop in orthopedics stocks was around 33% in 2008, making them seem incredibly cheap. Here, cheap is a measure of a stock’s historical price/earnings ratio, and in this case, the poor performance of orthopedic stocks in comparison with past recessions.

However, the firm’s constant monitor of the levels and types of procedures being performed at major orthopedics centers in hospitals and specialty practices showed that nearly all centers achieved record levels of surgeries this past year. For example, one of the top five orthopedic specialty practices in the United States reported record high revenues and earnings in 2008, based on more than 17,000 surgeries. Approximately 13,000 of those were elective surgeries. During October 2008, which was disastrous for most industries, this particular practice had its largest revenue month ever.

The majority of procedures nationwide have been elective surgeries. Perhaps surprisingly, those have remained much more constant in unit-growth terms than nonelective trauma procedures.

Statistically, nonelective procedures have trended lower during economic downturns. The reason is possibly due to reductions in activities such as skiing (which tend to be risky), or fewer road accidents, because people are staying home more often.

The outlook for healthcare revenues generally remains firm despite the compelling need to rein in the rate of growth. This need refers to the continuing growth of healthcare expenses in the United States, measured by the percent of gross national product spent on healthcare versus the underlying cost inflation level. The outlook for orthopedic devices continues to be encouraging because of unabated demand. However, prices are likely to soften as the publicly financed portion of healthcare such as Medicare and Medicaid continues to outpace the private sector.

Tectonic Shift

Related to the underlying trends in financing and innovation, there are structural changes in the industry. Orthopedics manufacturing is beginning to undergo a tectonic shift in structure and complexion. Overall revenues are forecast by the major, publicly traded corporations to grow worldwide by 7–9%, largely through continuing hip, knee, and spine expansion. This sector represents more than 80% of the market and has been yielding profit margins in the $8000–$10,000 range per unit sold.

However, price increases are expected to slow considerably, perhaps down to a range of 1–2%, while reimbursement will stay even or slightly higher. Midsize companies with established products or those with dominant shares in niche markets are hoping to maintain up to 20% in global growth rates. Some of the smaller players could do even better. However, underneath those headlines, the current economic climate is beginning to ravage many of the hundreds of companies with premarket or clinically immature technologies.

For example, by the author’s estimates, there are at least 200 companies offering some form of spine treatment. These firms remain dependent on the availability of private investment capital to survive and navigate the increasingly high cost of securing FDA clearance. They are also tasked with persuading payers to reimburse the use of their products.

Right now, venture capital firms, as well as entities such as sovereign wealth funds, have less cash available and face the prospect of dwindling sources of supply. That translates to a drive for deeper due diligence, shorter profit horizons, and a reduced appetite for risk.

For most, this means turning attention to existing investments and putting pressure on client companies to accelerate development or find a buyer at currently depressed valuations. The buyer is likely to be one of the major, cash-rich device companies. For example, according to Global Markets Direct’s medical equipment deals database, there were 42 mergers and acquisitions signed in the orthopedics devices market. Joint reconstruction, spine, and orthobiologics companies accounted for 70% of the deal volume. In the past two years, the French orthopedic company Tornier acquired Nexa Orthopedics, BioProfile, DVO Extremity Solutions, and Axya Medical to significantly expand its products in the extremities (small bone and joint) market.

If the past is a prelude, orthopedics could experience a substantial or even precipitous fall in innovation as the industry becomes increasingly risk averse. Given the five- to seven-year premarket development time it generally takes to launch a new product, this suggests a lengthy stretch of inactivity. This is not good news for patients.

As an example of the time-to-market lag, the Scandinavian Total Ankle Replacement (S.T.A.R.) prosthesis has been used clinically since 1990 and has been implanted in more than 14,500 patients worldwide. Its U.S. investigational device exemption clinical trials were initiated in 2000, yet nearly a decade later, the product still isn’t available to patients in this country.

The landscape is not completely barren, of course. Patients are benefiting, or will soon benefit, from a series of innovations that have come through the approval process and will fill unmet needs. These products include hip and knee implants designed for gender-specific anatomies, biodegradable implants that support healing in smaller joints, and the above-mentioned total ankle replacement.

Despite the issues illustrated by S.T.A.R., this does indicate a path that others may follow in pursuing the introduction of truly innovative and potentially life-changing technologies in the United States. The costs and years that it takes to obtain FDA approval for a new device is considered worthwhile, because if a company is first to market in the United States, it can have several years of exclusivity before a competitor comes along.

Smaller Options

Until quite recently, there were comparatively few treatment options for repairing or replacing diseased bones and joints. Because of the trend toward specialization among orthopedic surgeons and the corresponding growth in both resources and technological development, patients are benefiting from a wider spectrum of treatment options.

In virtually all anatomies affected by arthritis, orthopedic surgeons can choose a course of treatment using an algorithm that matches the degree of severity with the appropriate treatment. In the past, the surgeon may have had only one or two choices—conservative or radical. A surgeon may now have a choice of half a dozen or more implants, biomaterials, or fixation devices.

The growth of diabetes in the United States has led to more than 70,000 lower limb amputations. Exterior fixation technologies (above) are helping foot and ankle surgeons salvage affected limbs.

This variety is especially prevalent in the small bone and joint market. Although it represents a fraction of the $38 billion orthopedic device market, it is the fastest growing sector at a gain of 15% in estimated revenues during 2008 versus 2007, according to analyst estimates.

During 2009, there will be about 60 million visits to the doctor or surgeon by Americans with complaints relating to their small bones and joints. Those can be defined as being located from the tips of the finger to the shoulder, and from below the knee to the toes.

Conclusion

The outlook for orthopedic devices will continue to be encouraging despite the current economic slowdown. Partially because our affluent society is going global, well-established procedures in hip, knee, and spine will be joined by newer products to fix upper and lower limb problems. Everyone wants to live longer, stay active, and remain pain free.

Full disclosure: Viscogliosi Bros has a significant interest in the S.T.A.R. prosthesis through its investment in Small Bone Innovations Inc. (New York City).

Anthony G. Viscogliosi is a principal at Viscogliosi Bros LLC (New York City).