Extremity Product Market: Growing Strong

Hold on to those fingers and toes! Despite the economic slowdown, you’ll still need two hands and maybe one foot to count the double-digit growth rate in the extremities repair and device market. With a 15% to 20% annual product sales growth prior to the fourth quarter of 2008 (4Q08), even the current economic storm couldn’t stop a sustained double-digit growth percentage throughout the first half of 2009. This market has apparently found a break in the clouds and a ray of sun to keep it growing strong.

Extremities device sales have been rising steeply over the past decade (the market grew by more than 110% between 2005 and 2008), and we expect total sales to surpass the $1 billion mark this year. A low volume of hip and knee device sales negatively impacted the total reconstructive market, but shoulder, foot and ankle implant sales, as the fastest growing sectors in orthopedics besides spinal implants, provided stability for the market.

Extremity product sales for 2Q09 totaled $241 million worldwide and grew at the rate of 11.6% year-over-year (YOY). Winners this quarter were Biomet, Inc., Wright Medical, Inc. and Exactech, Inc., three companies that posted strong double-digit growth for the quarter. Zimmer Holdings, Inc. also rebounded after two quarters of low sales. 

The following table shows the major extremity companies with their 2Q09 earnings and future estimates through 2012.

Table 1: Worldwide Extremity Product Earnings (in millions) by Company (2009-2012E)

Source: SEC filings, PearlDiver estimates and press releases. ArthroCare has not reported sales since 1Q08. Stryker sales represent just their shoulder sales. Ascension and Tornier represent estimates.

Manufacturers blame a decline in the number of procedures performed as the primary reason for the lower growth rates in 2009 as compared to 2008. Company officials reported flat pricing and believed it had no significant impact on sales. Innovative new technologies such as the second-generation reverse shoulder arthroplasty and the continued success of the total ankle replacement devices contributed to the growth of the extremity product market. Domestic growth in particular sustained the market while international growth was minimal due to fluctuations in foreign exchange rates. Chart 1 illustrates the growth rate for each company’s extremity sales for the first two quarters of 2009 and estimates for the third and fourth quarter of the year.

Chart 1: Extremity Companies Growth Rate (1Q09 – 4Q09E)

DePuy continues to hold the number 1 spot as the worldwide extremity product market leader for 2Q09. Tornier, Inc., a privately held company now based in Minnesota, is number 2, followed by Zimmer and Wright Medical as numbers 3 and 4, respectively. Biomet holds the number 5 spot for the quarter with 9.5% market share worldwide. Chart 2 illustrates the market share by company for 2Q09.

Chart 2: 2Q09 Extremity Product Market Share

Biomet, Inc.

Privately held Biomet, which reports it’s earning every quarter, had a highly successful quarter. In their second quarter of 2009, total extremity product sales were $22.9 million, an 18% YOY worldwide growth rate, compared to 2Q08. Extremity sales were led by 28% growth in the domestic market. After 2Q09, Biomet now holds a 9.5% market share, an increase from 7.8% from 1Q09.

Biomet, which rolled out its second-generation reverse shoulder prosthesis device in May 2009, expects this product to have an impact on third quarter earnings. The products that led to its high growth rate this quarter were the Copeland Humeral Resurfacing Head, the Comprehensive Primary Shoulder Device and the Total Evolutive Shoulder System.

Biomet has gained a strong position in the upper extremity product market, and we expect it to have high double-digit growth in the third quarter. We estimate that Biomet will report 15.4% YOY growth from sales of $20.2 million. The reverse shoulder device is gathering strong reviews and will be a key contributor to high growth.

Wright Medical Technologies, Inc.

Although upper extremity products represent between 70% to 75% of the total extremity product market, Wright Medical instead targets the lower extremities and has aggressively risen to the place of top selling manufacturer in the lower extremity division. However, the company has not written off upper extremity products completely; Wright Medical also has a shoulder system (Olympia) in the market. The company’s extremity division represents 21.6% of its net sales worldwide, an increase from 2Q08 of 18.5%.

For 2Q09, Wright Medical reported a growth of 17%, taking in $25.6 million in extremity product sales. While that growth is lower than the company’s last six or seven quarters, it is still phenomenal for the lower extremity region, making Wright Medical the number 1 lower extremity manufacturer ahead of DePuy and Tornier.

Wright Medical drove its domestic sales up by 24% with the help of products like INBONE, CHARLOTTE Foot and Ankle system, DARCO plating systems, and the RAYHACK Osteotomy System acquired in September 2008. International sales decreased by 8% from 2Q08 which brought down the overall sales increase. Wright Medical’s extremity sales now represent 10.6% of the total extremity product market worldwide up from 9.8% at the end of 2008. Taking into account the slight decline in growth over the last two quarters, we estimate the 3Q09 will bring Wright Medical total sales of $25.4 million with a growth rate of around 17% annually.

Exactech, Inc.

Exactech’ shoulder division has experienced a great run over the past two years. Even though this quarter saw a slight decline, the growth was still exceptional. For 2Q09 Exactech reported a growth of 31% in its shoulder division. This represented a drop as the company had been reporting a higher than 50% growth rate each quarter for the past two years. According to management, the reason for the decline was a slow start at the beginning of the quarter. Sales picked up as the quarter progressed reaching $5.1 million.

For the first half of 2009, sales of Exactech’s extremity products were up by 42% to $10.9 million compared to $7.6 million for the same period in 2008. This was due to the continued success of the Equinoxe Shoulder system. We estimate that the shoulder division will grow in the neighborhood of 35%, bringing in $5.7 million in sales. Extremity product sales for 2Q09 represent 11.7% of Exactech’s total sales compared to 9% of the total sales for 2Q08.

Exactech now holds 2.1% of the total extremity market share worldwide, which is an increase from 1.8% in 2Q08. Its new products such as the Fracture Plate and Fracture Platform, which are being launched late in the third quarter, will likely boost sales in 2009 and 2010. We estimate that Exactech will close its sales for 2009 at $23.4 million with a 40% annual growth.

DePuy Orthopaedics, Inc.

For 2Q09, Johnson & Johnson’s DePuy, the leading extremity product company worldwide, reported close to 10% YOY growth, down from the prior period of 12.2% growth. This was slightly higher than our prior forecast of 7.5% due to the company’s strong growth ($50.4 million) in shoulder product shipments. Domestic extremity product sales represented the majority of sales for the second quarter.

DePuy’ share of the extremity product market for 2Q09 is, we estimate, now 20.9%, slightly down from 21.3% in 2Q08. The shoulder market, which represents close to 80% of DePuy’s total sales, is the driving force behind the company’s growth. However, DePuy’s loss in market share is due in part to the stiff competition from Wright Medical and Tornier in the foot and ankle division. For 3Q09 we estimate DePuy’s extremity sales will continue to grow at a low double-digit rate of 10.2% buoyed by a strong shoulder device market. For the year 2009 we estimate a solid 10% growth with annual total sales of $234.4 million.

DePuy still reigns as the shoulder division leader with more than $200 million in extremity product sales annually, but it’s not easy to stay king of the mountain forever. Wright Medical is giving DePuy strong competition within the lower extremity division while Biomet and Tornier are doing the same in the shoulder market.

Zimmer Holdings, Inc.

After two dismal previous quarters, Zimmer bounced back to life in 2Q09. Extremity product sales grew by almost 9% resulting in total sales of $33.5 million. The fourth quarter of 2008 and the first quarter of 2009 experienced only 3% and 4% YOY growth, respectively. The company’s extremity product sales now represent 3.3% of its total sales which is an increase from 2.9% in 2Q08.

Zimmer’s domestic sales for the quarter represented 76.6% of its total extremity product sales with a growth of 19% YOY. The Bigliani/Flatow Shoulder Solution and the Zimmer Trabecular Metal Reverse Shoulder System led its extremity product sales in the U.S. while international growth suffered a decline due to changes in foreign exchange rates. Europe, which represents 17.8 % of Zimmer’s extremity product sales, reported a 19% decline from the second quarter of the prior year. Asia-Pacific, which represents 5.6% of Zimmer’s total extremity product market, reported a 7% decline as compared to 2Q08.

Extremity products were the second best performing market for Zimmer behind spine products, which represented an 18% annual growth due to the acquisition of Abbott Spine in 4Q08. For 3Q09 we estimate that Zimmer will retain consistent growth as it did in this quarter at 8% YOY, bringing in $30.3 million in extremity product sales.

Other Extremity Companies

Tornier, the second largest extremity product manufacturer, was estimated to have $141 million in extremity sales for the year 2008. We estimate that Tornier will report around $156 million in total extremity sales for 2009, a consistent 11% annual growth rate and continued stiff competition for DePuy. Tornier’s lead products are the Aequalis Shoulder System and the NexFix MTP Fusion System.

Integra LifeSciences Holding Corporation is another good performer in the extremity product market posting double-digit growth, according to management. We estimate that Integra LifeSciences annual extremity product sales for 2009 will be in the range of $70 million to $75 million. Stryker Corporation, which does not play a significant role in extremity, reported an estimated 4% decline in its quarterly shoulder division sales. Small Bone Innovation, Inc. (SBi), Arthrex Inc., Orthofix International N.V. and Acumed LLC are other established extremity companies that represent an estimated 10% to 12% of the total extremity market.

We expect third quarter to be consistent with the first and second quarter earnings. Extremity product manufacturers still make up a small, growing market compared to the hip, knee and spine product markets. Joint replacement and reconstruction procedures for extremities are still increasing due to a low base, and prices remain steady compared to other orthopedic markets where procedure volumes are dropping and prices have had a negative impact. There is still demand for more procedures and devices, and with innovative products being introduced every quarter, the extremity product market has fertile soil and plenty of room in which to grow.

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