Source: Wright Medical Group, Inc.
Extreme in Extremities
Wright Medical Group, Inc. is one of the oldest suppliers of extremity implants and holds the #1 market share position in the hand and finger market. But in the last two years, Wright’s rate of extremity product sales growth has accelerated and, based on its latest product innovations, it appears as though that growth rate will continue.
Looking at the most recent quarterly results (3Q07 released this past November), Wright reported that its sales of extremity implants outperformed company sales in large joints by a significant margin. It’s enough to ask the question: Are extremity implants Wright’s core business? Actually, the answer is “no.”
Wright Medical’s primary market focus is hip and knee products, the sales of which account for 60% to 65% of Wright’s annual revenues. The company’s biologics business is also a greater revenue contributor than extremities and brings in almost 20% of the company’s annual sales. So, at Wright, the increasingly high-profile extremities business is really its third-largest revenue contributor. For 2007, we estimate, extremities will account for almost 15.6% of overall sales at Wright.
But when it comes to growth, Wright’s extremity business is #1. Sales of extremity implants have grown smartly every quarter since 1Q03 and for 2007, we estimate, extremity revenues will increase 33% on a year-over-year basis. In the 3Q07 numbers that were released in November, Wright’s management reported that global extremity sales increased by 45% (year-over-year growth). What is most interesting about this is that, while domestic sales rose by a very respectable 37%, international sales jumped a whopping 83%.
Since 2003, sales of extremity products at Wright have grown 88% to almost $60 million, we estimate, for 2007. In the following table we demonstrate how important extremity implant sales have become for Wright Medical and what, we expect, those sales will look like in 2007, 2008 and 2009.
Table 1 - Wright Medical Group, Inc. Revenue Model ($ in Millions)
Source: Wright Medical Group, Inc.
What is the secret to Wright Medical’s success in the extremity market? Certainly a key factor was the 2007 acquisitions of R&R Medical (we estimate R&R represents between $4 million and $6 million in annual sales) and Darco International, Inc. ($6 million annual sales for 2006), and the late 2007 acquisition of Metasurg, a Houston-based company that manufactures foot and ankle products (which we estimate represents $1 million to $2 million in annual sales). Combined, those recent acquisitions, while not expected to have an impact this year (2007), should contribute 18% to 24% growth in the company’s extremities market. But beyond acquisitions, Wright’s success boils down to basic product innovation and salesmanship. Here is a list of Wright’s bread and butter extremity products.
Shoulder
Upper Extremity Implants
Foot and Ankle Fixation
Advanced Membrane Technology
Elbow
Probably the one product that has been getting the most press is Wright’s highly innovative CHARLOTTE line of foot and ankle fixation products. In addition, Wright’s CAROLINA Jones System, CLAW Plate and the COMPRESSION STAPLE have been getting rave reviews and are contributing very well to Wright’s growing extremities sales. The EVOLVE Modular Radial Head System and the MICRONAIL System are also more than carrying their load. In combination, this product line is the reason Wright’s extremity business is gaining share—both in terms of the company’s overall sales and in terms of the broader extremity marketplace.
Interestingly enough, the extremities market overall is actually LARGER than spine or large joints, at least as measured in terms of patients and procedures. Extremities still lags those other, better-known markets in terms of revenues—for now. Going to the PearlDiver database we find that the extremities market accounts for 41% of the total orthopedic market as defined by procedures to treat hips, knees, spine, and extremities problems. Following extremities, spine makes up 37%, and hips and knees accumulate 22% of the orthopedic patients that reside in our database.
The PearlDiver database uncovers some of the most important growth markets in the extremities area. Below we list the top diagnoses in each area of extremities. Also note how high the patient counts are for each diagnosis—extremities ARE the largest orthopedic sector! Treating extremities pain and other issues is a very conservative marketplace. Still, considering how large this market is, we think there are excellent opportunities for innovation and, aside from Wright Medical’s offerings, products that have caught our attention include MEDISPEC Ltd’s extracorporeal shockwave therapy for foot problems and the Autocuff system introduced by ArthroCare Corp. for shoulder injuries. The following list illustrates the top diagnoses for each extremity and their distinct patient counts for the years 2004 through 2006, according to our PearlDiver database.
Shoulder – Pain in joint involving shoulder region (ICD-9-D-719.41) accumulated just over 949,000 distinct patients.
Elbow – Lateral epicondylitis elbow region (ICD-9-D-726.32) accounted for almost 219,000 distinct patients.
Wrist – Carpal tunnel syndrome (ICD-9-D-354.0) accumulated over 358,000 patients.
Hand – Open wound of fingers without complication (ICD-9-D-883.0) accounted for almost 243,000 distinct patients.
Foot – Plantar fascial fibromatosis (ICD-9-D-728.71) accumulated just over 519,000 distinct patients.
Looking beyond Wright Medical Group’s growth, we note that ArthroCare Corporation is making a strong product pitch in the shoulder categories and is reporting a strong sales performance. We also note that Zimmer Holdings, Inc. and DePuy (Johnson & Johnson) have put up strong product offerings in the shoulder arena, posting impressive 34% and 51% YOY growth for 2007, respectively.
The following table shows our PearlDiver revenue model for the other public extremity product manufacturers that have made a serious effort in the extremities market these last five years. All the companies in the following table have shown excellent annual sales growth.
Table 2 – Revenue Model of the Market (In Millions)
Source: Companies’ SEC Filings and PearlDiver Estimates
Private firms like Tornier, Inc., Ascension Orthopedics, Inc., INBONE Technologies, Inc. and others are clearly performing very well and, collectively, represent 10% to 15% of the overall market. Not surprisingly, the extremities market has proven to be a fertile arena for M&A activity.
Here again, Wright Medical has been a leader. In April 2007, Wright bought Darco International, Inc.'s reconstructive foot surgery line of business for approximately $17 million in cash. Later in the same month, Wright acquired Pennsylvania-based R&R Medical Inc., which provides external fixation devices to the foot and ankle and trauma markets, for an initial cash payment of $8 million. Then, in October 2007, the company added foot and ankle surgery products from Houston-based Metasurg for an initial cash payment of $2.5 million. No doubt, these three acquisitions have given Wright a big boost and are key aspects in this year’s expectations for strong revenue performance.
We expect that sales growth rates for extremity implants will continue to outpace large joints and, particularly for Wright Medical, will lead manufacturers into international markets. For 2008 we are forecasting that Wright’s extremity sales will increase 28% to almost $77 million. For 2009, we are forecasting that extremity implant sales will rise another 13% to $86.4 million. M&A activity, we expect, will continue to drive consolidation in this market and, increasingly, we think large joint manufacturers will look to the extremity product category as a winning strategy to increase the overall performance of their broader product portfolios.
For more information about extremity markets, please refer to the PearlDiver Extremities Data Book, Diagnoses & Surgical Procedure Volumes and Charges: Extremities Outpatient and Inpatient, U.S., 2004 – 2006 available at www.ryortho.com/bookstore.htm.