In our 2022 installment of THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT®, we identified several trends that are shaping the future of orthopedics. Below we look a little deeper into five developments: staffing shortages, a volatile supply environment, the robustness of enabling technology sales, fast-growing mid-tier companies and the shift of procedures out of hospital inpatient settings.
Staffing Shortages Go Beyond Nursing
The hospital staffing shortage is the biggest wildcard in orthopedics right now, according to CONMED CEO Curt Hartman. The pandemic supercharged the existing trend of registered nurses leaving the workforce in the United States. Per 2018 data from the U.S. Department of Health and Human Services, the average age of an RN was 50 years old. Many opted for early retirement or simply left the field during the pandemic.
Beyond healthcare, tight labor markets and absenteeism from COVID continue to impact orthopedic companies of all sizes. Smith+Nephew’s staffing woes at its Memphis manufacturing hub added to its pile of 2021 challenges. Conformis recently struggled with suboptimal manufacturing levels due to high turnover and absenteeism. Stryker reported delayed Mako sales because of staffing shortages among construction and installation workers.
While the overall labor market may settle soon, the nursing shortage could persist into the next decade. Even before the pandemic, the nursing workforce’s growth could not match the demand of America’s skyrocketing 65-and-older demographic. Due to educators leaving the workforce and other resource constraints, nursing schools turned down more than 80,000 qualified applications in 2020.
A Highly Volatile Supply Environment
Global supply chains have undergone an unprecedented stress test throughout the pandemic. Overall, suppliers and orthopedic device companies have partnered closely to manage the disruption. The price and availability of raw materials like titanium, silicone and resin remain challenging. The early-year COVID surge in China and Russia’s war on Ukraine exacerbated problems.
Stryker CFO Glenn Boehnlein thinks some high costs could be permanent. He said, “Freight is another place where we’re seeing real increases. A lot of that is the tight supply chain and the tightness of our ability to deliver products to our customers. We’re seeing a lot of overnight deliveries. We’re seeing a lot more air freight when normally we would use a more economical mode for freight. For the longer term, these labor and transportation costs are probably a little more permanent.”
Some smaller companies like OrthoPediatrics, SeaSpine and Paragon 28 have reported minimal disruption. In general, however, orthopedic players are expecting supply chain volatility to persist into at least 2023. One supply-side executive we spoke to said a recession would likely be necessary to reset the market.
Enabling Technologies Remain in High Demand
Enabling technologies, particularly robotics, defied expectations in 2020 by surging to record sales. Revenue from the capital sales, disposables and service contracts helped some of the largest orthopedic players mitigate implant volume losses. Mid-tier players like SeaSpine and ATEC forged ahead with acquisitions to secure enabling technologies despite the pandemic.
The category continued its robust sales in 2021 as more companies leaned into the modernization of orthopedics through technology. These companies are recalibrating their strategies for the future. Zimmer Biomet CEO Bryan Hanson said, “We’re also very focused on driving change for ZB, a real evolution of the company from a metal and plastic provider of implants to a leading med-tech innovator. I can tell you more than 70% of our product development dollars are being spent on our ecosystem of connected technologies. I believe that the technology advancements potentially can reshape the growth curve of these markets.”
These technologies have yet to establish their clinical benefits but remain in high demand in hospitals and other surgical settings. They also have appeal to an increasingly sophisticated patient population. Enabling technology sales took a step back in the first quarter of 2022, but we expect the entire year to bring more growth.
Mid-Tier Companies Taking Share from Largest Players
Some of the fastest-growing players in orthopedics are public mid-tier companies in the $100 million to $300 million annual revenue range. Many of them operate in the spine or foot and ankle markets. Treace Medical Concepts, ATEC, Paragon 28, OrthoPediatrics and Vericel all had double-digit CAGR over the last four years through organic growth, primarily.
ATEC’s astonishing transformation spurred revenue growth from $92 million to $243 million from 2018 to 2021, a CAGR of nearly 30%. The company instituted operational and cultural changes while reigniting its innovation engine. But ATEC’s meteoric rise couldn’t happen without missteps from some of the largest diversified players. For instance, DePuy Synthes’ Spine and Other segment retracted by $375 million between 2018 and 2021, a CAGR of -3%.
Treace Medical Concepts is a sub-$100 million company that plays exclusively in the foot and ankle market that is drawing more attention from the largest players. CEO John Treace remains confident in his company’s head start. He said, “We’ve been competing alongside these products for years now. Stryker has a system. J&J acquired the CrossRoads system. We haven’t seen a real change in the competitive dynamics. We continue to run our offense and build our business. Nothing is getting in the way of us achieving the growth rates committed to at this point.”
Largest Companies are Investing Heavily in ASCs
The pandemic accelerated the shift of some orthopedic procedures out of the hospital. The Centers for Medicare and Medicaid Services loosened inpatient-only restrictions recently for profitable elective orthopedic procedures in joint replacement and spine. Payors, meanwhile, are expanding the use of medical necessity reviews to shift cases to ambulatory sites. According to research firm Sg2, orthopedic outpatient procedures will grow more than +30% from 2019 to 2029. During that same time, orthopedic inpatient procedures will decline by -20%.
Companies like Stryker, Zimmer Biomet, Smith+Nephew and Enovis prioritize capturing ASC procedures. We estimate the average ASC penetration for the joint replacement market at about 10%, up from the low single digits just a few years ago. Enovis does about 20% of its cases in the ASC and cited the setting as a key share driver.
However, there are still challenges to overcome before ASCs and similar settings reach their full potential. We believe that capacity is still a headwind, as are space and staffing constraints. Enovis President and COO Brady Shirley called the effective management of inventory in multiple care sites per surgeon a “devastating challenge.”
The orthopedic market is navigating a time of significant change. It has steadily adapted to the new market realities and societal shifts in the wake of the pandemic while also managing the acceleration of underlying trends like the nursing shortage and ASC shift. Orthopedic stakeholders have a golden opportunity to modernize the industry as it prepares for a likely future with fewer resources and more patients.