COVID-Proof Orthopedic Trends That Will Shape the Market in 2021

The increasing adoption of enabling technology, company consolidation through M&A and accelerating growth of outpatient centers are COVID-proof orthopedic trends that will shape the market in 2021 and beyond. While the pandemic may certainly slow these trends in the short term, we see them as market fundamentals that will withstand disruption and play a crucial role in shaping the market during the recovery.

Orthopedic Players Prioritize Enabling Technology

In November 2019, Brian Kearns, Globus Medical’s Senior Vice President of Business Development and Investor Relations, made an interesting prediction. He said, “Within ten years, most orthopedic surgeries will employ robotics of some kind.” That seemed like an optimistic assessment at the time, given the current penetration of robotics in orthopedics. However, commentary from the top orthopedic companies since then has made one thing clear: the wait-and-see period for embracing enabling technology is over.

It is worth remembering that utilization rates for enabling technology are low despite the amount of coverage and hype surrounding it. Some companies and surgeons are still not convinced that robotics offers significant clinical benefits. However, utilization rates are undeniably increasing, and the top device companies in the market are focusing more effort than ever to develop these technologies.

Seven of the ten largest orthopedic companies have invested heavily in robotics:

• DePuy Synthes (Orthotaxy)
• Stryker (Mako)
• Zimmer Biomet (ROSA)
• Smith+Nephew (Navio/Brainlab)
• Medtronic (Mazor)
• NuVasive (Pulse robotics)
• Globus Medical (ExcelsiusGPS)

These seven companies generated combined revenues of $32.4 billion in 2019 or 61% of the entire orthopedic market. These players exert significant influence in the direction and pace of the overall market.

Companies are shifting resources away from traditional implants to provide additional focus on the development of enabling technology. Bryan Hanson, President and CEO of Zimmer Biomet, acknowledged the shift in strategy when he said, “We’ve taken a hard look at the R&D pipeline and started to bias more toward robotics and informatics. Most of the money is now shifting toward ROSA, mini robotics, informatics, efficiency in doing the procedure.”

This reallocation of R&D spend is not unique to Zimmer Biomet. Smith+Nephew leadership identified innovation as a key 2020 priority, committing to additional R&D investment to move the company to the forefront of digital health. DePuy Synthes also strengthened its investment in enabling technology in 2019 through its burgeoning VELYS ecosystem.

Players like Stryker and Medtronic have demonstrated the revenue-generating power of robotics in orthopedics, as well as the increasing rate of adoption. Medtronic’s Mazor has been a consistent performer for the spine giant, helping to offset the occasional soft quarter for core spine implants or Infuse biologics.

Meanwhile, Stryker’s knee franchise grew +7.7% in 2019 due in part to the continuing inroads made by Mako as it approached 860 installed units. Mako procedures topped 114,000 for the year, an increase of +50% vs. 2018. Stryker drove growth in their knee franchise in 1Q20 in the face of increasing COVID-19 disruption.

Stryker CEO Kevin Lobo said, “There’s nothing magical about our first-quarter knee. It’s the continuation of the trend of the last four years or five years, where we’ve been consistently taking market share. I’m very proud of the work that our team has done on Mako as well as cementless. Both of which, as you saw over the last two or three years, have had steep increases in their adoption rates. That continued in the first quarter.”

We expect the purchase of capital equipment to slow through 2021 as hospitals recover from the financial burdens of responding to COVID-19. However, device companies that heavily invested in robotics and imaging will double down during the recovery to further differentiate themselves.

Merger & Acquisition Activity Focuses on Tuck-Ins

Mergers and acquisitions remained active in 2019, with the largest orthopedic players making tuck-in purchases to boost their hardware, software and capital equipment portfolios.

The most industry-shaping deal came when Stryker announced its intention to acquire Wright Medical. In a move that left some observers scratching their heads, Stryker announced in November 2019 its intent to acquire Wright Medical for a total value of $5.4 billion. While rumors had occasionally circulated about a purchase of Wright Medical, very few observers suspected Stryker would make a bid. Questions remain about how the portfolios of the two companies will mesh. The scheduled close for the deal is 2H20.

The deal would vault Stryker to the number one spot in extremity joint replacement while also strengthening its number two position in trauma. There is uncertainty about any divestments Stryker needs to make, especially in lower extremities. The deal would also initiate another large-scale integration effort on the heels of Stryker’s bumpy incorporation of K2M. If the acquisition goes through, Stryker’s competitors expect to benefit from the subsequent market and salesforce disruption.

While orders of magnitude smaller than the Stryker/Wright deal, we saw Globus Medical’s mid-2019 acquisition of StelKast, a privately-held manufacturer of knee and hip implants, as another potentially transformative deal.

The success and technical superiority of the ExcelsiusGPS system in the spine segment gave Globus the confidence to enter the joint replacement market in 2Q19. At the time, Globus CEO Dave Demski said, “We’ve seen the impact that robotics can have on the implant business, and we’re very happy with the success we’ve had in spine. We think we’ve developed a strong core competency there. We’ve got a great team. We were looking for other ways to leverage that technology, and looking at the success that other companies have had in total joints thought that was a logical place to go.”

It will be interesting to see whether Globus’ strength in enabling technology allows it to overcome the lack of scale and resources as it competes with massive competitors across multiple orthopedic segments.

Anika Therapeutics is another company pursuing transformation through acquisitions. In early 2020, Anika announced it had signed agreements to acquire both Parcus Medical and Arthrosurface, marking a massive step in the company’s evolution from contract manufacturer to a global commercial organization in sports medicine and orthopedics.

The acquisitions bolster Anika’s salesforce and, critically, give the company access to all new sales call points in operating rooms. Armed with a broad portfolio and larger target market, Anika is well-positioned to drive substantial growth in the years ahead.

Rounding out our most notable M&A activity from 2019 and 1Q20 are several deals in which companies acquired enabling technology, including:

• Smith+Nephew’s purchase of Brainlab’s joint replacement business and Atracsys’ optical tracking technology
• ATEC Spine terminated its planned acquisition of EOS imaging due to COVID-19, but is actively exploring partnership options
• SeaSpine’s partnership with 7D Surgical to co-market the Machine-Vision Image Guided Surgery platform along with SeaSpine-specific instrumentation

Small companies remain the innovation engine in orthopedics. While M&A volume is likely to dip in 2020 and 2021 due to companies’ focused response to the fallout from COVID-19, we may see a flurry of activity during the recovery as smaller, resource-poor companies become more attractive targets.

Medtronic CEO Geoff Martha said, “Asset prices are down. We can play offense. Our focus remains the same on tuck-ins. I’m partial to the tuck-ins that are more meaningful and can affect our growth rate, our long-term growth rate. There are some opportunities that I felt were out of our reach, too expensive before and now are more in line with what we think are reasonable returns for those investments.”

Orthopedic Procedures Shift to Outpatient Centers

We previously looked at outpatient centers as a potential growth vector for players that didn’t have the scale to compete against the robotic systems of larger competitors. This year we’re looking at Ambulatory Surgical Centers (ASCs) through the lens of companies racing to find the right balance of function and cost in selling capital equipment in outpatient centers.

As patient volumes increasingly shift to ASCs, centers are looking for ways to differentiate. Patrick Vega of Vizient Advisory Solutions expects outpatient procedures to grow +13% from 2018 to 2023. During that time frame, outpatient hip and knee replacement surgeries will increase over 200%, and outpatient spinal fusions will grow 56%. He said, “Hospitals can expect that surgeons will elect to take clinically appropriate patients to ASCs, resulting in a net loss of inpatient. Further, the percentage of outpatient cases will not remain static; rather, the numbers will grow. Proactive vendors and health systems are devoting strategic and tactical resources to leverage the market reality rather than lag among competitors.”

Enabling technologies like surgical planning software, robotics and connected post-operative applications can be an essential selling point as patients become more educated about their care options. Outpatient centers present unique barriers to entry for capital equipment, including tighter budgets, limited storage, smaller operating rooms and reduced reimbursement. In the case of hospital-run Players that are selling robotics, imaging and navigation equipment, however, are already dealing with larger stakeholder groups at the hospital administration level.

Larger companies will likely leverage their pricier technologies to secure favorable share agreements with high-volume ASCs and hospital purchasing groups. Players with dedicated capital salesforces and flexible terms could benefit by taking a significant amount of market share in the early procedural surges in outpatient centers.

Companies like Smith+Nephew are targeting ASCs with enabling technologies like Navio that have smaller form factors. Additionally, the company believes it can leverage its existing presence in outpatient centers for sports medicine further to drive the adoption of digital surgery across additional segments. In 4Q19, Smith+Nephew CEO Roland Diggelmann said, “Reimbursement changes with new coverage of total knee replacement from 2020 onwards will certainly help. We look to leverage our existing advantages such as our position in sports medicine and CT-free robotics for this specific ASC segment.”

While orthopedics’ largest players are rolling out ASC strategies for their enabling technology, companies of all sizes and across all market segments are developing outpatient plans and product lines. ASC operators, too, are becoming more sophisticated to attract patients, drive efficiencies and improve outcomes.

ASCs are likely to recover deferred surgeries, and therefore revenue, before hospitals. We do not see COVID-19 as an inflection point that will significantly accelerate the shift of procedures to outpatient centers. The small number of ASCs compared to hospitals and economies of scale limit growth potential in the short term.

Katherine Owen, former Stryker VP of Strategy and Investor Relations, said, “The shift to recon procedures in the ASC setting is already underway. This probably continues us down that path, but there’s only so much capacity. There are about 300 ASCs in the U.S. that are doing hip and knee procedures. They are essentially running at full capacity. Now, they may be able to do more by staying later on working weekends. But that is really dwarfed by the number of hospitals in the U.S., which is about 5,000. So, I think you’re going to see the shift continue, but I wouldn’t expect some massive climate change in the trend because the capacity just isn’t there to absorb it.”

These COVID-proof orthopedic trends will endure and play a significant role in shaping the market as it recovers from the pandemic. While they are not immune to uncertainty and disruption, they represent the core growth strategies of orthopedics’ largest players.