There is a great deal of uncertainty in the orthopedic market as the world struggles with the COVID-19 pandemic. The situation will remain fluid for a significant period of time, which leads us to advise that the real impact of the virus on orthopedics will not be clear until 2021 or even later. To lend some perspective for the near term, however, we’ve compiled our thoughts and those of analysts and industry veterans.
In February, we heard of modest impacts on public orthopedic companies. During that time, China accounted for the vast majority of COVID-19 cases. Relatively few device companies have a great deal of exposure in the Chinese market. The largest orthopedic companies—DePuy Synthes, Zimmer Biomet, Stryker, Smith+Nephew and Medtronic—derive between 2% and 7% of their revenue from China.
Today, the virus has spread to more than 160 countries, with the U.S., Europe and parts of Asia experiencing exponential increases in infection rates. Numerous forecasts have the number of infections peaking in the U.S. in the second or third quarter—bringing some relief to the intensity of the situation and the emergence of a somewhat clearer view of our industry’s path forward. We’re hopeful the fourth quarter will bring some relief but suspect that the clock will run out on market recovery in 2020.
In all the uncertainty, there are several knowns.
Before we jump into specifics, let’s acknowledge the economic and human-behavior realities. Unemployment rates in the U.S. are climbing. COVID-19 is wreaking havoc on employers; layoffs and bankruptcies are inevitable. Lessons from past recessions suggest that the folks who expected to have a joint replaced or an injury repaired will be more concerned with finding a job—or keeping the job they have due to recovery times. In addition, many would-be patients are scared to catch the virus and will put off that knee replacement to avoid possible exposure.
Compounding the human and economic impacts are the unprecedented realities of mandated delays. On March 18, the Centers for Medicare & Medicaid Services announced that all elective and non-essential procedures should be delayed during the COVID-19 outbreak to preserve hospital beds and supplies. Non-urgent spine and orthopedic surgeries, including hip and knee replacement and elective spine surgery, were classified as Tier 2a and should consider being postponed.
Before government action, we heard that orthopedic procedures were being deferred for two to eight weeks, particularly in areas heavily impacted by COVID-19 like the U.S. coasts. Healthcare systems are diverting substantial resources to COVID-19 management and treatment. Clinicians are working outside of their specialties to provide adaptable skillsets in overburdened health systems.
There is some debate in precisely defining “elective.” For instance, during a call with the financial services firm BTIG, New York-Presbyterian Hospital’s CFO Kevin Ward said that they consider hip replacements for seniors to be non-elective. CMS guidance indicates that the agency sees hip replacements for seniors differently.
Stephen Sunderland, a Partner in L.E.K. Consulting’s Shanghai Office, said that the period of significant disruption in the Chinese orthopedic market lasted six to eight weeks nationwide, and will persist longer in Hubei province. However, he cautioned against extrapolating that window globally because of China’s ability to enforce stricter epidemic control measures. The late and often inadequate responses to the crisis in the U.S. and other countries will result in different infection curves.
Procedure deferrals impact all orthopedic market segments. Joint replacement and many types of spine procedures will have to wait. Trauma cases will continue, but the effects of social distancing and shelter-in-place orders will undoubtedly reduce the number of trauma incidents.
How might the procedure postponements influence orthopedic revenue?
This is a tough question to unpack. Company revenues will decline. It’s inevitable. Projecting the impacts on the industry overall and to the privately-held companies will become clearer when public companies report 1Q and 2Q revenue. Those data points will inform our outlook. We’re in the midst of authoring THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT®, which always contains five-year projections. We’re accustomed to and comfortable with drawing likely conclusions in the absence of sufficient information, but publishing an outlook through 2024 is a quandary to be sure.
Mike Matson of Needham ran a “stress test” based on a variety of scenarios. For the companies covered by Needham, Matson estimates revenue declines anywhere from a manageable 4% to a jarring 18% for 2020. Matson notes that the market is trending toward the “worst case” scenario in which Stryker declines -18.6% from Needham 2020 revenue estimates, while NuVasive declines at -19% and Medtronic -16.8%. Companies are bracing for excessive disruption, as evidenced by ConMed pulling release of its 2020 guidance on March 20.
Veteran consultant Jean-Paul Burtin said, “The significant impact will be on the economics aspect, since many small or even medium players may suffer a great deal from losses and lack of cash-flow. I anticipate some bankruptcies among OEMs not able to secure financing from investors or lenders. That may impact startups and, therefore, innovation.”
For the time being, you can expect (and plan for) business disruptions and revenue declines across the board—all companies, all market segments. In the same breath, we’re confident that the orthopedic market will recover due to demographics and the lasting economic need to keep us all active and productive. The majority of procedures that are being delayed will remain in the queue, for now, ultimately getting completed. And, new patients will continue to feed a robust orthopedic pipeline.
Mike Evers is ORTHOWORLD's Digital Content Strategist.