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Current & Critical

2017's Industry Opportunity: Diversification of Portfolios

We know that, like us, many of you rely on our financial forecasts and industry insight to assist in budget and business development. As we all look to the new year, we thought it timely to offer our estimates for end of year performance for the top five companies, as well as share an observation on one theme that shaped the industry in 2016 and is expected to remain top of mind in 2017: that is, diversification. 


Exhibit 1: Top Five Performers 
Estimated 2016 Sales and Growth vs. 2015
 


 
 

In the recent ORTHOWORLD Membership survey, many of you offered your outlook on market opportunities. Those that crossed OEM and supplier lines included launching new product offerings, entering high-growth markets and engaging in acquisition activity—all with the purpose of becoming a more diverse provider. 

This theme isn’t new. The top five companies by orthopaedic revenue (DePuy Synthes, Zimmer Biomet, Stryker, Smith & Nephew and Medtronic, by our estimates) have strategically moved in this direction for several years, with the belief that the more products, services—resources—across orthopaedics, the better positioned they’ll be for growth. They aren’t the only companies that have been on this path, of course, but we start with them because combined, they hold more than 60% of the worldwide orthopaedic market share. Their performance suggests industry health and their activity regularly sets industry tone and trends. 

In Exhibit 1, we project that full 2016 as-reported revenue for these companies combined will reach $29 billion and grow by nearly 3% vs. 2015.

We estimate that the top four will end the year profitably; this is in contrast to 2015, when DePuy Synthes, Zimmer Biomet and Medtronic posted losses. As you can see in the tables of company breakouts throughout this article, our forecasts have Stryker and Smith & Nephew posting sales growth north of 4%, Zimmer Biomet north of 2% and DePuy Synthes above 1%. While we expect Medtronic to post a loss, its last quarter reported was the company’s strongest since 2Q15. Further detail on what drove growth each quarter can be found at ORTHOWORLD.com/ORTHOKNOW.  

 
DePuy Synthes Estimated 2016 Sales
and Growth vs. 2015

 
 
 

Zimmer Biomet Estimated 2016 Sales
and Growth vs. 2015

 
 
 

Stryker Estimated 2016 Sales
and Growth vs. 2015

 
 
 

Smith & Nephew Estimated 2016 Sales
and Growth vs. 2015

 
 
 

Medtronic Estimated 2016 Sales
and Growth vs. 2015

 
 

We’re happy to report that these projected numbers are better than we’d anticipated. We expect that when 4Q16 results are finalized, we’ll find that our estimate of 1.3% worldwide orthopaedic growth for 2016, as reported in the most recent installment of the ORTHOPAEDIC INDUSTRY ANNUAL REPORT®, was too conservative.

If you recall, early guidance indicated that the influence of slowing growth in international markets like China and the Gulf States, a strengthening U.S. dollar versus ex-U.S.currencies, continuing price pressures and internal restructuring all impacted 2015 growth and were expected to extend into 2016, resulting in flat or declining revenue for these companies. 

Those headwinds were present in 2016, to a degree. However, throughout the year, device company executives and analysts repeatedly said that the companies cited “market growth” and “market stabilization,” most notably when talking about the joint reconstruction market. We’ll provide a deeper definition of those phrases in the months to come as we consider the health of the whole industry.

Revenue for these companies was partially driven by new product launches, a focus on high-performing markets and engagement in M&A activity—three observations called out in the Membership survey results as opportunities for 2017 and beyond. These are basic good business practices, not a reinvention of the wheel. Smart companies evolve with their customers and prioritize based on where they’ll receive the highest return on investment. The thread that runs through the observations, as mentioned above, is that we’re hearing from companies of all sizes and in all areas of the supply chain that they seek to boost the diversity of their offerings to increase their attractiveness to customers. 


How are companies going about it?

  • When it comes to new products, survey respondents mentioned interest in being a more comprehensive provider and one that is able to measure value for their customers. This extends beyond the OEMs and was mentioned in the survey by suppliers and consultants, too. Throughout 2016, we repeatedly covered device companies’ investments in solutions that will allow them to assist hospital customers beyond the OR. To take a line from OMTEC® Keynote Bill Tribe, Ph.D., of A.T. Kearney, successful companies will reach further in the value chain to leverage end-to-end interactions with customers. OEMs and consultants said they plan to capitalize on assisting customers (hospitals, surgeons, OEMs) in meeting needs around bundled payments. Contract manufacturers, for instance, seek to add services like sterile packaging and logistics to their range of capabilities. Our observations were formed based on your responses to the ORTHOWORLD Member survey. So, who replied? A breakdown of company affiliation is depicted below. Of those who responded, 39% hold executive management positions and 19% have business development responsibilities, followed by marketing and sales, each at 11%. The remaining 18% comprised manufacturing, sourcing, regulatory and R&D.
     
  • Per your survey responses, the market segments that hold the greatest opportunities are trauma, extremities and spine. According to ORTHOWORLD estimates, trauma is a $6 billion business and spine (excluding biologics) is an ~$8.5 billion market with potential to reach $9 billion by 2018. On the OEM side, the attractiveness of the trauma market is emphasized by once pure-play spine companies like NuVasive and Globus Medical that plan to enter the segment. The survey results indicated that smaller OEMs, as well as implant and instrument contract manufacturers, have plans to enter or bolster their presence in these markets because of their growth potential and complementary nature to current capabilities.
     
  • Total M&A and strategic transactions reached 48, as of December 15. Acquisitions in 2016 better positioned companies geographically, like Globus’ purchase of Alphated Spine’s ex-U.S. assets, and afforded companies breadth of products (think Zimmer Biomet’s acquisitions of LDR and Cayenne Medical). The pace is expected to continue in 2017, with the top five device companies and suppliers indicating M&A of all sizes will remain a priority.
     

In considering your ability to diversify, it’s important to understand your company’s strengths. What can be leveraged to easily broaden your reach? Also, to steal another line from Bill Tribe, the most effective strategies are likely to be company-specific. While yes, Tribe subscribes to the theory that you will need to diversify, he also believes that you need to do it your own way. Finally, it’s important to understand your limitations. There’s simply not enough time in the day to do everything. Common challenges mentioned in the Member survey included difficulties in hiring reliable people, finding new clients, securing new funding, prioritizing project pipelines and overcoming regulatory constraints. 

Is diversification or the need to be a fully-comprehensive partner the only answer to growth? No. This is simply an observation that persists as we track strategic activity, and one that we wanted to share as we prepare for a new year. 

We wish you the best in 2017. We also plan to diversify our offerings to meet your needs. We’ve heard your request to gain a better understanding of the companies that fall just below the top five in revenue size. We plan to introduce complimentary profiles on select companies in the first half of the year. Other prevalent requests are better access to international trends and data, and perspectives from those in the trenches — like you. 
 


WHO TOOK THE SURVEY?

OEM/Device Company 42%

Supplier 31%

Consultant 11%

Distributor 11%

Other 5%
Our observations were formed based on your responses to the ORTHOWORLD Member survey. So, who replied?

A breakdown of company affiliation is depicted here. Of those who responded, 39% hold executive management positions and 19% have business development responsibilities, followed by marketing and sales, each at 11%. The remaining 18% comprised manufacturing, sourcing, regulatory and R&D.