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Year in Review

Continuing 2011 Results, Including AAOS Conference Highlights

The orthopaedic industry appears to be tilting its focus from implant materials and toward implant alignment and personalization, per analyst review of the 2012 meeting of the American Academy of Orthopaedic Surgeons (AAOS). On the floor and in recent earnings calls, companies noted observations of stability in hip and knee procedure volumes, as well as consistent pricing levels. Extremity growth continues to be strong, with shoulders leading that segment.

While the presence of spine companies at the AAOS conference has diminished, analysts noted upbeat feedback from companies on the progress of products undergoing Premarket Approval review. Perhaps 2012 will bring the first approval of cervical discs in a long time.

Technology Highlights from AAOS 2012:
Focused on Fit

Patient specific instrumentation/custom cutting guides

Analyst checks revealed that patient specific instruments may be utilized in 15% to 20% of all knee procedures. All large players participate in this space.

Alignment and soft tissue balancing

Emerging technologies include OrthAlign’s KneeAlign2 that measures anatomical landmarks during surgery and provides instant feedback (See BARE BONES®, 3/12.); OrthoSensor, which supplies its trial implant for Stryker’s Triathlon knee (sensors to analyze fit, joint load); and Zimmer, whose acquisition of Synvasive provides the eLIBRA Dynamic Knee Balancing system (sensors to determine positioning of femoral component). Zimmer also highlighted a variety of personalized solutions for hip and knee.

Custom implants

Lead by ConforMIS (iTotal, iUni G2 and iDuo G2) for knees. Stanmore Implants also offers custom implants for uni knees.

Robotics

MAKO Surgical displayed its next-generation hip. Designed for use with the RIO system (Robotic Arm Interactive), the implant may enter first cases in 2H12. Stanmore featured its Savile Row robotic surgical system, which the company intends to offer at no cost to hospitals.


Throughout this continuing review of 2011 earnings, we feature select analyst observations from the annual meeting. Exhibit 1 on the following page displays 2011 market growth by segment, and performance highlights that follow address both 4Q11 and 2011 results.

Exhibit 1
Orthopaedic Sales1 Increases by Product Segment: 2011 vs. 2010

Notes to Exhibit 1
1 Orthopaedic products ; constant currency, pro forma growth
2 Includes biologics
3 For the quarter ended 11/30/11; includes Dental. Spine includes Bone Stim and Biologics; Bone Stim reflects all Bone Healing sales.
4 For the quarter ended 1/27/12
5 Spine
6 For the quarter ended 12/31/11
7 Extremities: extremities + fixation combined; Endoscopy: endoscopic + communications, most of which is orthopaedic; Spine: neuro + spine. Total growth excludes Patient Handling.
8 ORTHOWORLD estimates
9 For the quarter ended 12/31/11
10 Excludes Other (Aerospace)
 

Alphatec Spine
$197.7MM, +6% (U.S. $133.8MM, +9%; ex-U.S. $63.8MM, -2%
4Q11 revenue: $49.5MM, +7% (U.S. $32.8MM, +2%; ex-U.S. $16.8MM, +19%)

-  4Q11 product launches include Trestle Luxe Anterior Cervical Plate, Avalon Occipito-Cervico Plate, Epicage MIS Lumbar Interbody Spacer, etc.
-  Validating machinery in the U.S. to commence manufacture of certain currently outsourced implants, starting with Trestle Luxe; commenced insourcing of anodizing steps
-  Focusing upon emerging markets (Australia, Brazil, China, India, Russia); Japan performing very well
-  Seeing moderation of price pressures in U.S., year over year pricing pressure in low single digits
-  Filed new Investigational Device Exemption study for pivotal 510(k) study of OsseoFIX, expects to start enrollment in 2H12
-  OsseoScrew gaining acceptance in Europe; no regulatory clearance in U.S.
-  Ceased distribution in 4Q of Xenon pedicle screw due to regulatory “glitch” and will relaunch in 1Q12
-  ProFuse performing very well
-  PureGen implanted in >1,300 patients through 4Q
-  Noting a pick-up in allografts, possibly related to Infuse

Anika Therapeutics
$39.8MM, +30% (MONOVISC +76%, ex-U.S. +38%; SRL Orthopaedic +40%)
4Q11 revenue: $11.7MM, +39% (ORTHOVISC U.S. +34%, ex-U.S. +41%; MONOVISC ex-U.S. +76%; SRL Orthopaedic +48%)

-  U.S. market share for ORTHOVISC at 14%
-  Entered into U.S. distribution agreement with DePuy Mitek for MONOVISC
-  FDA denied request for Orthopaedic Advisory Panel review of MONOVISC; Anika in appeals
-  Planning to initiate randomized, controlled human clinical trial of Hyalograft C Autograft
-  Update on Cingal single-injection viscosupplement: submitted dossier for CE Mark approval, planning to initiate a new clinical trial

ArthroCare
$238.08MM, -3% (U.S. $151.7MM, -8%; ex-U.S. $86.2MM, +8%)
*  Sports Medicine $228.3MM, -2% (Sequent Meniscal Repair $3.3MM)
*  Other (includes Spine) $9.7MM, -22%
4Q11 revenue: $64.8MM, +3% (U.S. $42.6MM, +7%; ex-U.S. $22.2MM, -5%)
*  Sports Medicine $62.3MM, +4%
*  Other $2.4MM, -27%

-  Ambient represents ~30% of sports medicine Coblation sales
-  Shift in mix toward Ambient has helped maintain overall average selling prices in face of price pressure
-  Expecting U.S. Sports Medicine to grow in low single digits in 2012
-  By close of 1Q11, will have no further sales to stocking distributors in U.S.
-  Savings from recent facility consolidation (~$6MM annually) will be reinvested into research & development
-  Recently announced new Department of Justice civil investigation, focused upon radiofrequency ablation business and potential violations of False Claims Act

AxoGen
Regenerative medicine company, focused on development of technologies for peripheral nerve reconstruction/regeneration
-  Products include Avance Nerve Graft, AxoGuard Nerve Connector, AxoGuard Nerve Protector
-  >6,000 implantations of AxoGen products in the U.S., to date
-  Clinical studies are ongoing, and company has 11 issued and pending U.S. patents + 12 pending ex-U.S. patents

BioMimetic Therapeutics
Launched Augmatrix Biocomposite, calcium phosphate + collagen bone graft substitute to be combined with bone marrow aspirate for use in fracture repair, bone void flling, etc.
-  Released results from 30-patient clinical trial of Augment Rotator Cuff Graft in treatment of full thickness rotator cuff tears vs. suture alone; Augment reached primary safety endpoint and required no additional OR or anesthesia time vs. current standard of care

Cayenne Medical
Product launches included Quattro system for rotator cuff and labral repair, AperFix II for soft tissue multi-ligament reconstruction (ACL, PCL, MCL, LCL and MPFL)
-  Expects to double growth in stocking hospitals in 2012

China Kanghui
>300 distributors in China, serving >2,500 hospitals
-  First total joint products from acquisition of Wei Rui Li expected to launch in China in 2Q
-  Products from acquisition of Consensus Orthopedics will launch in China in 2013-2014

ConMed
$437.8MM, +<1%
*  Arthroscopy $289.9MM, -1%
*  Powered Surgical Instruments $147.9MM, +3%
4Q11 revenue: $111.2MM, +1%
*  Arthroscopy $74.4MM, +2%%
*  Powered Surgical Instruments $36.8MM, -1%

-  Utilization rates fairly constant throughout year; weakness in Europe offset by strength in Brazil, Asia
-  Product launches included Hip Preservation instrumentation system; Y-KNOT, reportedly the smallest "all suture" anchor available; XACTPIN Graft Passing Guide; Hall Lithium Power Battery, etc.
-  In 1Q11, entered into association to serve as exclusive global marketing rep for Musculoskeletal Transplant Foundation’s sports medicine applications
-  Approach to excise tax: might add tax to invoices in 2013, raise prices for advanced technology products

DePuy
Received Premarket Supplement Approval for use of TRUMATCH Personalized Solutions instrumentation and software with SIGMA Rotating Platform Knee; claims that instruments can reduce procedure time by up to 35 minutes
-  Now has personalized instrumentation for both rotating platform and fixed bearing knees
-  Featured AOX polyethylene with Covernox antioxidant, will be used with SIGMA and LCS knees
-  New product launches will include Global Unite for humerus fracture, Global Steptech APG (Anchor Peg Glenoid)

DFine
Expects full U.S. commercialization in 1Q12 of STAR Ablation system for radiofrequency tumor ablation

DJO Global
$1,074.7MM, +11%
*  Bracing/Vascular* $387.9MM, +24%
*  Recovery Sciences $342.5MM, -1%
*  Surgical Implant $64.9MM, +4%
*  International $279.2MM, +14%
4Q11 revenue: $284.1MM, +14%
*  Bracing/Vascular* $106.2MM, +34%
*  Recovery Sciences $89.2MM, flat
*  Surgical Implant $16.7MM, +5%
*  International $71.8MM, +11%
(*Bracing/Vascular includes products serving the diabetes market.)

-  New products generating success, including Turon shoulder, Exos upper extremity braces, etc.
-  Empi revenue continues to feel impact from unfavorable insurance pricing, decrease in patient visits to therapy clinics

Exactech
$205.4MM, +8% (U.S. $133.0MM, +1%, ex-U.S. $72.4MM, +24%)
*  Hips, $33.7M, +17%
*  Knees $80.1MM, +5%;
*  Biologic & Spine $24.3MM, -13%
*  Extremity $39.9MM, +33%
*  Other $27.4MM, +<1%
4Q11 revenue: $53.1MM, +2% (U.S. $34.0MM, -2%; ex-U.S. $19.1MM, +11%)
*  Hips, $9.3MM, +13%
*  Knees $20.1MM, -2%
*  Biologic & Spine $5.9MM, -21%
*  Extremity $11.0MM, +29%
*  Other $6.7MM, -4%

-  Optimistic that procedure rates have bottomed out
-  Hip growth supported by significant contributions from direct operations in Japan and Spain
-  Launched InteGrip porous metal technology in U.S., in Novation Crown Cup system; full launch of system will occur in 2H12
-  Optetrak CR Logic and Logic PS knees now fully launched, with instrument sets rolled out to entire distribution network
-  Strong surgeon acceptance of Optetrak Logic Knee
-  Launching PSC (posterior stabilized constraints) and CRC (cruciate retaining constraints) tibial inserts in 2012
-  Introduced Equinoxe Augmented Glenoid implant system, as well as Gibralt cervical thoracic spine system
-  Launching total ankle arthroplasty product in 2H13
-  Commenced multi-center clinical trial in Taiwan for cartilage regeneration technology, enrolling ~100 patients (See BARE BONES®, 1/12.)

Greatbatch Medical
$140.2MM, +11%
4Q11 revenue: $31.6MM, +3%

-  Initiatives to further expand, optimize and leverage manufacturing infrastructure slated for completion in 2013, intended to support more capable and cost-effective orthopaedics business
-  Organic growth in 2012 will remain challenging, given weakness in underlying markets and global economic headwinds
-  Expects revenue for 1H12 to be below 2011 levels but rebounding in 2H12 as healthcare markets stabilize and begin recovering

Histogenics
NeoCart update: Autologous cartilage implant system granted Phase III Investigational New Drug study under Special Protocol Assessment from FDA; multi-center study will enroll 245 patients to compare to microfracture; FDA clearance expected by 2015
-  VeriCart: Cartilage repair scaffold for augmentation of microfracture; expects to receive CE Mark approval in 4Q12 and launch in early 2013

Integra Orthopedics
$328.7MM, +13%
4Q11 revenue: $89.5MM, +21%

-  Extremities reconstruction grew in low teens
-  Legacy foot and ankle products, regenerative medicine weaker than expected; weakness will extend through 1Q12
-  Orthobiologics posted double-digit growth
-  Private label spine revenue flat
-  3rd-generation EVO 3 and Mosaic biologics products doing quite well
-  Introduced pre-cut allograft wedges for both Evans and Cotton osteotomies, an instrumentation set designed to enable assessment of osteotomy space and aid in selection of the appropriate allograft wedge
-  New spine products include Newport MIS pedicle screw, Daytona deformity system, Capistrano allograft spacer, Complete cervical cage, Vu aPOD Prime PLIF and Accell EVO 3 demineralized bone matrix
-  New shoulder product to launch this year
-  Ascension integration update: sales force fully trained, kept key distributors; will move forward with “semi-hybrid” model with smaller portion of sales from independent agents
-  Physician-owned distributorships not a core part of strategy at this time

MAKO Surgical
$84.5MM, +91%
*  Procedures $34.6MM
*  RIO Systems $43.9MM
*  Service $5.9MM
4Q11 revenue: $32.9MM, +122%

-  Sold 49 MAKOplasty Total Hip Arthroplasty (THA) applications and 48 RIO systems in 2011
-  During 2011, 6,932 MAKOplasty procedures performed
-  ASP for MAKOplasty THA ~$165,000 per application
-  In 1st full quarter of commercial sales, >50% of domestic RIO systems sold included both knee and hip applications
-  Noting trend over past few quarters of existing customers purchasing additional RIO system to more efficiently manage hospital workload
-  Claims ~10% of 2011 U.S. partial knee market share
-  Will debut 2 new hip implant systems by end of 2012
-  Next-generation hip implant will feature a cup that uses a porous-structured technology that is reportedly stronger and more flexible than those currently available

Mathys
CHF 111.2MM (~US $122MM), +7%

-  Domestic sales +30%
-  Double-digit growth recorded in Australia, Austria, France, the Netherlands
-  Japan subsidiary will beome operational in 2012

Medtronic (For 3Q12 ended 1/27/12)
$784MM, -10% (U.S. $555MM, -14%; ex-U.S. $229MM, +4%)
*  Core Spinal $596MM, -6% (U.S. $390MM, -10%; ex-U.S. $206MM, +3%; Core metal -5%; Balloon kyphoplasty -7%)
*  Biologics $188MM, -20% (U.S. $165MM, -23%; ex-U.S. $23MM, +15%; Bone morphogenetic protein -26% global, -30% U.S.)

-  Large part of market share pressure coming from smaller spine companies, physician owned distributorships
-  U.S. Infuse sales -30%
-  Solera sales +10% and garnering double-digit price increase, but less than half of total sets in field currently
-  Expecting Solera to comprise >40% of core metal revenue mix
-  Modest uptick in U.S. balloon kyphoplasty procedure volumes, new products (including Expander 2 balloon) stabilizing price

NLT Spine
Debuted PROW lumbar interbody fusion device, received FDA 510(k) clearance in 1Q
-  Next-generation system is expected to launch in 2013; also developing version for lateral fusion

NuVasive
$540.5MM, +13% (ex-U.S. ~$10MM, +60%)
4Q11 revenue: $150.2MM, +16%

-  Recently launched Precept Fixation System for posterior fixation
-  At ~75% patient enrollment in XL TDR study
-  2012 product launches will include indication-specific instruments for XLIF, new lateral fixation options, new access and fixation options for cervical spine, etc.
-  Surgeons responding well to PEEK implants for cervical spine, resulting in some cannibalization of allograft sales
-  100% customer retention to date following acquisition of Impulse Monitoring, with 85% of neurophysiologist team trained on NeuroVision M5
-  Planning to increase from 160 neurophysiologists to 200 by year-end
-  Biologic used in ~50% of all NuVasive cases, currently
-  Awaiting FDA clearance of AttraX synthetic biologic
-  Will discontinue pursuit of NeoDisc motion preserving device for cervical spine; will “just take too long to get through FDA”
-  FDA discussions on PCM very encouraging; hopeful that 2012 is the year for approval

Orthofix
$573.1, +5%
*  Spine $304.2MM, -1 (Stimulation $160.4MM, -7%; Implants and Biologics $143.9MM, +7%)
*  Orthopaedic $165.9MM, +15%
*  Sports Medicine $103.0MM, +8%
4Q11 revenue: $150.6MM, +6%
*  Spine $78.6MM, flat (Stimulation $42.4MM, flat, Implants and Biologics $36.2MM, flat)
*  Orthopaedic $44.5MM, +17%
*  Sports Medicine $27.5MM, +10%

-  Continuing success with Trinity Evolution stem cell allograft; Collage is a good contributor and selling ahead of plan
-  Developing next-generation version of Trinity Evolution, designed to complement current product, offer superior handling and enable use with additional procedures; launch tentatively slated for 2013
-  Commenced ex-U.S. launch of Galaxy external fixation system for complex trauma applications, includes designs for shoulder and elbow
-  U.S. product launches include Centronail ankle compression nail for hindfoot fusion, Contours Lapidus plate for midfoot fusion
-  Entered into agreement with Musculoskeletal Transplant Foundation to co-develop and commercialize new tissue form for bone grafting applications (launch in 2013), expand MTF’s Trinity Evolution processing capacity
-  Substantially resolved outstanding government legal matters (See BARE BONES, 3/12.)
-  Decided against doing business with physician owned distributorships ~2 years ago; still watching them closely

OrthoHelix
~$20MM

-  2012 launches include ankle fusion system, hammertoe fixation, MIS calcaneal fracture system, expanded PocketLock plates

OrthoSensor
Developing spinal distractor to work with disposable trial implants
-  Incorporating acoustic ultrasound technology into disposable mechanical alignment product for introduction in 2Q
-  Further developing technologies to address all aspects of arthroplasty (planning, data collection, implants)

RTI Biologics
Unveiled Multipotent Adult Progenitor Cell (MAPC) technology, to be known as MAP3, with two scaffold configurations (cancellous and bridge)
-  Will complete large animal clinical studies of MAP3 in 1Q12 and proceed with human trials within 2-3 years
-  Future products include bovine xenograft tendon (See ORTHOKNOW, 2/12.); latter is a 4-6 year project intended to alleviate supply constraints
-  Actively seeking “tuck in” acquisitions across all business segments

Smith & Nephew
Commenced U.S. launch of POLARCUP Dual Mobility Hip, complement to BIRMINGHAM Hip (BHR)
-  POLARCUP boasts 10+ years of clinical history ex-U.S., is designed to address challenges of primary and revision cases that are susceptible to dislocation
-  Results from 10-year study following progress of the 1st 400 U.K. recipients of BHR revealed that 99% of patients were satisfied or extremely satisfied with procedure

SpineView
Featured ELIF (endoscopic lumbar interbody fusion) technique for visualization and discectomy
-  >3,000 patients treated with SpineView technology to date

Stryker
Introduced System 7 heavy duty power tool technology (See ORTHOKNOW, 2/12.); instruments account for 14% of company’s annual sales
-  Featured products included ARIA Spinal System, AVS Anchor-C cervical cage, ReUnion Total Shoulder Arthroplasty Modular System
-  ReUnion reportedly the first shoulder to use highly-crosslinked polyethylene in its glenoid component

Symmetry Medical
$359.0MM, flat
*  Instruments $115.3MM, -2%
*  Implants $103.3MM, -7%
*  Cases $75.8MM, +1%
*  Other* $25.1MM, +12%
*  Surgical $39.5MM, +14%
4Q11 revenue: $84.5MM, -12%
*  Instruments $27.3MM, -21%
*  Implants $22.9MM, -13%
*  Cases $15.9MM, -22%
*  Other* $7.2MM, +22%
*  Surgical $11.2MM, +22%
(*Other includes non-orthopaedic revenue.)

-  Symmetry Surgical reporting segment represents Direct to Hospital business
-  4Q sales impacted by decline in sales to 5 largest orthopaedic customers due to sluggish procedure growth
-  Customers’ planned new product launches should start to impact revenue in 2H12
-  On-time delivery percentages now in the 90s, lead times at or below historical norms, past-due orders at multiyear low

Synthes
$3,973.8MM, +5%
*  North America $2,219.8MM, +3%
*  Europe $942MM, +5%
*  Asia Pacific $537MM, +17%
*  Rest of World $275MM, +1%
4Q11 revenue: $991.7MM, +1%
*  North America $539.3MM, -2%
*  Europe $238.7MM, +3%
*  Asia Pacific $143.8MM, +16%
*  Rest of World $69.9MM, -3%

-  North America: ongoing success with VA-LCP Forefoot/midfoot system and VAL Curved Condylar Plate; spine challenged by declining procedure volumes, pricing pressures, reimbursement hurdles, though performance stabilized with rollout of Matrix pedicle screw

-  Europe: introduced new Dynamic Locking Screw

Asia Pacific: Australia and New Zealand >15% growth, China and India >20%

Rest of World: double-digit growth in Latin America; transition to direct sales in Chile a success

Tornier
$254.5MM, +12%
*  Total Extremities $200.9MM, +14% (Upper $160.8MM, +16%, Lower $25.6MM, +8%, Sports Med/Biologics $14.4MM, +10%)
*  Large Joints/Other $53.5MM, +4%
4Q11 revenue: $68.8MM, +12% (U.S. +13%, ex-U.S. +12%)
*  Total Extremities $54.2MM, +17% (Upper $43.2MM, +18%, Lower $7.0MM, +13%, Sports Med/Biologics $3.9MM, +13%)
*  Large Joints/Other $14.5MM, -2%

-  Pricing held up nicely in 4Q, expected to continue
-  Biggest revenue generators in 2011: KneeTec total knee, Ascend primary shoulder, Aequalis reverse shoulder, Stabilis ankle fusion system, new sports med products
-  Commenced clinical evaluation of sports biologics in 4Q, including Insite FT metal and PEEK polymer anchors for rotator cuff repair and Duo anchor
-  Expanding BioFiber scaffold with larger sizes and a collagen coating; initial feedback positive
-  Launching 14 new products in 2012, including humeral nail (FDA cleared and CE Marked), revision ankle, Duo labral repair system, patient-specific instruments for new total knee (midyear launch in Europe)
-  Will commence pivotal clinical study with synthetic growth factor in U.S. in next 12 months
-  No plans to launch Salto 3-piece ankle in the U.S.

TranS1
Showcased new lateral system that is slated for 1Q12 full launch
-  Featured new discectomy tool, bowel retractor and internal retractor for lateral system
-  Recently announced American Medical Association approval of application for a Category I CPT code for L5-S1 spinal fusion using pre-sacral interbody fusion approach with AxiaLIF
-  Now has positive coverage decisions from five small- to mid-tier private payors

Wright Medical
$512.9MM, -1% (U.S. $295.9MM, -5%; ex-U.S. $217.0MM, +4%)
*  Hips $173.2MM, -2%
*  Knees $123.9MM, -4%
*  Biologics $69.4MM, -12%
*  Extremities $135.4MM, +9%
*  Other $10.8MM, -12%
4Q11 revenue: $126.8MM, -9% (U.S. $73.2MM, -10%; ex-U.S. $53.6MM, -8%)
*  Hips $42.7MM, -9%
*  Knees $30.5MM, -13%
*  Biologics $15.5MM, -22%
*  Extremities $36.0MM, +4%
*  Other $1.9MM, -12%

-  Expanded patient specific instrumentation outside of knee offerings with Prophecy INBONE system for total ankle, full market release will occur in 2H12
-  Substantially increasing investment in foot/ankle surgical education
-  Planning additions to Evolution knee system, extensions to Prophecy platform to include Evolution, making select improvements to hip portfolio
-  Aggressively converting major portion of U.S. independent distributor foot/ankle territories to direct sales: seeking 70% direct, 30% indirect; will attempt to keep all reps that are currently in distributorships
-  Sales force at 175 reps to date

Zimmer
Launched Universal Power System and STABLECUT surgical saw blades
-  Announced availability of Patient Specific Instruments for use with Unicompartmental High Flex Knee
-  Expects to launch intelligent instruments for hip in 2H12
-  With ISTO Technologies, commenced randomized, controlled, 225-patient, 25-center U.S. Phase III clinical study to evaluate DeNovo ET Engineered Tissue Graft vs. microfracture in the repair of knee cartilage defects


Sources: Company press releases, earnings calls, filings with the Securities and Exchange Commission, Canaccord Genuity Musculoskeletal Conference, Mizuho Securities USA Inc. Industry Flash, Wells Fargo Securities Equity Research

Julie A. Vetalice is Editor, Information Products for ORTHOWORLD Inc. She can be reached at 440.543.2101 or julie@orthoworld.com