Ortho Market Pressures Moderated in 3Q, Year-End Surge Unlikely

The third quarter of 2022 brought a modest improvement to macroeconomic pressures faced by the orthopedic market. We estimate the overall market grew in the low single digits for the quarter compared to last year. However, ongoing disruption and shortages limit any recovery’s potential upside.

Procedure Volumes Trending in the Right Direction

Several companies called out improving procedure volume in the third quarter. Recovery of knee and hip replacement procedures accelerated in the U.S. after lagging behind most other segments since the pandemic’s start.

NuVasive said that lower acuity thoracolumbar and cervical spine procedures recovered more quickly than complex cases in the third quarter.

The overall trauma market appears soft in 2022, but orthopedic executives point to transitory factors.

Stryker CEO Kevin Lobo previously said, “That happens from quarter to quarter, right? So, whether it’s the weather or who knows what, it’s not unusual. I have zero worries about our Trauma and Extremities business.”

Companies expect normal seasonality to increase sales for the fourth quarter. However, staffing and supply shortages compounded by healthcare pressure from seasonal flu and RSV likely take a sizeable 4Q jump off the table.

Companies Initiate Price Actions and Cut Costs

The ongoing inflationary environment is driving up costs across most categories. Stryker called out labor, metals and transportation as highly impacted areas and noted  variability in these segments drives inefficiencies that increase costs further. Several players increased implant prices, but the impact of those moves could take time to read through due to contract timing and rebates.

Companies across the revenue spectrum are cutting costs while trying to maintain a strong R&D pipeline and commercial channel.

Conformis announced that it would cut up to $12 million in employee-related expenses, while Surgalign undertook a corporate restructuring to save up to $35 million.

We expect orthopedic M&A volume will decline for the second year after a flurry of activity in 2020. As of mid-November, we tracked 22 orthopedic M&A transactions after the industry recorded 42 in 2020.

Companies like Stryker and Bioventus paused activity while integrating recent acquisitions and paying down debt. Even well-armed companies like Johnson & Johnson and Globus Medical are taking a wait-and-see approach.

Johnson & Johnson CFO Joe Wolk said, “We still hold $34 billion in  cash, which positions us extremely well to continue exercising that level of capital allocation around acquisitions or significant collaborations going forward. In fact, maybe we’re even a little bit more bullish and eager to do something. The market is a little bit funny. The volatility isn’t conducive to M&A right now because you have sellers and  potential sellers holding on to 52-week highs, or all-time highs, which quite frankly aren’t too distant in the rearview mirror.”

Enabling Technology Sales Performance Mixed

Sales of enabling technologies, especially robotics, gave a critical boost to companies through the worst periods of the pandemic. However, hospitals have been more cash-constrained in 2022 and are moving away from the traditional up-front sales model for big-ticket enabling technology.

The overall volatility of the macro environment also hurt robotic sales, according to Stryker and Smith+Nephew. Stryker’s Mako platform experienced sales and installation delays due to hospital shortages beyond the clinical staff. Smith+Nephew called out the lack of semiconductors as a headwind for sales of its CORI system.

Not every company felt the same impact, however. Globus Medical recorded its highest third quarter enabling technology revenue ever, while both DePuy Synthes and Zimmer Biomet called out their robot systems as positive sales drivers.

Robots are making headway into ASCs and international markets as well. Zimmer Biomet COO Ivan Tornos said, “Half of our ROSA Knee System installations are in the U.S., and half are international. Around 30% of our robots are going into  ASCs, and that segment is growing. We’ve seen exciting momentum with our hip software there. Our robot sales are in line. They continue to move in the right direction. As we enter Q4, we’re very excited about where we are from a robotic  standpoint.”

Given the sustained disruption in the orthopedic and overall market, the third quarter of 2022 brought more positives than negatives. Inflationary and supply pressures didn’t worsen, while procedure volume trends improved. While the situation remains dynamic, we’re cautiously optimistic that the orthopedic market will see a meaningful seasonal bounce in the fourth quarter, followed by improving stability in early 2023.