Orthopedic Market Recovery Rate Accelerates in 2Q20

The orthopedic market recovery rate accelerated in 2Q20, bringing better-than-expected results across the industry. Procedures continued to shift to ASCs in the quarter, while relatively robust capital equipment sales defied assumptions about hospital financial constraints. The depletion of existing patient backlogs factored heavily into the recovery rate. New patient pipelines remain depressed and could lead to slower recovery in the back half of the year.

Market Recovery Exceeded Expectations In 2Q20

As elective procedure shutdowns spread in late-March, the industry saw massive sales declines. In the last two weeks of March, Stryker’s sales declined by -30%, while Zimmer Biomet’s declined by -60%. The orthopedic industry, as a whole, braced for a grim second quarter with expected declines between -60% and -70%.

Based on a cross-section of public companies we cover, we estimate that the orthopedic market declined approximately -35% in the second quarter of 2020 (jump to company performance tables). Nearly every player observed sequential improvement throughout the quarter, with April marking the low point of the market. By June, some players like Globus Medical worked their way back to double-digit growth. So, what moved the entire recovery timeline ahead by a full quarter?

Deferred Procedures Fueled Recovery

The orthopedic market recovery rate accelerated in the second quarter due in large part to surgeons addressing their backlogs of previously deferred procedures. Few companies ventured guesses about their remaining backlogs, but the consensus among analysts indicates the industry backlog is about 50% depleted. Zimmer Biomet values its current backlog at $700 million to $800 million. Vericel, on the other hand, expects to exhaust its remaining backlog early in the third quarter.

“Relative to the backlog, it’s important to note the approximate value of this backlog just for us is already worth $700 million to $800 million in revenue. That value will continue to grow until the market returns to normal growth rates. My sense is that the first category of patients, those that were deferred initially, will likely be completely run through by the time we get to the end of 2020,” said Bryan Hanson, Zimmer Biomet President and CEO.

ASCs and Robotics Challenge Assumptions

The results of the second quarter also challenged two assumptions from earlier in the year. First, some observers thought COVID could herald an inflection point in the shift of procedures to ASCs. Second, at the low point of the market, it seemed that capital purchases were off the table for hospitals.

ASC utilization increased during COVID, and companies are shifting strategies to leverage these settings fully. Smith+Nephew designed its CORI next-generation robot with outpatient centers in mind, and company CEO Roland Diggelmann said he sees a shift to ASCs as a part of the U.S. health system’s response to COVID. However, moments later, he said, “It’s a small number, of course, because the majority of the capacity is in central hospitals. I would say it’s close to about 10% of our knee sales. It’s a higher proportion than for others.” While the pandemic has pushed some procedures into outpatient settings, meaningful growth will likely take some time as capacity grows, and these centers take on more complex higher revenue procedures.

Stryker called its ability to sell Mako units in the second quarter “a pleasant surprise.” Zimmer Biomet currently has 150 ROSA Knee units deployed and expects 200 to 300 in the field by the end of the year. Smith+Nephew logged the first sale of its CORI robot in the quarter, as well. Globus Medical did not find similar success, with revenue from its ExcelsiusGPS system falling -55% in the quarter. However, NuVasive announced the delay of its Pulse robot until 2021. Globus’ ExcelsiusGPS could benefit in the back half of the year from NuVasive’s postponement of Pulse.

Outlook for the Second Half of 2020

We expect the orthopedic market recovery rate to taper off in the second half of 2020. As surgeons continue to work down their patient backlogs from previously deferred surgeries, surgical consults that lead to new patient candidates are trending below normal levels. While complete procedure shutdowns are unlikely going forward, regional surges in the virus have led to near-record levels of COVID-related hospitalizations in late July for the U.S. The American healthcare system is better equipped to handle these patients now. Still, the surge could further reduce patient motivation to seek medical care. Leadership at Johnson & Johnson said doctor’s office visits were down 10% to 15% in June.

Given these factors, we expect 2H20 to bring further sequential improvement, albeit at a slower pace than the second quarter. We’re forecasting the third quarter at -10% compared to 2019, while the fourth quarter could be flat versus the prior year. Overall, we now project that the orthopedic market will decline -12% to -13% for 2020, an improvement from our original forecast of -17%.

Supplementary Data Tables

Anika’s performance is attributable to inorganic growth from the acquisitions of Parcus Medical and Arthrosurface. On an organic basis, its revenues declined more than $5 million in the second quarter. ATEC, on the other hand, drove growth through improving key metrics like revenue per procedure and number of products sold per procedure.