Orthopedic Market Top Takeaways and Projections for 2020

• With the surgical backlog now depleted, the market’s recovery pace slowed in 3Q
• Enabling technologies, tuck-in acquisitions and an accelerating shift of procedures to ASCs are key orthopedic trends in 2020
• We expect the orthopedic market to decline around -10% for the full year 2020

The orthopedic industry faced unique challenges and profound uncertainty in 2020. Below, we’ll analyze the orthopedic market’s recovery through nine months, recap three crucial trends that are contributing to the strong underlying fundamentals of the industry and share our year-end projections for product segments and select public companies.

Recovery Momentum Slows in the Third Quarter

The third quarter brought significant improvement over the second quarter in which many companies saw declines of -30% or more. We estimate the overall orthopedic market grew between +0.5% and +1% in 3Q20 compared to the prior year. Market growth declined in the low teens for the nine months year-to-date compared to the preceding year.

Procedures deferred in April and May drove the V-shaped recovery in the second quarter’s late stages through the beginning of the third. In July, Zimmer Biomet valued its backlogged procedures at $700 million to $800 million. However, recovery momentum slowed deeper into the third quarter as the backlog depleted rapidly.

Exhibit 1: 2020 vs. 2019 Growth by Quarter

NuVasive CEO Chris Barry said, “Volumes flattened out in the quarter. The volumes were approaching pre-COVID levels, but we haven’t seen a trend in volume growth. Normally, we see a slight uptick from August through September, and we didn’t see that this year.”

Some players outperformed the overall market and their peers, with particular strength among the mid-tier spine companies. Globus Medical’s U.S. spinal hardware revenue grew +17% in 3Q, while ATEC closed the quarter with the best month in company history to finish at +41%. Some of SeaSpine’s largest U.S. regional markets slowed due to COVID infections, but the company still closed 3Q at +8.3% due to territory expansions.

Enabling Technology Sales Weathering the Storm

Enabling technology capital sales performed better than expected in 2020 against the backdrop of financially constrained hospitals. As the orthopedic market bottomed out in April and May, some device company leaders questioned the wisdom of even broaching the subject with hospital executives.

“What we’re hearing from customers is now is not the time for us to be evaluating capital technology, and we’ve got a lot of other priorities right now, and we need to get back into surgery. We need to get revenue-generating procedures back into facilities. So, we’re not pushing hard on capital. It’s not what customers want to hear from us right now,” said ConMed President and CEO Curt Hartman.

While ConMed’s year-to-date arthroscopic capital sales are down approximately -21% compared to last year, other equipment remains in demand. Providers demonstrated an appetite for joint replacement and spine robots. For instance, Stryker continued finding success with Mako placements. The company described its second-quarter robot sales as a pleasant surprise, and then Mako passed the 1,000-placement milestone in 3Q20. Stryker expects a “record-setting” fourth quarter for the system. Zimmer Biomet surpassed 200 robotic placements in the third quarter while Smith+Nephew placed their first CORI system in 2Q.

Globus Medical’s revenues from its ExcelsiusGPS robot declined in the third quarter versus the prior year against a difficult comparison, but did improve +66% sequentially from 2Q. Medtronic specifically called out Mazor as outpacing Globus by a factor of 1.5.

Medtronic’s President Geoffrey Martha explained the resilience of certain types of capital equipment, saying, “Our capital products tend to be tied to profitable elective procedures like spine, so that helps. The other thing is providing flexible financing. Although there is some pressure on general capital, when that capital is supporting an elective procedure that is profitable and critical to the hospital’s financial recovery, they’re continuing to have these conversations with us.”

Brisk Cadence of Tuck-In Acquisitions

While the total number of deals this year will likely decline from last year, 2020 did bring a surprisingly brisk cadence of tuck-in acquisitions. We’ll probably not see another acquisition the size of the recently closed Stryker purchase of Wright Medical any time soon. Still, the ripple-effects of that deal will create opportunities for growth and market share shift.

Zimmer Biomet anticipates disruption at Stryker during the integration of Wright Medical. “I would be very happy if there was disruption when you try to bring those two organizations together finally. The fact is, most of the time in our industry, bringing two organizations together is a dis-synergy risk. I would expect, given the historical view of acquisitions in our space, that we have an opportunity to take advantage of that. We have a very clear strategy in our extremities business,” said Bryan Hanson, Zimmer Biomet’s President and CEO.

DJO purchased Stryker’s STAR ankle system as part of the regulatory approval for the Wright Medical deal. Shortly thereafter, Smith+Nephew acquired Integra LifeScience’s orthopedics business, potentially as a counter move to DJO. Colfax, DJO’s parent company, believes the high fragmentation of the foot-and-ankle joint replacement market offers multiple acquisition-related growth paths.

In the spine segment, Medtronic bolstered Mazor’s capabilities with the acquisition of Medicrea’s surgical planning software, while Surgalign purchased HoloSurgical for its augmented reality and artificial intelligence (ARAI) platform. Zimmer Biomet could eventually contribute to a shakeup in spine as it begins to manage its portfolio and divest non-core business lines.

ASCs Are the Next Orthopedic Battleground

The shift of orthopedic procedures into ASCs continued in 2020. However, the COVID-related shift brought only modest, and likely transient, acceleration of procedures moving to outpatient settings. These facilities’ numbers and capacity remain well below the threshold needed to support the explosive growth predicted by many industry observers. We expect momentum will shift to outpatient settings, especially now that Centers for Medicare & Medicaid Services finalized its rule to eliminate the Inpatient Only list, starting with the removal of approximately 300 primarily musculoskeletal-related services, and to cover total hip replacement in ASCs.

For now, penetration remains low for ASC spine and large joint procedures, even among companies that focus on those settings like Smith+Nephew and NuVasive. Approximately 10% of Smith+Nephew’s knee replacement revenue comes from ASCs, while NuVasive characterized its ASC revenue as single digits comprising lower complexity cases.

“When we talk about the ASC in spine, we need to be deliberate around what specific procedural opportunities are best associated with that type of shift in care. Un-instrumented lumbar procedures, decompressions, discectomies and the like are commonly done on an outpatient basis. It’s time to evolve. We see across orthopedics a desire to leverage those alternate care settings,” said NuVasive Executive Vice President and CFO Matt Harbaugh.

It may be some time before ASCs truly reach critical mass in capacity and capability, but the largest orthopedic companies are increasingly focused on positioning themselves for that time. Both Smith+Nephew (CORI) and DePuy Synthes (VELYS) are deploying ASC-optimized robotics. Zimmer Biomet increased investment in its Sports Medicine franchise throughout 2020, including the acquisitions of Incisive and Relign in 3Q20. Stryker and Acumed are two examples of a recent surge of device companies offering all-in-one ASC plans that include inventory, pricing, billing and financing.

The increased focus paid off for Stryker in the third quarter. Company Chairman and CEO Kevin Lobo said, “We’re very pleased with our performance in ASCs. Mako’s number in ASCs in the third quarter was the highest we’ve had so far, so Mako is part of the solution. We had double-digit growth in our sports medicine business that plays in the ASC primarily. We tend to operate separately, by product category, in the hospital, but we’re not doing that in the ASC. Our aligned offerings are working very well.”

Orthopedic Market Revenue Projections for 2020

The orthopedic industry endured unprecedented challenges and uncertainty through 2020 as the pandemic nearly shut down elective procedures in April and May. However, we feel there’s enough information available to make some educated guesses for the end of the year

While the market rebounded impressively through the third quarter, that momentum quickly flattened as the surgical backlog depleted. New patient acquisition is improving, but volumes are only about 90% of their historical norms. Patient confidence and employment-based medical coverage are at risk due to the COVID winter surge. According to the COVID Tracking Project, daily cases and hospitalizations are shattering previous records in the U.S. Daily deaths are trending toward new highs in early December, as well.

With these factors in mind, we estimate that the orthopedic market will decline by -10.1% in 2020. Both the hip and trauma segments maintained relative resilience through the year, while knees and sports medicine stayed under significant pressure. Of the top-tier players, Stryker continued its trend of outperforming its peers. In the mid-tier, Globus Medical, DJO, SeaSpine and ATEC are all in prime positions for share gains in 2021.

However, significant uncertainty remains in the market. It is impossible to know what the surging pandemic will bring in the coming months or what policies the incoming U.S. administration will enact. Overall, the consensus in the industry points toward 2021 growth rates being fairly comparable to 2019. Regardless of what the early portion of 2021 brings, orthopedic companies have shown that they are extraordinarily adaptable and can find opportunities even in the most challenging environments.

Exhibit 2: Projected 2020 Orthopedic Revenue by Product Segment

Exhibit 3: Projected 2020 Orthopedic Revenue by Company

Seeking More Insight? Download an Excel spreadsheet of 4Q and FY Projections for the worldwide orthopedic industry and select public companies. Access our 20-minute webinar with deeper insight on crucial industry trends and market recovery projections.