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After more than a year of volatility, the orthopedic market is finding its footing once again. Last summer brought a similar sense of optimism, but this time feels different amidst the ongoing COVID vaccine campaign and resumption of activity. As we await second quarter earnings reports, here are three questions we have: how close is the market to “normal” conditions, will M&A activity keep pace with its active 2020 and just how much can digital technology change orthopedics?
How Far Along is the Orthopedic Market’s Recovery?
After declining by -10.6% in 2020 vs. 2019, the orthopedic market had a bumpy start to 2021. However, by March, trends improved significantly. We estimate that the market grew in the low single digits for the first quarter of 2021. Most companies saw sequential improvement throughout the first quarter and into April, with the U.S. generally recovering more quickly than Europe.
Exhibit 1 shows our estimated year-over-year growth rate for the orthopedic industry by quarter. Amid an expanding vaccinated population and lifting restrictions, the market showed signs of recovery in most segments. Enabling technology sales remained robust following a record-breaking fourth quarter. Knee replacement, OA pain management injections and some areas of sports medicine are lagging behind, but we expect them to make up ground in the second half.
Exhibit 1: Orthopedic Market Year-over-Year Growth Rate by Quarter
Executives expressed a wide range of opinions on the market’’s recovery. ConMed described the market as a “long way from normal,” while Globus Medical declared that its spine business is operating at pre-COVID levels. Medtronic estimated recovery at 85% to 100%, depending on the combination of therapy and region.
The scope of the accumulated procedure backlog remains challenging to assess, as well. Zimmer Biomet estimated its backlog at “hundreds of millions of dollars” that would take 12 to 18 months to work through. Colfax shared similar sentiments around timing, with a “catch up” period lasting into 2022.
Hospitals appear to be in a better financial situation than many expected. Stryker CEO Kevin Lobo said, “Hospitals are in a pretty good financial position. Unlike prior crises that we’ve gone through, whether it was the financial meltdown or other issues, the hospital liquidity is very good. As procedures are coming back, we see through our order book that hospitals are actually in excellent financial position and better than frankly I would have expected when the pandemic first hit.”
U.S. unemployment rates improved modestly so far in the second quarter. Unemployment dropped below 6% in May for the first time since the pandemic began, but it is still 2.2% higher than the 12-month average for the period before COVID-19 hit the U.S.
One employment trend is positive for ASC-focused orthopedic players, however. According to Ryan Zimmerman of BTIG, hiring in outpatient centers is ramping up. He said, “We see a clear acceleration in hiring in physician practices, dental practices, and ambulatory surgery centers versus the broader healthcare setting.”
Will the Pace of Tuck-In Acquisitions Accelerate?
Despite the impact of financial constraints, 2020 brought a brisk pace of mergers and acquisitions. We tracked 42 transactions for orthopedic device companies last year. Through the first half, 2021 is off to a slower start, with 13 closed transactions compared to 19 at the same point in the previous year.
Kyle Rose, an analyst with Canaccord Genuity, said that there is a “paucity of true organic growth within large-cap medtech.” We think that’s especially true in the spine segment. That market accounts for nearly 43% of our tracked M&A transactions so far in 2021, and 35% of all transactions going back to 2016.
Outside of spine, DJO has rapidly stood up a foot-and-ankle business by investing $225 million in a short span via deals with Stryker, Trilliant Surgical, MedShape and Mathys. We expect the company to remain active in 2021. Before the Mathys addition, Colfax’s CEO Matthew Trerotola said, “We’re in a position where we can now build the business organically plenty and have strong double-digit growth over time. But there are also other bolt-ons and tuck-ins within that space that we can take a look at. We certainly have more flexibility now. But I would say that most of the things that we’re thinking about are in the small to medium-size range, versus big moves, in the short to medium-term.”
Can Technology Really “Reshape the Growth Curve” in Orthopedics?
Zimmer Biomet’s Bryan Hanson highlighted the exciting potential of digital technology in orthopedics. He said, “We’re very focused on a real evolution of the company from a metal and plastic provider of implants to a leading med-tech innovator. Think of us as a high-tech company that happens to be in medtech. I believe fundamentally that this shift is coming not only for us, but for the entire market that we play in. These technology advancements potentially can reshape the growth curve of these markets.”
While the idea that digital can reshape the growth curve of the entire industry raised some eyebrows, Zimmer Biomet is hardly the only company championing this type of transition. Medtronic and Globus Medical have both undertaken an evolution toward integrated technologies. Surgalign said that the very currency of the orthopedic market is moving from implants to digital services.
Robotics drove essential revenue streams for the largest orthopedic players in 4Q20 and 1Q21. Will momentum sustain placements in the second quarter, or are we about to hit a lull? Despite penetration and utilization remaining low, these platforms are increasingly a “must-have” portfolio item, as we see from NuVasive’s difficult position amid the delayed Pulse launch. We expect the success of these platforms to continue in 2021, in addition to more mid-sized players acquiring differentiated digital solutions.
We’ll be watching for answers, or at least clues, to these questions and more as orthopedic companies begin reporting their second-quarter results. Despite some lagging product categories like knee replacement and osteoarthritis pain management, we remain confident in the market’s potential to finish the year with modest growth over 2019.
After more than a year of volatility, the orthopedic market is finding its footing once again. Last summer brought a similar sense of optimism, but this time feels different amidst the ongoing COVID vaccine campaign and resumption of activity. As we await second quarter earnings reports, here are three questions we have: how close is the market...
After more than a year of volatility, the orthopedic market is finding its footing once again. Last summer brought a similar sense of optimism, but this time feels different amidst the ongoing COVID vaccine campaign and resumption of activity. As we await second quarter earnings reports, here are three questions we have: how close is the market to “normal” conditions, will M&A activity keep pace with its active 2020 and just how much can digital technology change orthopedics?
How Far Along is the Orthopedic Market’s Recovery?
After declining by -10.6% in 2020 vs. 2019, the orthopedic market had a bumpy start to 2021. However, by March, trends improved significantly. We estimate that the market grew in the low single digits for the first quarter of 2021. Most companies saw sequential improvement throughout the first quarter and into April, with the U.S. generally recovering more quickly than Europe.
Exhibit 1 shows our estimated year-over-year growth rate for the orthopedic industry by quarter. Amid an expanding vaccinated population and lifting restrictions, the market showed signs of recovery in most segments. Enabling technology sales remained robust following a record-breaking fourth quarter. Knee replacement, OA pain management injections and some areas of sports medicine are lagging behind, but we expect them to make up ground in the second half.
Exhibit 1: Orthopedic Market Year-over-Year Growth Rate by Quarter
Executives expressed a wide range of opinions on the market’’s recovery. ConMed described the market as a “long way from normal,” while Globus Medical declared that its spine business is operating at pre-COVID levels. Medtronic estimated recovery at 85% to 100%, depending on the combination of therapy and region.
The scope of the accumulated procedure backlog remains challenging to assess, as well. Zimmer Biomet estimated its backlog at “hundreds of millions of dollars” that would take 12 to 18 months to work through. Colfax shared similar sentiments around timing, with a “catch up” period lasting into 2022.
Hospitals appear to be in a better financial situation than many expected. Stryker CEO Kevin Lobo said, “Hospitals are in a pretty good financial position. Unlike prior crises that we’ve gone through, whether it was the financial meltdown or other issues, the hospital liquidity is very good. As procedures are coming back, we see through our order book that hospitals are actually in excellent financial position and better than frankly I would have expected when the pandemic first hit.”
U.S. unemployment rates improved modestly so far in the second quarter. Unemployment dropped below 6% in May for the first time since the pandemic began, but it is still 2.2% higher than the 12-month average for the period before COVID-19 hit the U.S.
One employment trend is positive for ASC-focused orthopedic players, however. According to Ryan Zimmerman of BTIG, hiring in outpatient centers is ramping up. He said, “We see a clear acceleration in hiring in physician practices, dental practices, and ambulatory surgery centers versus the broader healthcare setting.”
Will the Pace of Tuck-In Acquisitions Accelerate?
Despite the impact of financial constraints, 2020 brought a brisk pace of mergers and acquisitions. We tracked 42 transactions for orthopedic device companies last year. Through the first half, 2021 is off to a slower start, with 13 closed transactions compared to 19 at the same point in the previous year.
Kyle Rose, an analyst with Canaccord Genuity, said that there is a “paucity of true organic growth within large-cap medtech.” We think that’s especially true in the spine segment. That market accounts for nearly 43% of our tracked M&A transactions so far in 2021, and 35% of all transactions going back to 2016.
Outside of spine, DJO has rapidly stood up a foot-and-ankle business by investing $225 million in a short span via deals with Stryker, Trilliant Surgical, MedShape and Mathys. We expect the company to remain active in 2021. Before the Mathys addition, Colfax’s CEO Matthew Trerotola said, “We’re in a position where we can now build the business organically plenty and have strong double-digit growth over time. But there are also other bolt-ons and tuck-ins within that space that we can take a look at. We certainly have more flexibility now. But I would say that most of the things that we’re thinking about are in the small to medium-size range, versus big moves, in the short to medium-term.”
Can Technology Really “Reshape the Growth Curve” in Orthopedics?
Zimmer Biomet’s Bryan Hanson highlighted the exciting potential of digital technology in orthopedics. He said, “We’re very focused on a real evolution of the company from a metal and plastic provider of implants to a leading med-tech innovator. Think of us as a high-tech company that happens to be in medtech. I believe fundamentally that this shift is coming not only for us, but for the entire market that we play in. These technology advancements potentially can reshape the growth curve of these markets.”
While the idea that digital can reshape the growth curve of the entire industry raised some eyebrows, Zimmer Biomet is hardly the only company championing this type of transition. Medtronic and Globus Medical have both undertaken an evolution toward integrated technologies. Surgalign said that the very currency of the orthopedic market is moving from implants to digital services.
Robotics drove essential revenue streams for the largest orthopedic players in 4Q20 and 1Q21. Will momentum sustain placements in the second quarter, or are we about to hit a lull? Despite penetration and utilization remaining low, these platforms are increasingly a “must-have” portfolio item, as we see from NuVasive’s difficult position amid the delayed Pulse launch. We expect the success of these platforms to continue in 2021, in addition to more mid-sized players acquiring differentiated digital solutions.
We’ll be watching for answers, or at least clues, to these questions and more as orthopedic companies begin reporting their second-quarter results. Despite some lagging product categories like knee replacement and osteoarthritis pain management, we remain confident in the market’s potential to finish the year with modest growth over 2019.
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ME
Mike Evers is a Senior Market Analyst and writer with over 15 years of experience in the medical industry, spanning cardiac rhythm management, ER coding and billing, and orthopedics. He joined ORTHOWORLD in 2018, where he provides market analysis and editorial coverage.
