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Growth and Consolidation in the Orthopaedic Medical Device Market: 1999 to 2015 Reveals Increased Market Share and Mergers and Acquisition Activity

Mitchell Ng, BA *†

Simon Song, BSE *°

Stephen Bigach, BSE†

Anton Khlopas, MD†

George F Muschler MD†

John Callaghan, MD t

Nicolas S Piuzzi MD†

Michael A Mont MD†

* These authors contributed equally to this work

† Cleveland Clinic, Department of Orthopaedic Surgery, Cleveland, Ohio

° Duke University, Department of Biomedical Engineering, Durham, North Carolina

Instituto Universitario del Hospital Italiano de Buenos Aires, Argentina

t University of Iowa, Department of Orthopaedic Surgery, Iowa City, Iowa

Conflict of Interest: Mitchell Ng is a partner at investment fund Thessalus Capital, which invests in healthcare stocks.  Thessalus has no active positions in companies mentioned or in orthopaedic medical device companies.

Corresponding author:

Michael Mont MD

Department of Orthopaedic Surgery

Cleveland Clinic

9500 Euclid Avenue Cleveland, Ohio 44195

[email protected]

Abstract​

Background:

Orthopaedic surgeons often require highly specialized medical devices, implants, and equipment, which are usually offered by several vendors. Few studies have analyzed the orthopaedic medical device companies responsible for creating and marketing these products.  Therefore, our aims were to: 1) determine the variation in market share among the top 10 orthopaedic device companies from 1999 to 2015, 2) track the orthopaedic market growth rate during this period, and 3) analyze key mergers and acquisition (M&A) activity within the orthopaedic device market to determine their impact on market consolidation.

Methods:

Financial data was gathered on the top 10 orthopaedic device companies ranked by worldwide sales from 1999 to 2015. For publicly-traded companies, revenue figures were obtained from Securities and Exchange Commission (SEC) reports, and for private companies, industry reports such as Orthoworld provided the best approximation for annual sales. Annual sales were calculated for the period of interest (1999 to 2015) and aggregated to calculate the market share and compounded annual growth rates (CAGRs) of the Top 5 Companies, Top 10 Companies, and Overall Worldwide Market.  A list of comprehensive M&A transactions was obtained through S&P Capital IQ, a financial information database used widely across Wall Street, filtering results by transaction size and target company profile.  The final M&A list and worldwide sales figures were cross-checked with company specific findings, press releases, and third-party annual reports.

Results:

The top 10 companies decreased their overall market share from 72.7% in 1999 to 70.5% in 2015, while the top 5 companies increased their market share from 52.8% in 1999 to 62.2% in 2015.  During this time period, the orthopaedic device market also experienced notable growth and consolidation.  The worldwide orthopaedic market grew at a CAGR of 8.9% from 1999 to 2015, at a rate of 12.0% from 1999 to 2008, and at 2.8% from 2009 to 2015. Increased M&A activity contributed to the increase in consolidation based on increasing size and market share of the top 5 companies in the orthopaedic device sector.

Conclusion:

The orthopaedic device market is growing at a decreasing rate and is consolidating, both of which suggest industry maturation. With this industry maturation, there has been a shift towards niche sub-industries like biomaterials and specialized implants to maintain growth, which may further shape the orthopaedic landscape in years to come.

INTRODUCTION

The increase in rates of sports/activity-related injuries [1], obesity [2], and aging population [3] have been associated with an increased incidence of orthopaedic diseases (e.g. osteoarthritis, trauma) [4], and therefore an increased demand for orthopaedic surgical interventions. Most of these procedures require specialized medical instruments, as well as implants such as joint arthroplasties, plates, screws, and grafts [5]. Considering the changing landscape of healthcare delivery and reimbursement, monitoring the prices and changes in the orthopaedic market for the various medical instruments and devices is of marked importance.  These changes will continue to impact hospital purchasing capabilities and surgical practices [6,7]. Understanding developments in the orthopaedic market provides important background context for the clinician-supplier-patient dynamic, and aids to predict future trends of the industry.

Historical analysis of the overall global medical device technology market shows that the top 10 companies account for approximately 40% of the total market, whereas, the top 50 account for 78% of the entire market [8]. However, the orthopaedic medical device market, as a subsector of the global medical device industry, appears to have a greater degree of clustering [8]. To date, the orthopaedic device market has not been well-characterized, and the degree of consolidation and financial performance is not well-defined for orthopaedic surgeons. Furthermore, significant mergers and acquisitions (M&A) activity within the orthopaedic subspace, key drivers behind the changing industry dynamic, and the future direction of the orthopaedic device market has not been analyzed.

Therefore, the purpose of this study was to provide a comprehensive analysis of the orthopaedic device market from a financial perspective, specifically by tracking orthopaedic sales and market shares over the past 15 years. Specifically, our aims were to: 1) determine the market shares of the top 10 orthopaedic device companies from 1999 to 2015; 2) quantify the growth rate of the orthopaedic market during this time period, and 3) analyze key merger and acquisition (M&A) activity within the orthopaedic device market to identify market consolidation.

METHODS

Delineating Orthopaedic Device Market Consolidation from 1999 to 2015 by Calculating Top 5 and 10 Companies' Market Share of Worldwide Sales

Financial information was gathered on the top 10 orthopaedic companies ranked by worldwide market share, defined as proportion of annual sales. For publicly-traded companies, audited financial statements were obtained online through annual filings (Form 10-K) that are registered with the Securities Exchange Commission (SEC) and are accessible to the public via company websites or the SEC EDGAR (Electronic Data Gathering, Analysis, and Retrieval) database. For private companies exempt from filing with the SEC, financial data is rarely disclosed to the general public. Taking this into consideration, annual sales were obtained from industry reports, the next best alternative providing reasonable estimates on financial data on private companies. The primary industry reports used for this study were OrthoWorld's (formerly known as Knowledge Enterprise) Worldwide Orthopaedic Market annual reports, copyrighted by Dorland's Biomedical (Philadelphia, Pennsylvania, USA).  Founded in 1992, Orthoworld Inc. (Chagin Falls, Ohio, USA) is the only strategic services firm dedicated solely to publishing data on the worldwide orthopaedic market, publishing reports, newsletters, and news abstracts including Orthoknow, U.S. Orthopaedic Product News, and the National Orthopaedic Surgeon Panel series. [9]

From these two sources of information, worldwide annual sales of each orthopaedic device company were calculated for each year during the time period of interest (1999 to 2015). Since certain companies had reporting segments that did not relate to orthopaedic devices (e.g. Zimmer and Biomet report dental sales), revenue adjustments were made and are reported (Supplemental Table 2) to provide the details behind the calculations for each company's annual sales. Furthermore, by adding the “Other Sales”, or sales contributed by companies outside of the Top 10, the total worldwide market for orthopaedic device sales was calculated; this was provided as an estimate by Orthoworld. Market share was then calculated as a percentage of the total worldwide market for sales, and the Top 5 and 10 companies' market share is reported from 1999 to 2015 (Table 1, Figure 1). If a Top 10 company was acquired during a fiscal year, their status was reported and replaced by the next largest orthopaedic device firm so that there was a new entrant to the Top 10 list. Furthermore, the compounded annual growth rate (CAGR), which is a geometric average that provides a constant rate of return over a time period, was calculated using the formula [final/initial](1/(n – 1)), where n is the number of years.

Analysis of M&A Activity in the Orthopaedic Device Field and Watershed Moments

A list of comprehensive M&A transaction was obtained through Standard & Poor's (S&P) Capital IQ (New York, NY, USA), a financial information database and data analytics platform used widely across Wall Street [10].  It was originally designed to serve the investment banking community, and is found in over 4,200 firms such as J.P. Morgan and Piper Jaffray, and over 500 academic institutions [11]. A list of M&A transactions was compiled for each company using the M&A/Private Placements search engine (under “Transactions”) with the following filters: 1) By Role – Buyer Only; 2) By Type – Merger/Acquisition; and 3) By History – All History; and 4) Include Transactions for: Subsidiaries. The results were aggregated into a list, and transaction sizes of below $10 million were omitted. Furthermore, the aggregated list was filtered based on the target company profile, and only transactions where the target company was an orthopaedic device firms remained. The final compiled list was cross-checked with company specific filings, press releases, and third-party annual reports (Orthoworld) (Table 2 and 3). Using this information, a chart for consolidation in the orthopaedic device market was created (Figure 2), with the original top 10 companies by annual sales in blue circles, latter top 10 firms in green circles, and other acquisitions in red, with the deal value provided if applicable.  With 72 total M&A deals from 1999 to 2015 among the top 10 firms, only mergers or acquisitions greater than $100M (45 total) were included in the image (Figure 2 and Table 3).

RESULTS

Variation in market share among the top 10 orthopaedic device companies from 1999 to 2015

Within the orthopaedic device market from 1999 to 2015, the 5 largest firms (Supplemental Table 1) by market capitalization have gained market share with respect to that of the overall worldwide market. The top 5 companies increased their market share from 52.8% in 1999 to 62.2% in 2015, and the top 10 companies have ceded market share from 72.7% in 1999 to 70.5% in 2015 (Table 1).

Orthopaedic Device Market Growth Rate

From 1999 to 2015, the overall worldwide orthopaedic market grew at a compounded annual growth rate (CAGR) of 8.9%, and for the Top 5 and 10 companies at a rate of 10.1% and 8.7%; yet for the 1999 to 2008 period, the overall worldwide orthopaedic device market grew at 12.0% (Top 5 – 12.9%, Top 10 – 12.7%), and from 2009 to 2015 grew at 2.8% (Top 5 – 3.9%, Top 10 – 1.6%) (Figure 1 and Table 1).  In contrast, the global and U.S. medical device sector, of which orthopaedics consists of 7.9% of worldwide market share [12], has grown at a CAGR of ~4.4% and ~6.1% respectively [13].  In summary, from 1999 to 2015 the orthopaedic device market has had positive growth rate every year, but is growing at a decreasing rate.

Significant M&A within Top 10 Firms and Rest of Orthopaedic Device Industry

Accelerating Consolidation in the Orthopaedic Device Market between Top 10 Companies

From 1999 to 2015, the top five orthopaedic device companies by market capitalization did not change places: 1) Stryker, 2) Zimmer, 3) Biomet, 4) J&J, 5) Synthes (Supplemental Table 1).  There was however significant M&A activity by top firms (Table 2).  Two clusters of orthopaedic firms exist from M&A activity between the top 10 orthopaedic device companies, with Zimmer and J&J (DePuy) leading intra-group mergers between top 10 companies. In 2002, Zimmer acquired Sulzer (also known as Centerpulse) for $3.2 billion in cash-and-stock, the first acquisition between Top 10 firms from 1999-2015. In addition, Zimmer completed 4 acquisitions with publicly accessible transaction values for a total amount of ~$600 million before its noteworthy merger with Biomet, a deal valued at $13.35 billion. Sulzer (acquired Spine-Tech for $595 million) and Biomet (acquired Lanx and Interpore International for $147 and $280 million, respectively) completed transactions of their own as a separate entity, and the total aggregate value of Zimmer's acquisitions (including acquisitions made by subsidiaries / acquired companies) is estimated to be $18 billion. Similarly, Johnson & Johnson has acquired various companies since its hallmark acquisition of DePuy in 1998. It acquired Synthes (formerly known as Synthes-Stratec) in April 2011 for $21.3 billion; Synthes had acquired Mathys, another initial Top 10 orthopaedic device firm, for $1.1 billion in August 2003, and made two other acquisitions for a total of $380 million (N Spine Inc., Spine Solutions). Altogether with DePuy's acquisition of AcroMed for $325 million, the J&J family of orthopaedic firms is estimated to be worth $26.5 billion. Other Top 10 companies have similarly made a string of acquisitions, with Stryker participating in 12 transactions for a total deal value of $7.2 billion, MedTronic spending $10.5 billion on 12 acquisitions, Smith & Nephew spending $3.6 billion on 7 deals, and Wright Medical acquiring 7 companies for a total of $3.9 billion (Table 3).

Ultimately, due to M&A activity in the sector, the composition of the Top 10 companies changed considerably over time; in 1999, the industry was comprised of 2 large firms with >$1 billion in revenue, and 8 smaller-sized companies with <$1 billion in revenue. In 2015, there were 3 industry leaders ($5+ billion in revenue), 3 mid-sized firms ($1-3 billion in revenue), and 4 small firms (<$1 billion in annual sales). Of note, even after all M&A transactions by the top 10 orthopaedic device companies, the top orthoapedic company by market capitalization, Stryker, has maintained its leading place.

Acquisition of Smaller Orthopaedic Device Firms by Industry Stalwarts

In addition to the consolidation that resulted from Zimmer and J&J's history of acquisitions, almost every original and new Top 10 company has been a participant in the M&A activity in the industry. Stryker has acquired 10 companies with an aggregate value of $6.6 billion, with important acquisitions such as Howmedica ($1.9 billion), Porex Surgical ($1.4 billion), and MAKO Surgical ($1.65 billion). Similarly, Smith & Nephew has acquired 5 companies for an aggregate total of $3 billion in transaction value (important deals being Arthrocare for $1.7 billion, Plus Orthopaedics for $889 million). Medtronic has also been active, acquiring fellow Top 10 firm, Kyphon, for $3.9 billion in July 2007, in addition to 8 other orthopaedic firms for an estimated total value of $8.8 billion. The Wright Medical Group merged with Tornier in October 2015, and the deal in 2014 (estimated to be worth $3.3 billion) consolidated the 10th smallest firm with a peer of similar size in the orthopaedic device market.

Discussion

The orthopaedic device market is undergoing increasing consolidation as the market share is concentrated among the top 10 firms in the field, and that the overall orthopaedic device market is growing at decreasing rate. Overall CAGR from 1999 to 2015 was 8.9%, with 12.0% annual average from 1999 to 2008, but only 2.8% from 2009 to 2015 (Table 1). The rise seen in M&A activity was not only explained by the acquisition of smaller firms, but also due to colossal mergers or acquisitions of fellow Top 10 stalwarts in the industry (Zimmer - Biomet, J&J - Synthes) (Figure 1). For example, the Top 7 companies in 2005 all generated revenues from $1 to $4 billion, showing greater parity than the industry in 2015, when the Top 3 companies had annual sales of $5 to $9 billion, and the next 3 companies were mid-sized ($1 to $3 billion in annual revenue) or much smaller (<$1 billion in sales) (Table 1).  After considering all M&A transactions by smaller firms, Stryker still remains the #1 orthopaedic firm by market capitalization, 33% larger than its nearest competitor Zimmer.  Such large-scale transactions are responsible for the increased market share from 52.8% to 62.2% of the top 5 companies from 1999 to 2015. Both market consolidation and decreased overall growth rate are signs of industry maturation.

There are several limitations to this study.  Many transaction terms are left undisclosed even if the acquirer is a large publicly-traded company, and this is especially common among smaller deals involving start-ups or pre-revenue stage companies.  In addition, given that the time frame of interest extended back to 1999, not every company website provided accessible SEC filings or press releases; for clarification, this time period of interest was selected given that financial data from the early 1990's is usually not electronically accessible.  As a result, information regarding M&A activity could not be sourced from one central source, and instead a comprehensive and thorough process was required to gather information in the most systematic and complete approach possible: a) SEC filings and company websites were first consulted to document public transactions; b) Orthoworld was consulted since the annual report documented every active orthopaedic company, confirmed mergers and acquisitions, and listed other noteworthy financial and clinical events.

In order to report the annual revenues of the Top 10 companies accurately with respect to the worldwide orthopaedic device market, we provided details on adjustments to revenue breakdowns (exclusion of certain reporting segments or businesses/subsidiaries), given that most largest companies in the field have other non-orthopaedic device businesses (dental, wound repair, etc.) (Table 1 and Supplemental Table 2).  In addition, the “Other Sales” component encompassed all other orthopaedic device companies that were outside of the Top 10, and comprises a wide range of company sizes and annual sales (the majority of which are non-revenue generating).  Thus, Table 1 provides an approximation of the market share of orthopaedic device firms not in the Top 10 companies by annuals sales based on Orthoworld's estimations, estimating total worldwide market annually.

Overall the increased in M&A trends seen in the orthopaedic device market have two important ramifications for clinicians and researchers: 1) price changes, and 2) increased emphasis on niche specialty products. Downwards pricing pressure has existed in the orthopaedic device market due to a plethora of factors: the Affordable Care Act reimbursement effects, decreased utilization rates of costly procedures like knee/hip implants, and increased commoditization. This has prompted large orthopaedic firms such as Zimmer and Biomet [19] to merge to capitalize on improved economies of scale and consolidate to sustain competitive pricing. When examining price changes, it is especially important to consider the consumer's perspective – in most cases large hospitals.  Hospitals are compensated for most procedures by diagnosis and procedure codes. The cost of an orthopaedic device is a large portion of the total surgery cost to the hospital, often averaging 43 to 50% of costs, but has been seen as high as 87% [6,20].  While most surgeons are unaware of the price variation between different devices [21,22], hospitals have taken note of this expense, some limiting vendors available to negotiate contracts for lower overall pricing.  Other hospitals have tried different methods to cut costs.  One method recently described by Okike et al.[6] showed improving physician awareness of cost through a Green-Yellow-Red system (based on costs, the available options for devices were categorized as "green" (preferred vendor), "yellow" (midrange), or "red" (used for patient-specific requirements) that decreased cost, maintained physician choice, and created competition amongst vendors.  This push from hospitals for decreased pricing may be a potential explanation for consolidation shown by our results – larger firms are typically better-equipped to price products lower and survive on lower profit margins.  This being said, it is also important to note that while the consolidation of large orthopaedic firms in the short run will allow for depressed prices through economics of scale, in the long run there is potential risk for price collusion and oligopoly [23], whereby specific implants or surgical equipment/tools are only offered by few vendors. The implications of these findings are or outmost importance, since orthopaedic costs are the leading Medicare payment to hospitals by diagnosis [6].  

While effects of market consolidation on device pricing are a balance between economies of scale and potential price collusion, overall maturation of the orthopaedic device market is a markedly positive sign for patients and healthcare providers alike.  The increas in M&A activity, specifically the acquisition of smaller start-up firms by larger firms, mirrors closely what happened in the pharmaceutical marketplace years ago [24].  Orthopaedic device firms face the constant challenge of driving growth, either organically or inorganically through acquisitions. The orthopaedic device market, specifically hip and knee replacements, have matured to the point where it is becoming increasingly more challenging to develop a product that can markedly improve outcomes at a competitive price.  Consolidation only addressed by “organic growth”, allows firms to sustain better pricing/margins on products even if volume remained immobile, but inorganic growth is often the source of increasing top-line (revenue) and bottom-line (profit) performance [25]. Additionally, smaller orthopaedic device companies can be acquired for their innovative pipeline before emerging as a potential competitor to established companies if they demonstrate proof-of-concept and commercial success. Recent notable examples include Wright's acquisition of Solana Surgical (a maker of specialized foot and ankle implants) for $90 million [26] for their worldwide extremities business, Tornier's acquisition of OrthoHelix for $135 million [27] for their small bone screw and plate implants, and Zimmer's acquisition of Knee Creations for their subchondroplasty procedure [28]. Furthermore, as evident by the Wright-Tornier merger [18,29], orthopaedic firms have simultaneously targeted high-growth sectors of the orthopaedic device market such as historically less-emphasized sub-specialties (foot and ankle, hand and wrist, elbow, shoulder), biologics, sports medicine, and other innovative subfields.   Increased investment interest in these specialty orthopaedic device sub-industries like small joints (i.e. hand, elbow and ankle) and biomaterials will likely pave the way for future innovation.  In short, market maturation will drive increasing focus towards medical devices with smaller niche patient populations, but where there is greater chance to obtain large market share. This is already occurring, whereby in addition to the horizontal consolidation in hips/knees, established firms are seeking to augment their platform by acquiring sports medicine, trauma, spine, and extremities companies [30].

For orthopaedic surgeons, the recent decade of consolidation has both advantages and disadvantages. From a supplier perspective, increasing consolidation should enable large orthopaedic firms to deliver products and services in a more efficient manner, which will allow hospitals to better control the costs of implants and services. However, less competition could also mean fewer options for surgical equipment and tools, since there are decreased incentives for innovation. One result of a mature orthopaedic device market could be declining innovation among established companies, and a shift towards smaller nimble startups that willingly tap into the entrepreneurial spirit of surgeons.

CONCLUSION

​The orthopaedic device market has grown at a CAGR of 8.9% from 1999 to 2015, and is projected to continue growing 2-4% a year. From 1999 to 2015, there has been marked consolidation of orthopaedic device companies, with the top 5 companies increasing total market share from 52.8% to 62.2%, and top 10 companies controlling 70-75% of the market.  Acquisition of smaller firms accounted for significant M&A activity, but the most sizeable transactions were seen between the top 10 players (Zimmer – Biomet, J&J – Synthes).  Stryker has retained its place as largest orthopaedic device company by market capitalization, 33% larger than nearest competitor Zimmer.  Consolidation and stabilizing growth rates of the orthopaedic device market has important financial and clinical ramifications, indicating industry maturation, price changes in surgical equipment/tools/implants affected by both less market competition/price collusion competing and economies of scale, and a shift in innovation towards smaller startups.  There is preliminary evidence of increased transactions in niche high-growth sectors of the orthopaedic device market such as shoulder, foot and ankle, hand and wrist, sports medicine, biologics, and biomaterials.  The orthopaedic device marketplace is changing, and surgeons should be aware of how this will affect their choice and method of delivering appropriate

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