PREVIEW-Shaky orthopedic device market set to rebound

* Analysts expect modest 2010 rise in hip, knee procedures

* Sales seen improving gradually as year progresses

* Q4 results expected to confirm market is stabilizing

By Susan Kelly

CHICAGO, Jan 25 (Reuters) – U.S. orthopedic device makers, hobbled in 2009 by sluggish procedure volumes, are poised for modestly better growth this year as pent-up demand and a recovering economy spur sales.

Investors will look for evidence of improving demand for hip and knee replacements when device makers Stryker Corp (SYK.N) and Zimmer Holdings Inc (ZMH.N) as well as Johnson & Johnson’s (JNJ.N) DePuy unit report fourth-quarter results this week.

“We got some signs last quarter that the deferral of procedures that had been going on for much of this economic crisis was easing up a little bit. After a tough year or two for some of these companies, their prospects definitely look a little brighter in 2010,” said Morningstar analyst Julie Stralow.

Growth in the market for reconstructive joints slowed last year as patients, unable to afford surgery or unwilling to take time off from work in the weak economy, delayed those procedures.

“We all found out hip and knee surgeries were more elective than we thought,” said Noble Financial Group analyst Jan Wald, who has “hold” ratings on both Zimmer and Stryker.

But demand didn’t fall off a cliff, as some investors had feared, and the market’s recovery is expected to be similarly gentle.

“We’re sensing there’s some stability in the market,” said Wald, who expects device makers’ fourth-quarter results to bear that out.

Demand should really begin to improve in the first or second quarter, he said. Overall, he expects the global market for reconstructive joints to grow in the mid-single digits in 2010, up from about 3 percent last year, excluding the impact of currency translations.

Hospitals will continue to feel the pinch from lower patient admissions and will keep pressure on their physicians to control costs. That pressure will be passed on to device makers, Wald said.

“We don’t see much pricing power on the part of the companies, so whatever they get is going to be volume and procedures, not necessarily pricing,” he said.

However, year-over-year earnings comparisons will become easier as people who delayed surgery become more confident about using their funds and taking time off work to have the procedure, Stralow said.

Stryker earlier this month released preliminary fourth-quarter sales that were above expectations, and privately held orthopedic device maker Biomet Inc has also reported encouraging quarterly results, suggesting the market is holding up, analysts said.

Robotic surgical systems maker Intuitive Surgical Inc’s (ISRG.O) surprisingly strong fourth-quarter profit last week bodes well for Stryker’s hard-hit medical equipment unit, Stralow said.

“It looks like hospital administrators may be willing to open their wallets a little bit more. If we see momentum in that business, maybe investors will come back to that name,” she said. Stryker’s medical equipment unit sells beds, stretchers and operating room equipment.

Bernstein analyst Derrick Sung sees the U.S. hip and knee market growing 6 percent in the fourth quarter and recovering to 8 percent in 2010 due to easier comparisons with the prior year, pent-up demand and new products.

“While we expect weakness to persist in outside-U.S. hip and knee markets, growth appears to have bottomed in Q2,” Sung said in a research note on Monday.

(Reporting by Susan Kelly; Editing by Phil Berlowitz)



Josh Sandberg

Josh Sandberg is the President of Ortho Spine Partners and Partner for The De Angelis Group. He also serves as Co-Founder and Editor of OrthoSpineNews.

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