Summary of the Hip and Knee Markets

The Market and The Trends

In 2011, global sales for hips and knees were estimated at $12.7 billion. Knees comprised $6.9 billion and hips $5.8 billion of total sales. Geographically, sales in the US accounted for slightly over 50% of global joint replacement revenues.

Also in 2011, growth in hip and knee procedures worldwide remained at low single digit levels, primarily as a continuing result of the global economic uncertainties that faced patients and institutions worldwide. Previously, single-digit growth has not characterized the joint replacement market since the early 1990’s.

In the US, several additional trends were evident, including:

Regulatory: Over the past several years, the FDA has severely tightened requirements for 510k clearances. As a result, the percentage of positive 510k clearances has decreased, the number of requests for additional information during the 510k process has increased, and the total 510k review times have lengthened. For orthopedic companies, timelines have been extended and the cost to innovate has increased.

Comparative Effectiveness: The Health Care Reform Law has mandated comparative effectiveness, which compares the benefits and costs of different treatment methods. Comparative effectiveness uses data to evaluate the relative effectiveness of two or more treatment methods (one device versus another) in realistic healthcare settings and measures differences in patient outcomes and/or differences in cost. Comparative effectiveness will increase the scrutiny on existing and potential future treatments and products and make data collection a must.

Cost Removal Programs. In an effort to further reduce implant costs, hospitals are implementing bundled payments for in-patient procedures. These bundled payments are delivered across an episode of care (a total hip or knee) versus having a hospital pay for services separately. Based on early experiments in orthopedic procedures, bundled payments have yielded device savings to hospitals.

In addition, over the past 3-4 years, several orthopedic companies have offered generic hips to hospitals and have penetrated a very small segment of the market. These generic hips sell for 40-50% less than the standard products based on an alternative distribution model, which in many cases has resulted in the elimination of the high paid, commissioned sales rep entirely or replacement by a lower paid individual (former nurse, operating room tech).

Commoditization. Diminishing R&D productivity, greater regulatory hurdles and changes in selling/marketing relationships have opened the door for greater competition, including lower cost providers. This has created a buyer’s market, as price has become an increasing lever in purchases. Without disruptive technologies to reverse pricing trends, the price outlook remains concerning.

At between 4 and 5.5% of sales, R&D remains one of the smallest expenses for the major and mid-major publicly-traded orthopedic companies. Innovation has been underwhelming in the last five years with little in the way of new, disruptive technologies. With decelerating revenue, R&D has been an area of underdevelopment in Orthopedics.

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