Rebound of Orthopedic Market Generates Excitement for Future Growth

The orthopedic market endured three tumultuous years in the wake of the COVID pandemic and the macroeconomic disruption that followed. While 2022 did bring encouraging signs for the industry, economic pressures will likely persist throughout 2023 and potentially beyond. However, orthopedic companies remain adaptable in the face of prolonged disruption. We estimate that the global orthopedic market generated $55 billion in sales during 2022, growing 3.5% compared to the prior year (see Exhibit 1).

Let’s look back at a year filled with newsworthy mergers and rebounding case volumes, and look ahead to a future of data-driven and personalized outpatient care. The numbers and insights are based on THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT®.

Exhibit 1: Orthopedic Sales – 2020 to 2023E ($Millions)

The major players in each orthopedic segment continue to shift M&A priorities, create ASC-focused products and pivot toward modernizing orthopedics through digital technologies.

Exhibit 2 illustrates orthopedic segments by market share, while Exhibit 3 shows sales for 2020 to 2022.

Exhibit 2: Market Share by Product Segment 2022

Exhibit 3: Orthopedic Product Segment Sales – 2020 to 2022 ($Millions)

Joint replacement. Surgical volumes rebounded in 2022 after two years of lagging recovery compared to other orthopedic segments. The knee and hip replacement categories finished above their historical averages, growing 4.9% and 3.8%, respectively. The negative impact of volume-based procurement in China stung highly globalized joint replacement players like Zimmer Biomet, DePuy Synthes and Smith+Nephew.

Spine. The spine market saw two major M&A transaction announcements between late 2022 and early 2023. Orthofix and SeaSpine closed their merger, while Globus Medical’s purchase of NuVasive is pending. Those deals represent a significant shake-up in the orthopedic hierarchy. Orthofix is now the tenth-largest company in orthopedics, while Globus is in line to become the second ranked company in spine. Outside of those acquisitions, mid-tier players like ATEC continue to take market share from diversified strategic companies.

Trauma. The trauma space experienced a softer market in 2022, exacerbated by volume-based procurement in China. However, the diverse foot and ankle segment is attractive to orthopedic players of all sizes, from industry-leading Stryker to mid-sized CONMED and down to pure-play disruptors like Paragon 28. Albert DaCosta, Paragon 28’s CEO, called the foot and ankle segment “the last remaining gem in orthopedics.”

Sports medicine. Large incumbents like Stryker and Zimmer Biomet are increasingly focused on sports medicine because of its high growth subsegments and the attractive ASC setting. However, continuing supply chain disruption impacted the availability of parts required for sports medicine capital equipment. Those shortages hurt 2022 sales for companies like Smith+Nephew and CONMED.

Orthobiologics. This segment remains highly active for new products and M&A transactions. The Orthofix/SeaSpine merger in particular created a broad biologics and regenerative portfolio that is further strengthened through the ongoing partnership with MTF Biologics. Orthopedic companies competing in the viscosupplement market, such as Bioventus, suffered from lost sales as reimbursement for hyaluronic acid treatments switched from wholesale acquisition cost to average selling price.

Enabling technology. Changing capital equipment acquisition models blunted the previously rapid growth in this segment. Outright sales for robotics and navigation fell out of favor as rentals and volume-based agreements rose to the fore. However, the increasing penetration of technology in orthopedics generates massive datasets that can help companies monitor patients and improve outcomes. This space remains ripe for innovation and growth potential.

Macro Environment Remains Dynamic and Challenging

Despite some of the positive macro trends we saw in 2022, orthopedic companies are hedging their bets for 2023. Restructuring, cost containment and portfolio rationalization are some of the ways that companies are adjusting to economic pressures. Most public players provided very conservative revenue guidance due to the amount of uncertainty in the market.

“We do not see 2023 as a normal market,” said Zimmer Biomet CEO Bryan Hanson. “We have a very constrained supply situation. We’re managing through it, but it’s a tough road. That’s going to continue throughout 2023. Staffing shortages and our supply chain capacity are going to remain headwinds for us in 2023. We’re also monitoring the recession risk’s impact on elective procedures, particularly as it relates to unemployment rates.”

Hanson’s peers largely agreed with his assessment during fourth-quarter earnings calls. Johnson & Johnson CFO Joe Wolk said that staffing shortages are the biggest challenge facing hospital administrators, and CONMED’s CFO Todd Garner doesn’t expect staffing pressure to abate until sometime in 2024.

National volume-based procurement (VBP) tenders in China have orthopedic companies re-evaluating their presence in that market for joint replacement, spine and trauma implants. Players like Zim-Vie and Medartis left China, and Smith+Nephew pulled its trauma products from the market. Joint replacement implant prices declined in excess of 80% due to the national tender. Those impacts annualize out in mid-2023.

Domestic Chinese players like MicroPort and AK Medical saw their market access increase significantly due to VBP. Global players like DePuy Synthes and Zimmer Biomet won’t have the same upside, but remain committed to the Chinese market.

At the time of print, only DePuy Synthes had reported first quarter earnings for 2023. The results reflect continued market trends from last year: Overperformance in U.S. joint replacements due to procedure backlog, pull-through sales from enabling technology, a softer trauma market and wide-ranging impacts from VBP in China.

M&A Focuses on Fast-growing Segments

Orthopedic M&A activity accelerated between 2017 and 2020. The pandemic brought unprecedented orthopedic funding and M&A markets, culminating in 42 transactions in 2020. Since then, deal volume declined more than 40% in 2021 and dropped another 12% in 2022 (Exhibit 4).

Exhibit 4: Orthopedic M&A Transactions by Year

The spine segment is the most active in orthopedic M&A. It accounts for 28% of all transactions since 2016. No other segment has more than 17% share of transactions. However, companies shifted their acquisition targets in 2022. The trio of trauma, orthobiologics and enabling technology accounted for nearly 70% of M&A transactions last year, with all three segments above 20% share.

The fragmented nature of the foot and ankle market within trauma makes it especially compelling to acquisitive companies such as Enovis, which is actively seeking smaller-scale tuck-in deals. The company most recently added Novastep, a subsidiary of Amplitude Surgical, to its stable of foot and ankle buys that include MedShape and Trilliant.

DePuy Synthes, CONMED, Medartis and Tyber Medical also made recent buys in foot and ankle.

Stryker CEO Kevin Lobo cited Wall Street’s “harsh” reaction to unprofitable companies as a key reason that valuations fell. He said, “That doesn’t mean that the companies with lower valuations are excited to sell at these new values. I think it’s going to take a little time for that new reality to set in. As a company that is acquisitive and has been acquisitive over time, this could bode well for us over the next couple of years if valuations stay at this level.”

So far in 2023, however, orthopedic M&A transactions are on pace for just 18 total deals. It looks like it may take a while longer for companies to come to terms with lower valuations after the bonanza of 2020 and 2021.

ASCs Drive Strategy Decisions

The pandemic accelerated the existing trend of orthopedic procedures moving to outpatient and surgery center settings. Stryker leadership said that every hospital system it works with has new construction plans involving ASCs and called it an “undeniable future trend.”

Success in the ASC setting requires lower costs with better efficiency. Companies like Enovis and Anika Therapeutics are aligning their strategies and offerings to those unique needs.

Enovis said about 20% of its knee replacement business comes from ASCs, with the market average being closer to 10%. According to company CEO Matt Trerotola, Enovis’ agile and entrepreneurial DNA aligns well with ASCs.

“We’ve got simpler instrument tray sets for our knees. Our OaraScore software is now broadly used to risk score patients for the ASC,” Trerotola said. “When we launched our ARVIS enabling tech, we didn’t try to copy what had been done so far. We were trying to think about where things are going. More procedures are moving into the ASC. ARVIS is smaller, doesn’t require a pre-operative scan and doesn’t add much cost or time to procedures. Our customers appreciate that mentality.”

Anika Therapeutics’ recently launched Revo-Motion reverse shoulder system was specifically designed for the ASC and enhanced O.R. efficiency. The system boasts the industry’s smallest diameter threaded glenoid baseplate to enhance intraoperative flexibility and a streamlined two instrument tray design to limit sterile reprocessing volume and reduce relative cost for customers. According to Anika, most competitive systems require between four and six instrument trays.

Improving reimbursement and expanding capacity will further accelerate the shift of orthopedic procedures to the ASC setting in the coming years. We expect that shift will continue to inform the product designs and business strategies of orthopedic companies.

Pivot to Digital Technology Accelerates

Enabling technology sales neared $1.2 billion in 2022, accounting for 2.1% of the global orthopedic market. The segment enjoyed relatively buoyant sales throughout the pandemic period. However, sustained market pressures shifted capital equipment acquisitions away from outright sales and toward rentals and volume-based deals.

Despite the pressures mentioned above, orthopedic companies are all-in on enabling technology. Skip Kiil, President of Medtronic’s Cranial and Spinal Technologies division, said the company’s R&D efforts are disproportionately slanted toward technology. Zimmer Biomet previously said that more than 70% of the company’s development dollars are spent on enhancing the ZBEdge ecosystem of orthopedic digital technologies.

Stryker’s 2022 struggles in the spine segment highlight the importance of enabling technology in orthopedics today. The company said that its spine business will remain in a “dogfight” into 2024 because it lacks a robotic solution to pit against market leaders Medtronic and Globus Medical. Stryker re-prioritized its robotic development roadmap to focus on its spine application over its shoulder surgery application.

The proliferation of technology in the field has made data the new currency of orthopedics as companies harness artificial intelligence to add predictive analytics. Companies with broad ecosystems of technologies are excited about the possibilities of collecting and integrating data throughout the patient experience. Zimmer Biomet, for example, can collect data through ROSA robotic procedures, use of the mymobility platform and now the Persona IQ smart knee implant.

Enabling technology is also driving new product ideas and treatment options in complex areas like foot and ankle. Paragon 28 acquired Disior, a 3D analytics and planning application, in 2022.

“We’re using Disior meaningfully in our development process and integrating it into even some of the new products we have under active development today,” said company CEO Albert DaCosta. “We’re overwhelmed with how quickly we could answer questions given the three-dimensional visibility that Disior gives us into deformities and planning. There’s a really nice pipeline of opportunities for us to start integrating Disior into some of the products we’ve got on the market, including some of the new products that are being developed.”

Despite the strategic importance of enabling technology to device companies, surgeon utilization of these platforms remains stagnant. About 20% of joint replacement cases use navigation, while only 11% use robotics. Those numbers are even lower for spine surgery, at 18% and 3%, respectively. We remain confident that enabling technology will eventually cross the chasm into mainstream use, but that timeline could extend more than five years.

A more competitive robotic market in spine and an emerging one in shoulder surgery will further spur growth in the coming years. Smaller navigation-focused companies like OrthAlign are targeting the technology needs of the ASC, while a few, like Surgalign and OrthoGrid, focus on software-based solutions. Patient monitoring and engagement tools are likely to gain rapid adoption as more care moves out of the hospital setting.

Forecasting What’s Next

In all, 2022 brought positive momentum for orthopedic procedure volume recovery. However, sustained macroeconomic pressures will make the operating environment dynamic and uncertain for companies of all sizes. Despite these challenges, we expect the most acquisitive companies will remain active in fast-growing segments, ASCs will increasingly drive strategic decisions and the digital evolution of orthopedics will accelerate in coming years. Save Supplier