Analyst Highlights AAOS Expectations

According to a recent investor brief published by New York, N.Y.-based Leerink Swann medtech analyst Richard Newitter, a recent conversation his group had with a physician specialist just prior to this week’s American Academy of Orthopaedic Surgeons (AAOS) annual meeting in Chicago, Ill., seemed to indicate good things in store for orthopedic manufacturers’ stocks.

“Overall, we expect AAOS should serve as a positive catalyst for ortho stocks, especially if feedback from the conference echoes the specialist’s expectation for accelerating procedure volume growth trends,” Newitter wrote. “From a product-specific standpoint, at AAOS, the specialist will be focused on learning more about Zimmer Holding’s new Persona knee and exploring emerging robotics technologies to see if they compare or improve upon MAKO Surgical Corp.’s solution.”

According to Newitter and colleagues, the specialist they spoke to reported “a steady improvement” in hip and knee volume during 2012 at his practice (an increase of 2-4 percent in year-over-year growth growth) which is carrying over into the first few months of 2013. For this year, the physician reported volumes up 5-6 percent January and February.

“While he does not expect further acceleration from these levels, he does think it can continue at this rate for the rest of 2013, given that his wait times remain robust. He was booked out for four to five weeks on average during 2009-2010, a metric that rose to seven to eight weeks in 4Q12 and which still hovers at this level currently,” Newitter wrote. “To the extent we hear similar positive feedback from [doctors] and/or company managements at AAOS this could suggest our 2013 U.S. hip and knee growth forecast of approximately 2.8 percent—versus and increase of 2.4 percent in 2012—is overly conservative.”

Several new knee platforms will be showcased at the conference, including Johnson & Johnson’s Attune knee, Stryker Corp.’s “Get-Around-Knee,” and the Evolution Knee from Wright Medical Technology Inc. But, Newitter and company expect the “biggest splash” will come from Zimmer’s much-anticipated Persona Knee (and iAssist).

Persona has been in limited launch mode since the second half of 2012 and moves into full launch in the first quarter of this year, though according to Newitter, “a more meaningful sales impact is unlikely” before the second half of the year.

“This is Zimmer’s first major knee launch in almost a decade, and while we don’t expect it to drive any major market share shifts—hip/knee share is generally sticky, and this physician said he is unlikely to switch away from WMGI (Wright Medical) products—we do think it could be a source of incremental positive price/mix shift gains for Zimmer,” he wrote.

According to Newitter, the specialist was unaware of Any AAOS-led studies or initiatives questioning hyaluronic acid (HA) efficacy, a popular treatment for knee arthritis and a method used to delay total knee replacement surgery. Viscosupplementation is an injection of hyaluronic acid into the knee joint. Hyaluronic acid (also known as hyaluron and hyaluronate) is a natural substance normally found in the synovial fluid of joints. Its function is to act as a joint lubricant and shock absorber. It has been found that patients with knee arthritis have less hyaluronic acid in their joint. The theory is that by injecting hyaluronic acid into the joint, the knee will have the necessary amount of hyaluronic acid and will also help the body stimulate production of more hyaluronic acid, which will improve symptoms of pain and allow for better functional mobility. There have been reimbursement challenges for the treatment, however.

If AAOS were to take a less-favorable position on the HA/viscosupplement category it could potentially have negative implications for Zimmer, or at least “limit upside to estimates” for the company’s newly launched single injectable Gel-One product, “which is widely anticipated to be source of incremental growth for ZMH (Zimmer) in 2013 and beyond,” Newitter wrote.

Newitter’s team projects approximately $40 million in 2013 Gel-One sales (a total of a $750 million market). They reported that the physician also said he would be “willing to try almost any single-injectible HA product.” Zimmer could be “well positioned to gain market share” in the HA segment, the Leerink Swann analyst reported based on this kind of feedback.

“We will look to get more clarity on upcoming HA studies and physician sentiment” at the conference, Newitter wrote, but ultimately thinks the “bigger catalysts” for Zimmer will will be whether U.S. hip and knee market growth is on a sustainable upward trajectory, and if the company can successfully execute on the Persona launch to re-accelerate its U.S. knee growth back to market rates in the second half of the year.

“Ultimately, we are inclined to think the ‘buzz’ coming out of AAOS will be more positive than negative on both of these two fronts,” he wrote.

Other new technologies to note included the NavioPFS unicondylar knee replacement robotic system from Blue Belt Technologies (which received FDA 510(k) clearance for the NavioPFS in November last year), and other “intelligent instrument” products such as Synvasive Technology Inc.’s e-LIBRA knee balancing system used with Zimmer’s NexGen and Natural knee products, and OrthoSensor’s recent partnership with Biomet.