Co-authored by Christoper Dorn
It would be easy to look at 2010 and focus on the negative. Difficult economic times, including higher levels of unemployment, have put downward pressure on procedure volumes. The financing environment has been challenging overall, but especially so for earlier-stage companies. FDA regulatory changes, reimbursement and healthcare reform have created significant uncertainty regarding the ability to get new products approved and reimbursed. Among all of the challenges, however, lie an increasing number of positive signs for the new year.
The economy appears to be on the mend. Despite a setback in the November unemployment numbers, unemployment is still down from its peak of 10.1 percent and is expected to continue to decline. The economy appears to be growing again. Though gradual, the quarterly gross domestic product (GDP) has steadily increased since 2Q09. (See Exhibit 1.)
Exhibit 1: Quarterly GDP in the U.S.: 4Q07 to 3Q10
All exhibits in this article are sourced from Capital IQ.
As the economy rebounds, procedure volume is expected to increase. Against this backdrop, the demographic trends for spine and orthopaedics remain firmly in place. According to the U.S. Census Bureau, 12 percent of all Americans were 65 and older in 2004, and it is expected that that population will grow to 21 percent by 2050. In addition, despite the uncertainty created by H.R. 3590, up to 32 million Americans may be added to insured status, potentially enhancing the opportunities created by these demographic trends.
Public equity valuations are relatively flat, but cash positions continue to rise. Over the past two years, despite significant volatility, share prices for spine and orthopaedic companies have remained relatively flat. Orthopaedic bellwethers Johnson & Johnson and Medtronic have returned approximately four percent and eight percent, respectively, since 2009. Companies that have shown improving share price trends, such as ArthroCare and BioMimetic Therapeutics, have taken advantage of those increased valuations to raise capital. In Exhibit 2, we highlight the change in market capitalization for the past 12 months for publicly traded orthopaedic and spine companies. We have arranged the companies by market cap as of 12/6/10 – less than $500 million, greater than $1 billion and between $500 million and $1 billion.
Exhibit 2: Change in Market Capitalization of Global Orthopaedic and Spine Companies: 2009 to Present
Whereas share price performance has been uneven in the industry, most companies have added significant cash to their balance sheets, which will potentially lead to increased merger and acquisition (M&A) activity. Since calendar year end 2009, cash on hand for the largest orthopaedic companies has increased over 20 percent. (See Exhibit 3.)
Exhibit 3: Change in Cash Balances ($MM) in the Orthopaedic and Spine Sector
Medtronic now has approximately $3.5 billion in cash on hand, as compared to approximately half that at the end of 2008. Johnson & Johnson has increased cash on hand by approximately 14 percent to $22 billion, while Smith & Nephew has increased by almost three times. Cash on hand provides maximum freedom for companies to pursue an acquisition strategy. Stryker in particular has earmarked over $1.5 billion of their cash for acquisitions.