In October, we sat down with leaders from Globus Medical to discuss their surprising entrance into the joint replacement market and robotics’ role in orthopedic surgery. As a quick refresher, during the 2Q19 earnings call, Globus Medical announced that it had acquired substantially all of the assets of StelKast, a privately-held manufacturer of knee and hip replacement implants and instruments. Globus paid USD $24.1 million in cash upfront with an additional potential $4.3 million in product milestone payments. Globus is expected to commercialize a robotic system for joint replacement in late 2020.
During our conversation, Globus Senior Vice President of Business Development Brian Kearns said that historically the company had not been interested in the joint replacement market. From his perspective, its top players—Zimmer Biomet, Stryker, DePuy Synthes and Smith+Nephew—had the market well covered, and outcomes are generally very good with the current technology.
So, what changed?
A Strong Core Competency in Robotics and Technology
Per Mr. Kearns, the answer goes back to 2014 when Globus acquired Excelsius Surgical and started developing robotics expertise around its ExcelsiusGPS platform for spine surgery. Since then, the company’s focus on developing a pipeline of disruptive technology has driven near double-digit growth in the spine market, where segment-wide growth is only projected at nearly 2% in 2019. (We estimate Globus Medical’s total 2019 revenue at $774 million, +8.6% vs. 2018. See Exhibit 1.)
|Exhibit 1: Globus Medical Revenue 2017 – 2019P ($MM)|
A common theme among analysts and investors at NASS 2019 was the superiority of Globus’ platform versus the competition, with PiperJaffray’s industry note remarking, “we continue to believe GMED remains the technology leader at this point.” This technological advantage convinced Globus leadership that they could innovate in the joint replacement space.
Company President and CEO David Demski said during the 2Q19 earnings call that Globus had been working on a joint replacement robot for several quarters and accelerated that investment in the first quarter leading up to the acquisition of StelKast. He went on to say, “We’ve seen the impact that robotics can have on the implant business, and we’re very happy with the success we’ve had in spine. We think we’ve developed a strong core competency there. We’ve got a great team. We were looking for other ways to leverage that technology and looking at the success that other companies have had in total joints; we thought that was a logical place to go. We wanted to buy an implant manufacturer with a strong track record of safety and reliability, so we weren’t really looking for [a company with] revenue.”
Globus has continued to iterate upon the ExcelsiusGPS platform with imaging, navigation and robotic additions—a combination that the company believes provides a strategic advantage and is a signal of what might be important in future joint replacement enabling technology. Globus’ Interbody Solutions offers navigation and real-time feedback during dilation, disc preparation and implant insertion. Globus is the only player to offer interbody placement with its robotic system, presently. Beyond robotics, the company is also expanding its enabling technology offerings through the development of the Globus Imaging System (GIS), slated to launch in 2020. GIS comprises a mobile combination C- and O-arm that provides fluoroscopy, digital radiation and CT scan. GIS will be fully integrated into Globus’ robotic and navigation tools.
One area in which Globus is potentially challenged, however, is in its ability to place enabling technology units at the same rate as its larger competitors, likely due to its smaller salesforce. After an initial strong start due to pent-up demand for ExcelsiusGPS at launch in 4Q17, revenue growth for Globus’ Enabling Technology reporting segment trailed off and hit an especially weak 1Q19 (-42.9% year over year). However, Globus returned to form in the normally soft capital sales third quarter with $13.9 million in revenue for their enabling technologies, +120.5% year-over-year growth.
Opportunities in the Joint Replacement Market
Globus Senior Vice President and CFO Keith Pfeil laid out a “Crawl – Walk – Run” strategy for the company’s entry into joint replacement, with the aim to achieve best in class implant hardware and robotics. However, Mr. Kearns didn’t mince words when asked who Globus’ direct competitors in that space would be, saying that they’re going after the top players straight away (Zimmer Biomet, Stryker, DePuy Synthes and Smith+Nephew). So, when Globus fully enters the joint replacement market, it will be competing against massive international companies with vast resources and salesforces. Combined, the top four hold 82% of the $9 billion knee replacement market and 73% of the $7.5 billion hip replacement market, according to our estimates
Globus, DePuy Synthes and Smith+Nephew are all expected to launch joint replacement robots in 2020. Stryker and Zimmer Biomet are already on the market with Mako and Rosa, respectively. Of course, Globus is used to contending with behemoths and their enabling technologies, as they share the spine segment with Medtronic and DePuy Synthes.
In his 2Q19 remarks, Mr. Demski said that the company has recognized that ExcelsiusGPS is a consistent value-add by watching spine surgeons utilize the technology in the O.R. “We know our technology’s better today. We believe in it strongly. We’re going to continue to win in terms of the way the technology works...We know how this incorporates into surgical practices.”
Mr. Kearns echoed those sentiments in relation to the joint replacement market. To him, one of the company’s key strengths is their ability and willingness to work so closely with their surgeon partners to address pain points of current offerings on the market—even if it means cannibalizing product lines. Additionally, Globus doesn’t have a vast, entrenched business in joint replacement to protect. They can be disruptive and agile in ways that their larger competitors in the space cannot.
Notably, Globus’ run of success coincides with missteps and setbacks from some of their future joint replacement competitors. Zimmer Biomet and Smith+Nephew’s hip and knee franchises have growth in the low single digits quarter-over-quarter since 2016. DePuy Synthes’ knee franchise has experienced average quarter-over-quarter decline of -1% since 2016, but fared better in hip replacement, with an average growth of 1.8%. Stryker’s Mako technology has made them the outlier, with mid-single-digit growth in knees and hips during the same period.
The question that remains is: How big of a splash can Globus Medical make in the joint replacement market? They certainly have the expertise in robotics and enabling technology to be disruptive. We believe that their product development team will be able to create something innovative out of the small portfolio acquired from StelKast, but will it be enough to tempt surgeons away from the largest players that have been mainstays in joint replacement and which themselves will be launching new robots in the coming year or two? Can Globus create enough scale in their joint replacement portfolio to challenge top tier players, or will they seek another acquisition to bolster their hardware lineup? This is a storyline that will play out over the long term, well beyond the targeted late 2020 launch, and will require patience from stakeholders and observers alike.
The Future: A Full Musculoskeletal Company
As we wrapped up our meeting, we asked Mr. Kearns to speculate on the future of robotics in orthopedics. He predicted that within 10 years, most orthopedic surgery would employ robotics of some kind, and the next wave of orthopedic robot innovation will incorporate features focused on soft tissue. In the interim, Globus is focused on becoming a fully diversified musculoskeletal company. As their internally developed trauma line continues to ramp up slowly, the company plans to enter the sports medicine market in the coming years. The success or failure of their entry into joint replacement is likely to be a bellwether for the company’s overall evolution.
His article was adapted from one that originally appeared on ORTHOWORLD.com.