1996 ortho overview

8/8/2019 1996 Ortho Overview

1/97

H

AMBR

ECHT&

Q

UIST

LLC

IN

STITUT

IONAL

RESEARCH

Robert C. Faulkner

Daniyal Shoaib

The Skinny on The Skeleton

1997

An In-Depth Assessment of Trends

and Investment Opportunity

in the Orthopaedic Industry

GrowthPricing

ConsolidationNew Technologies

Investment Strategies

In collaboration with

KNOWLEDGE ENTERPRISES, INC.

H&Q Orthopaedic Industry Coverage

New Coverage Existing Coverage

Biomet OrthoLogic

DePuy Sofamor Danek

Stryker Spine-Tech

Industry Report

December 30, 1996


2/97

H&Q Orthopaedic Industry Snapshot

I

NDUSTRY

I

NVESTMENT

S

TRATEGY

In core reconstructive markets, invest in industry leadership the consolidators.

In niche markets, invest in acquirable unique technology at sane valuations.

Core market outlook is improving for pricing and growth; risks are discounted.

S

TOCK

R

ECOMMENDATIONS

Stryker

(Nasdaq/STRY - $30 1/8) STRONG BUY

EPS growth of 20% is intact and OP-1 is a potential kicker.

Excellent risk/reward profile; 12-month target price $39.

DePuy

(NYSE/DPU - $20 1/4) BUY

Industry leadership on sale; strong geographic and product diversity.

Consistent share gainer and a proven consolidator with upside.

Excellent risk/reward profile; 12-month target price $24.

Sofamor Danek

(NYSE/SDG - $30 1/2) BUY

Spinal implant liability now quantifiable; key events to occur in January.

Undervalued and the best takeover candidate long term.

Relatively high-risk/high-reward profile; takeover value $60 minus liability.

Spine-Tech

(Nasdaq/SPYN - $24 1/8) BUY

The hot play in fusion cages; the biggest near-term opportunity in orthopaedics.

Positive 12- to 24-month outlook, but 1997 expectations look too aggressive.

Fairly valued now; buy on dips or with outperformance.

Biomet (Nasdaq/BMET - ($15 1/8) HOLD

Low geographic and product diversity reduces growth potential.

Moderate size impedes growth through acquisition.

Without acquisitions, EPS risk is likely on the downside.

OrthoLogic

(Nasdaq/OLGC - $5 3/4) HOLD

Transition to direct sales for bone growth stimulators put brakes on growth.

Regrouping may require one or two more quarters; wait for bottom.Product is the best, and long-term outlook is good.


3/97

Investment Theme. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Out of Adversity Comes Opportunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Waiting for Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Potential Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

A Brief History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Industry Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

The Reconstructive Device Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Long-Term Developments: Goals and Technologies to Watch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Mix Shift and Pricing in the U.S. Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Pricing Forecast: Partly Sunny. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Winning in the Future: To Contract or Not to Contract?. . . Contract!. . . . . . . . . . . . . . . . . . . . . . . 14

The Ex-United States Reconstructive Device Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

The Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

The Trauma Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Long-term Developments: Goals and Technologies to Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

The Spinal Implant Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Long-term Developments: Goals and Technologies to Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Lumbar Spinal Implant Market Outlook Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Fusion Cages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

The U.S. Lumbar Instrumentation Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

The Players . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Osteobiologics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Soft Tissue Repair/Sports Medicine Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Arthroscopy/Sports Medicine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Bone Substitutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Company Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Stryker Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

DePuy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Biomet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Table of Contents


4/97

List of Exhibits

Exhibit 1: Estimated Worldwide Reconstructive Market Dollar Growth: 1993A to 2000E . . . . . . . . . . . 5

Exhibit 2: Market Segment Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Exhibit 3: Market Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Exhibit 4: Porous/Cemented Mix Shift Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Exhibit 5: Impact of Mix Shift on Sales for Industry and Major Players . . . . . . . . . . . . . . . . . . . . . . . . 11

Exhibit 6: Financial Indicators in U.S. Reconstructive Joint Procedures: 1995 . . . . . . . . . . . . . . . . . . . 12

Exhibit 7: U.S. Hip and Knee Unit Share Trends: 1990-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Exhibit 8: Estimated 1995 Reconstructive Market Shares for Major Players ($) . . . . . . . . . . . . . . . . . . 17

Exhibit 9: Spinal Implant Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Exhibit 10: Fusion Market Segments by Procedure and Dollar Volume . . . . . . . . . . . . . . . . . . . . . . . . . 21

Exhibit 11: Fusion Cage Implantation in Lumbar Spine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Exhibit 12: Comparison of Fusion Cages with Todays Modalities on Key Outcome Parameters . . . . . 24

Exhibit 13: U.S. Markets and Maximum Potential for OP-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Exhibit 14: Sales and Growth by Reported Category: 1995A to 1998E . . . . . . . . . . . . . . . . . . . . . . . . . 36

Exhibit 15:Sources of Revenue Growth: 1995A to 1998E

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Exhibit 16: Strykers Cash Flow Provides Opportunity for Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Exhibit 17: DePuy's Cash Flow Enables Continued Growth Through Acquisition . . . . . . . . . . . . . . . . . 52

Exhibit 18: Sources of Total Sales Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Exhibit 19: Key Product Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Exhibit 20: Hip Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Exhibit 21: DePuy Mix Shift Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Exhibit 22: Sources of DePuy Reconstructive Device Sales Growth: 1996E to 2000E . . . . . . . . . . . . . 56

Exhibit 23: Spinal Implant Sales by Product Segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Exhibit 24: Sales By Reported Category: Fiscal 1994A to 1997E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Exhibit 25: Sources of Total Biomet Sales Growth: Fiscal 1994 to Q1-97 . . . . . . . . . . . . . . . . . . . . . . . 66

Exhibit 26: Biomets Cash Flow Provides Opportunity for Growth ThroughInternal Product Development and Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Exhibit 27: Implant Sales Growth: Fiscal 1996A to 2000E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Exhibit 28: Sources of Biomet Reconstructive Device Sales Growth: Fiscal 1996 to 2000E . . . . . . . . . 68


5/97

The Skinny on the Skeleton

INVESTMENT T

HEME

Out of Adversity Comes Opportunity

The orthopaedic industry is largely an out-of-favor industry in the investment worldat present. The purpose of this report is to assess whether the trends leading to this out-of-favor status are complete and how far they have to go, as well as to determine whereand whether bargains may be found. The maturation and pricing pressure of the core hip

and knee segments of the industry are well documented. In the United States, proceduregrowth is in single digits, mix has shifted from high end to less expensive units, bigbuyers have forced bids for business, perceived product differentiation has diminished,and Medicare Diagnosis Related Groups (DRGs) have squeezed providers, who passpressure along to suppliers. No doubt, the reconstructive business is caught in the crossfire of change in healthcare. The spinal implant business is in the midst of technologicaland competitive change and players rank high on acquirers wish lists, generating adiversity of opportunities.

We are bullish oninvestment inorthopaedics.

Despite the difficult industry environment, we are here to say that this industry offersinvestors opportunity

. We are bullish

on investment in orthopaedics, particularlyinvestment in those companies which will benefit from ongoing change. The list ofindustry ills represents past history and even a bit of the present, but the future looksbrighter. At a basic level, unit volume growth is solid and no effort is underway to reduceprocedure growth. Orthopaedic reconstructive surgery remains one of the mostsuccessful in healthcare in terms of outcomes because it restores function, often fully.We also believe that mix-driven price declines accounting for most of the price pressureto date are moderating at present. Furthermore, we believe that the worst increases indiscounting are behind us, as most big buyers now have contracts and the rest of thebuyers are not big. (These issues are covered fully in the body of this report.)

The winners will beleaders, those withmarket power, whichnow offer inexpensive

quality and growth.

The orthopaedic market is a maturing market with a few unique twists. So, who winsin a maturing market? The winners will be leaders

, those with market power, whichcomes in the form of market share and reach in selling and distribution. In the contextof this rather expensive market, we believe that select orthopaedic companies offer

inexpensive quality and growth

.

Our best stock pick isStryker (STRONGBUY), and we alsofavor DePuy (BUY).

Our best stock pick is Stryker

(STRONG BUY), and we also favorDePuy

(BUY).In both cases, investors buy market leadership and proven management teams. Strykeris our favorite stock because it has higher projected earnings per share (EPS) growththan DePuy, a cheaper P/E-to-growth rate ratio, and impending news on OP-1, therevolutionary bone growth protein, all driving potentially greater upside in the next year.DePuy, however, is the pit bull of the industry, with the best track record of growth in thecore orthopaedic markets. We have confidence that the company can take advantage of

December 30, 1996*

Dow 30:

6560.91

S&P 500:

1291.38

Robert C. Faulkner

(212) [email protected]

Dan Shoaib

(212) 207-1409

[email protected]

*Report priced after market close December 27.


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change to grow internally and be an industry consolidator. As DePuy makes furtheracquisitions, which are not included in EPS estimates, rising estimates may driveappreciation even further. It is also the best takeover candidate for an even bigger playerwho wants to buy critical mass in the industry. We rate Biomet

a HOLD despite itsimpressive record of growth because of its less developed critical mass, including sharein the core U.S. markets and more limited scope in geography and product lines. Weexpect the risk to be on the upside for DePuy and on the downside for Biomet.

Among spinal implantcompanies, we believeSpine-Tech (BUY) hasa great future, and werecently moved to aBUY on SofamorDanek.

Among spinal implant companies, we believe Spine-Tech

(BUY) has a great futurebut we are concerned that near-term expectations are aggressive. Any significant breakin the stock price should provide a buying opportunity, as would outperformance onnumbers. We recently moved to a BUY on Sofamor Danek

(SDG) because of increasingclarity on its liability situation. We view Sofamor Danek and Spine-Tech as excellenttakeover targets in general, and Sofamor Danek at these valuation levels if liability riskis quantified. We believe Spine-Tech is a bit richly valued for a near-term acquisition.

We are recommending acquirers, not targets, especially in the core reconstructivemarkets. We have selected the acquirers for two reasons: (1) if acquirors are valuedappropriately for their present business, acquisitions should provide upside, as in thedrug industry a few years ago; and (2) we think valuations could become worse for the

acquirees in the core businesses as the competitive scenario evolves.

Leadership isinexpensive today.

For the large cap companies, our definition of quality includes leadership positionsin key markets, a history of taking market share, and a strong platform for consolidation.These companies have the critical mass and technology base necessary to both growinternally and maximize new technologies and consolidation opportunities, and thecapability to capitalize on change. Indeed, change is what we see ahead for theorthopaedic industry. Aggressive directsales is essential, as companies that can leverageacquired product lines through strong distribution channels are likely to registersustained growth.

There are also opportunities among the small companies with internal growthpotential that may be tomorrows takeout candidates. For the small capitalizationcompanies, the key to success is product differentiation, defining differentiation asuniquely superior clinical outcomes for patients, not merely features. We prefercompanies that are developing or marketing products that meet a significant unmet need,possess superior FDA labeling claims, and are highly proprietary. These are thecompanies that can enter a competitive marketplace and be valuable enough to beacquired with high returns to public investors.

Waiting for Consolidation. . .

What about consolidation among these many players with 10% to 23% market sharein the core reconstructive business? Many have predicted it before now and rumors arerampant, but the industry says everything is too expensive. Four factors seem to support

the inactivity: (1) universal optimism among industry participants; (2) recent failures inacquisitions; (3) two unique structural attributes of the industry (surgeon champions andindependent distributors); and (4) valuations.

Everyone still believesthey can win.

First, everyone still believes they can win. Biomets growth has been sustained;Howmedica and Zimmer have installed new managements to staunch the market sharelosses. Over time, someone will lose faith in their ability to grow the business, at whichpoint a business will be sold because valuations will reach the level at which there are


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Institutional Research: The Skinny on the Skeleton

3

buyers. We believe that this process is now beginning to gain momentum as contractingfor market share takes hold. Once again, we expect a big transaction this year. . . but wehave said it before.

Valuations are crucial because of the recent disappointments in acquisitions. TheKirchner acquisition by Biomet, in particular, showed that it is difficult to integratehistorical competitors and retain all the business. Kirchner was a $72 million entity asan independent business, but now retains only $60 million in revenue. If an acquirer

expects to lose a piece of the acquired business, it is exceedingly difficult to justifyacquisitions at current valuations.

Industry structure canmake these acquisitionsdifficult.

Two structural elements can make these acquisitions difficult. The first is thesurgeon-driven nature of promotion of these product lines. Surgeon champions design,promote, and are paid royalties on products for specific companies. Loyalty to and ofspecific surgeons is hard to maintain through these transitions. Other companies maylure them away or they may become disgruntled due to rival surgeons already under thetent of the acquirer. If these surgeons are not retained, significant business can be lost.The second element is that many implant companies have used stocking or independentdistributors who may carry other product lines as well. As a result, the company oftendoes not have the relationship with the customer, and cannot carry the business with it if

it is sold. These distributors may be lured away by competitors in the transition, resultingin lost business.

Finally, the fact that much of the industry is buried in large corporations means thatthese businesses serve a multitude of strategic purposes. For Bristol-Myers-Squibb, thesale of Zimmer, the largest orthopaedic company, would be counter to a stated objectiveof internal and acquired growth. Pfizers intentions with Howmedica remain unclear, asefforts to achieve growth continue.

The more lucrativeopportunity is toconsolidate fragmentedsegments inorthopaedics.

We do not need mergers of major public entities, however, to generate real earningsgrowth from consolidation. The more lucrative (if smaller) opportunity is to consolidatethe many highly fragmented segments in orthopaedics. These can be purchased for threeto six times cash flow, be immediately accretive, and be grown substantially by a largerorganization. This type of consolidation is ongoing, and benefits the acquirers.

We believe that the besttargets today are innon-core businesses,such as trauma, spine,etc.

We believe that the best targets today are in non-core businesses, such as trauma,spine, etc., that can be leveraged by a larger company. The prime targets in non-reconstructive businesses are Sofamor Danek, Acromed, Advanced Spine, Spine-Tech,OrthoFix, Arthrex, OrthoLogic, and Arthrocare. The most likely buyers ofreconstructive companies are Johnson & Johnson, and Sulzer, a European concern. ASulzer/Biomet fit would give geographic complementarity. We would expect Johnson &Johnson to be more interested in buying critical mass, indicating companies like Smith& Nephew, Howmedica, Zimmer, or DePuy. The most likely targets or sellers, willingor otherwise, include Biomet, Howmedica (Pfizer), Smith & Nephew, and DePuy. All ofthe larger players are likely to be buyers of peripheral businesses. Please refer to acomplete grid of companies and activity by business segment in the Appendices.

Potential Risks

We feel that most risks are at least adequately discounted. A key risk for theorthopaedic industry could be the impact of potential Medicare reform in 1997. Itappears clear that the Republican Congress has little enthusiasm for grabbing this hotpotato, but there are likely to be some cuts to "reduce the rate of growth." The


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orthopaedic industry is particularly susceptible to Medicare-targeted reform since thelarge majority of orthopaedic procedures are performed on the elderly. Hospitals wouldtry to pass this pressure onto manufacturers. We have no evidence that hip and kneesurgery is to be targeted.

A B

RIEF

H

ISTORY

History is importantbecause it is beingundone.

For those new to the metal-bending industry of healthcare, a brief chronicle of theorthopaedic industry may give context to our analysis and predictions. The history isimportant because much of it is being undone or rewritten with current trends.

Just 30 years ago, the industry was in its proverbial swaddling clothes. Previously,joints were fused and functionality was not reestablished. The predominant therapy waspainkillers and a cane. Replacements for the hip came first, followed closely by the knee.The roster of industry players grew largely through the defection of disgruntledengineers and sales managers from successive generations of companies.

The benefit of the new hips and knees was enormous, relieving pain and restoringfunction with low risk. As procedures grew from just a few hundred thousand in the mid-

1980s to almost 1,000,000 for hips and knees worldwide today, the companiesintroduced more and more features and benefits. Porous coatings were used to enhancebone ingrowth and reduce side effects from cement. The cost-plus environment allowedprices to escalate 10% to 20% per year.

Three factors conspired to put the brakes on growth. First, the introduction of DRGsby Medicare in the 1980s turned implants from profit generators in a cost-plus systeminto costs in a flat-procedure-fee system. Hip replacements were targeted for especiallylow reimbursement rates. This was the first domino in a chain effect leading to largebuying groups and the cost pressures experienced by hospitals today. The knee and hipbusinesses were especially hard hit because volumes were big, exposure to Medicarewas large (90%), and the implant itself made up a large proportion of the procedure cost.Medicare has kept increases in reimbursement well below inflation for several years, aswell, and many hospitals still lose money on the procedure.

Second, procedure growth slowed as nearly full penetration was reached at about70% of all eligible patients. Third, and most important today, the much-touted hightechnology premium products proved to be of little clinical value for less active patientsrelative to the cemented products. The financial result of this trend has been steadilydeclining share for high-priced units, and an overall decline in average selling prices(ASPs) due to the mix shift. We believe this trend is largely over, contributing to ourcomfort with investment in the industry.

With the rise of contract buyers in the United States, territory representativesbecame less important, and with declining ASPs, distributor profits were crushed, often

decreasing the quality of coverage. At present, the core industry is restructuring in a shiftfrom independent to direct sales people. The shift allows companies to control thecustomer contact and capture distributor margins, and, in some cases, ensure adequatesales coverage. This shift is perhaps 65% complete, and some companies may nevershift to direct forces.

Cost reduction has kept pace with price reductions thus far. Manufacturing is a jobshop process. Costs are reduced with better processes and work flow and elimination ofnon clinical-value-added elements, such as high-polish finishes and less expensive


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5

instruments. Some players expect to reduce costs by 25% over a four-year period tooffset price erosion, and they are confident that this can be accomplished. There isminimal economy of scale in the manufacturing process.

I

NDUSTRY

O

VERVIEW

Key issues include

pricing inreconstructive devices,and the trend towardcontracts.

This overview covers key industry segments and statistics and places particular

focus on issues and segments relevant to growth and investment value. The key issueshighlighted include pricing in reconstructive devices, with new analysis showing thedominant and diminishing impact of product mix on this trend, indicating a near-termuptick in growth. Quantification of the trends driving pure pricing declines points tomoderating, but continuing minor price pressure. Discussion of the trend towardcontracts in the reconstructive segment highlights existing market share as the keycompetitive advantage. The key segments highlighted are reconstructive devices, spinalimplants, and osteobiologics, while others are covered in less detail.

The orthopaedic products market generated estimated worldwide sales of$7.2 billion in 1995. It is characterized by a high degree of fragmentation and consistsof both high growth and low growth segments. By far, the largest segment of the

orthopaedic products market is reconstructive devices, mainly hip and knee prostheses,with estimated worldwide sales of $3.6 billion in 1995, nearly 50% of the market. Thereconstructive device market is mature in the developed world, with approximately 6%unit growth and 3% dollar growth in the United States in 1995, and 3% unit growth and4% dollar growth ex-United States, for worldwide dollar growth of 3.3%.

In a quest for growth,many companies arediversifying into highgrowth segments.

In a quest for growth, many major orthopaedic companies are diversifying into highgrowth segments of the orthopaedic market such as trauma, spinal implants,osteobiologics, and sports medicine. This diversification has leveraged the largercompanies market power into the smaller markets, resulting in significant consolidationof the industry as a whole.

Exhibit 1

Estimated Worldwide Reconstructive Market Dollar Growth: 1993A to 2000E

1993 1994 1995 1996 1997E 1998E 1999E 2000E

U.S. Market

Procedures 3.2% 5.4% 6.4% 5.3% 5.1% 5.2% 5.2% 5.2%

Mix (2.9) (2.6) (2.1) (2.1) (1.1) (0.6) (0.4) 0

Price 2.0 (0.1) (1.7) (1.9) (2.4) (2.0) (1.8) (1.3)

Total 2.3 2.7 2.6 1.4 1.6 2.5 3.0 3.9

Ex-U.S. Market

6.0 5.0 4.0 4.0 3.0 4.0 5.0 5.0

Worldwide

4.2% 3.9% 3.3% 2.7% 2.3% 3.3% 4.0% 4.4%

Source: Industry Data Sources, H&Q estimates, Knowledge Enterprises, Inc.


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AMBRECHT

& Q

UIST LLC

The trauma market includes devices that promote the healing of fractured bones andhad 1995 estimated worldwide sales of $1.0 billion, or 14% of the orthopaedic productsmarket. We include internal and external fixation and bone growth stimulators in thismarket. Trauma procedures and products are remarkably effective at repairing theskeleton. We expect the trauma market to sustain double digit growth over the nextseveral years as new technologically advanced devices that reduce the costs associatedwith fracture treatment and provide added clinical benefit come to market. As a market

less reliant on Medicare reimbursement, the cost pressures are often less severe than forreconstructive segments. While we do not include it for discussion in the traumasegment, OP-1, Strykers bone growth protein, will have its first application in trauma.The product promises to have a significant impact on recovery and healing rates indifficult trauma cases, and is the first significant new technology in the segment in manyyears.

The spinal implant market includes instrumentation designed to increase the successrates of vertebral fusion procedures and had 1995 estimated worldwide sales of$450 million at the end-user level, or about 6% of the orthopaedic products market. Weexpect strong growth in the U.S. spinal implant market through the turn of the centurywith the recent introduction of fusion cages, a novel technology providing improvedclinical benefit that could expand the number of implant procedures performed. Thebaby boomer demographics of increased back problems should help fuel growth as well.

Arthroscopy includes instruments and visualization technologies for minimallyinvasive diagnosis and surgery on joints and sports medicine. The worldwide market is$715 million, with $450 million in the United States and $265 million ex-United States.The core arthroscopy business was recently a fast-growing market, but growth hasslowed to under 5%. New products that save surgeon time and/or improve outcomes canbe rapidly adopted.

Osteobiologics are genetically engineered molecules (drugs) that directly stimulatebone and soft tissue formation. The market for these products does not exist today, asthese molecules are currently in clinical development, but these products offer the

highest growth potential of any segment of the orthopaedic products market. Stryker islikely to be first, with a product scheduled for launch in late 1998 or 1999. We projectrevenue potential well in excess of $200 million in the United States alone within severalyears. Most major orthopaedic players are attempting to develop similar products, eitherindependently or in collaboration with a development stage company.

The markets for bone replacements and cartilage repair are in their infancy and, inour view, have great long-term growth potential. Both are fertile ground for manydeveloping companies with novel products.


11/97


7

T

HE

R

ECONSTRUCTIVE

D

EVICE

M

ARKET

The reconstructive device market, defined as implants for hips, knees, andextremities, registered 1995 estimated sales of $1.8 billion in the United States and$1.7 billion ex-United States. Geographic concentration of the market is typical, withthe U.S. representing around 50%, and Western Europe and Japan representing 30% ofthe worldwide market. Worldwide hip sales are estimated at $1.7 billion in 1995, with$800 million in the United States growing at negative 2% and $900 million ex-UnitedStates growing in the mid single digits. Worldwide knee sales were estimated at$1.75 billion, with $950 million in the United States growing at 4% and $800 millionex-United States growing in the high single digits. Worldwide sales of implants for theextremities, mainly the shoulder, were estimated at $110 million, with $70 million in theUnited States and $40 million ex-United States, with shoulders growing over 20%.

The two criticalinvestment issues arepricing trends anddetermining thewinners.

The two critical issues surrounding investment in this industry are identifying thenature and extent of pricing trends in the United States, and determining whichcompanies will capitalize on change to emerge winners in the United States and

globally

. As outlined in detail below, we believe that most of the price decline in theUnited States has come from mix shift, a trend we believe is just about over. Present(1996) average unit price declines are on the order of 6.3%, of which mix shift is 3.3%,indicating real price declines in the United States of 3%. The absolute price decline hasresulted as large buyers have driven bidding processes. However, we believe that the

Exhibit 2

Market Segment Shares

Source: H&Q estimates

Reconstructive

Devices

50%

Trauma

14%

Arthroscopy/SM

10%

Soft Goods

10%

Spine

6%

Other

10%


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AMBRECHT

& Q

UIST LLC

structure and dynamics of the market will suppress this trend to a 1% to 2% annual pricedecline, at most. We posit also that larger companies are likely to benefit from the trend,and that smaller ones will suffer. Our projection for the impact of mix shift and pricedeclines in the United States is 5% total in 1997 and 3.5% in 1998, improving thereafter.Pricing in Europe has been relatively benign with annual increases of 2% to 3%, but issubject to large sudden changes, such as when France instituted its TIPS pricingsystem, reducing hip and knee prices substantially. It is rumored that France will

institute a further 10% to 12% price cut in February 1997.

Growth in the core geographic markets the United States, Western Europe, andJapan is expected to come mainly from the growing populations of elderly persons,and greater demand resulting from an increasingly fitness-oriented population,reduction in procedure risks, improvement in implant technology, increased use ofimplants in younger patients, and development of orthopaedic procedures for other bodyparts. In the emerging markets, particularly Asia, growth should come from greater

demand resulting from increasing economic prosperity, an aging population, and lowcurrent penetration rates for orthopaedic implant procedures.

Background

A hip or knee replacement is clinically indicated for a patient with osteoarthritis,rheumatoid arthritis, aseptic necrosis, or fracture leading to severe joint pain and/orlimited range of joint motion. It can be categorized as either primary or revision. Arevision replacement is clinically indicated when infection of the joint occurs or when

Exhibit 3

Market Growth

Source: Industry Data Sources; Knowledge Enterprises, and H&Q estimates

US Reconstructive Market Growth - Hips

1992 1993 1994 1995 1996 1997 1998 1999 2000

Procedures 2.6% (1.3%) 4.5% 4.5% 4.5% 4.0% 4.0% 4.0% 4.0%

Mix Impact (3.4%) (3.2%) (3.0%) (3.3%) (2.0%) (1.5%) (1.0%) 0.0%

Price 3.9% (0.8%) (1.4%) (2.5%) (3.0%) (3.0%) (2.0%) (1.5%) (1.0%)

Total Growth (5.5%) (0.1%) (1.0%) (1.8%) (1.0%) 0.5% 1.5% 3.0%

US Reconstructive Market Growth - Knees

1992 1993 1994 1995 1996 1997 1998 1999 2000

Procedures 4.4% 7.8% 6.2% 8.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Mix Impact (2.4%) (2.0%) (1.4%) (1.1%) (0.5%) 0.0% 0.0% 0.0%

Price 7.0% 5.0% 1.0% (1.0%) (1.0%) (2.0%) (2.0%) (2.0%) (1.5%)

Total Growth 10.4% 5.2% 5.6% 3.9% 3.5% 4.0% 4.0% 4.5%

Reconstructive Market

1992 1993 1994 1995 1996 1997 1998 1999 2000

Procedures 3.5% 3.2% 5.4% 6.4% 5.3% 5.1% 5.2% 5.2% 5.2%

Mix Impact 0.0% (2.9%) (2.6%) (2.1%) (2.1%) (1.1%) (0.6%) (0.4%) 0.0%

Price 5.5% 2.0% (0.1%) (1.7%) (1.9%) (2.4%) (2.0%) (1.8%) (1.3%)

Total Growth 0.0% 2.3% 2.7% 2.6% 1.4% 1.6% 2.5% 3.0% 3.9%

Ex-US Market 6.0% 5.0% 4.0% 4.0% 3.0% 4.0% 5.0% 5.0%

Worldwide Growth 4.2% 3.9% 3.3% 2.7% 2.3% 3.3% 4.0% 4.4%


13/97


9

the implant loosens because the supporting bone of the primary implant becomescompromised. The lifetime of an implant is sufficient to see 97% of patients to the grave,but can last anywhere between 5 to 25 years post-procedure, with most lasting at least15 years.

A primary or revision replacement can be categorized as either a total or partialreplacement procedure. The vast majority of reconstructive device procedures consistof total joint arthroplasty. In total hip arthroplasty, the upper bone in the leg (femoral

head) is removed and discarded. Then the socket into which the femoral head fits(acetabulum) is enlarged and a layer of (usually) plastic, ultra high molecular weightpolyethylene (UHMWPe) is implanted, usually in a metal hemisphere. Finally, thefemoral head is replaced by a smaller metal sphere attached to a stem which isinserted into the medullary canal of the femur (thigh bone). In a partial hipreplacement, only the femoral head and neck are replaced. In total knee arthroplasty,a more complex but similar procedure in nature, the articulating surfaces (surfaces atwhich bones meet) of the femur and tibia (lower leg bone) are replaced and the patella(knee cap) is generally resurfaced.

Fixing the components of an implant to the skeleton is accomplished by either bonecement (polymethylmethacrylate) or bony ingrowth into a porous coated implant. In a

cemented implant procedure, the bone cement is packed into the excised area before theimplant is inserted. Then, after implant insertion, the implant is held in place until thecement hardens. In a porous coated implant procedure, bony ingrowth through the poresin the implants coated surface achieves fixation. Porous coated implants are typicallymore expensive than cemented implants, but take less operating room time and do notincur the cost of cement and cement-related accessories. There is an ongoing debate inthe clinical and managed care communities about exactly when and for whom a porouscoated implant is clinically indicated and what the relative economic merits are of each.

Long-Term Developments: Goals and Technologies to Watch

Hip and knee replacement procedures constitute some of the most successful

procedures in history. They eliminate pain, restore function, and require minimalmonitoring or maintenance. For over 90% of patients, it is a permanent fix. This factcontributes to the industrys present ills by making differentiation of implantsexceedingly difficult. While remaining progress to be made in improving theseprocedures may be minor, the focus is on improving the wear characteristics of the self-lubricating plastics used in the implants. Wear particles tend to trigger an immunereaction, which can result in osteolysis, the destruction of the bone around the implant.Other efforts focus on enhancing implant-to-bone contact upon implantation in orderto avoid growth of fibrous tissue which provides less purchase for the implant.Improved instrumentation is the major focus, while bone growth proteins may be alonger-term solution.

Mix Shift and Pricing in the U.S. Market

The two most significant recent trends in the U.S. reconstructive device market area mix shift from more expensive porous coated implants to less expensive cementedimplants, and pricing pressure.

Mix shift was anindependent factorfrom cost containment.

From January 1993 to September 1996, the percentage of unit sales coming fromporous coated hips has declined from 48% to 25% and for porous coated knees from47% to 20%, as indicated in Exhibit 4. It is important to note that the mix shift issue wasan independent factor from cost containment, but was clearly accelerated by it.


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15/97


11

We estimate that the shift from porous coated to cemented implants negativelyimpacted U.S. knee implant revenue from -1% to -2% per year and U.S. hip implantrevenue around -3% per year from 1994 to 1996 Stabilization of this trend definitivelybrightens the outlook for the reconstructive device market.

Pricing Forecast: Partly Sunny

Pure pricing pressureis more minor than iswidely perceived.

Pure pricing pressure from hospitals remains, though it is more minor than is widelyperceived. It appears to us that price declines accelerated in the first half of 1996. Weestimate that the change in ASP for reconstructive devices overall was about -3% at theend of the second quarter of 1996. Importantly, according to most industry players, theASP declines appear to have decelerated in the second half of 1996, which could bodewell for reconstructive device manufacturers. ASP declines appear to be more severe inhips than in knees and in porous coated implants than in cemented ones.

Price erosion has been driven by the consolidation of providers and the resultingincrease in power of administrative buyers, made more acute by Medicare cuts. Hospitaladministrators have a fairly simple goal: to make money on the $10,900 reimbursementfor DRG 209 (see Exhibit 6). To make the procedure profitable, costs were reducedprimarily by reducing average length of hospital stay from 19 days in 1982 to 7 days in1994. Many now have a length of stay of 5 days. Hospitals and surgeons also reducedprocedure OR (operating room) time from 2.5 hours to as little as 45 minutes, at asavings of $40 per minute fully costed.

Exhibit 5

Impact of Mix Shift on Sales for Industry and Major Players

1994 1995 Q3-96

Industry Hips -3.2% -3.0% -2.2%

Knees -2.0% -1.4% -1.2%

Zimmer

Hips -3.9% -0.5% -3.3%

Knees -0.9% -1.0% -0.5%

DePuy

Hips -3.5% -5.9% -5.4%

Knees -5.1% -3.2% 2.7%

Howmedica

Hips -4.2% -7.5% -6.2%

Knees -2.8% -2.7% -2.7%

Biomet

Hips -2.7% -1.6% 2.0%

Knees -1.6% -0.3% -1.2%

Source: IMS America; H&Q estimates


16/97

12 H

AMBRECHT

& Q

UIST LLC

To gain negotiating leverage, administrators urged surgeons to standardize on asingle implant to allow volume purchasing, a tactic that has met with mixed success thusfar. However, with implants constituting a significant percentage of DRGreimbursement, it appears likely that they will continue to be a primary area of focus forcost-conscious hospitals.

Buyers appear to belosing some of their

leverage.

This story bring us to the present time, wherein buyers appear to be losing some oftheir leverage. We are calculatedly optimistic that the worst of the price declines is over,

based on three observations.

First, surgeons have been recalcitrant, to date, in complying with implantstandardization, and administrators are not fond of changing surgeon behavior.Orthopaedics as a practice is highly profitable, and for most hospitals, hips and kneesare a relatively small part of the orthopaedic business associated with a surgeon. Insteadof enforcing compliance system-wide for a buying group, some local administratorsallow surgeons to use any product, often at the old price, and sometimes only if thecontract price is matched. The industry has wised up a bit recently and revised thesecontracts to tie discounts more closely to volume.

The result of surgeon recalcitrance is a standoff between surgeons and

administrators. We expect this standoff to significantly slow price erosion from herebecause it does not allow rapid switching, or even any switching in many cases, amongbrands. Second, the renewed profitability of the procedure is also a positive sign for near-term pricing trends. A customers profitability should reduce his urgency in negotiations.

The third observation is that the Columbia/HCA contract, won by DePuy andHowmedica, may mark a floor for pricing near term. We draw analogies with the drugindustry, which had similar large buyer experiences. In the drug industry, price declines

Exhibit 6

Financial Indicators in U.S. Reconstructive Joint Procedures: 1995

Total Hip PartialHip

RevisionHip

TotalKnee

RevisionKnee

Charges

$21,306 $19,342 $24,880 $21,155 $20,805

Costs*

$10,477 $9,782 $12,239 $10,278 $10,193

% Markup

103.4% 97.7% 103.3% 105.8% 104.1%

Reimbursement

$10,727 $10,826 $11,263 $10,947 $10,903

Gain/(Loss)

$250 $1,044 ($976) $669 $710

Implant Cost

$3,056.03 $515.10 $4,446.00 $3,783.58 $4,778.76

% of total cost

29.2% 5.3% 36.3% 36.8% 46.9%

Length of stay (days)

6.50 8.52 7.46 5.92 5.98

*Captures costs for: routine/special care nursing, operating room, laboratory, radiology, pharmacy, medical

supplies and other ancillary services

Source: CHIPS, company price lists


17/97


13

appeared to halt partially in response to the Medicaid best price policy, in whichHCFA paid the best price given to any other volume buyer, less 15%. This policy madesignificant increases in discounts to any one account highly onerous, likely spurringpricing discipline.

Initially, DePuy and Howmedica felt beaten up by the contract, having given upmore than they received, and rumors were circulating that the contracts would beterminated by both sides. The widely quoted figure of 40% discounts likely stimulated

price concessions throughout the market and certainly stimulated price cuts to hospitalsin the Columbia/HCA system by companies not in the contract.

The hip and kneebusiness is a minorpiece of a hospitalsprofitable orthopaedicbusiness.

A few statistics and laborious calculations may support our optimism for betterpricing near term. Today, as much as 75% of all hips and knees are sold at list price tosmall-volume and/or surgeon-driven hospitals. Price pressure is likely minor for thissegment. If a single hospital seeks to reduce implant costs, it can more easily drivecompliance than a system of hospitals, but the low potential volumes limit discounts to5%, if any. If all hospitals entered contracts and drove compliance over five years, theprice decline would be 5% on 75% of units, or 0.75% per year on the whole business.Of course, most hospitals are not in contracts and the spread of contracts in thissegment of hospitals is likely to be slow. For a low-volume center, the hip and knee

business is likely a minor piece of the orthopaedic business, which remains highlyprofitable. The payoff from the painful process of gaining compliance diminishes inthese circumstances.

Our calculations give ahypothetical pricepressure of 1% to 2%.

For the other 25% of implant volume, the oft-quoted figure of 40% discounts forColumbia/HCA strikes fear into everyone. However, virtually 100% of implants used ina system the size of Columbia/HCA would have to be of a single manufacturer in orderto achieve a 40% discount. Such a level of volume clearly cannot be met by Columbia/HCA or any other account. Through October 1996, DePuy gave a 19% discount toColumbia/HCA. Using a 19% discount as the maximum likely for the largest accounts,we can hypothesize that typical discounts will be under 15%. To acheive these discounts,accounts must drive share, a slow and painful process, making discount creep a slow

process over a period of years. If we assume five years for the change, and a presentdiscount of 5% for these accounts (the minimum), the industry will lose 10% price overthis time, or 2% per year, on 25% of the business, or 0.5% per year on the wholebusiness. We believe that the large group purchasers that can drive compliance (the keyattribute) have already signed contracts, indicating a moderation of this particularpressure. In sum, these calculations give a hypothetical price pressure of 1.25% per year,or 1% to 2% in general terms.

Another concern is that high-volume centers will increase their share significantly,driving down implant prices through their expansion. We have been waiting for thistrend, but it is glacially slow, if it exists at all. Because over 90% of procedures are paidby Medicare, price competition among providers is not a factor because price is set.

Surgeon choice remains up to the individual. Not least, in the long term, it may bedifficult for high-volume centers to demonstrate better quality because the success rateis so high. We do not expect significant volume concentration until centers can competeon outcomes quality, which appears a long way off.

A final factor against wild price erosion is that large orthopaedic companies are notterribly profitable, at 10% to 15% net income margins, indicating that they should notbe far from prices below which they will not go. We believe that the Columbia/HCAexperience delineated this point. Costs can continue to be squeezed, but there is not an


18/97

14 HAMBRECHT & QUIST LLC

obvious expense line on the P&L that can be eliminated, such as SG&A. These productsremain high-service items, a factor which is unlikely to change drastically, althoughservice levels are certain to be reduced selectively.

Overall, we expect reported average unit prices to decline 3% to 4% for 1997,including 1% for mix and 2% to 3% for price alone. These numbers are slightly higherthan the hypothetical example because they include a comparison against the first halfof 1996, during which mix and prices declined rapidly. In 1998, we expect average unit

prices to decline 2% to 3%, including 1% mix and 2% price. This decline should be morethan offset by unit growth of 5% per year in the U.S. market.

Winning in the Future: To Contract or Not to Contract?. . . Contract!

Market share isbecoming a moreimportant competitiveadvantage.

We believe that the reconstructive market is undergoing a profound change in itscompetitive landscape, and that the impact has not yet been felt. Simply, market share isbecoming a much more important competitive advantage because compliance is now thekey to cost savings for hospitals, and the path of least resistance to achieving complianceis to choose an implant that is widely used. Furthermore, once compliance on an implantbrand is accomplished, it strikes us as highly unlikely that these accounts canrealistically switch brands regularly without infuriating their surgeons, since surgeon

switching is clearly a sticking point. Upon contract expiration, a new company wouldhave to beat existing prices but expect significantly lower volumes at first than theestablished player, who has had time to grow share and volume to justify the discount.

So why would a manufacturer not pursue contracts? There are two views aboutcontracting by competitors: it is too risky not to play, and it is too risky to play. Asignificant percentage of reconstructive device procedures (as high as 60%) areperformed by low volume orthopaedic surgeons who require high service levels frommanufacturers. As a result, manufacturers not part of contracts can sell into hospitalswith contracts by continuing to provide attentive service to orthopaedic surgeons whomay prefer a specific implant system or guidance from a particular sales representative.If a surgeon performs only 20 procedures per year, and has an active practice in other

procedures at the hospital, a hospital is unlikely to go to the mat to enforce complianceon implant choice. It is widely assumed that significant legal issues prevent hospitalsfrom forcing compliance against the will of a surgeon.

Non-contracting manufacturers, Biomet primary among them, continue toemphasize surgeon relationships as the mainstay of their business and productdifferentiation as communicated by surgeon champions to maintain volume and pricelevels. They point to success, so far, in their own firm prices, the apparent decelerationof pricing pressure, and the pain the rest of the industry inflicted on itself by agreeing todraconian reductions.

In our view, contractsare here to stay.

The key question is whether the balance of power will continue to swing towards theadministrator as buyer or back towards the surgeon. In our view, hospital administrators

and group purchasing contracts are here to stay. In five years, the percentage of contract-based reconstructive device sales has increased from 0% to about 25%. We expect thatthis percentage, along with compliance rates, will continue to increase because bothparties, buyers and sellers, stand to gain.

In the near term (one to two years), manufacturers may be able to maintain priceeffectively by avoiding group purchasing contracts, emphasizing productdifferentiation, and catering effectively to the orthopaedic surgeon, but it will be at theexpense of market share and, possibly, viability in the longer term (two-plus years).


19/97

Institutional Research: The Skinny on the Skeleton15

A good example of this dynamic may be the Columbia/HCA contract granted toDePuy and Howmedica. The actual outcome is hotly debated, but DePuy claims to haveachieved unit increases of 36% and dollar increases of 17% through Columbia throughOctober 1996 versus 1995, an apparently clear payoff. However, other manufacturerscontinued to sell into Columbia/HCA hospitals. Biomets sales in the Columbia/HCAnetwork have grown 5% to 6% in 1996, for example. The important statistic, however, isthat Biomet growth in Columbia/HCA is at less than half the rate of 10% to 15% in 1995.

Osteonics also acknowledges losing share in these accounts. It appears that surgeons areat the beginning of the compliance curve in this account. As compliance increases, wefind it difficult to imagine that non-contract participants will grow in these accounts.

The ultimate answer to the question of which companies will win is likely to lie atthe middle of this standoff between administrator and surgeon. This middle ground ismarket share, because the larger the market share a company has, the easier it is for apurchasing system to gain compliance around that product. If prices at a given volumeare relatively constant across manufacturers, and if discount is a function of absolute orincreased volume, then starting market share is a key competitive advantage.

The Ex-United States Reconstructive Device Market

Outside the United States, the two key markets for reconstructive devices are Europeand Japan. Europe is highly fragmented, with each country demonstrating its own trendswith regard to growth and pricing. Most European sales strategies incorporate a country-specific approach, with a direct presence in the major European markets, including theUnited Kingdom, Germany, and France. Many companies have established a directpresence by creating distribution subsidiaries, often by buying out former independentdistributors. These purchases are increasingly common in part because distributors arefinding it difficult to carry the vast inventory required to compete. The establishment ofdistribution subsidiaries in major European markets has become even more importantwith the Americanization of the European regulatory climate, which has increasinglyrequired manufacturers to possess critical mass on location for coping with legal andregulatory issues. Distribution subsidiaries provide a parent company with the hands-on

expertise and level of communication necessary to navigate these regulatory hurdles.

In Japan, where legal and regulatory hurdles have also been rising, going directappears essential. Almost all companies have a direct presence in Japan, except Biometand Wright Medical. In Japan, there is a strong belief in the quality and clinical resultsof U.S. products, which control 80% of the market. Importantly, perhaps more so inJapan than in any other part of the world, relationships drive orthopaedics sales,indicating that consolidation of market share in any given product segment is unlikely,once distribution capacity has been maximized.

The Players

The reconstructive device market is highly fragmented and intensely competitive.The major players include DePuy, Biomet, Osteonics, a division of Stryker, Zimmer, asubsidiary of Bristol-Myers Squibb, Howmedica, a subsidiary of Pfizer, Smith &Nephew, Johnson & Johnson Professional Inc., a division of Johnson & Johnson, andIntermedics, a division of Sulzer Orthopaedics. Market shares are clustered very tightly,with DePuy and Zimmer neck and neck with about 22% to 23% share in the hip implantmarket, and Zimmer leading the knee implant market with about 22% share, with severalother manufacturers posting double digit market shares.


20/97


Exhibit 7

U.S. Hip and Knee Unit Share Trends: 1990-1995

Source: IMS America; H&Q estimates

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

199519941993199219911990

Biomet

DePuy

Howmedica

Osteonics

Richards

Zimmer

0%

5%

10%

15%

20%

25%

30%

35%

199519941993199219911990

Biomet

Depuy

Howmedica

Intermedics

J&J

Osteonics

Richards

Wright

Zimmer

Knee Market Share

Hip Market Share


21/97


THE TRAUMA MARKET

The worldwide trauma market had 1995 estimated sales of $1.0 billion, with$500 million in the United States growing at 14% and $500 million ex-United Statesgrowing at 11%. The objective of trauma devices is to achieve complete bone healing orunion and restoration of alignment and full range of motion in patients who havesustained fractures for whom casting alone is insufficient. Trauma devices includeinternal fixation devices, external fixation devices, and bone growth stimulators.

The worldwide internal fixation device market had 1995 estimated sales of$675 million, with $350 million in the United States growing at 12% and $325 million

ex-United States. Internal fixation devices include mainly plates and screws used toachieve fracture reduction. Surgical intervention is required to fasten the plates andscrews to the surface of the bone at the fracture site and again to remove them after thefracture has healed. The surgical implantation procedure is often lengthy and carries therisk of infection of the fracture site.

Intramedullary fixation, involving the insertion of a metal rod into the bone canal toachieve reduction, has become increasingly popular for treatment of long bone fractures,as this procedure carries a lower risk of fracture site infection. However, intramedullaryfixation also generally requires a second surgery for removal of the metal rod after thefracture has healed.

The U.S. internal fixation device market is dominated by one company, Synthes.Other players include Zimmer, Smith & Nephew, and Howmedica. It appears thatSynthes and Zimmer are gaining market share.

The worldwide external fixation device market had 1995 estimated sales of$180 million, with $80 million in the United States growing at 9% and $100 million ex-United States growing at 9%. External fixation devices seek to achieve fracturereduction from the outside of a limb, without extensive open surgery. They can offersome important clinical and cost advantages over internal fixation devices for certainindications. First, external fixation devices allow patients to bear full weight on the

Exhibit 8

Estimated 1995 Reconstructive Market Shares for Major Players ($)

Worldwide United States Ex-U.S.

Zimmer 18.6% 20.4% 16.6%Howmedica 13.7% 13.2% 14.2%

Sulzermedica 13.3% 7.3% 19.6%

DePuy 12.4% 14.6% 10.0%

Johnson & Johnson 8.9% 9.8% 8.0%

Biomet 7.8% 12.0% 3.3%

Stryker 7.6% 8.0% 7.2%

Smith & Nephew 6.0% 7.0% 5.0%

Others 11.7% 7.7% 16.0%

Source: Knowledge Enterprises, Inc.


22/97


affected limb at an earlier stage than internal fixation devices, and require less time toattach. They also do not require an extensive second surgical intervention for deviceremoval.

Synthes is the market share leader with 31% share, followed by EBI, a division ofBiomet, with 20% share, Smith & Nephew with 12% share, Howmedica with 11%share, and Orthofix with 11% share. It appears that Synthes and EBI are gaining marketshare. We estimate market growth of 10% over the next few years.

We believe that bonegrowth stimulatorscould become first-linetherapy for treatment ofnon-healing fractures.

The U.S. bone growth stimulation device market had estimated 1995 sales of$122 million, growing at 10%, with negligible sales ex-United States. Bone growthstimulators are prescribed for treatment of non-healing fractures and as adjuncts forspinal fusion procedures to increase the success rates for vertebral fusions. Currently, thegold standard for treatment of non-healing fractures is surgical intervention involvingthe harvesting of bone from the patients iliac crest for implantation at the fracture site,a procedure associated with high rates of morbidity. Although bone growth stimulatorshave been around since the late 1970s, an increasing body of scientific evidencedemonstrating efficacy and new technology has resulted in the resurgence of the market.We believe that bone growth stimulators could become first-line therapy for treatmentof non-healing fractures if orthopaedic physicians gain greater comfort with clinicalresults. We estimate that the market potential for bone growth stimulators could be asgreat as $400 million at peak.

The major players in the bone growth stimulation market include EBI, the marketshare leader with 60% share, OrthoLogic with 9% share, and Orthofix with 10% share.OrthoLogic has rapidly gained market share since the introduction of its bone growthstimulator for treatment of non-healing fractures in March 1994, up to 21% as of thethird quarter of 1996. Its product requires only 30 minutes of treatment time per dayversus 10 hours per day for EBIs bone growth stimulator.

Long-term Developments: Goals and Technologies to Watch

Unmet clinical needs in trauma revolve around reducing procedure risks and

improving healing rates. Reducing surgeon and operating room time remains a potentdriver for new products as well. Bone growth proteins, bone graft substitutes, andresorbable fixation products are the top identified needs. Bone growth proteins promisehigher healing rates, leading to fewer repeat surgeries and faster patient function. Theimpact could be large, with changing needs for fixation implants. Bone graft substitutesmay offer equivalent healing to autologous bone while avoiding the painful graftprocedure, exposure to infection, or poorer healing rates with many present substitutes.Finally, the ideal resorbable technology would promise better load-bearing attributesthan metal and would obviate the need to remove implants after bones are healed, as iscurrently recommended.

THE

SPINAL

IMPLANT

MARKET

We believe that devices used in spinal fusions comprise one of the orthopaedicmarkets with the greatest near-term growth potential due to fusion cages in the UnitedStates and the high remaining unmet need in these procedures, especially in the lumbarspine. The market is only now beginning to benefit from new technologies andtechniques which will improve outcomes, reduce risks, and increase the population ofpatients who can benefit from the procedure. Other products, such as bone graftsubstitutes and bone growth proteins, stand to grow this market further in meeting thestill-high unmet need.


23/97


We look for stronggrowth in the U.S.market due to theintroduction of fusioncages.

We estimate a worldwide spinal implant market at end-user prices (not allcompanies have their own direct sales forces) of $450 million in 1995, with U.S. salesof $250 million, growing at 8% in 1995, and ex-United States sales of $200 million,growing at approximately 10%. Growth comes from procedures, price, and increasedimplant usage. We look for strong growth going forward in the U.S. market, near 20%,due to the introduction of fusion cages, and continuing ex-United States growth at 10%through 2000 due to growing usage of implants. It is the opportunity to make devices

first-line therapy for close to 100% of fusions, the unequivocal standard of care, thatrepresents the growth opportunity in both cervical and lumbar fusions.

In the United States, cervical (upper spine) fusions appear to be growing at over10%, and penetration of implants is rising rapidly. The cervical market is primarily aU.S. business, with $45 million in the United States and $65 million worldwide. Growthhas been driven by the increase in cervical fusions due to increasingly good results withthe procedure, and through penetration of implants into the procedures. Synthes hasdominated this business in the United States, but Sofamor Danek has made substantialinroads. Growth in this segment likely has a couple more years before the procedures arefully penetrated.

We expect growth inlumbar procedures toincrease to 10% withthe introduction offusion cages.

Lumbar fusions appear to be almost flat, at 78,000 in 1995, and the rate of implantusage is rising slightly. The lack of growth is driven by payers who object increasinglyto the poorly proven benefit of fusion surgeries. Overall, procedure growth appears to bearound 4% in the United States. We expect growth in lumbar procedures to increase to10% with the introduction of fusion cages due to the well-documented benefits of theproduct. We expect procedures to grow at 7% in Europe, with remaining growth comingfrom increased penetration of implants into procedures performed. We include completeprojections and segmentation of the lumbar spinal implant market in the Appendix.

Exhibit 9

Spinal Implant Market

Geographic Distribution

Source: H&Q estimates

U.S.

56%

Asia/Other

20%

Europe

24%

U.S56%

Europe

24%

Asia/Other20%


24/97


We differ from an apparent consensus on the outlook for the lumbar spinal segmenton a number of details. First, we suspect that lumbar fusion procedures and implant saleswould be single-digit in the near future without fusion cages. Second, we believe thatthe number of lumbar procedures for 1997 is 82,000, less than many figures quoted. Thisfigure is corroborated by most procedure data sources (HCIA, IMS, NCHS). We alsofear that some expectations for first-year sales (1997) for fusion cages are aggressive, atas high as $90 million. We believe the opportunity is real and of the same magnitude as

others in the longer term. We believe that our 1997 estimate of $37 million is acheivable,but still optimistic. Our numbers show a one-year slower ramp to peak versus others.Even at our lower numbers, the product would be the most successful first-year launchin orthopaedic industry history.

To hit $90 million in U.S. sales of the fusion cage in the first year, we must assumepenetration of 28% of all lumbar procedures with implants, regardless of the indicationfor the procedure. Or we must assume penetration of 22% of all lumbar procedures,with or without implants. These surgeons are conservative, still smarting from liabilitysuits with pedicle screws, and not all surgeons are yet convinced of the fusion cagesbenefits for a wide segment of their patients. And, in 1997, not all of them will betrained until later in the year. The fusion cage companies also face well-entrenchedcompetitors such as Sofamor Danek, DePuy, and AcroMed, who are likely to playheavily on surgeons conservatism.

Background

There are three primary surgical procedures on the spine: laminectomy, discectomy,and fusion. Laminectomy is a decompression procedure in which part of the spine isremoved to relieve pressure on the surrounding nerves. A discectomy is the removal ofall or a portion of a herniated disc. Neither discectomy nor laminectomy generallyinvolves device implantation.

Spinal fusions are performed to eliminate the pain caused by a number of factors.The three primary ones are: pain due to degeneration of disks between vertebrae and the

occasional associated malalignment (70% of patients); trauma, including auto accidentsand removal of tumors (20% combined); and spinal deformities such as scoliosis, thesevere lateral curvature of the spine (10%). In trauma and degenerative disc disease, painand reduced function occur as the deformation of the spine causes contact between thebony spine and the nerves emanating from the spinal column. The common fusionprocedures are: fusion with bone graft without instrumentation, and fusion with bonegraft with plates, screws, hooks, or rods.

The spinal fusion market has anatomic and severity segments which drive productselection. The spine has three sections: upper, or cervical spine, the middle, or thoracicspine, and the lower, or lumbar spine.

Cervical fusions have

been the fastest growingsegment.

Cervical fusions have been the fastest growing segment as surgeons increase their

usage of implants. Upper vertebrae bear less load and are much smaller than the lowervertebrae, requiring minimal support. Until recently, instrumentation was not often usedin cervical fusions. The implants used are simple plates and screws similar to traumaproducts. In Europe, fusion cages are available for cervical procedures but are in early-stage development in the United States (Spine-Tech). Although constituting almost halfof spinal fusion procedures, cervical fusions generate on the order of $500 perinstrumented procedure versus $2,000 for lumbar procedures. Almost all surgeries fordeformities or trauma are instrumented with hooks, rods, screws, or plates.


25/97


The lumbar spinal fusion segment is the largest segment in dollar terms and a closesecond to cervical fusions in procedure terms. Implants, including screws, plates, hooks,or rods, have become the standard of care, although bone alone is still commonly used.

The fusion cage is themost exciting "new"technology.

The interbody fusion cage (fusion cage, or cage, shown in Exhibit 11 on thefollowing page) is the most exciting "new" technology for spinal surgeons, particularlyin view of the potential for laparoscopic implantation. Fusion cages have been marketedin Europe for years to a modest reception. Fusion cages are generally cylindrical, around0.5 inches in diameter, hollow, and with holes in the sides (like rolled swiss cheese). Twofusion cages are inserted in the disc space side by side, protruding into the top and

bottom vertebrae, and filled with bone fragments harvested from the patient to enhancepossibility of fusion. The fusion cages reestablish disc height, and thereby restore theproper anatomy (likely relieving pressure on nerves), and bone grows through the holesand around the fusion cages for a fusion. They provide proper physiological support,through the vertebral bodies of the spine. Threads on the exterior of the cage prevent thecage from slipping out of the hole into which it was implanted or protruding through theother side. The devices can be implanted in an open procedure or with laparoscopictechniques.

The FDA approved two fusion cages, Spine-Techs BAK/L and U.S. Surgicals RayThreaded Fusion Cage, in the fall of 1996. Fusion cages are entering a highly receptivemarket. In a quirk of fate, fusion cages are the first products approved by the FDA forgeneral lumbar fusion. Pedicle screw and plate constructs, the present standard of care,have not been approved for this use

Severity segments are based on the number of levels to be fusioned, the degree ofstabilization required, and the activity level of the patient. Where disc degeneration ortrauma afflicts multiple levels of the spine, implants are almost always used. Older orless active patients are less likely to receive an implant.

Exhibit 10

Fusion Market Segments by Procedure and Dollar Volume

Source: Industry Sources; H&Q estimates

38%

50%

32%

47%

18%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Procedures Dollars

Cerv

Thor

Lum

Cervical47%

Thoracic16%

Lumbar38%


26/97


In the United States, we estimate implant usage in around 77% of total lumbarfusion procedures. An estimated 60% of fusions of a single level of the lumbar spineused an implant in 1995. We believe that fusion cages will increase the rate of implantusage. Instrumentation would undoubtedly be above the present penetration level in theUnited States were it not for the pedicle screw lawsuits, catalyzed by a December 17,1993, "20/20" episode highlighting the off-label usage of pedicle screws and supposedharm done to patients. Since then, the growth of lumbar fusion procedures has not fullyrecovered, with negative growth rates for 1993/94 and 1994/95. Most spinal implantcompanies selling pedicle screws have now been granted approval for limitedapplications in the lumbar spine. A process is underway to downclassify pedicle screwconstructs from Class III (requiring clinical trials) to Class II (510 (k)). This process ismoving at a glacial pace.

Long-term Developments: Goals and Technologies to Watch

Spinal fusion, by whichever means, remains a rather crude solution to spinalproblems; it may reduce pain, but it does not restore function. Frequently, the fusion atone disk level increases the burden on adjacent sections, leading to further deterioration.There will almost certainly be other approaches to fusion. Ultimately, the goal is torestore function to the affected area of the spine, perhaps through an implantable disc.Such a development would bring spine surgery to the level at which hip and knee surgeryis today, allowing restoration of function.

Other materials and shapes placed in the disc space may be able to achieve the sameobjectives as fusion cages, but would require a regulatory process of five to seven years forU.S. approval. Sofamor Danek has obtained the rights to and patented the use in the spineof Hedrocel, an ultra-strong material likely to withstand the spines compression forces,yet retaining a rigidity similar to that of bone. We are not aware of progress with thismaterial in clinical trials. Sofamor Danek is also experimenting with a fusion cage thatconforms to the lordotic curve, the natural curve of the spine. The advantages ordisadvantages of such a device are unproven and are unlikely to be significant, in our view.

Exhibit 11

Fusion Cage Implantation in Lumbar Spine

Source: Spine-Tech

Pre-Operation Post-Operation

HealthyDisc

DiseasedDisc

Fusion Cage Implants

L4

L5

S1

L4

L5

L4

L5


27/97


A bone substitute allowing the elimination of the harvesting of bone is also animportant development goal for spinal fusion development. Surgeons require bonefragments to place in the location at which the fusion is desired. With pedicle screws it ison the lateral processes, the bones on the back of the spine, and/or between the vertebrae.For surgeries using a fusion cage, bone fragments are placed inside the cage. To obtainbone fragments, surgeons must make an additional incision to harvest bone from thepelvis (iliac crest). Some say that this procedure is more painful than the spinal procedure

itself, leaving an enduring ache, and it exposes a patient to additional trauma, recovery,and risk of infection, and costs the surgeon time. To date, no bone graft substitute hasbeen accepted as standard of care for the spine. There are several on the market, includingprocessed cadaver bone and coral-based products. At present, such products cost around$1,500 per spinal procedure, indicating a very large potential market. Spine-Techrecently announced a development agreement with Orquest for such a product; the mostpromising candidate, in our view.

The next quantum leap in fusion is likely to be the combination of a device andmorphogenetic proteins, a drug that stimulates bone growth (see Osteobiologicssection for further detail on other applications). Sofamor Danek and Genetics Institutehave created an alliance for the development and sale of the Genetics Institute product,rhBMP-2, for North America. Sofamor Danek appears to have the lead in clinicaldevelopment for spinal applications for bone morphogenetic proteins. The challenge todate has been to find a carrier for the protein that can deliver it. Sofamor-Danek is aboutto start clinical trials of rhBMP-2 in conjunction with the lordotic fusion cage, the firstU.S. clinical trial of a bone growth protein in the spine. This is a pilot study leading toa pivotal trial. Approval is not likely for five years (2002). Stryker has rights to the spinefor OP-1, a bone growth protein licensed from Creative BioMolecules. While not in theclinic in the U.S. for the spine, Stryker has completed trials for non-union fractures,with launch expected in 1998/1999. It is likely that some will be used in the spine onan off-label basis for the spine. Stryker is performing exploratory studies in the spinein Europe.

The holy grail in spinal surgery is to restore function with an implantable disc, much

as one replaces a knee joint. A number of attempts have been made and failed and manyare in development. We are not aware of any late-stage clinical work in this area. Theproduct is, in our view, not on the forecasting horizon.

U.S. Lumbar Spinal Implant Market Outlook Discussion

The major issues in determining market growth through 2000 are:

he impact of fusion cages on the U.S. lumbar fusion market in 1997/98

Increased competition in the pedicle screw segment

The evolution of views of pedicle screws in the lumbar segment.

Fusion Cages

We believe that fusion cages are likely to push U.S. growth in the lumbar spinemarket, 50% of the total, to near 20% over the next few years, with traditional pediclescrew products flat or declining in growth. Fusion cages appear to have almost everyfactor in their favor for rapid and deep penetration into the spinal market. The primaryreasons why fusion cages should reach their potential are:


28/97


Cages are likely to offer a quantum leap in the clinical risk/benefit tradeoff, andenhanced cost effectiveness, which should establish cages over time as the first-lineimplant for single-level fusions.

Fusion cages should penetrate fusion procedures presently performed withoutimplants, expanding the market for implants.

Cages should grow the number of lumbar fusions due to reduced procedure risks.

Cages are priced at twice the price of substitutes, expanding the market dollar valuethrough mix upgrades, but limiting penetration somewhat.

Cost reduction is likely, especially with laparoscopic approaches.

The quantum leap in clinical benefit is multi-factorial. On the typical primaryendpoint, percentage fused, cages are not definitively better or worse thaninstrumentation. Viewed as a clinical risk/benefit tradeoff package, cages offer a clearenough advantage. It is the combination of improvements in outcome, such as betterimprovement in pain, with the reduction in risk and recovery time that makes the fusioncage clinically valuable.

Other benefits are likely to include reduced blood loss and reduced operating timeof 60 to 90 minutes against several hours for present procedures, which increases asurgeons output and income. Fusion cages are likely to save money in the procedurealone. Our estimates show up to $3,600 savings for a single-level fusion compared to anon-instrumented procedure, or $2,300 compared to an instrumented procedure.Savings are less in multi-level procedures. Further savings are likely to accrue toworkers compensation insurers through the faster recovery and return to work.

Exhibit 12

Comparison of Fusion Cages with Todays Modalities on Key Outcome Parameters

Modality

Fusion CageStandard

InstrumentationNon-Instrumented

Procedure

Fusion % (1 level) 93% * 95% *** 70% ***

Post-Surgical Device Removal/

Problem Requiring Surgery % 2.5% * 12.5 *** 0% #

Net Pure Success % 91.5% 82.5% 70%

Post-Fusion Pain Meds Needed 0% ** 9% ** generally higher

Average Return to Work 11 weeks ** 23 weeks ** likely higher

Hospital Recovery Time 4 days (open) *

2 days (lap.) **

4-7 days ## 7 days ##

* Kuslich: Average

## Industry/NCHS

** Zdeblick; small study,

significant

*** estimated 1 level from

Yuan, et al

# Yuan, et al, excluding

stimulators

Source: H&Q analysis


29/97


The U.S. Lumbar Instrumentation Market

The market for spinalinstrumentation, isheading for profoundchanges.

The core market for spinal instrumentation, the term for plates, screws, and hooksand rods used in lumbar spinal fusions, is heading for profound changes, in our view.The three major issues are the entry of a new technology (fusion cages), the entry of newcompetitors, and signs of diminishing satisfaction with the surgical approach itself. Weexpect these issues to result in flat or declining average unit prices from 1998 onwardand in absolute declines in units.

Unit growth in theUnited States is likely tobe flat or down.

Unit growth in the United States is likely to be flat or down as a result of the entryof fusion cages, which promise to take some volume from instrumentation. Today, 60%of dollar volume comes from multiple-level procedures, procedures for which webelieve fusion cages are less likely to be used, although this is not yet proven. For single-level procedures, we estimate that fusion cages will reduce instrumentation growth to -1% between now and 1999. Overall, we expect unit volume for instrumentation todecline 5% in 1997, and 2% to 3% in 1998.

Within the instrumentation segment, the biggest change is the entry of competitionsince the approval of pedicle screw constructs for use in the lower lumbar spine, perhaps10% of lumbar procedures. While not carte blanche for broad marketing, it gave an

opening to industry players not willing to promote entirely off-label. Stryker, Biomet,Wright, DePuy, Cross Medical, and Synthes are seeking to turn up the heat. DePuy andSynthes have made significant inroads, taking at least 5 share points from SofamorDanek in the lumbar products market in 1996, as well as share from AcroMed, AdvancedSpine, and Smith & Nephew.

The implication ofentrants is thelikelihood of aprogression to bids bylarge buyers.

The implication of these entrants is the maturation of the business and the likelihoodof a progression to bids by large buyers. The companies with large shares will stand tosucceed best in this scenario, as compliance around a certain product is the key togaining volume and it is easiest to induce compliance around a product surgeons alreadyuse. We do not expect the spine market to repeat the dramatic fate of hips and knees,however. To start with, there is no apparent mix issue, where a high-priced technology

from all manufacturers works no better than the standard one. Also, with SofamorDaneks almost 50% share in the United States, the company has considerable leverageon the compliance issue. Nonetheless, we suspect the days of acheiving 3% to 5% priceincreases are likely to be over by 1998. The non-Medicare (20% Medicare) profile ofpayers and the implants low proportion of procedure cost (10%) are other moderatingfactors compared to hip and knee implants.

Dissatisfaction with instrumentation would exacerbate a trend to disuse spinalinstrumentation. For example, the robustness of clinical data supporting instrumentationis unusually poor compared to most other device or drug therapies. Studies rarely havebeen prospective and randomized, and the control, bone graft alone, was neverdeveloped with clinical data. These issues were highlighted at the 1996 North AmericanSpine Society meeting and, as a result, we see potential for increasing dissatisfactionwith pedicle screw constructs as better studies are performed. Add this to the ongoinglegal turmoil, and sentiment could swing quite easily. Our sense of increasing skepticismcomes from the 1996 North American Spine Society (NASS) meeting in Vancouver, atwhich a few above-average quality randomized studies showed little to no benefit forpedicle screw constructs versus bone alone. It is clearly too early to sound the death knellfor the products, but momentum appears to be against them.


30/97


The Players

Currently, the two major players in the lumbar spinal implant market are SofamorDanek and AcroMed. Sofamor Danek leads the market with 50% share in the UnitedStates, 40% in Europe, and around 50% in Asia. AcroMed is a distant number-twocompetitor in spinal instrumentation behind Sofamor Danek, with 17% in the UnitedStates and about 17% share worldwide. AcroMed was the pioneer in spinalinstrumentation, introducing the pedicle screw approach in the United States, and was

the first company targeted in the ongoing litigation surrounding the use of pediclescrews. The company recently announced a settlement agreement for $112 million forapproximately 3,000 to 4,000 cases. The agreement will be submitted to the judge forapproval on January 6. The companys U.S. business has suffered under the distractionof litigation and the onslaught of DePuy and Synthes, but hangs on to the number-twospot, with a solid 22% share.

DePuy now appears to be the number-three company in lumbar spinalinstrumentation, making a meteoric rise from an estimated 1% worldwide market sharein 1993, to 6% in 1994, to 10% at the end of the third quarter of 1996. In the UnitedStates, the company has gained 14% market share in three years. However, 30% ofDePuys U.S. sales of approximately $15 million in 1995 were of a titanium mesh

ca

1996 ortho overview

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