extremities market update - may 2012
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May 2012 Extremities Market UpdateTRANSCRIPT
May 2012
Carleton McKenna & Company – Healthcare Insights
Extremities Market Update
© 2012 Carleton McKenna & Company
1801 East Ninth Street Suite 1425 Cleveland, OH 44114 | 216.523.1962 | www.carletonmckenna.com Securities offered through Financial America Securities, Inc., Member FINRA, Member SIPC and the affiliated broker-dealer of Carleton McKenna & Company, LLC
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For more information, please contact:
Extremities Market Update Author:
Dominic M. Brault
Managing Director
(216) 523-1962
To learn more about Carleton McKenna, please contact:
or visit us at:
www.carletonmckenna.com
Paul H. Carleton
Managing Partner
(216) 523-1962
Christopher J. McKenna
Managing Director
(216) 523-1962
I. Orthopedic Market Overview
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Lower Extremities
Hip Knee Spine Shoulder Elbow Wrist/Finger/Thumb Foot / Ankle
Market Size
U.S. $2.7B $3.9B $4.3B $575M $200M $300M $800M
ROW $3.0B $2.8B $2.9B $225M $50M $50M $200M
Global $5.7B $6.7B $7.2B $800M $250M $350M $1.0B
Growth Rate
Low Single
Digit
Low Single
Digit Flat
High Single
Digit
High Single
Digit High Single Digit High Single Digit
Key Players Biomet Biomet Medtronic JNJ/DePuy Biomet JNJ/DePuy JNJ/DePuy/Synthes
J&J/DePuy J&J/DePuy J&J/Synthes Zimmer Zimmer Wright Medical Wright Medical
Smith & Nephew Smith & Nephew Stryker Biomet Acumed Integra LifeSciences Integra LifeSciences
Stryker Stryker NuVasive Tornier Wright Medical Small Bone Innovations Small Bone Innovations
Wright Medical Wright Medical Zimmer DOJ Surgical Tornier Biomet Tornier
Zimmer Zimmer Biomet Stryker Stryker/Memometal
Orthofix Smith & Nephew
Alphatec
Extremities Market
Worldwide Orthopedic Market
Total Global: ~$19 Billion
Upper Extremities Global: $1.4B
Total Global Extremities: ~$2.4 Billion
Large Joint Market Upper Extremities
Worldwide Orthopedic Market
Business Planning / Reporting
• The worldwide orthopedic market generates over $20 billion in global revenue, with the large joint (hip, knee, and spine) market
representing the large share of the total market.
• The large joint market is generally characterized as stable, competitive, and challenging, related to pricing pressures, procedure deferrals,
payer pushback, supply cost containment at hospitals, higher co-pays, and COBRA.
• The extremities market is pegged at roughly $2.4 billion and is underserved relative to the large joint market. Most large orthopedic
companies (J&J, Zimmer, Stryker, and Smith & Nephew) have weak offerings in the extremities market. Although the extremities market
faced macroeconmic headwinds like its larger joint brethren, the overall growth rate continues to be in the high single-digit (some argue low
double-digit) range, which offers a nice respite from the other challenging ortho markets.
Source: BMO Capital Markets, RBC Capital Markets,
Credit Suisse, BernsteinResearch, and Carleton
McKenna
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Extremities Market Overview
Business Planning / Reporting
The extremities market is relatively more rosey than in hips and knees,
given younger patients, private payors that are less affected by Medicare
reimbursement, a largely untapped revision pool, and generally lower
penetration rates.
While growth rates may have slowed related to deferrals of elective
procedures and lower price increases (analysts suggest it is hard to tell
since the market is highly fragmented), growth is still relatively attractive,
hovering in the high single-digit range.
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Hips, Knees, Spine Extremities
• According to ThinkEquity, the size of the U.S. extremity hardware market is estimated at approximately $1 billion
(70% foot & ankle, with the balance hand, wrist, and elbow), growing at an 8% CAGR.
• A late 2011 survey of extremity surgeons conducted by RBC Capital Markets also points to relative stability in the
upper extremity market with expectations for high single-digit to low double-digit growth.
Given the comparable growth rates to the other large joint markets, the stocks that participate in this sector (i.e.,
Tornier, Integra LifeSciences, and Wright Medical) are garnering quite a bit of attention (as evidenced by Tornier’s
premium valuation), and the companies that do not have a stalwart portfolio (i.e., Zimmer, Stryker, etc.) seem to be
making forays into this segment.
• Management @ Zimmer announced an anatomical combined shoulder adapter at the American Academy of
Orthopedic Surgeons
• Stryker suggested on its 4Q11 conference call that it will be investing in shoulders
Extremities Market Commentary
Business Planning / Reporting
“The upper extremity market, which is how we categorize shoulder
and elbow and the hand and the wrist, we believe that the market is
growing at a 10% to 12% rate. And others may agree with that, they
may disagree with that, but we see that as a solid double-digit market
grower.” Tornier 4Q11 Earnings Call on February 23, 2012
“Our pricing in the fourth quarter held up very nicely and we anticipate
those trends will continue.” Tornier 4Q11 Earnings Call on February
23, 2012
“During the fourth quarter, we did not see any deterioration in the
growth profile of the Foot and Ankle market, and we continue to
believe that this market is currently growing approximately 8%.”
Wright Medical 4Q11 Earnings Call on February 23, 2012
“Extremities has slowed down some but clearly it is still kind of the
shining star in the space.” Integra LifeSciences 4Q11 Earnings Call
on February 23, 2012
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Extremities Growth Opportunities
Business Planning / Reporting
An increasing foot and ankle surgeon base should enable growth in the US foot market. • An AAOS surgeon survey showed that only 10% of orthopedic surgeons identified the foot and ankle as one of their
specialties versus nearly 3.5x as many for adult knees
• This number is expected to increase as better implant technology expands the market size (big players spending on
R&D in this area given relatively low competition)
Increasing coverage for US total ankle replacement. • Reimbursement issues have constrained growth in the total ankle replacement market is the past, as most insurers
consider this procedure experimental
• Now, some are considering this procedure medically necessary
There is a very strong patient demographic tailwind, as roughly 1.3 million people will turn 65 each
year between now and 2015.
Should the Patient Protection and Affordable Care Act pass, roughly 32 million individuals may
gain access to health care.
Despite persistent pressures in the U.S. and Europe, emerging markets are starting to gain traction,
with most attention paid to China, Brazil, and India. • China is by far the most attractive market opportunity, given the size of the population, upward mobility, increasing
government spending, and migration to urban centers
Private equity could step into the orthopedic market with the companies trading at historical lows. • Notably, all are trading at discounts to where Biomet and KCI sold to private equity and depending on leverage ratios
and exit multiples, the Med Tech stocks are becoming attractive targets with potential returns in the 20-30% range
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Extremities Risk Factors
Business Planning / Reporting
Increased competition in the extremity market could hamper growth. • The extremity market is one of the faster growing markets in orthopedics and has begun to gain the
attention of the larger manufacturers. This increased attention may not be favorable if companies build out
their extremity business internally rather than through acquisition.
A MedTech excise tax is slated to begin in 2013. • This is a 2.3% tax on all U.S. device sales. The impact across the sector will be significant, particularly for
small-cap companies.
European volumes may drop off with new austerity measures in place to reign in public spending. • For example, Greece enacted measures to cut spending on medical devices by 25% over two years.
There are key structural changes underway in healthcare, including shift of burden to consumer,
cost consciousness among hospitals, decreasing reimbursement, and hospital consolidation, among
others.
The FDA approval process is “difficult” and expensive as there is a need for clinical and economic
data to demonstrate utility and the adoption of new technologies.
Heading into 2012, key macro indicators remain largely negative. • US real GDP growth is still struggling
• Consumer confidence (which is correlated to physician office visits) is showing improvement but off historic
lows
• Still high unemployment
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II. Recent Transactions Summary
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Business Planning / Reporting
MedTech M&A Overview
Year
Average
EV / Sales
Multiple
Average
EV / EBITDA
Multiple
Average 30
Day Deal
Premium
Total Deal
Value (In
Billions)
Average Deal
Value (In
Millions)
Number of
Deals
Number of
Deals >$1
Billion
2011 3.41x 12.5x 54% $47.0 $1,344 35 6
2010 4.53x 23.4x 55% $14.1 $370 38 4
2009 2.85x 14.6x 118% $10.6 $462 23 2
2008 3.76x 21.3x 51% $37.0 $1,193 31 6
2007 4.03x 24.5x 41% $45.0 $1,124 40 12
2006 5.81x 14.8x 37% $44.5 $1,483 30 7
2005 4.38x 26.6x 42% $37.8 $1,990 19 4
2004 4.82x 18.3x 20% $35.5 $1,774 20 6
2003 3.08x 12.7x 63% $18.1 $1,062 17 3
2002 2.55x 12.0x 38% $2.3 $208 11 0
2001 4.56x 22.1x 21% $20.7 $1,091 19 4
10-yr
Average
4.04x 19.0x 48% $26.7 $1,076 25 5
Source: BMO Capital Markets
Consolidation is expected to draw interest in smaller M&A candidates, particularly in the more highly
fragmented extremities market. The 10-year average EV / sales and EV / EBITDA multiples are 4x and 19x,
respectively. The average premium paid has been nearly 50%.
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Select Med Device Transactions
Business Planning / Reporting
Date Target Buyer Target Description
EV
(In
Millions)
Target
Sales (In
Millions)
Target
EBITDA
Margin
EV /
Sales
EV /
EBITDA
11/4/2011 KCI Private Equity Wound care and
regenerative medicine
$5,793 $2,055 31% 2.7x 8.5x
9/23/2011 Ascension
Orthopedics
Integra
LifeSciences
Provides orthopedic devices
for the hand, upper
extremity, and foot
$67 $19 n/a 3.5x n/a
8/31/2011 Salient Surgical Medtronic Devices and tools for
surgical procedures
$496 $100 n/a 5.0x n/a
8/31/2011 PEAK Surgical Medtronic Surgical tools and tissue
dissection for physicians
$118 $20 n/a 5.9x n/a
8/31/2011 Cocentric
Medical
Stryker Minimally invasive surgery $135 $30 n/a 4.5x n/a
6/6/2011 Memometal
Technologies
Stryker Extremities implants $162 $30 n/a 5.4x n/a
5/23/2011 SeaSpine Integra
LifeSciences
Orthopedic trauma and
spine products
$89 $50 n/a 1.8x n/a
4/27/2011 Synthes J&J Orthopedic trauma and
spine products
$19,300 $3,758 43% 5.2x 12.1x
12/21/2010 Beijing
Montagne
Zimmer Artificial joints in China $50 $9 n/a 5.5x n/a
8/25/2010 Gaymar Stryker Patient temp and ulcer
devices
$151 $77 n/a 2.0x n/a
Source: Capital IQ, Inc. and Pitchbook
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Select Med Device Transactions
Business Planning / Reporting
Date Target Buyer Target Description
EV (In
Millions)
Target
Sales (In
Millions)
Target
EBITDA
Margin
EV /
Sales
EV /
EBITDA
10/16/2008 Abbott Spine Zimmer Devices for neck and back $360 $109 n/a 3.3x n/a
8/1/2008 Theken Spine Integra
LifeSciences
Spinal fixation devices $186 $35 18% 5.3x 30.3x
11/2/2007 Kyphon Medtronic Spinal fracture devices $3,953 $488 20% 6.4x 28.7x
9/25/2007 Biomet Private Equity Orthopedic reconstruction $11,271 $2,107 28% 4.9x 13.6x
5/31/2007 PLUS
Orthopedics
Smith &
Nephew
Orthopedic reconstruction $708 $300 n/a 3.0x n/a
Averages $2,856 $612 28% 4.3x 18.6x
Upper Quartile $2,331 $394 31% 5.4x 28.7x
Lower Quartile $127 $30 20% 3.2x 12.1x
Source: Capital IQ, Inc. and Pitchbook
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III. Comparable Public Companies
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Comparable Public Companies
There are very few, if any, directly comparable companies with pure focus on the extremities market.
Most of the large orthopedic companies focus in the hip, knee, and spine areas. Tornier is the closest
to a pure play extremities company and is also one of the smaller companies in the group.
Company Main Product Focus
Johnson & Johnson (DePuy, Synthes) Reconstruction (large joint)
Stryker Reconstruction (large joint)
Zimmer Reconstruction (large joint)
Smith & Nephew Reconstruction (large joint)
Tornier Extremities
Integra LifeSciences Extremities, spine, neuroscience
Wright Medical Reconstruction (hip, knee, extremity)
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Public Companies
Key Stats
Public Company Comparables Financial Information
In Millions of Shares and U.S. Dollars, Except Stock Price
4/9/2012 Market Value Add: Add:
Price Shares of Equity Total Noncontrol. Enterprise
Company Per Share Outstanding ("MVE") Net Debt Int. in Subs. Value ("EV")
1 Johnson & Johnson (NYSE:JNJ) 65.34$ 2,745.3 179,379.9$ (12,634.0)$ - 166,745.9$
2 Stryker Corp. (NYSE:SYK) 55.03 381.3 20,980.7 (1,650.0) - 19,330.7
3 Zimmer Holdings, Inc. (NYSE:ZMH) 64.72 177.2 11,468.4 495.5 7.6 11,971.5
4 Smith & Nephew plc (LSE:SN.) 9.76 896.2 8,746.4 138.0 - 8,884.4
5 Tornier N.V. (NasdaqGS:TRNX) 24.99 39.3 982.4 (14.8) - 967.6
6 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 33.83 26.9 909.4 435.5 - 1,344.9
7 Wright Medical Group Inc. (NasdaqGS:WMGI) 19.01 38.3 727.7 8.1 - 735.8
Company
LTM
Revenue
NTM
Revenue LTM EBITDA NTM EBITDA
LTM EBITDA
Margin
NFY EBITDA
Margin
8 Johnson & Johnson (NYSE:JNJ) 65,030.0$ 67,487.3$ 19,398.0$ 21,299.2$ 29.8% 31.6%
9 Stryker Corp. (NYSE:SYK) 8,307.0 8,672.6 2,452.0 2,544.4 29.5% 29.3%
10 Zimmer Holdings, Inc. (NYSE:ZMH) 4,451.8 4,537.8 1,470.6 1,674.7 33.0% 36.9%
11 Smith & Nephew plc (LSE:SN.) 4,270.0 4,305.9 1,191.0 1,259.9 27.9% 29.3%
12 Tornier N.V. (NasdaqGS:TRNX) 261.2 282.1 22.1 37.9 8.5% 13.4%
13 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 780.1 827.2 158.1 169.4 20.3% 20.5%
14 Wright Medical Group Inc. (NasdaqGS:WMGI) 512.9 483.0 64.6 69.5 12.6% 14.4%
15 Low Quartile 646.5$ 655.1$ 111.4$ 119.5$ 16.4% 17.4%
16 Median 4,270.0 4,305.9 1,191.0 1,259.9 27.9% 29.3%
17 Upper Quartile 6,379.4 6,605.2 1,961.3 2,109.6 29.7% 30.4%
Source: Capital IQ, Inc.
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Public Companies
Multiples
Company
EV / LTM
Revenue
EV / NTM
Revenue
EV / LTM
EBITDA
EV / NTM
EBITDA
1 Johnson & Johnson (NYSE:JNJ) 2.56x 2.47x 8.6x 7.8x
2 Stryker Corp. (NYSE:SYK) 2.33x 2.23x 7.9x 7.6x
3 Zimmer Holdings, Inc. (NYSE:ZMH) 2.69x 2.64x 8.1x 7.1x
4 Smith & Nephew plc (LSE:SN.) 2.08x 2.06x 7.5x 7.1x
5 Tornier N.V. (NasdaqGS:TRNX) 3.70x 3.43x nmf nmf
6 Wright Medical Group Inc. (NasdaqGS:WMGI) 1.43x 1.52x 11.4x 10.6x
7 Integra LifeSciences Holdings Corporation (NasdaqGS:IART) 1.72x 1.63x 8.5x 7.9x
8 Low Quartile 1.90x 1.84x 7.9x 7.3x
9 Median 2.33x 2.23x 8.3x 7.7x
10 Upper Quartile 2.63x 2.55x 8.6x 7.9x
Source: Capital IQ, Inc.
Public Company Comparables Multiples
The companies are generally trading within a range of 2-3x revenue and 8-9x EBITDA.
Tornier, the most pure play extremities company, trades at the high end of the range at over 3x
revenue, given its focus on a more attractive extremities market
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Public Companies
Multiples
1.50x
2.00x
2.50x
3.00x
3.50x
4.00x
Med Tech Index
Multiples in the orthopedic sector have compressed over the last several years, mainly due to slowing
growth in hip, knee, and spine area (there is still growth in the extremities market) combined with the
weak macroeconomy and structural changes in healthcare
The index is comprised of the seven companies included herein
Source: Capital IQ, Inc.
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Public Companies
Share Prices
The index is comprised of the seven companies included herein
Source: Capital IQ, Inc.
The S&P 500 is up over 15% during the last six months, while the orthopedic device companies are
generally flat, which suggests an uncertain near term outlook.
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Med Tech Index S&P 500
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Survey Year
Number of
Deals
Median
Premium
2006 29 51.6%
2007 38 39.1%
2008 46 78.7%
2009 30 56.2%
2010 37 54.0%
Historical Merger Premiums
Source: Mergerstat Review 2011
Mergerstat Review 2011 also breaks down acquisition premiums by industry classification. The
premiums in the drugs, medical supplies and equipment industry ranged from 39% to 78% with
a median premium of 54% (which is essentially in-line with the 10-year premium of 48%
discussed in Section II) as follows:
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IV. Extremities Market Multiple Conclusion
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Extremities Market
Multiple Conclusions
Business Planning / Reporting
Approach Revenue
Multiple
EBITDA
Multiple
M&A Transactions
10-Year Average 4.0x 19.0x
Select Deals – Average 4.3x 18.6x
Select Deals – Upper Quartile 5.4x 28.7x
Public Companies (No Acquisition Premium)
Average 2.3x 8.3x
Upper Quartile 2.6x 8.6x
Tornier 3.7x nmf
Public Companies (Including Implied Acquisition Premium of 50%)
Average 3.5x 12.5x
Upper Quartile 3.9x 12.9x
Tornier 5.6x Nmf
Extremities market
attractive growth
prospects should result in
a premium valuation, in-
line with Tornier and the
upper quartile of our
select M&A transactions
or roughly 4-6x revenue
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V. Carleton McKenna
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