Replacement-Joint Market Shows Signs Of Improvement In 3Q

The $11 billion market for replacement hips and knees is showing signs of improvement after a recession-caused slowdown in orthopedic procedures, another subtle indication of an economic recovery.

It may be a slow and steady recovery, but third-quarter reports from big industry players including Zimmer Holdings Inc. (ZMH) hint that it's underway. As Zimmer explained, after watching procedure rates dip three to four percentage points earlier this year, it looks like there was a one-point recovery in the third quarter.

Procedure volumes are "beginning to thaw in the ortho reconstructive market," said Joanne Wuensch, an analyst with BMO Capital Markets.

Replacement joints fix often debilitating arthritic problems, but people can push off treatment if they're concerned about lost insurance, high out-of-pocket charges or taking time off work. These effects have slowed the market this year, although industry executives have said they believe procedures have been deferred rather than canceled.

Zimmer's better-than-expected third quarter, reported Thursday, came on the heels of reports from Stryker Corp. (SYK) and Johnson & Johnson (JNJ) that also pointed to modest signs of market recovery. Together those companies comprise the bulk of the replacement-joint market. Smaller Biomet Inc., which is privately held and tends to take market share, has also reported for its most recent fiscal quarter, and the U.K.'s Smith & Nephew Plc (SNN) reports on Nov. 6.

The view ahead for the sector is still hazy. The industry faces questions about the effects of health-care reform, potential changes to a Food and Drug Administration fast-track approval process commonly used in orthopedics and pressure on prices from cash-strapped hospitals. Orthopedics companies haven't reported big increases in price erosion, but they have long been under pressure, and hospitals appear to be squeezing prices on other devices such as certain cardiology implants.

Amid all this, signs that the downturn in replacement joint procedures wasn't too damaging has already fueled a big rebound in stocks - Zimmer and Stryker shares soared about 71% and 57%, respectively, between early March and Thursday's close.

The industry can at least face future questions while procedure growth rates improve, which may not happen rapidly. "We think that over time you're just going to see a continued progression towards a more normalized procedure rate," Zimmer Chief Executive David Dvorak said on the company's earnings call.

Bernstein Research analyst Derrick Sung said the U.S. market "looks like it has convincingly bottomed with glimmers of recovery emerging." Meantime, he noted that international markets still look weak, but don't seem to be worsening.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

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