Don’t expect pandemic backlog to fuel orthopedic sales, says Needham (NYSE:ENOV)

Don’t expect a pandemic-related backlog in procedures to fuel sales of orthopedic medical devices this year, according to a new analysis by Needham & Co.

In a recent report, the investment bank said the backlog appears to have been largely exhausted, with 2023 sales of most orthopedic products coming in just modestly higher than they would have if the pandemic never occurred.

Needham calculated the constant currency compound annual growth rates, or CAGRs, from 2013 to 2019 for four leading categories of orthopedic devices and applied them to the pandemic years of 2020 to 2023 to see how the products have fared.

The hip market grew the most last year, according to the analysis. The constant currency CAGR for hip replacement products was 1.9% from 2013 to 2019. If the market grew at the same rate through the pandemic years, 2023 sales would have reached $6.22B. Needham estimates 2023 sales were actually $6.32B, or 1.5% higher than its non-COVID estimate.

The spine market was the next best performer. Needham estimated the constant currency CAGR for 2013 to 2019 at 1.6%, which would have resulted in sales of $9.77B in 2023 if they grew by the same rate. The bank estimates that 2023 sales actually rose to $9.88B in 2023, or 1.1% higher than the non-COVID estimate.

For the knee market, the constant currency CAGR was 2.7% from 2013 to 2019, with sales expected to reach $8.55B in 2023 in they grew at the same pace. Instead, sales reached an estimated $8.61B in 2023, topping Needham’s non-COVID estimate by 0.7%.

The trauma and extremities market, meanwhile, saw slower-than-expected growth. Needham estimates the segment had a constant currency CAGR of 6.2% from 2013 to 2019. If the market had grown at the same rate during the pandemic, sales would have hit $10.31B in 2023. Needham estimates that sales reached only $9.54B in 2023, or 7.5% lower than its non-COVID estimate.

Needham noted prices for implants improved after the pandemic, which may have resulted in higher-than-expected sales. “But even accounting for improved pricing, we think that orthopedic market growth is likely to be meaningfully slower in 2024 than in 2023,” it added.

Overall, Needham is expecting the orthopedics market to grow by 4.8% in 2024, compared with an estimated 7.3% in 2023. “While most orthopedics companies beat consensus during 2023, we think upside may be more limited in 2024,” Needham added.

The investment bank said it still favors Enovis (NYSE:ENOV) and Alphatec (NASDAQ:ATEC) in the orthopedics and spine segments as their shares are lower, with growth expected to be driven more by share gains than actual market growth.

Other orthopedic companies covered by Needham include CONMED (CNMD), Globus Medical (GMED), OrthoPediatrics (KIDS), Paragon 28 (FNA), Medtronic (MDT), Stryker (SYK) and Zimmer Biomet (ZBH).