By Jon Kamp
Of DOW JONES NEWSWIRES
BOSTON -(Dow Jones)- The slowdown affecting the orthopedic-devices market is likely to continue for several months as people with bum knees and hips defer procedures due to economic uncertainty, according to the top official at Smith & Nephew PLC (SNN).
The U.K.-based company does about half its orthopedics business in the U.S., where lost health insurance, steep co-payments or worries about time off from work have slowed growth in procedures for replacement hips and knees. The industry in general is anticipating growth this year will be roughly a couple percentage points below the typical high single-digit pace of market expansion.
"That's pretty much what we've seen," said David Illingworth, Smith & Nephew's chief executive, in an interview with Dow Jones Newswires.
"I think we're going to see a few more quarters of pressure on volumes," he added. "I don't think it's played out yet."
He also discussed the outlook for bone-sparing hip resurfacing technology in the U.S., where market growth has been restrained amid thin competition, and the rising need for medical evidence to defend premium-priced products as the U.S. pursues health reform.
Smith & Nephew competes in the $11 billion hip and knee market with Zimmer Holdings Inc. (ZMH), Johnson & Johnson (JNJ), Stryker Corp. (SYK) and privately held Biomet Inc. Though a smaller player among this group, Smith & Nephew is the biggest European medical-devices company.
Illingworth, who didn't talk specifically about the soon-to-conclude second quarter, stressed that he believes orthopedic procedures are being pushed back rather than cancelled altogether. People typically need joint-replacement surgery to fix painful arthritic problems that can worsen while they wait.
"I really don't think that we're ultimately going to lose those procedures," he said. "I think it's people saying 'look, there's uncertainty in my life and this is not the time to be going and taking three months off of work and getting a knee replaced.'"
Illingworth said the company hasn't seen anything remarkable regarding product prices, which are holding ground. The company is watching, however, for any signs that premium-priced products are coming under pressure in this economic environment, he said.
The CEO also met with sell-side analysts during a U.S. visit this week, and left Wachovia's Michael Matson saying that while the orthopedics markets may be close to a bottom, "a rebound does not appear imminent."
Pressure on product prices is an ever-present concern in orthopedics, where companies often rely on fetching premiums with new products to bolster their revenue growth. In a newly cost-conscious environment amid the push for U.S. health reform, orthopedics companies will need to show high-priced products also yield premium results, Illingworth said.
He pointed to a product (a model of which he had on hand) that is part of a knee-replacement system in which instruments are customized for patients. The company plans on premium prices, but believes it can demonstrate the devices will more than offset this by improving accuracy and saving time, Illingworth said.
Asked whether hospitals have demanded such evidence in the past, Illingworth said it wasn't a focus among device manufacturers.
Smith & Nephew is well-known for its "hip resurfacing" system, which takes away less bone than traditional hip surgery and may appeal to younger patients who could need that bone for later fixes. Resurfacing constitutes about 8% of hip procedures in top markets overseas, but has only grabbed about half that much in the U.S.
Some U.S. surgeons are skeptical about the merits of resurfacing, which is challenging to perform, and analysts say the market hasn't matched expectations. But Illingworth said it's actually where Smith & Nephew thought it would be and will grow further when more competitors reach the U.S.
All major competitors sell the technology overseas, yet market against it in the U.S., according to Smith & Nephew, which holds about 80% of the U.S. resurfacing market. Only the U.K.'s Corin Group PLC (CRG.LN) has thus far joined Smith & Nephew here.
"The way for us to move penetration further along in the U.S. is to get more competition," Illingworth said. Among other companies, J&J and Biomet may be closest to reaching the U.S. with their own resurfacing systems.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com