Orthopedic advances and COVID-19 related changes from .../media/in... · orthopedic sales taking the biggest hit. Orthopedic sales fell 8.3% in the first quarter. Hip sales dropped

Orthopedic advances and COVID-19 related changes from Medtech Insight

2 / July 2020 © Informa UK Ltd 2020 (Unauthorized photocopying prohibited.)

Orthopedic Roundup: Zimmer Biomet, J&J, Smith & Nephew, Stryker Hope For Post-COVID Recovery As Elective Surgeries Restart

Executive SummaryThe big four companies in the orthopedics space hope that the restart of elective surgeries will make up for lost sales, but many uncertainties remain.

The four major companies in the orthopedics space – Johnson & Johnson, Smith & Nephew PLC, Stryker Corp. and Zimmer Biomet Holdings Inc. – have all seen significant reductions in first-quarter revenues due to the delay of elective procedures as hospitals focused on treating COVID-19 patients.

With many US states taking steps to resume outpatient and inpatient elective surgeries under President Donald Trump’s three-part plan to reopen the country, companies are hoping to ramp up procedure volumes in the coming months. Analysts agree, however, that the negative financial impact of the delays will probably last for months, as customers are likely to reduce inventory and conserve cash. (Also see “Plan To ‘Reopen’ America Gradually Allows Return Of Elective Orthopedic, Colon, Eye Surgeries” - Medtech Insight, 21 Apr, 2020.)

Zimmer BiometAfter withdrawing its 2020 full-year guidance on 6 April, Zimmer Biomet was one of the last major medtechs to report first-quarter earnings.

For the first quarter, Zimmer Biomet reported a net loss of $509m compared with net earnings of $246m from the same period a year ago. Its global

knee business fell 8.3% year-over-year, marking the second-largest decline among the big four players in this space, while its hip business saw the biggest decline among the big four, at 9.7%. First-quarter sports, extremity and trauma sales declined 5.8%.

Zimmer Biomet’s CEO Bryan Hanson told investors during the first-quarter earnings call on 11 May that the pandemic has had a significant impact on its business, given their dependence on elective surgeries.

“We have 80%-plus of our global revenue that comes from elective procedures,” Hanson said, adding he expects that patients will ultimately return to the health care system. (Also see “Knees Boost Zimmer Biomet; Turnaround Continues, But FDA Woes Linger” - Medtech Insight, 6 Feb, 2020.)

Suketu Upadhyay, Zimmer Biomet’s CFO, told investors that procedures were down 75-85% from early February to mid-March.

He expects a “sequential deepening” of procedure-deferral rates in the second quarter, followed by an upward trend starting in June as countries and states reopen, continuing into the third and fourth quarter. He cautioned that the “rising level of improvement remains fluid,” and added that he does not expect a significant recurrence of COVID-19 later this year.

Credit Suisse analyst Matt Miksic wrote in his 11 May report that Zimmer Biomet’s expected sequential monthly improvements are in line with his analysis, but he remained concerned about the


company’s ability to effectively compete against Stryker’s MAKO robotic surgery platform.

Upadhyay told investors that Zimmer Biomet’s robotic ROSA platform contributed to sales early in the first quarter, but added that COVID-19 negatively impacted capital sales overall. Hanson reiterated the company’s commitment to the ROSA platform and said investments in ROSA and other robotics-related initiatives remained “key priorities.”

Miksic noted that sales of Zimmer Biomet’s knee devices in the Americas in the first-quarter fell 7%, including robot sales, which were $44m below Credit Suisse’s estimate.

The analyst lowered the company’s 2020 sales estimate by $34m and increased its 2020 earnings per share by 38 cents to $4.02.

Smith & NephewSmith & Nephew said on 6 May that its first-quarter revenues fell 7.6%, year-over-year, to $1.1bn, citing the impact of COVID-19, with orthopedic sales taking the biggest hit.

Orthopedic sales fell 8.3% in the first quarter. Hip sales dropped 8.6%, which is the second-largest decline among the big four orthopedic companies, and knee sales declined 10.6%, the largest drop among the four players.

Smith & Nephew’s trauma device sales fell by 7.1%, impacted by fewer traffic accidents due to the shelter-in-place and lockdown restrictions.

Roland Diggelmann, Smith & Nephew’s CEO, told investors during a 6 May earnings call he is optimistic that elective surgeries will soon restart in some of the largest markets.

“Some states started to announce selective case approvals from 22 April and more than 40 states had made announcements by 1 May,” Diggelmann said about the US market.

He noted that the company’s next-generation CORI computer-assisted surgery platform, which was cleared by the US Food and Drug Administration in February for use in unicondylar knee replacement surgery, is ready for launch as surgery ramps up in the US. In April, the company received the CE mark for the REGENETEN rotator cuff implant, allowing for EU marketing of this product in its sports medicine portfolio.

In response to an analyst’s question about the US recovery, Diggelmann said he is seeing gradual recovery, but said a lot depends on patients’ confidence to return to hospitals as well as hospitals being able to do elective surgeries again.

“Every hospital is in a different recovery status. They will develop protocols, always on the auspice of the broader guidelines. Infection control is a very, very important point and it will affect the entire delivery of care, of course, from accessing the hospital to the treatment and also to the rehab,” he said. “I think that [in the] short-term, it probably will impact the capacity, but I think it’s also going to become a new normal and we’re going to see efficiencies there as well.”

Diggelmann also expects downward pricing pressures to increase, acknowledging that hospitals have “put capital expenditures on the backburner.” But he expects this to be temporary, saying that the trend to create efficiencies will continue.

“We have an opportunity with our NAVIO [and] with our CORI platform on robotics, because it is a modular system, because it is a small footprint


and because it is also less expensive than others on the market,” Diggelmann said.

StrykerStryker CEO Kevin Lobo also painted a bleak picture on the impact COVID-19 had on the company’s orthopedic business. The company posted net earnings of $493m for the first quarter on sales of $3.5bn, an increase of 2%. Orthopedic net sales of $1.3bn increased 2.8% in the quarter.

Ryan Zimmerman, an analyst with BTIG, wrote in his 30 April report that the company’s first-quarter revenues beat BTIG’s estimate of $3.4bn on organic growth of 2.4%, driven by the resiliency in knees, instruments and medical, and spine business.

“Investors worried that Stryker’s elective procedure exposure would hamper results, the diversity of the portfolio helped to offset procedure declines in late March,” Zimmerman wrote.

During the company’s first-quarter earnings calls on 30 April, Lobo told investors that the last week in March, the company’s sales declined 30% versus the same period in the prior year. The most declines were seen in hips, knees, spines and endoscopy, but were offset by other businesses. During April, Stryker’s orthopedic and spine sales were down about 65% while its medical-surgical and neurotechnology businesses fell 25%.

“Clearly we are seeing a deferral in elective procedures, particularly with our orthopedic and spine business,” Lobo told investors. He expects those numbers to rise within the coming months, but said the timing is too fluid to make predictions, which is also the reason why Stryker didn’t give a Q2 or full-year guidance.

Stryker’s hip business saw the third-largest decline among the top four players at 6% during the first quarter while its knee business still performed much better compared to its peers, declining 1.6%.

Stryker withdrew its prior 2020 financial guidance, predicting organic sales growth between 6.5-7.5%.

Johnson & JohnsonJohnson & Johnson’s global first-quarter sales were $20.7bn, a 3.3% rise from the first quarter in 2019. However, the impact of the pandemic didn’t escape J&J’s medical device business, which declined 4.8%. (Also see “J&J Remains Optimistic Despite 5% Decline In First-Quarter Device Sales” - Medtech Insight, 15 Apr, 2020.)

The company’s orthopedics division declined 6.5% in the first quarter. The COVID-19 pandemic impacted growth in this franchise by about 750 basis points.

Knee sales fell 6.1% in the first quarter, the third-largest decline among the big four players, while its hip sales saw the lowest decline at 5.6% among the four companies.

Trauma declined by 3.5% with spine sales taking the biggest hit with a 10.6% decline.

The company pointed to continued pricing pressures in orthopedics with spine, hips and knees declining by 5%, 2% and 1% respectively, versus the fourth quarter of 2019.

J&J CEO Alex Gorsky told investors during the 14 April earnings call that the company’s medical devices business is experiencing a “near-term negative impact and expects this to continue while elective procedures are deferred and hospital


resources are deployed to address patients impacted by the pandemic.”

Joseph Wolk, J&J’s CFO, told investors that medical devices remain the most uncertain, noting some companies have withdrawn their guidance. He said that J&J assumes that the most significant negative impact occurs in the second quarter with signs of stabilization in the third quarter and some recovery in the fourth quarter, which is based on external and internal data.

He also foresees that hospitals will have the capacity to make up deferred procedures from earlier in the year, but suspects that patients may be hesitant to get elective procedures done, also acknowledging the financial and personnel constraints hospitals are facing.

Advanced surgery fell by 1.4%, resulting from a significant impact of COVID-19, which the company estimated was almost an 800 basis point impact.

Wells Fargo analyst Larry Biegelsen wrote in

his 15 April note that the company remains committed to its digital/robotics strategy with the Monarch and Verb platforms, which “validates their respective markets and bodes well for the market’s long-term growth.”

Updated GuidelinesAs the US is re-opening its hospitals and ambulatory care centers to provide “Non-COVID-19 essential care” as outlined by the Centers for Medicare and Medicaid Services (CMS) in April, the American Academy of Orthopedic Surgeons offered its five clinical recommendations. (Also see “CMS Chief Advises Separate Non-COVID-19 Wards At Hospitals To Allow Device-Related Elective Surgeries To Resume” - Medtech Insight, 22 Apr, 2020.)

Among the guiding principles are: ensuring patient safety and the safety of health personnel and staff as the highest priority; adherence to the Centers for Disease Control and Prevention and relevant federal, state and local public health guidance and recommendations; and decision making at the local level and following legal restriction.


FDA Issues Guidance For Small Businesses To Comply With Posterior Cervical Screw Systems Rule

Executive SummaryThe guidance points small medtech companies that may not have a robust regulatory staff to 510(k) special controls requirements for posterior cervical screw systems. The rule was implemented last year after years of discussion between the US agency and industry stakeholders.

After issuing a final rule last year that regulates posterior cervical screw systems as class II devices with special controls, US regulators have published a final guidance to help small medtech manufacturers of such devices on how to comply with the reg.

On 1 May the US Food and Drug Administration published “Classification of Posterior Cervical Screw Systems: Small Entity Compliance Guide.” The document lists where in the code of federal regulations the makers of such devices need to look for guidelines in order to ensure they are compliant with FDA regulations.

A year ago the agency began requiring 510(k) submissions for posterior cervical screw systems made after 1 May 2019. The decision was the

result of years of conversation between the FDA and industry stakeholders, including the Orthopedic Surgical Manufacturers Association.

Before the final rule was implemented such devices made before 1976 were considered unclassified pre-amendment devices, and those made after were simply classified as class II devices but without any special controls.

In 2012 the FDA’s Orthopaedic and Rehabilitation Devices Panel recommended the devices be treated as moderate-risk class II products but with special controls. (Also see “Ortho Panel Endorses Class II Status For Posterior Cervical Screws” - Medtech Insight, 24 Sep, 2012.)

After several more years of discussion, the agency finally came back with the final rule that added special controls, including requirements around the intended use of the products, non-clinical performance testing, biocompatibility and labeling.

The new guidance helps point smaller businesses to the special controls requirements if they are bringing a new product to market and don’t have regulatory staff to figure out where to find them.


Plan To ‘Reopen’ America Gradually Allows Return Of Elective Orthopedic, Colon, Eye SurgeriesCompanies making related devices could see renewals in sales

Executive SummaryUnder guidelines recently unveiled by President Trump, US health care facilities could gradually start phasing-in more elective surgeries, including commonly performed operations that were postponed due the COVID-19 outbreak – many of which involve extensive device use. Elective surgeries include orthopedic joint replacement procedures, colonoscopies and cataract-correcting procedures that could resume as early as May under Trump’s plan.

US President Donald Trump recently issued a plan and recommendations for normalizing American life amid the coronavirus outbreak. Called “Opening Up America Again,” the effort includes a phased-in approach from the administration as to when elective surgeries can resume.

As a general rule of thumb, elective surgeries – which were delayed or canceled over the past two months so there would be enough capacity at health care facilities for COVID-19 patients – frequently account for the lion’s share of financial support for hospitals and ambulatory surgical centers, and similarly, elective surgeries equate to greater sales for device makers. (Also see “Wall Street Tries To Guess The Impact Of Pandemic On Medtech Revenues” - Medtech Insight, 24 Mar, 2020.)

In the meantime, other patients needing elective surgeries for limb-replacement (artificial joint) procedures, colonoscopies, cataract surgeries and other device-related therapies that can

be scheduled in advance or postponed, have found their procedures temporarily put on hold by hospital or ambulatory surgical center (ASC) administrators. For example, knee and hip artificial joint manufacturer Johnson & Johnson estimated in a 14 April earnings call that about two-thirds of procedures that include the use of its devices are considered to be non-urgent or elective, so they’ve been deferred until the pandemic subsides. The company said its first quarter 2020 device sales were down by 5%. (Also see “J&J Remains Optimistic Despite 5% Decline In First-Quarter Device Sales” - Medtech Insight, 15 Apr, 2020.)

Trump last week said he is eager to get American businesses – including the lucrative health care industry – back to work again, so the Opening Up America Again plan would have all health care facilities resume elective surgeries, as clinically appropriate, in the near future. In fact, some facilities could open as early as late May or June as long as they meet a set of proposed state or regional gating criteria, say medtech industry experts who have examined the proposal.

Industry groups, including both the Medical Device Manufacturers Association (MDMA) and AdvaMed, issued statements hailing the president’s plan to gradually reopen health care facilities for business. “We commend the administration for providing federal guidance to safely allow elective surgeries to resume,” MDMA president and CEO Mark Leahey said in a 17 April statement.

Meanwhile, Trump emphasized the economic benefits of his plan. “These steps will help


state and local officials when reopening their economies, getting people back to work, and continuing to protect American lives,” the president said in announcing the proposal on 16 April.

Industry Analysts Say Elective Surgeries Could Resume In MayUnder Opening Up America Again, at the point when each state or region has shown a downward trajectory in the number of documented coronavirus cases within a 14-day period (or a similar downward trajectory of positive COVID-19 tests among their population being tested within a 14-day period), they can move forward, step by step, into new phases of reopening specified businesses.

The steps include three phases, with elective surgeries gradually allowed to take place in more and more health care settings, from hospital outpatient departments and ASCs initially in each state’s Phase 1 period, to all hospital settings in all states and regions by Phase 3.

For example, when a state reaches Phase 1, elective surgeries can resume “as clinically appropriate” on an outpatient basis at facilities (such as outpatient hospital departments with low numbers of coronavirus patients, or at ASCs) that adhere to Centers for Medicare and Medicaid Services (CMS) guidelines, the plan states.

Health care facilities in Alaska and Oklahoma already have announced they will begin

performing elective surgeries in early May, and the states of Texas, Florida, Ohio, Kentucky, South Carolina, Arizona and Arkansas were expected “to take similar actions,” said proprietary industry analyst reports by Wells Fargo Securities on 18 April and Credit Suisse on 20 April.

“Approximately 25% of total US surgical capacity could reopen in the next 2-3 weeks,” Credit Suisse analysts Matt Miksic and Vik Chopra estimated, based on the presidential plan timelines.

In Phase 2 of the president’s plan, elective surgeries could resume at ASCs and in both outpatient and inpatient departments with low numbers of COVID-19 cases, while in Phase 3, all health care facilities could carry out non-elective and elective procedures.

Non-Elective And Elective Surgeries, According To CMSBelow are two charts, the first reviewing non-elective, lifesaving or limbsaving surgeries and medtech materials/equipment typically used for them. The second spotlights elective surgeries, according to information provided by the CMS on 7 April, and applying retroactively for reimbursement purposes from 19 March 2020 until the end of the COVID-19 crisis.

First, here are some examples of lifesaving, acute-need surgeries and related devices, which have continued to be carried out during the coronavirus outbreak in the US, the CMS says:


Necessary Surgeries To Prevent Death Or Organ Disfunction


Meanwhile, included in the more “elective” category are additional procedures necessary for patients’ ongoing health and well-being – or for important diagnostic purposes to forestall preventable death, brain damage, the loss of limbs or eventual blindness:

Non-Life-Threatening Elective Surgeries And Procedures


Start-Up Spotlight: Iraq War Veteran Deploys ‘Bone Paint’ To Combat Traumatic Injuries

Executive SummaryTheradaptive’s “paint-like” regenerative therapeutic can be applied to any device to promote bone regrowth or regenerate tissue.

After seeing the devastating effects of war first-hand, Iraq war veteran Luis Alvarez made it his personal mission to combat traumatic orthopedic injuries by developing a technology platform to expedite healing of bones and tissues.

While finishing his doctorate in biological engineering at the Massachusetts Institute of Technology (MIT), Alvarez developed the technology, dubbed AMP2, that can create proteins which can be applied like a paint to any orthopedic implant or device on the market.

Alvarez, a retired US Army lieutenant colonel who served in Iraq, said coating an implant is superior to using current therapy for bone growth.

“It’s very difficult to deliver proteins to specific locations in the body and keep them there,” Alvarez, founder and CEO of Theradaptive, told Medtech Insight. “Many other groups have tried to deliver encapsulated proteins or chemically bind them to materials, but those methods disrupt protein activity and don’t allow for full bioavailability. We first applied our technology to modify bone morphogenetic protein 2 (BMP2), which has the strongest track-record for bone regeneration, so it can bind to any device to promote bone regrowth.”

Alvarez said AMP2 can turn any device that’s

normally ineffective into a potent regenerative therapeutic. Alvarez spun out the technology from MIT in 2017 with $9m in non-dilutive funding from the Department of Defense and the Maryland Stem Cell Research Fund. The technology is about 18 months away from being tested in humans, but has shown promising results in animals.

In a large animal study conducted at the Mayo Clinic and Cleveland Clinic, scientists were able to correct a bone defect of about 5cm with a bone graft that was loaded with the company’s regenerative AMP2 therapeutic.

Viviane Luangphakdy, lead investigator of the animal study, wrote in an abstract that the technology demonstrated to be “safe and effective in the most challenging large animal model that is available.”

“Improved materials and strategies for bone regeneration in compromised tissue beds will enable better outcomes for military and civilian patients suffering from large traumatic lower extremity injuries and reduce the need for amputation,” Luangphakdy concluded. The findings were presented in February at the Orthopedic Research Society Meeting in Phoenix, AZ.

Alvarez says Theradaptive also has landed several partnerships. This January, Theradaptive and Japanese orthopedic biologics maker Orthorebirth signed a licensing agreement to develop and market a regenerative therapeutic for traumatic bone injuries and congenital skeletal defects. Under the agreement, Orthorebirth will be responsible for developing and commercializing


the product in Asia, while Theradaptive will develop and sell the product in the US.

Theradaptive has also collaborated with medtech giant Medtronic PLC in spinal fusion studies and with[Johnson & Johnson Innovation - JJDC Inc.] Alvarez hopes to find additional partners and to raise enough cash to fund human trials in 2021.

The company has already been in discussions with the Food and Drug Administration, which classified the technology as a class III device rather than a biologic. Alvarez said the device designation is good news for the company, saving it “time and money” in pursuing regulatory approval. Drugs typically require longer clinical trials to meet FDA standards.

“Here you have a technology that has the potency of a biologic but enjoys the regulatory pathway of a device, which is a more favorable investment opportunity,” Alvarez said.

The technology has wide applications and could potentially be able to help trauma patients regrow bones in as little as six weeks without plates and screws, and help spinal fusion patients get back on their feet in days. The company’s first indication will be in spinal fusion, which Alvarez estimates is an $8bn global market, half of which is addressable by Theradaptive’s technology. The company is also leveraging work in regenerative skin and blood vessels.

Short term, Theradaptive plans to finish preclinical trials, generate strong data in a Phase II trial, and then raise enough funding to expand the platform into other tissues such as soft tissue and cartilage.

After serving with soldiers in Iraq who had their limbs amputated due to limited options to regrow the tissue needed to make limbs functional, Alvarez said he returned to MIT to find a solution.

Now he has this advice for other entrepreneurs: “Disregard people who tell you, you can’t do something.”

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Orthopedic advances and COVID-19 related changes from .../media/in... · orthopedic sales taking the biggest hit. Orthopedic sales fell 8.3% in the first quarter. Hip sales dropped