Tools for the job – analysing the global power tools market21 November 2014
Power tools are key for many orthopaedic procedures. Driven by the industry’s continued innovation in cordless battery-powered systems as well as a better understanding of corded systems’ downsides, surgeons globally have been adopting premium-priced electric and, more significantly, battery-operated tools. GlobalData details how the market is set to fare up to 2020.
The field of orthopaedic power tools is among the most established markets in the orthopaedic industry. In 2013, revenue from the global orthopaedic power tools market, consisting of large-bone power tools, small-bone power tools and high-speed power tools, was estimated to be $1.4 billion across the ten major markets covered in this report - the US, France, Germany, Italy, Spain, the UK, Japan, Brazil, China and India.
Despite the lingering economic uncertainties and hospitals' tighter budgets for upgrading capital equipment, sales in the orthopaedic power tools market are expected to experience moderate growth throughout the forecast period, reaching $1.7 billion with a compound annual growth rate (CAGR) of 2.5% in 2020.
Key drivers for this include: a fuelling of demand for consumables due to the growing numbers of orthopaedic surgery procedures; increased cross-selling opportunities as a result of operating room (OR) supply standardisation; a high-margin consumables-based recurring-revenue business model that encourages capital equipment purchase; the need for enhanced patient experience and OR efficiency further driving the adoption of battery-powered tools; and improving healthcare infrastructure in China and India fostering future growth.
The key barriers include: economic softness and hospital cost-containment measures that delay capital equipment upgrades; high costs associated with premium devices, which slows down adoption and encourages reprocessing; intensifying market competition with slow innovation on the horizon; and a shrinking margin in the global power tools market, dampening investor interest.
The world view
As of 2013, the US comprised the largest market share with 46% and is expected to continue to contribute a substantial amount to the global power tools market over the forecast period. Together, France, Germany, Italy, Spain and the UK contributed 21% to the market revenue, with Germany leading the pack at 7%. Despite the German economy's recent return to growth, the other euro area countries are still struggling to get back on their feet after weathering the sovereign debt crisis.
In the rest of the world, Japan represents, at 15%, another market with a significant presence. While all the major markets are expected to grow in sales units, Western countries will be experiencing stronger price pressures and delayed capital equipment upgrades stemming from their governments' healthcare budget constraints for high-volume orthopaedic surgeries. Throughout the forecast period, GlobalData expects the global market share to evolve gradually, with China and India's faster-growing revenues providing a multitude of opportunities for manufacturers seeking international expansion.
In the past few years, as hospitals consolidate and more physicians become hospital employees, hospital administrators are taking a greater role in purchasing. In most hospitals, all supplies and new technology proposed for use have to go through a cost/value analysis committee, making the purchasing process more complex and time-consuming.
As for orthopaedic power tools, there is an increased involvement with hospitals' 'C-level' management in the procurement process of premium systems. These senior hospital executives often need to assess whether the procedure mix and payer mixes can support the purchase of certain orthopaedic power tools, and such a value analysis will help them to map out a purchasing plan that matches the hospital's financial condition.
Moreover, given the current exigent economic conditions, hospital administrators are deploying different approaches to realise cost control. Today, it is an increasing trend among large orthopaedic vendors to leverage their market position by offering bundle discounts for hospital departments upon the purchase of a combination of implants, instruments and capital equipment, rather than giving a discounted price for power tools. In some cases, orthopaedic power tools are included for no charge as part of multiyear consumables contracts.
Meanwhile, despite the increasing constraints on spending, there is a rising demand among hospital administrators for additional services from orthopaedic companies to help increase the efficiency of clinical staff and lower the overheads of daily operation. In particular, the supply side's efforts in helping hospitals with operations management and inventory optimisation, as well as the medical education of clinical support professionals in the OR, are most desired.
There is one clear leader in the orthopaedic power tools market: Stryker. The pioneer in orthopaedic and spine technology, and a constant pusher of the frontiers in the power tools space, Stryker has sustained the leading position, especially in the large-bone and small-bone segments. GlobalData estimates the company currently contributes to about 35% of the global market. Following Stryker are ConMed Linvatec, DePuy Synthes and Medtronic.
Beyond these multinationals, the global orthopaedic power tools market is crowded with small-cap instrument-focused companies with established power tool portfolios vying to steal share; what's leftover contains a wide range of domestically manufactured 'me-too' products targeting the low-end market. While Stryker is very likely to continue to dominate, GlobalData anticipates an evolving competitive landscape.
However, the bar for effective competition has been raised again and again, making it very difficult for small to mid-sized companies to navigate the competitive landscape. How these tier-two companies will leverage their platform technology to diversify current portfolios and enhance their competitive edge against Stryker will be the most interesting thing to follow in the coming years.
In Western economies, despite the economic softness, battery-powered systems will continue to generate traction in the orthopaedic community, mainly driven by an expanded appreciation of the clinical advantages associated with these cordless systems, as well as the more aggressive marketing efforts from companies to encourage upgrades.
Meanwhile, the sales units of pneumatic tools will be declining in terms of overall market proportion as surgeons adopt new-generation battery-powered systems, particularly for large-bone surgeries.
However, although the use of battery-powered tools has enjoyed rapid growth in large-joint reconstruction procedures in most Western economies, it is still limited in emerging markets at this point. Cost is a primary deciding factor in purchasing orthopaedic equipment in developing countries such as China and India. While battery-powered systems can introduce sterility and improved mobility into the OR, their premium price tags hinder widespread adoption, encouraging use of electric and pneumatic tools in the developing world.
In recent quarters, numerous orthopaedic companies have posted only low-single-digit growth in their power tools segment and an increased decline in capital equipment products. Moving forward, cost-containment efforts by cash-strapped hospitals will continue to result in pricing erosion in nearly every segment of the orthopaedic power tools market, particularly with large-bone power tools, as the whole orthopaedic community is now placing appreciable emphasis on austerity measures in hip and knee procedures.
Although the competition is set to tighten due to the increased pricing erosion and cost-reduction measures in the general orthopaedic industry, there are still growth opportunities. For instance, given the recent saturation in the large-joint reconstruction segment, an increasing number of players see the extremity market as an attractive avenue for growth, investing heavily in physician training and consumer marketing. How to develop and introduce additional line extensions that address new surgical applications in small-bone procedures is currently one of the research directions in the power tools field.
What do physicians think?
As the adoption of battery-powered tools increases further in the next five years, surgeons will be anticipating more efforts from the supply side to push the frontier in battery-powered systems: "You are going to be looking at lighter batteries. For a total knee surgery, you are going to hold that saw for 50-60% of the time, if you manage your time well," comments one. "If you have six to eight cases a day, by the end of that day, your accuracy and your stabilisation will change. What we are looking for is an ergonomic grip, light batteries that require little or no manoeuvering, and precision, power and longevity of the system."
Because the power tools market overlaps with a number of medical fields, cross-selling is to be expected and has helped a number of orthopaedic companies gain competitive advantages in marketing their portfolios. Thus, companies that do not boast a strong spine/orthopaedic product line will have reduced bargaining power.
"Most hospitals would work with a certain company and look for a whole package of medical supplies, covering implants, instruments and power tools so that they can negotiate and come up with the best pricing," says another insider.
Recently, single-use power tools have started to attract media attention. Despite companies' aggressive marketing efforts, key opinion leaders indicated that even though these on-the-shelf solutions may help in reducing overhead costs to some extent, their cost-effectiveness in volume surgeries is not yet proven.
"It might be a good idea for hospitals to keep them on standby in case of dead batteries, sterilisation issues and time restraints, but this doesn't mean they are cost-effective," explains one source. "For general hospitals, we want the major cost of equipment to be nil on a case-by-case basis and only small part of the absolute cost."
The saturated orthopaedic power tools market requires companies to keep competing on price. However, to expand revenue streams and sustain margin growth, power tools vendors will need to effectively engage with an evolving client base to understand market realities and deliver a value-adding portfolio to match hospitals' needs.
"They give you power tools for free if you keep buying consumables from them. Also, what we have now seen more in the tender process is that they offer value-added services," notes another source. "For example, they have consultation services to help with coding and hospital logistics. Larger companies have the capability to provide discount structures based on volume, and they also have the power to provide additional value-adding services to improve the efficacy of your work stream and department structure."