The future of big orthopedic device companies: Boom or bust?
Seven orthopedic industry thought leaders predict what the future holds for big orthopedic device companies.
Chase Behrendt, MBA, CMPE, CEO, Fox Valley Orthopaedics (Geneva, Ill.): I see the orthopedic device companies continuing to do well over the course of the next several years as they pursue mergers and acquisitions to take advantage of economies of scale and tax inversions to lower their corporate tax rates. Inevitably, the payers will reduce reimbursement to providers both by eliminating cost plus percent contracts that disincentive cost control and adjusting reimbursement amounts lower. This provider reimbursement management will put external pressure on manufacturers to lower cost and force much more aggressive price competition amongst current vendors.
Steve Lichtenthal, vice president of business development, The Orthopaedic Implant Company (Reno, Nev.):The future success of the big orthopedic device companies depends on their willingness to adapt to the new world of healthcare. Where big orthopedic companies begin to accept that the majority of implants and designs they produce are commodity-type products and price them accordingly, they will see success and opportunities to increase market share.
For those large vendors who continue to price stable-technology implants as though they are innovative, will decidedly languish. Big orthopedic device companies who can produce truly innovative implants that also carry a real component of value will ultimately be leaders in the field going forward.
DM (Nashville): My opinion, big ortho understands the market is headed towards lower prices, higher patient volumes and greater risk for poor product execution. Fewer companies with bigger share footprints are already in play. The challenge for big ortho is streamlining the product and service levels in line with lower prices and predicted higher patient volumes using current technologies; e.g. total hips, knees, trauma. Big ortho needs to reduce the instrument asset expense in a market where in 10 years an estimated 1 million TKAs might be performed annually.
Can big ortho survive? Well it depends on how thoughtful and innovative big ortho managers can become. Clearly in some big ortho companies when you get past the financial charades employed to bolster the quarterly financial results, one cannot sustain this sort of tactic too much longer.
Big ortho needs to consider:
1. How to become a multi-product segment provider 2. How to utilize lower margin products to gain exclusivity and guaranteed market share 3. Streamlining product delivery to maximize support efforts of service reps 4. Placing in the market talented sales reps who cross over multiple levels within customer organizations 5. Assuring customers that quality and product innovation will continue and be available without cost antagonism 6. Aligning ALL stakeholders with revenue and strategic plans for the entire organization
Yes, big ortho will survive, but it will be a rollercoaster ride.
Thomas Mitchell, president, CEO OrthoDirectUSA (Fort Wayne, Ind.):
The problem with the orthopedic device industry is NOT the cost of the devices… the greatest cost are the costs associated with their process to go to market (SG&A). We can no longer afford Ritz Carlton service. They must lower their selling costs. The problem is huge. This will have a significant impact.
The big box orthopedic companies have significant challenges ahead. There will be price compression - and it will be significant. Generic devices and a change in the value stream dynamics will significantly impact the orthopedic device space (similar to how the generic pharmaceutical industry has impacted the pharma space). The title wave will start slow then "metastasize." Generics will be the largest segment of the orthopedic device space.
Hospitals that"get smart" will be at a significant advantage. It has been a sellers' market, but there will be new low-cost supplier entrants. The market is ripe for disruption. The combination of economic forces with the commoditization of orthopedic devices will change it to a buyers' market" for the informed and prepared provider.
The big box incumbents will slow the change process by trying to make "quality" the focus. This will delay the transformation a bit, but economic pressure (and free enterprise - the generic market will be profitable!) will eventually force all to "get through the knothole on this issue". Bottom line will eventually get communicated. The devices are ALL pretty much ALL functionally equivalent.
Lars Thording, Vice President of Marketing and Public Affairs, Intralign: There's an emerging portfolio of value-based medical technology manufacturers with enough critical mass to upend the orthopedic device market as we know it. As providers face mounting financial pressures, they will increasingly turn to so-called generic devices to realize sizable supply chain cost savings. They will also increase OR throughput by embracing the surgeon extender model, minimizing reliance upon sales reps and adopting a host of other clinical and operational efficiencies. Device manufacturers that fail to adapt to this paradigm shift will see negative impacts to their profits.
Device company executive: I think it's less relevant what we think their fate is than what they think their fate is. They operate at a very different altitude and influence the political/regulatory process in ways we can't fathom. Maybe there will be less money for them, so the competition in the zero-sum game will become fiercer and less tolerant of minor players whittling away at the edges. Nonetheless they are very accustomed to playing in tighter margin international markets, so they can survive. I think they will do whatever they can do to maintain margins and eliminating duplication of overhead is an obvious target. Given the choice, shareholders would rather own one efficient company than two less efficient companies.
Anonymous: As more and more orthopedic surgeons and hospitals participate in bundled payments we are certain to see price compression unless there is a compelling story about reduced hospital costs due to premium devices. That is unlikely.