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Developing New Orthopaedic Business Models: 2020 and Beyond

Posted in Health Reform Watch | Sep 2016 | Comments (0)

Tags: orthopaedic technologyorthopaedic industry trendsinnovationbusiness plan

This article was originally published in the August issue of ORTHOKNOW® and intended for the orthopaedic device manufacturer audiencethose responsible for the creation and development of your surgical devices.

Bill Tribe_crop_web_copyTo thrive in the healthcare environment of tomorrow, orthopaedic device companies will need to operate within a greater portion of the supply chain, assisting upstream and downstream customers in finding operational value. This will require companies to forge stronger relationships, focus on internal efficiencies and launch services, not just devices. Ultimately, the business models of orthopaedic device companies must radically change if they want to maintain profitability, margins and independence in coming years. This was the message from OMTEC® 2016 keynote speaker Bill Tribe, Ph.D., Partner at A.T. Kearney’s Health Practice.

The message is bold, yet not surprising. One needs to look no further than the product—not device, but product—launches of the largest industry players in recent years. Observe a number of examples: DePuy Synthes’ focus on bundled payment services, Stryker’s purchase and subsequent launch of the Mako robot, Smith & Nephew’s development of Syncera. Additional players and offerings, like Cardinal Health’s expansion into the commercialization of orthopaedic implants and Millstone Medical Outsourcing’s direct-to-patient and hospital distribution model, are reaching new portions of the supply chain.

Tribe referred to these as pilot programs. While it can be assumed that a large amount of research and resources, both personnel and capital, went into the creation of these technologies and services to gain meaningful return on their investments, most on this list are too early in their lifecycles to deem successful long-term.

What these companies attempt to do with these models, though, is to solve a different problem for their customers while generating a new revenue stream for themselves. They move beyond legacy devices and distribution to target new price points and customers, and even create new audiences. Tribe argued that all orthopaedic companies, regardless of size or position in the supply chain, should introduce alternative business models that match the shifts in healthcare and their own company needs.

Here is why.

The Economic Case

Margins across the medical device sector have been falling for more than a decade, and will continue to erode by about 5% if unaddressed, according to Tribe’s research. Compounding that is the continued negative impact of price pressure, at nearly 3% per year. An average orthopaedic company would need to reduce its cost of goods by 12% or its Selling, General and Administrative expenses by 8%, or some combination of the two, to offset that 3% in price pressure, he says. That pressure is consistent; therefore, companies must get leaner each year.

On a positive note, orthopaedics is a $46 billion industry growing in the low-single-digits year over year, according to ORTHOWORLD’s THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT®. Healthy procedural volumes due to a growing and aging population, and untapped and underserved markets, mean that the industry remains attractive.

By A.T. Kearney’s estimates, $4 billion to $5 billion in combined operating profit and working capital opportunity is up for grabs from now until 2020 for orthopaedic companies that are able to respond to the industry’s disrupting factors (more on these below) by restructuring business models, products or both.

In attempting to capture that opportunity, Tribe referenced two important points. Number 1, the implant is a small percent of the overall procedure and post-operation cost. For example, an implant accounts for about 3% of a total hip replacement procedure and post-operation cost.

Number 2, Tribe’s analysis of each group within the value chain found that orthopaedic device companies large and small experienced the greatest margins. (See Exhibit 1.) As the customers on either side of the OEM—from the contract manufacturers to the hospital—face increasing pressures in the healthcare environment, they will continue to reference that unevenness and push back against their device company partners. 

Exhibit 1: Orthopaedic Value Chain Margins

Untitled-1

Notes on Exhibit 1: Distributors based on Cardinal Health, McKesson & ABC; OEM majors based on Zimmer Biomet, Stryker, Smith & Nephew, challengers based on NuVasive, Amplitude and Exactech; hospitals based on American Hospital Association and Kaiser Permanente; CMOs based on Greatbatch, Symmetry and estimates for private players.



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