Thoughts on Low-Cost Orthopaedic Device Companies

In July, The Wall Street Journal published an article titled “Low-Cost Orthopedic Device Firms Aim To Shake-Up Market.” The following thread arises from an ORTHOWORLD Linkedin group discussion in which the question was posed,

What are the group's thoughts/opinions on small firms offering discounted orthopaedic products?

Anonymous #1 at a manufacturing company • China and India are already producing low cost orthopaedic products to compete against the current market. It is only a matter of time...

John Sommer, Operations at OrthoDirectUSA • Low cost orthopedic products are already MANUFACTURED in the U.S. Unfortunately, the wasteful supply chain with consigned instruments, consigned implants and sales rep commissions has driven prices to unsustainable levels. There is a new business model. Check it out at www.orthodirectusa.com.

Anonymous #2 from the financial sector • I would think a low-cost orthopedic implant might mean more surgeries for the patients because of the lack of R&D on these implants. But on the other side of that coin, even the implants with all the expensive R&D fail. I guess you let the patient decide what implant they can afford and what surgeon to put it in and let the chips fall where they may...

John Sommer • Almost 75% of orthopedic patents have expired. Much of the "innovation" is tweaks to current technology and is covered under predicate 510(k) approvals. We would consider most of orthopedic technology to be "stable technology." There is no reason for these stable technologies to demand premium pricing in the marketplace. Reimbursements are shrinking. Medicare is broke. The current supply chain must change to respond to this crisis.

Mark Piazza, President at Mark T. Piazza, LLC • If a small orthopaedic company (which is what I believe is meant by "small firm") is able to produce an implant at less cost than one of the "larger" orthopaedic companies, and if that implant is well researched, manufactured and approved, it should be acceptable in the market. If the smaller firm has lower overhead than the big companies, that is a competitive edge for that firm. Of course, if that small firm implant does not perform as expected or promised, then consequences will follow.

Anonymous #3, a consultant • All markets mature and develop and eventually become commodity markets in which price of course plays a significant role. The orthopedic companies have brought it upon themselves since the industry has no cohesion - there is no way the oil industry would give away pumping stations to sell their gasoline!!! Also the larger orthopedic companies are only concerned about share price and have failed to invest in true innovation, and true innovation is one of the best answers to the "commodity" challenge. Don't just tweak products - take them to a new level. I do not believe that an implant of high quality can be manufactured more cheaply by a small company with minimal volumes (have tried that myself several times), but certainly with a leaner structure and lower profit margin expectations those small companies can be price agressive.


Itai Nemovicher, President at The Orthopaedic Implant Company • It is not that we can produce or manufacture implants at a lower cost than our competitors - we simply have eliminated the high overhead associated with a direct sales force, streamlined our supply chain, and reduced our margins to what we feel is more appropriate. Regardless whether a device is considered a "stable technology," there is still the R&D needed to ensure that the implants are high quality. Coupled with the U.S. regulatory landscape, I don't see implants prices in the U.S. ever reaching those of China and India.

Abhishek Agrawal, Manager - International Marketing at Matrix Meditec Pvt Ltd • I represent one "SMALL" Indian orthopedic company. I agree with most of the opinions that major driver for producing low cost implants is relatively lesser overhead cost-biggest benefit of cheap labour (skilled & unskilled). We have also managed our borrowing sources in such a way that our overall interest rates would not cost more than 10-14% pa. I believe these parameters certainly give us an EDGE over other USA/European manufacturers. But at the same time, one should note that we use European raw materials and Korean/European machines to produce these implants. This will increase our capital investment and to some extent working capital owing to high cost of European raw material (cost of material + freight + import duty). We are already doing OEM for many European/Latin American companies and they are quite happy about the QUALITY of products. Low cost SKILLED labour is another advantage which helps us to produce/modify complex implants. The biggest constraint for small companies like us is less allocation of funds towards R&D, and because of which we remain manufacturer of OEM/standards/obsolete products only and are not able to come out with advanced products and technology. All in all, I firmly believe a proper amalgamation of technology & management from developed countries plus skilled labour with cheaper rate of developing countries can enable companies to churn out low cost ADVANCED products.

Nuno Reis, Product Specialist for Zimmer products at Werfen Group - Cormédica • In Europe, the problem is not only Asian countries producing implants of low price and questionable quality, there are also some European companies which simply copy parts of other large companies do through strong investment in R & D.

This is the result of downward pressure on prices, and that I believe could worsen with the economic crisis of the peripheral countries of Europe. The need to bring down the deficit in the health sector will certainly constrain the quality and longevity of implants and certainly lead to more revisions.

I believe it is the wrong way and that large companies will find strategies to stay on the market with the desired quality.

Asian countries may try to use European machines, American or Korean to produce those implants, but this does not solve easily the question of quality. Remember the thousands of hours spent in studying the biomechanics of a joint...and many others in a biomechanical study of an implant that can take about a year and a half to two years to get to the market. These implants cost one-third, do not go through this process, so have low production costs. What we can expect!!!!


Christopher Holton, President at Access Orthopedics, Inc. • In the U.S., efforts by small companies to sell lower cost implants inevitably fail, as the driving cost of the implant to the hospital is surgeon preference. The larger companies have a huge advantage on the cost side of the equation; the hospitals and surgeons are addicted to the company salesforce as adjunct hospital employees whose costs are hidden in the cost of implants, and the smaller companies cannot support quality representatives long enough to become competitive with the larger company's representatives. When the sales force ceases to be involved in the Operating Room, and when the hospitals can no longer pass on higher cost implants to insurers, then we will see prices drop precipitously. And the driver of that cost lowering will be the large companies, not the small. Right now, there is no pressure on the surgeon to demand lower prices. Even at a system like Kaiser, the small companies cannot compete because they cannot meet the demands of a vertically integrated system like Kaiser.

John Sommer • Surgeons are learning that there is very little difference in stable technologies. They are almost the same. Functionally, they are identical. In reality, hospital personnel can be taught to run an "orthopedic distributorship" within the hospital setting. I'm not talking about a POD. This is the hospital taking back the responsibility of running its own orthopedic service. Hospitals can purchase directly from the manufacturer and reduce their costs 60-80% from current prices. The small manufacturers have little or no selling expense, since there are no reps needed. So it is truly a win/win for the manufacturer and hospital. Physician owned hospitals and hospitals with co-management agreements transition easier into this business model due to the financial reward available by lowering implant costs. Reimbursements will continue to be squeezed. The large companies can not dismantle their supply chain easily since there are many contracts in place. We have used this business model successfully. Check us out at www.orthodirectusa.com.

Julie Vetalice, ORTHOWORLD • Article by surgeon and owner of RoG Sports Medicine: Generic Orthopedic Implants' Time Has Come, bit.ly/oVe2dH

Drew Distin, Executive Sales Manager at OrthoPros • I have to stand up for the rep. What many who have not sold medical devices fail to see are the months and years of technical training, hours conducting surgical demonstrations and sawbones practice, preparation for the individual case, inventory management, instrument maintenance, and other behind-the-scenes tasks that a good surgical sales professional takes on as his/her responsibilities. Ask almost every successful hip, knee, spine, trauma, sports med or cartilage repair surgeon if he or she needs a rep in the room (perhaps not for every case), and they will answer affirmatively. Do the same for scrub techs, personal assists, PAs or scrub nurses--the answer will be the same. When all hell breaks loose, it is the rep's responsibility to help hold things together and help find a solution to the problem--even with "stable technology" such as current total joint implants. Yes, there is a way to reduce costs, and the good companies are exploring ways to partner with the hospitals and surgery centers to do so, but there has to be a rational equilibrium. Getting rid of the rep will lead to undesirable and unintended consequences.


Anonymous #4, in business development • Drew, 25 years ago they never let reps into the OR. Where do ortho companies get a large percentage of the new sales reps? THE HOSPITAL!! These surgical techs are not idiots. Many of them are better trained than the "cover reps" that you send in to cover a case. OR staff can be easily trained to replace the reps and there are hospitals already doing it.

Christopher Holton • Anonymous #4, I'm sure there's logic in that comment, but I can't follow it. The challenge for all manufacturers is to sell product, not cover cases. The doctors are not complicit in the cost saving aspects and will buy product based on quality and service, with price playing a very small role in the buying process. Until that paradigm shifts, cheap overseas product will not sell in the U.S. unless they can make a compelling financial argument to individuals who can sell it. The increased demands on us as salesmen to perform services to our hospitals make it harder on us to make a decent living at current price levels. No one is going to sell the cheap crap with no base business if there's no profit in it.

Anonymous #4 • We're doing it already. It's made in the USA. You don't realize a peek suture anchor costs about $9 to make in the U.S. Arthrex sells it for $275. A pedicle screw costs $20 to make in the U.S. and most spine companies sell it for $400-$600. Go to www.orthodirectusa.com and see the changing market before your eyes. Doctors are becoming employees and will be compensated for saving money. Medicare has already begun a program in 9 states to make lump sum reimbursement to the hospital.

Anonymous #5, independent contractor for an orthopaedic company • To Anonymous #4: 25 years ago surgeons weren’t trying to do 6-10 total joints in a day. If you have been in an OR lately, you would realize that there is an incredible amount of reliance on the sales rep. Their role is to help facilitate the cases. I know from personal experience that if we rely on SPD to assure that all instruments are accounted for we are in deep trouble, and if you have been in an ortho case after 3pm you would know that most likely you are going to get a tech who at best rarely does total joints. For the safety and benefit of all involved you would probably want a well trained sales rep on hand. I could go on.

I guess it all depends on which side of the fence you are on. If you are with a new company trying to carve a niche (i.e. orthodirectusa) or a well established implant company, we are all trying to move forward to provide VALUE (value comes not just from price) to our customers and benefits to our patients.


Anonymous #4 • To Anonymous #5: I spent 20 yrs working on your side of the fence! If a former scrub tech is good enough to become a sales rep now, what is the difference if the hospital keeps them and gives them a raise to cover cases for the hospital in place of a rep? How many reps are former nurses and scrub techs?

Anonymous #5 • Actually, we really don't have many techs or nurses as sales reps. We do utilize them as case coverage for the basic cases depending on the level of competency and aptitude. The hospital could give them a raise to manage everything that it would require, but I submit that it may not be done as well. Generally speaking, we hire only college graduates as sales reps. This topic is too involved to expound on via email. Your company is an interesting venture and it may succeed—only time will tell.

Kate Sharadin, Business Development at Intellectual Ventures - Invention Science Funds • Sorry if any of this has been posted. I just had this discussion with someone. There are a number of issues to consider. Costs of healthcare in general. Though this is a remarkable procedure overall. However, and this will not be popular I know, orthopedic companies have historically increased price in the higher single digits, not recently, but for a time. I think the general rule of thumb is about a 70% blended gross margin, company wide, so some deviations here and there. Though I found it odd that R&D expense was considerably lower than other med device sectors, at a low to mid single digit % of revenues. So the question is, what is the will of investors to allow their "holdings" to generate lower operating profits and cash flow. It can still be a meaningful business, but the bar is set. Further, I see that AAOS cited that in ten years there will be 3 million knees per year, up from 500,000 in the U.S. now. At first, it's a license to print money on old standards, but if there is no money to pay, I guess this underscores what a great question this really is!

Ken Shireman • One of the things that the sales rep brings to the room is their experience. In the trauma world, Dr. Jones may do 3 femoral nails a year, but the rep sees 300 a year, so what this rep brings to the room is the experience of those 300 nails, tricks, tips and often times a complete solution to an orthopedic problem. We are not just there to aid in the flow of instrumentation, but often times we are there to help the surgeon through very difficult surgical procedures that frankly we have more EXPERIENCE in than they do.


Find the ORTHOWORLD Linkedin group at http://www.linkedin.com/company/orthoworld-inc. and join the discussion.

REFERENCE
Low-Cost Orthopedic Device Firms Aim To Shake-Up Market,” The Wall Street Journal, 5 July 2011.