To 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 orthopaedic device 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 should they want to maintain profitability and increase margins in coming years. This was the message from keynote speaker Bill Tribe, Ph.D., partner at A.T. Kearney’s Health Practice, for OMTEC 2016 attendees.
In order for this to be achieved, it is imperative that you, as a stakeholder in the orthopaedic industry, understand the forces driving these changes so that you can proactively assist your company and, importantly, improve your own chances for success.
Before we get to what the future might hold for you and orthopaedics, let’s start where Tribe began, briefly reviewing how we got to the present day.
The Economic Basics
You’ve probably experienced direct impact from a squeezed company budget in recent years. Margins across the medical device sector have been falling for more than a decade, and will continue to erode by about 5% if unaddressed, Tribe said. 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, according to Tribe. The price 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 ORTHOPAEDIC INDUSTRY ANNUAL REPORT®. Healthy procedural volumes due to a growing and aging population, as well as potential in untapped markets, mean that the industry remains attractive.
On that note, by A.T. Kearney’s estimation, there’s $4 billion to $5 billion in combined operating profit and working capital opportunity up for grabs for orthopaedic companies that are able to respond to the industry’s disrupting factors by restructuring their business models, products, or both.
Tribe outlined five prevailing industry headwinds: power shift to payors and providers, heightened regulatory scrutiny, unclear sources of innovation, new healthcare delivery models and the need to serve lower socio-economic classes. These disruptors are not new, and because they have presented themselves in various forms in recent years, they are casually mentioned in today’s conversations. Still, these disruptors are acute, they need to be addressed and, importantly for you, they hold strategies for ways to move forward.