Friday, June 12, 2009

Where is Spine Going?

Recently, the Spine Blogger had an opportunity to discuss the state of spine with a select group of industry professionals. The panel did not have a vested interest in facet arthroplasty, total disc arthroplasty, dynamic stabilization or stem cells. The participants have carried a bag, have exceptional clinical backgrounds, are in management positions, and are not CEO's. The Spine Blogger believes that just because you do not run a company, does not mean you don't possess leadership or have vision. Unlike other platforms, this Blog does not use the people's site to generate income or laude the industry, the Blogger is an untainted forum. We attempt to be honest. Most of all we try not to live by the Golden Oracle Theory, "I said it, therefore, it must be true!"

So what's wrong with Spine? We have too many "me too" companies! No need to mention their names since most of you already know who they are. Hopefully, with the downturn in the economy, investors will be more conservative and wiser in choosing their next investment, witnessed by the recent extinction of some of the so-called early growth stage or pre-revenue companies. As one of the industry's "Golden Oracles" Tony Viscogliosi stated at a 2008 emerging technology meeting, "there are over 500 pedicle screws, 250 cervical plates and there will be one rep selling and servicing one doctor." Hard to fathom that surgeons are performing that many procedures. Everyone agreed that we work in a zero-sum market, competing for each others market share, a by product of a commodity market. Based on the economy of scale the legacy companies in our industry have gotten too big to fail. These companies have become an oligopoly or cartel controlling the spine market witnessed by their positioning at major trade shows by the various spine societies dependency on their revenue. They have access to a greater range of financial instruments, specialized management teams, and achieve critical mass in marketing media. It's the "me too" companies that must be concerned. With major cracks in our banking system, the access to capital will hurt these smaller companies. If these companies are working on a line of credit and do not meet their banking covenants the ripple effect could be catastrophic. Their alternative would be to repair their breach of a debt covenant by an equity cure injecting equity funding back into their companies. This will only improve balance sheet ratios and avoid breaches of the covenants. The capital then raised via an equity cure would be used to make up a shortfall in revenues, cash flow or profits. Unfortunately the Spine Blogger does not see that happening since this is contingent on the terms of the debt covenants, in addition people at these "me too" companies exhibit too much greed. The reason many of these companies surfaced was because there was an excess of capital leveraged by using others paper. In addition, many of these companies have surgeon investors or inventors whom either have been duped or believed that they could make a windfall return. (Yes some have!) But let's face it, these companies either have inexperienced board members, or members whose time has come and gone. Yes, the world does change! As has been stated, the days of wine and roses are over for these early-growth stage companies

Second, the genie was let out of the bottle a long time ago (and it wasn't Barbara Eden). Surgeons, Hospital Administrators and Distributors know our margins. Hospitals and their purchasing groups know that general orthopaedics, trauma and spine places a major onus on the fiscal health of their facilities, witnessed by the surge of purchasing groups that are mandating capped pricing in order to compete in their markets. This alone is placing tremendous strain and effort on the "me too" companies. How does a "me too" player with an incomplete product line compete with the "one-stop" shopping concept? If the members of the spine cartel are willing to sign contracts to compete in these markets, how does this affect the smaller companies ability to generate revenue and maximize their operating income? The industry will continue to grow because of demographics, but let's face it, some type of change is inevitable. The "big boys" are having trouble getting reimbursement for their discs, companies and surgeons are being investigated, if not eventually prosecuted (when will the DOJ act), and commissions are going to be scaled back for distributors. Someone has to pay our beloved executives and their friends.

Eventually, there will be some type of government option for Americans that just cannot afford health-care insurance. Inevitably, Medicare reimbursements will be cut. Considering that we live longer, are more active, and want to preserve our longevity, how many of these surgeries could be avoided if Americans were better educated on taking better care of themselves (eat less, exercise more, spend quality time with their families). How many of these surgeries would be needed? Eventually we will see some type of regenerative therapy for degenerative disc disease only because of technological evolution.

So what's the alternative? The Spine Blogger and the Panel believe that rather than have additional "me too" companies and products, the industry needs more incubators and innovators rather than commodity products. Can someone provide better guidance for the investors?Hopefully the Stem Cell Industry will exhibit some sanity. In addition, we are starting to see a trend where companies are cutting back commissions that are paid to independent distributors. Maybe this will be a good thing since everyone on the panel agreed that sales has become a dying art in our industry. The day of brokering your surgeon as a consultant will eventually come to an end. The bottom line is all those companies that claim that they have emerging technologies are on the clock. Until then, Party on! The Spine Blogger wants to know what the people think?

1 comment:

  1. Spine Blogger: This is a tough issue and it depends on the strategy of the company, management, and what is promised to the investors.

    If you are starting a company with innovative concepts and limited funding (more likely nowadays), it will take at least 5-6 years to get into the US market. Look at some of the innovative startups that don't have a revenue stream, lately they are starting to go under or struggle tremendously. If you do not have some kind of revenue stream of "me too" products early, the surgeon investors and others will grow tired of the promises of a financial winfall. Management MUST be up front and honest with the investors that the winfall will not come for many years, not 1-2 years.

    If your strategy is to just be a "mee too" company, then I agree with you. We do need to generate innovative products, materials, techniques, etc., but the "mee too" products are needed now to generate revenue for the companies to fund growth and innovation.

    Just think, if IST with all of their money had a cervical plate, screw system, and a interbody fusion device (could develop all of those products for under $1.5M) over the last two years to generate revenue (could have generated $5M-$10M a year relatively easily), they might not have closed the doors. Obviously, in the case of IST, management would have squandered that money on a bigger building or a company helicopter, but a good CEO could have used the revenue wisely.