Three Down and One to Go!

As we enter the final month of the third quarter, the Spine Blogger is monitoring end of year results by the key players in our industry. It has been an arduous year! Unlike Wall Street, many of the start-up, early-growth stage and mid-stage companies have not had access to a TARP. The casualties include, IST, INION, VERTEBRON, and PEGASUS, these companies went down for the ten count (KO'd). Failure can be attributed to poor business models, inability to raise capital (greed), unrealistic expectations, and weak management teams. In addition, ARCHUS is on life support, and attempted to raise $19.5 million and was only able to raise $2.3 million in bridge financing, resulting in layoffs. Even though the markets seem to have stabilized themselves (at least for the time being), the economy is still floundering witnessed by the latest unemployment and mortgage foreclosure reports. We have been watching some of the smaller companies within our industry, and must question how many will have the financial wherewithal to take it to the next level, if they are producing or buying "me too" products. As a potential investor, would any of our readers infuse capital into another "me too" company? Like the revolution in the automobile industry, the spine industry needs to rid itself of these companies. As usual, market forces will take care of that.

But let's look at the bigger picture. If we exclude revenues for BMP's, the Blogger estimates that the US market will finish '09 at $6.9 - $7.1 bn. There will be a shift in the "spine major league standings." Medtronic will continue to be the market leader, yet, with all the bad press that they have received, we see them in a public relations mess. Once the industry darling, they now behave like the angry child as a result of the Michelson litigation. As hospitals look at the outrageous cost of BMP's and alternative technologies, and physicians evaluate their exposure and relationships with a company that has received bad press, we see them losing additional market share in the next three years. We believe that Synthes will become the second leading spine company, and DePuy will become #3. Though Synthes has had its share of problems that have been played out in the press, no one in the industry can compete with the "mystique" of the AO and its educational platform. In addition, Synthes has always walked to its own beat and is not driven by Wall Street. Stryker will sustain itself as the fourth largest spine company because of its ability to bundle total joints, trauma, med-surgical, sports medicine and biologics. Small companies have difficulties in competing with these one-stop shopping organizations. As successful as NuVasive has been, the question must be asked; "How long do they think they can ride the XLIF?" Even though they have been successful this year (congratulations NuVasive!), the word on the street is that if you take this surgical approach and implant out of their portfolio, what else do they have? In addition, we see companies like Synthes and Medtronic recently launching their own versions of an XLIF, with similar products from other competitors coming down the road. NuVasive's most valuable product continues to be Lukianov, who is an expert marketeer and a success story in his own right. We see Zimmer losing ground, and Biomet picking up momentum under Jeff Binder (he is the best thing that ever happened after Dane Miller got rid of the "dead wood" that use to manage EBI). Orthofix has rebounded considering that their stock was down to $9 last year, but, we must question their spine portfolio. The word on the street is that there is no "breakthrough technology." Besides, we still await the potential litigation that could be effected by the DOJ against Blackstone if they ever get their act together.

So who is the real up and comer? Look out for Globus, K2M and Trans1! These companies have been quite successful within their short tenure in the industry. Globus has gotten too big and the only option that we see for this company is to take it public, unless, someone like a GE or Boston Scientific has a need to buy their way into this industry. Trans1 has been on a great ride, but they need to "beef up" their portfolio. And then we have the infamous "Other" category.

Investors are no longer neophytes when it comes to performing due diligence on potential investment opportunities in the spine arena. These professionals are no longer just interested in top and bottom line revenues. They are now looking at business distribution models, what percentage of revenues comes from investing surgeons, who is running the company, how many consultants do you have, and is your technology really emerging. And therein lies the problem for many of the so-called "Other" or early-stage growth companies. What's new, what's true and do any of these technologies make a difference? How many more pedicle screws do we need? And even if someone comes up with a "slicker" design, will it increase the fusion rates? How many more cervical plates do we need? As the healthcare industry places greater focus on cost, will the same margins exist and will distributors and reps be making as much money as hospitals continue to pressure companies in making concessions to capped pricing in large markets?

So in closing, the so-called "Other" companies know who you are. Time will tell whether you had the right formula or whether you had the ability to think out of the box. The SpineBlogger wants to know what its reader think? Until then, Party On!