Saturday, April 10, 2010

Sunday Op Ed Piece - Good Night and Good Luck!

The turn of the millennium saw the beginning of the spine bubble where there were more start-up and early growth stage companies than any of us would have imagined. To paraphrase former Fed Chairman Alan Greenspan, along with the boom came an irrational exuberance. Parallels exist between what was developing on Wall Street and what was happening on Spine Street. The same way investors bought CDO's, collateralized debt obligations, without worrying what was inside of them, surgeons were investing in start-ups without really understanding whether the companies that they were investing in had product and intellectual property with any real short-term let alone long-term value. Many contend that the watershed moment for the industry was defined by the acquisition and eventual sale of ProDisc by the Viscogliosi Brothers. Many surgeons saw their peers cashing in and cashing out on the spine boom and they rushed to get in on the action. The consensus seemed to be, if they can do it, why can't we? As TSB likes to say, timing is everything.

The start-ups and early-growth stage companies that began surfacing were the equivalent of financial vehicles creating, packaging and selling potential emerging futures in the form of their own credit default swaps to surgeons. Surgeon investment was their insurance policy for future survival and minimizing risk. Unfortunately, change can be unexpected since markets tend to be dynamic in real time. Yet, the key to many of these companies survival would be that with surgeon investors, and a continuing trend in price increases, much would remain status quo. Rising implant prices created a false sense of security and their own momentum as bubbles do. But markets are never stable. Just like the housing bubble, we are in the spine bubble. The market is correcting itself not because of some recent post on pricing, but because of a dynamic called supply and demand. As less innovative products emerge, the so-called "Others" will be starved of growth revenue and market expansion. If we believe in free-markets, look at what happened to the price of flat-screen televisions as an example. Could it be that many of these companies are not in the bubble, but on the bubble waiting to burst?

Like any business if you are not innovating new products that change outcomes meaning improving the quality how can one continue to command the same pricing and margins that the industry once expected? What has happened over the last five years is that with a glut of commodity products the ordinary trajectory for profits begins to decline as competition increases. This just doesn't apply to the manufacturers, it also applies to the providers. These dynamics not only affect profitability, it also affects the industry's code of conduct.

The success of others, regardless of how it was achieved, has driven many in the industry to extremes. It has raised many legal and ethical questions because of the underlying intent. Imagine what this market would be like if there were no laws or regulations that provided oversight for what can and cannot be done. Many of the side deals that exist are reminiscent of the deals that existed on Wall Street, and many of you know that eventually it caught up with everyone. So today, many of these early growth stage companies are experiencing their own "stress test." In some respects, the structure resembles a ponzi scheme. As pricing continues to fall, many of these companies will teeter on the brink collapse.

In closing we marvel at physician owned distributorships, surgeon investors, distributor brokers, and illegal inducements when all of this is a by product of an industry that was hyped and hyper inflated. TSB wants to know what our readers think?


  1. Good insight, good analogy, spot on thought process, except, and you knew there would be one, except for those very few start-ups that actually have someone that knows business well enough to look beyond their mac-daddy surgeon, evaluate what the market really is, considers the competition, services, hospital needs or intentions on capitation, and calculates in alliances - those few companies that can think, may well make it and THEN those few companies as is always the case become the new power companies as they are able to buy up, at will, those poorly managed or wildly short sighted operations that have something to contribute but don't know how. There is always opportunity to be the best at something - it is being profitable enough to outlast all the others while you do it that separates you from the rest.

  2. A very thought provoking article and a bit scary. I believe though with great competition also comes great innovation. I enjoy reading your post, keep up the good work.

  3. Not only does great competition bring out innovation it also brings out the human side of the business. People are always willing to bend and if necessary break the rules. The best analogy would be sports. How many athletes use HGH to get a competitive advantage. The initial commentator was correct when they stated that few companies that can think may well make it..... the key word is few. Think about the many companies that continue to launch more commodity products into the market, the bet would be that they have been working on them for a couple of years due to many reasons. Poor execution, lack of capital, etc.,..... Good Post TSB

  4. Blogs are so informative where we get lots of information on any topic. Nice job keep it up!!

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  5. I believe that Spine Tech was the deal that started this, not the Pro Disc. I think the Pro Disc deal came about because of Spine Tech. A lot of surgeons made money when Spine Tech went public and was acquired.

  6. MM - be careful in comparing the spine industry to other industries like LCD TVs. Pricing does not work the same way. Ask yourself why there are 150 (or maybe even 500) pedicle screws on the market and all of them have gross margins > 90%. Name another industry where 100+ commodity products could have that kind of profitability. Can't do it, can you?

    The problem, of course, is our healthcare system: end users (patients), decision makers (surgeons), and payors (hospitals, insurance companies or govt) are completely disconnected (as it relates to price) and have different and conflicting goals. Name another industry where this exists... I can't.

    And, as you point out, human nature takes over and has abused this anomaly of poor industry structure. Dirtbag surgeons (wow, there are a surprising number of them) + sleezy executives (unlimited supply) + structural problems of the industry + poor regulatory oversight = the current state of affairs, which has a putrid stench.

  7. great post 9:47

    good explanation of why you can't compare spine to other commodity markets

  8. Why does one comment about flat screen tv's taint the post. Hasn't everyone including the government used the analogy of medicine being consumer driven. W himself had used those analogies. Isn't that what the previous administration looked to do. Simplify choice via an informed consumer. S'plain yourself