Saturday, September 4, 2010

Weekend Op-Ed Piece

As the U.S. economy continues to struggle, the spine industry approaches the homestretch of fiscal 2010. In retrospect, 2010 may become known as the year of living dangerously. With much skepticism regarding the industry's overall health, one must ask the question, will the industry ever return to its old form, or, is the industry looking for that new technology or indication that will allow it to re-define who it is?

Regardless that a few companies have exhibited growth with existing platforms, success of a few may not be a viable prognosis for the many. Market trends that were once believed to be temporary, or cyclical in reacting to the economy, have become a permanent fixture within the industry. The longer these trends persist, inevitably they become the norm. So what are these trends and how will they affect the industry's future. As delivery of healthcare in the U.S. becomes financially prohibitive for the masses, as profit margins re-align themselves, as the insurance industry continues to looks for creative ways in managing risk, the industry will not be able to afford utilizing the same formula it has for the last decade. The margins in medical devices has been the envy of other industries . Though the industry is experiencing a re-alignment, the margins will still be good if not great compared to others. Unfortunately, as margins decrease, the industry as a whole will have to re-define its business model, in many respects those strategies are beginning to take place in many mid-cap companies that are looking at a direct sales force instead of independent distributors, in addition to decreasing commissions even more so than ever. So what are these trends and how will they affect us?

Unemployment: As unemployment yo-yo's at the current level, consumers are re-evaluating their personal healthcare needs. Depending on one's current state, this could be a positive or negative view. As higher deductibles are passed onto consumers by their employers and the insurance industry, consumers will become much more conservative in their utilization of healthcare, of course, unless there is an emergency, or, they have extinguished a conservative modality of treatment, meaning they just have not gone to see a physician. Consumers have already expressed concern that if they take time off for surgery, they may not have a job when they return, thus avoiding the risk for unemployment. The cost of COBRA is a tremendous financial onus for the unemployed. As COBRA coverage expires, medical markets experience a decline in revenue. Desperate times, may call for desperate measures. As government continues to focus on the escalating cost of delivering healthcare, consumers are beginning to exhibit fiscal constraint not only in the way they manage their finances, but also in the way that they are managing themselves. Special interest groups complain about big government, yet, if the government did not step in during the last few years the financial ramifications for the industry could have been much worse than they were. Single digit growth and describing the market as flat, has become the industry's new mantra.

Pricing: Hospitals and purchasing organizations are placing tremendous pressure on the medical device industry to discount its pricing. The genie was out of the bottle a long time ago, and the industry has no one else to blame except itself. As hospital margins decline, companies are already succumbing to the demands for lower pricing in order to preserve current market share. Thin is in, and single digit growth may be with the industry for years to come. The strong will survive, the weak shall perish. A greater onus will be placed on the industry to figure out how to manufacture products in a cheaper, faster, more efficient way, without compromising quality than already exists. This will mean exporting manufacturing and more jobs overseas, or potentially looking for new frontiers. It could be India, China, or Indonesia. In many respects, maybe these countries will become better at making implants that the U.S. and beat us at our own game. In addition, premium pricing will be predicated on new and innovative technologies that truly affect clinical outcomes. The days of developing a product first, and then looking for a clinical indication are gone, witnessed by the current state. Pricing and profit will be a temporary windfall. The industry cannot continue charging a premium in a commoditized market? Until there is contraction in the number of existing spine companies selling "me too" products, a saturated market will not be able to sustain itself in this economy. If the reader does not believe this, just look back historically at other industries. Today, many of the smaller companies survive by becoming involved with physician owned distributors, physician investors, or physician owned hospitals, but even those business models are under tremendous scrutiny. As more and more physician practices become integrated with hospitals, or are owners of a hospital, or they own physician owned distributorships, the incentive is and will be to drive down pricing. This will affect the industry's ability to charge a premium for its products considering that it is estimated that 20-25% of a hospitals budget is dedicated to the purchase of medical devices.

The Gipper once said, tighten your belts because the industry is in for a bit of a ride. Trying to make sense of it all, I can see that at times it makes no sense at all. So remember the lyrics from Stealers Wheel, "clowns to the left of me, jokers to the right, here I am stuck in the middle with you. TSB wants to know what our readers think?


  1. We're not the only ones experiencing these difficult times. Many in other industries have had to lay off, decrease expenses, lay off, declare bankruptcy, etc.

    As time goes on things will return to "normal."

    With that said we're not going to do it with the same old products we currently have in our bags. Yes, we'll continue to see declines in profits as we get squeezed for our screws and plates. Why wouldn't we? Are we really offering anything new and unique? How much lower profile can we get? How much more increased angulation can you give? We're not doing anything but re-inventing the wheel as the years go by.

    Question: Are our clinical results improving? Compare them to results of 20 years ago and I would say yes. 5 years ago...I doubt it. Our technology has plateaued. We will only get back to "normal" if we can move away from our existing technology away from what it is to achieve something completely different. That'll be the day. When minimally invasive is Non-Invasive, when Zero-Profile is not only that but also zero access damage, when fusion is no longer what we look for in determining success vs failure.

  2. I couldn't agree more that the commoditization of products has begun and pricing pressure will only increase from here. Industry players will learn to manage costs more effectively, partly by right-sizing & shifting production overseas. Funny that TSB criticized Synthes for manufacturing in China and now seems to recommend that action. Of course, Synthes is horrible in its cost containment and I'm ashamed that I work for an organization that doesn't know how to perform any strategic planning, manage budgets to maximize asset values, etc. Perhaps the Chinese can teach us something. Getting back to point, I think pain mgmt, diagnostics and wellness programs will contribute to reducing the need for some surgeries & perhaps lead the industry towards the right growth path. Biologics are another area but new programs to educate the surgeon carpenters are necessary.

  3. Blah, Blah, Blah!!!!!

    While the ship goes down, the violins are playing and the pursers are re-arranging the deck chairs. It's like a Shakespearean story! A tragedy! Is this blog for therapy or for true martyrdom? TSB for President. Fix our industry. You are the right mind for the job. Go head up Advamed. Maybe expose some of your surgeon friends for what they are. And now it's time for something completely different!

  4. TSB did not imply that it was good for the industry that it is moving manufacturing overseas. The point was that maybe Chinese or Indian companies will begin to spring up and start selling their products in the US market, witnessed by the handful of Korean companies that have surfaced over the last few years.

  5. TSB.....How's Europe?

  6. Found this ad on Linked In..."Medical Device Sales Managers Needed!!! 275K at plan!"

    Why do these worthless, empty suits continue to make more money than most reps! They never bring a surgeon relationship to the table ever and rarely go out on a sales calls. Maybe if these manufacturers would start paying them what they are worth they would see more than single digit growth! They belong making 65-70K per year tops. Some should pay us to have to deal with their non sense! Failed at Sales so let's pay them more to manage sales people! What a scam!

    Happy Labor Day!

  7. As a long time field manager, I can assure you that the dumb ass posting "Medical Device Sales Managers Needed!!! 275K at plan!" is B.S. It is being dangled by a fool recruiter looking for a bigger fool candidate.

  8. As the aging population grows and the U.S. Gov becomes more socialized the best money will be made in Selling access to the Medicine.

  9. Supersnake,

    can you elucidate?

  10. The barriers to entry on the regulatory side will become even more significant (*ahem* Infuse post *ahem*). The result will be a shift from relationships with Surgeons, to relationships with regulators. FDA approval will become more expensive and the larger companies will no longer have to deal with the ankle biters.

    Moreover, how will regulators view new/revolutionary technology that significantly increases costs (*ahem* Infuse *ahem*). With the government being the regulator and the biggest payor, are costs also regulated a la Europe; will the result stiffle/disincentivize innovation?

    On the up side, there is a TON of $$ currently tied up in "consulting" and "sponsoring fellowships". If that burden is forgone, there is more of the pie to go around. How will hospitals afford this additional payroll burden currently born on the shoulders of the suppliers they punnish with capitation?

    Then again, maybe Device companies will start sponsoring paiges on congress-'persons' staffs and the whole thing is a wash!

  11. "it's the end of the world as we know it, and i feel fine"

  12. Anonymous said...
    In general, who are the greediest surgeons? Fellowships in the mid-late 90's or fellowship since 9/11?
    Or how about the old guys (the ones that can recognize a sublaminar wire)?
    Or does anyone see any pattern? How about type of fellowship training? Neuro vs Ortho?
    Just wondering. Any comments?

  13. Oh yeah?
    "I've got my spine, I've got my Orange Crush."

    R.E.M. is even facing tough times.

  14. Before I got into this industry from hospital capital equipment (long story), I had no idea how many scumbag docs had their dirty hands out. My opinion of the medical profession has taken a total dive. I can't tell you how many guys just come out and ask for a "higher level relationship" with the company. They don't even look at the product. The worst are the 45ish neuros and the university hacks. Total lack of ethics. I just pity their patients.