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?