The prospective merger of Synthes Spine with DePuy Spine is a good opportunity to take stock of the trends, both technological and business, in spine.
Post Synthes/DePuy Spine Merger Outlook
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To be sure, this will likely be a slow-motion merger. Merging organizations which represent roughly 22% of all implants and instruments for global spine surgery is no small task—particularly when government regulatory agencies across four continents have review and consent powers over this transaction. So, give it a solid year from announcement to closing.
At the end of this article is my latest sales forecast for spinal implants and instruments, including biologics, for the top 20 suppliers.
That Was Then, This Is Now
DePuy Spine and Synthes Spine are combining at a propitious time in the spine industry.
Between 1990 and 2008, sales of instruments, implants and related products for the treatment of back pain grew dramatically. Annual revenues have grown from approximately $100 million in 1990 to more than $8 billion in 2008, a CAGR of 27%. In 2009, based on the sheer momentum, growth was still strong at a year-over-year increase of 10%. But stiffer and more irrational reimbursement rules combined with changing relationships between hospital and surgeon clearly pointed to the beginning of more difficult times for suppliers in the market place. In 2010, sales of spinal implants grew at less than half the rate of the previous year—4.3%, year-over-year.
The complaint of back pain remains, unquestionably, one of the single most common causes for physician visits in the U.S. Almost 80% of the general population still suffers from low back pain at some point in their lives, and approximately 18% of them have debilitating pain.
According to U.S. Government statistics, back pain (with or without leg pain) is the most common reason for activity limitation among people below 45 years and the main cause for disability among people 45 to 65 years old. According to the National Center for Health and Statistics, approximately 14% of the total new patient visits (13 million per annum) are because of low back pain complaints.
So, demand for back pain treatment is unquestionably strong and growing. Meeting that demand with treatment plans that consistently, reliably and costeffectively relieve pain and return patients to their pre-pain activities remains frustratingly beyond the grasp of the broader healthcare community.
Certain healthcare providers have been using techniques, implants, conservative measures and diagnostic techniques that DO consistently, reliably and cost effectively relieve back pain and return their patients to a pre-pain lifestyle.
But the current system in the U.S. of providing and paying for spine care.isn’t incentivizing either providers or device or pharmaceutical companies to migrate successful techniques across the system.
The Loser’s Game
Charles Ellis coined the term “The Loser’s Game” in 1975 to describe a way for analyzing decision making. Charles Ellis is managing partner of Greenwich Associates, a board member of the Robert Wood Johnson Foundation and one of the most famous business theoreticians of our time.
A Loser’s Game, Ellis said, was a game where “the final outcome is determined by the activities of the loser.” Where “the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat.”
By contrast, the outcome in Winner’s Games “is determined by the actions of the winner. Victory is due to winning more points than the opponent wins—not simply to getting a higher score than the opponent, but getting that higher score by winning points.”
In medicine, certain maladies lend themselves to a Winner’s Game analogy. Cancers with high mortality rates are winner’s games where risk taking is rewarded and innovation is absolutely essential to lowering those horrible mortality rates.
Hip and knee reconstruction is a “Loser’s Game” in the sense that risk taking is not rewarded. Hip and knee reconstruction is one of the most routinely successful major surgeries ever. Introducing new techniques or implants lowers outcome rates while surgeons and suppliers walk up a learning curve. Why risk it? Instead, the primary strategic goal of every participant in hip and knee reconstruction is to reduce error rates—infections, mis-alignments, poor patient compliance with rehab and so forth. Products like MAKO Surgical Corp.’s knee robot reduce error rates and have found strong market acceptance. Products like Zimmer’s 2-Incision hip system increased error rates during the learning curve and fell out of favor.
Up to, we estimate, 2008, spine was largely a Winner’s Game with surgeon champions working closely with innovative companies to bring to market a growing stream of lower profile, less invasive, motion preserving and biologically active implants which tackled the truly intractable problem of debilitating back pain.
Over the past decade the cost of developing, testing and introducing new technology into the market place rose, however, at rapid rates and put the industry on a collision course with its reimbursing agencies.
For a number of reasons, including rising Centers for Medicare and Medicaid Services (CMS) skepticism over the cost/benefit of new spine technologies, surgeon consulting contract abuses, Department of Justice investigations and settlements, comparatively low rates of patient satisfaction (compared to hip or knee recon) and a changing of the guard at both the hospital level and the company have, we think, changed spine to a “Loser’s Game.”
A spine “Loser’s Game, ” we think, is characterized by being the industry of the manager, the 50-hour-per-week contract surgeon, the office insurance form processor, the detail man and the compliance officer. In other words, an industry defined by minimizing errors, risk and cost. From the supplier side, it means innovating in ways that can give the healthcare providers tools to reduce errors, risk and provide more consistent pain relief at lower cost. From the surgeon side, it means working more and more within a system where clinical pathways are affected by non-medical considerations.
Looking ahead, to the extent that the reimbursing agencies rely on actuarial firms (Milliman) to define, for example, what degenerative disc disease is (or whether it even exists at all), or to the extent that the FDA decides to punish spine companies for doing clinical studies (Annulex), the practice of treating back pain will of necessity devolve into a “Loser’s Game.”
The Sales Outlook for Suppliers 2009-2014
Our forecasts are based on the following assumptions:
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Demand for treatment of back pain will remain strong and keep growing due to aging and lifestyle factors.
Direct sales approaches will increase in popularity among suppliers. Because of the new challenges of marketing in spine, suppliers, we think, will increasingly transition to a direct sales approach in order to have more control over the distribution process. We note, for example, that while there is significant product, territory and managerial overlap between Synthes and DePuy Spine, the two sales forces spring from different core philosophies. Synthes is a direct sales model. DePuy uses distributor organizations. The Synthes sales force costs less but is also more mobile. In the year it will probably take to integrate the two organizations 5%, maybe 10% of these sales people may wander away. Still, we think it is entirely possible that the Synthes direct rep model will emerge as the surviving approach in this merger.
Reimbursing agencies—both CMS and private—will continue to raise the level of difficulty for patients to receive reimbursement for spine fusion surgery particularly if the diagnosis is degenerative disc disease.
The amount of resources devoted to administrative personnel at the provider level will continue to rise in response to insurance company tactics.
Innovation will shift emphasis from products and services that increase hospital revenues to products and services that reduce costs or error rates (and, in effect, pay for themselves). For example, new implants that reduce post-op complication rates (screw loosening, infection, pain, scarring), new distribution schemes designed to pull costs out of the system, new administrative tools and services that cheaply deal with growing logistical nightmare which is reimbursement and, finally, new work structures for surgeons, nurses and techs.
Latest Sales Forecast – Spinal Implants and Instruments (including biologics)
|
($ in millions) |
2009
2010
2011 est
2012 est
2013 est
2014 est
Medtronic
$2, 911
$2, 960
$3, 013
$3, 089
$3, 181
$3, 283
DePuy (Synthes)
1, 006
1, 014
1, 057
2, 049
2, 111
2, 179
Synthes
955
978
1, 028
–
–
–
Stryker
558
568
588
605
635
670
NuVasive
370
478
535
589
644
697
Orthofix
279
307
311
332
362
394
Globus
254
288
313
331
358
375
Zimmer
254
234
236
244
251
260
Biomet
160
161
165
166
169
175
Alphatec
132
174
195
212
233
254
Pioneer
112
128
148
160
178
184
K2M
83
103
152
190
247
295
Amedica / US Spine
38
47
61
73
88
110
TranS1
30
26
25
29
35
42
SiBone
1
12
20
36
62
110
Other
1, 585
1, 626
1.690
1, 877
1, 827
1976
Total
8, 728
9, 104
9, 537
9, 982
10, 381
11, 004
% Change
10.40%
4.30%
4.80%
4.70%
4.00%
6.00%
According to Charlie Ellis, the way to win when you are a participant in a “Loser’s Game” is to do the following:
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First, be sure you are playing your own game and give the other fellow as many opportunities as possible to make mistakes.
Second, keep it simple and concentrate on doing a few things unusually well.
Third, concentrate on your defenses. Almost all of the really big trouble that you’re going to experience in the next year is in your organization right now; if you could reduce some of those really big problems, you can win in a Loser’s Game.
Fourth, don’t take it personally. Striving in a Loser’s Game is like pulling harder in a Chinese finger cage. The harder you pull, the more trapped you become. Instead, reducing errors and raising consistency of service, product or patient outcome can make every company, surgeon or hospital in a winner in the new spine industry.
React:
Discussion
This is a fascinating development. In my practice we've seen similar outcomes with the revised protocol. The key differentiator seems to be patient selection criteria. Has anyone else noticed the correlation with BMI thresholds?
Great point. I'd push back slightly on the conclusion, the sample size in the cited study is too small to draw population-level inferences. That said, the directional signal is compelling and worth a larger RCT.
We implemented a similar approach last year. Early results are promising but we're still gathering 12-month follow-up data. Happy to share our protocol if anyone is interested.
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