June 3, 2019 – Mike Evers / ORTHOWORLD’s Market Analyst
Orthopedic industry revenue reached $51 billion worldwide in 2018 and grew 3.5% over 2017, according to estimates from THE ORTHOPAEDIC INDUSTRY ANNUAL REPORT® published by ORTHOWORLD.
Orthopedic device companies faced familiar challenges in 2018. Payors, regulators and customers are demanding better clinical and economic outcomes, while legacy product lines are becoming commoditized and price erosion is impacting all segments of the orthopedic market.
These pressures promise to be part of the orthopedic landscape for the foreseeable future, and in 2018 many companies refined their strategies to deal with the ongoing transformation of healthcare. Results were mixed among the largest companies as some stumbled operationally while others overperformed, due in part to early adoption of technology and entry into high-growth segments.
Common strategic themes present in 2018 that will continue as part of the industry’s narrative in 2019 and beyond include connected ecosystems of products, flagship technology (e.g. robotics), portfolio-wide pull through and a growing shift to outpatient procedures.
Large companies are racing to build a connected ecosystem of products with a flagship technology, whether robotic or software-based, at its core. These systems aim to provide comprehensive solutions throughout the episode of care and offer the surgeon tools to improve procedure flow through analytics and pre-op planning; reduce waste; enable predictable, repeatable clinical outcomes and monitor patient rehabilitation.
These ecosystems allow orthopedic companies to monopolize operating rooms and increase the disruptive cost of customers switching to other providers. Flagship technologies, particularly robotics, have been shown to be a significant factor in generating improved sales mix as they facilitate implant upselling and portfolio-wide pull through.
As the ecosystem strategy creates opportunities to take market share and improve sales mix, companies strive to be ready with a robust portfolio of up-to-date implants. Many players will pursue aggressive product launch cadences in 2019. Those with strong balance sheets may opt to buy their way into a differentiated product line, as we saw with Stryker’s acquisition of K2M and Smith & Nephew’s tuck-in acquisitions of Brainlab’s joint recon business, Ceterix Orthopaedics and Osiris Therapeutics in 1Q19.
A focus on outpatient centers offers an alternate growth vector for companies that either lack the resources to develop or purchase a robotics solution, or feel like the significant capital investment required of robotics is not a good fit for their customers. Like robotics, selling strategies for ambulatory surgery centers (ASCs) or hospital outpatient centers is a relatively new endeavor for orthopedic companies. Outpatient procedures, particularly in the U.S., are expected to rapidly grow as surgeons and ASCs demonstrate evidence of safety and efficiency and payors provide favorable reimbursement.
Device company leadership has voiced some uncertainty about the rate of growth. Some surgeons have shared that they’ve received pushback from hospital administrators to not move procedures to an outpatient setting due to lower reimbursement. It’s largely expected that payors will align with the outpatient movement, and once that happens, procedures will move. Companies focusing in this area now will develop advantages over competitors as they’re able to refine outpatient-specific selling strategies.
Wright Medical CFO Lance Berry recently summarized the nuances of selling to outpatient centers, saying, “The cost of the product is part of it, but also, how do they keep their O.R.s full? That’s their biggest cost. And how do they attract the type of procedures and patients that they want to fill up the O.R.? What can you do to help them with their efficiency? And then they want options, and they’re willing to pay fine gross margins for the different options, but they may want a lower-cost option and a higher-cost option that they will make some decisions around. So, it’s not as simple as price.”