TECH UPDATE

Figure 1. (click to enlarge) Orthopedic implant pricing has achieved 156% cumulative growth over 15 years. (Source: Orthopedic Network News (Volume 16, Number1, January 2005) Hip & Knee Arthroplasty )

The worldwide orthopedic device industry has been growing consistently during the past 20 years or so, in concert with growth in overall healthcare expenditures. Historically, it has been recession proof with positive year-over-year growth, even during periods of economic decline (see Figure 1).

The industry's growth has been sustained by technological innovation and increasing specialization among surgeons. Such innovation has stimulated unit sales increases of hip, knee, and spinal implants, and more recently, treatments for the smaller bones and joints in the extremities. At the same time, prices and reimbursement levels for these devices have also defied gravity.

Figure 2. (click to enlarge) A pattern growth in surgical implants is expected to accelerate. (Source: Viscogliosi Bros., LLC)

Will the impact of the current recession affect this pattern of growth? There will be some fallout in the areas of innovation and integration of new technologies, funded with venture capital, that have helped to transform the industry. However, demand for clinically proven surgical implants and other treatments for musculoskeletal disease and trauma is likely to accelerate rather than slow (see Figure 2).

Simply put, the aging population and the growing insistence to preserve the physical form and functionality is irresistible. People want to work and play longer, but the human body is not built to last as long as people are now living. As a result, virtually everyone who lives into old age will suffer some form of orthopedic injury or disease such as arthritis.

For example, the Centers for Disease Control and Prevention is monitoring the total economic impact of arthritis, estimating its cost at $128 billion annually in 2003. Another disease that is already an epidemic is diabetes. When left untreated, the condition results in more than 75, 000 lower-limb amputations a year. The technology already exists not only to prevent the need for such radical surgery but also to restore limb functionality and a better quality of life.

The Future Outlook

A constant monitor of the levels and types of procedures being performed at major orthopedics centers in hospitals and specialty practices revealed that nearly all centers achieved record levels of surgeries this past year.

The majority of procedures have been elective surgeries that, perhaps surprisingly, have remained much more constant in unit-growth terms than nonelective trauma procedures.

Statistically, nonelective procedures have trended lower during economic downturns, which is possible due to reductions in activities such as skiing (which tend to be risky), or fewer road accidents, because people are staying home more often.

The outlook for healthcare revenues remains firm despite the compelling need to rein in the rate of growth. The outlook for orthopedic devices continues to be encouraging due to unabated demand. However, prices are likely to soften as the publicly financed portion of healthcare such as Medicare and Medicaid continues to outpace the private sector.

Tectonic Shift

Related to the underlying trends in financing and innovation, times are obviously changing. The industry is beginning to undergo a tectonic shift in structure and complexion. Overall revenues are forecast by the major, publicly traded corporations to grow worldwide by 7–9%, largely through continuing hip, knee, and spine expansion. This sector represents more than 80% of the market.

Midsize companies with established products or those with dominant shares in niche markets are hoping to maintain up to 20% growth rates, and some of the smaller players could do even better. However, underneath those headlines, the current economic climate is beginning to ravage many of the hundreds of companies with premarket or clinically immature technologies.

For example, by our estimates, there are at least 200 companies offering some form of spine treatment. They remain dependent on the availability of private investment capital to survive and navigate the increasingly high cost of securing FDA clearance. They're also tasked with persuading payers to reimburse the use of their products.

Right now, venture capital firms as well as entities such as sovereign wealth funds have less cash available and face the prospect of dwindling sources of supply. That translates to a drive for deeper due diligence, shorter profit horizons, and a reduced appetite for risk.

For most, this means turning attention to existing investments and putting pressure on client companies to accelerate development or find a buyer at currently depressed valuations. Most of the time, the buyer is likely to be one of the major, cash-rich device companies. A casual glance at the mainstream media covering the orthopedic business sector already offers examples of this trend.

If the past is a prelude, orthopedics could experience a substantial or even precipitous fall in innovation as the industry becomes increasingly risk averse. Given the five- to seven-year premarket development time it generally takes to launch a new product, this suggests a lengthy stretch of inactivity. This is not good news for patients.

As an example of the time-to-market lag, the Scandinavian Total Ankle Replacement (S.T.A.R.) prosthesis has been used clinically since 1990 and has been implanted in more than 14,500 instances worldwide. Its U.S. investigational device exemption clinical trials were initiated in 2000, yet nearly 10 years later, the product still isn't available to patients in this country.

The landscape is not completely barren of course. Patients are or will soon benefit from a series of innovations that have come through the approval process and will fill unmet needs. These products include hip and knee implants designed for gender-specific anatomies, biodegradable implants that support healing in smaller joints, and a total ankle replacement.

Despite the issues illustrated in the S.T.A.R. example, it does indicate a path that others may follow in pursuing the introduction of truly innovative and potentially life-changing technologies in the United States . Where there is a will, there is a way.

Full disclosure: Viscogliosi Bros. has a significant interest in the S.T.A.R. prosthesis through its investment in Small Bone Innovations Inc. (SBi).

Anthony G. Viscogliosi is a principal at Viscogliosi Bros LLC ( New York City ). It was the first merchant banking firm focusing exclusively on orthopedics. The firm's principals have participated in more than 170 transactions involving orthopedics companies. For more information please visit: www.vbllc.com.