Orthopedic companies are giving up on the US Market. Throwing in the towel.
Orthopedic device companies have found themselves in the center of a storm of converging trends of economic, regulatory, and reimbursement uncertainty with the US market.
In order to deliver earnings and dividends to their shareholders, the big Orthos have no choice to ignore the largest market in the world – America. The resulting dynamics are that the big Orthos are moving their resources, inventories, training, clinical studies and R&D efforts into outside US markets, such as the BRIC countries.
Let’s look at the trends that are pushing the Orthopedic companies to outside US markets.
- The FDA has become unpredictable, unreliable, and anti-technology. This is well documented.
- The investment into new technologies for the US has simply become too punitive. For Class III devices, companies today must invest 8-10 years and $95M before seeing significant revenue. In Europe, new technology investment can be 1/3 as much, and revenue can be appreciated in a few short years. Where would you go first?
- Price points are dropping in the US. Well documented.
- Reimbursement is becoming more challenging in the US. Well documented.
- The growth in the number of trained Orthopedists is entirely OUS. The number of US trained Orthopedists has become stagnant.
- Additionally, as if there is not enough wind in the faces of the device companies, next year the Feds will be taxing gross sales in the US an additional 2.3%. There are other financial issues outside US, but at least they don’t take 2.3% right off the top.
A few real case examples
Omar Ishrak told us that Medtronic is focusing on OUS. He put his money where his mouth is recently announced that they are buying the largest Chinese Orthopedic company for $812M.
Olivier Bohuon says that Smith and Nephew is realigning its organization to focus on growth in BRIC countries. The reorganization is underway. Smith and Nephew is also increasing its R&D budget by $300M to focus exclusively on OUS markets.
Then there are the startups, where most of the innovation actually bubbles up from small rented offices around the US. The startups are different from the big Orthos in two ways – 1) they are developing truly novel devices and 2) they are starved for working capital. With these two handicaps, they have no choice but to go OUS with a fresh CE mark in hand. Startups and their investors certainly cannot tolerate the uncertainty and unpredictable of a 8-10 year FDA process for their novel devices. Additionally, startups must generate sales sooner to reach the breakeven horizon. EU is usually the starting point for the first real revenue.
Perhaps the golden age of Orthopedics in America is over.
What do you think?