Let’s talk about an unpopular topic in orthopedic circles – profitability.
Many orthopedic device companies can deliver world-class products that surgeons love, can grow top line revenue, but cannot create a profitable business. In other words, they have a financial leverage problem.
This leverage problem is caused by some sort of operational drag on the business. Let’s look at a four examples.
1/An inventory drag – Too much incremental inventory cost for each new customer added.
2/A selling drag – Too much incremental sales/distribution cost (or selling cost) for each new customer added.
3/A regulatory process drag – Too much incubation time (carrying salaries) before new products can reach a new customer.
4/A technology drag – Too much incremental cost in design/manufacturing incremental implants for each new surgery.
Let’s pick on Conformis because of the availability of long history and public financials.
Let me say up front… that Conformis makes great products, and arguably the best total knees in the world and surgeons love the tidy disposable instrument boxes.
Conformis has a classic technology drag problem. They have never found leverage in their imaging-to-delivered-custom-product technology. Each new product creation and sale requires the same amount of work and the same cost as the one before it… indefinitely.
Diving into the numbers, Conformis generates around $70M gross sales every year… but it cost them $100M in operating expenses. Earnings are a negative -$30M each year. (note: 2021 looks artificially strong because of a one-time $30M payment from Stryker).
Conformis has 310 full-time employees. Per employee, the company bleeds a negative -97K earnings per employee each year.
This is not a time problem – Conformis has had plenty of time to figure this out, but has never been able to find leverage. Conformis was founded in 2004.
This is not a funding problem – Conformis has had plenty of capital. Conformis has raised a staggering $523M in funding since inception and they went public back in 2015.
Back in 2005, I could understand that the 10th sale or the 100th sale for Conformis was not profitable, but 18 years later with $523M in cash infusions and access to public markets, they should have found a way to make the 10,000th sale profitable. The incremental cost of each new sale has to be minimized.
Don’t be Conformis.
Build a business that can find leverage as it grows.
Many ortho companies can make world-class products, and know how sell those products to hospitals… but that’s not enough. Companies must always be moving towards profitability.
TAKE HOME MESSAGE
You MUST always be seeking leverage in your business operations, or you will dig a debt hole. This debt burden will paint you in a corner and narrow your optionality, and you may eventually you will lose control of the business. A growing debt hole may strangle supply chains and access to the materials and equipment needed for your operations. Similarly, this hole may also prevent you from taking advantage of a developing market opportunities.