Many successful orthopedics companies create moats to give themselves a temporary competitive advantage. These moats are thought of as “defense” like a moat around a castle, but moats can also be used for “offense”.
“Moats can be both defensive and offensive weapons. In defense, they could be used to force the enemy to attack in a particular spot such as the castle’s most heavily defended area. But a moat might also allow the castle holder to hold one part of the line with fewer men while allowing a sortie (made larger by less defenders needed) on the besieging forces. A great moat allowed flexibility in defense and offense. Great leaders recognized this.” – George Savile, 1st Marquess of Halifax
Let’s look at 10 moats available to orthopedic companies today. I have ranked them from strongest to weakest.
This is the biggest moat for the Big Orthos that is caused by large supplier hospital contracts and/or robot capital purchase contracts that control most of the access to the hospital or ASC. This moat blocks out many of the ortho chihuahuas.
Moat 2) Regulatory clearance.
Class III clearances are one the strongest moats per product. These high hurdle regulatory moats can last for years, but the investment to create this moat can exceed 10 years and $100M in clinical trials.
Moat 3) High surgeon customer switching costs.
This common moat is less understood. Products with steep learning curves and complex surgical process that requires extensive training and/or robot systems can create a strong moat. The more comfortable that a surgeon becomes with a complex surgical tool, the more that the surgeon lacks the motivation to switch.
Moat 4) Business Scale.
Scale is a more narrow moat. The Big Orthos have huge product offerings and daily local sales support. The ortho chihuahuas that have few products and spotty sales coverage can.
Moat 5) Technology monopoly.
Companies that have a monopoly on certain technologies enjoy this moat. Zero competition. Examples: Nuvasive/Ellipse Technologies markets the only post-surgery remote control spine rods (MAGEC). Ossio markets the only strong non-permanent Foot & Ankle fixation (OSSIOfiber). Intrinsic Therapeutics markets the only implantable device that reduces re-herniation rates after discectomy (Barricaid), etc.
Moat 6) Fast product pipeline.
Orthos that out-innovate their competitors with speed create a moat. We did this at Wright Medical in the 2000’s when we moved from 4 launches/yr to 25 launches/yr. Alphatec Spine does this today by out launching the other spine companies. “My other rep isn’t bringing me anything new.”
Moat 7) Brilliant Marketing and Branding.
Marketing is a less appreciated moat, because most marketing sucks in orthopedics. Treace Medical used unique branding and direct-to-consumer marketing to create demand from surgeons and podiatrists.
Moat 8) A Unique Reimbursement Code.
Companies who win a new CPT Code for a new procedure or product category enjoy this moat, which is usually temporary.
Moat 9) Patents & Trademarks.
Intangible assets can be moats but this is less useful in practice as most IP can be “worked around” by a competitor.
Moat 10) Knowhow or Trade secrets.
This moat is enjoyed by some companies that have proprietary manufacturing processes. Rarely effective in ortho because there is so much copying and cross-pollination of employees.
