Disruptive Trend in Orthopedics – Think BRIC |

Disruptive Trend in Orthopedics – Think BRIC

The big five Orthopedic device companies (Stryker, J&J/DePuy/Synthes, Zimmer/Biomet, Smith & Nephew and  Medtronic Spine) have found themselves in the center of a perfect storm of converging economic, regulatory, and reimbursement trend uncertainty within the US market. Just as Thomas Friedman predicted in his best seller, The World is Flat, the flattened world has finally reached Orthopedics.

The flatting world is a massive trend. Recently, the big orthopedic players have given up on the US and EU markets for sustained profits. They are running to greener pastures. Let’s look at the facts. Expensive technologies saturate the US market. The US market also has the highest density of sales reps, increasing price pressures, changing, unpredictable regulatory bureaucracy, and liability with no predictable ceiling (J&J’s legal exposure on Metal-on-Metal will be north of $2B).

In order to deliver earnings and dividends to their shareholders, the big Orthos have no choice but to ignore the largest markets in the world—America and Europe. This shift has resulted

in the big Orthos moving their resources, inventories, training, clinical studies and R&D efforts from outside US and European markets to the big emerging markets. See: BRIC.

The big four emerging orthopedic markets are the BRIC countries, Brazil, Russia, India and China. These four countries represent 41% of the world population and grow their economies faster than the US GDP. They represent the largest medical markets in the world outside the US, Europe and Japan. They all have emerging middle classes that demand higher-quality medical. In India alone, analysts predict the middle class will grow from 50 million people to 580 million people between 2010 and 2025.

Let’s look at why the big Orthos are seeking greener pastures outside the US/EU markets.

9 Reasons to Think BRIC

  1. US Regulatory hurdles. – The FDA has become unpredictable, unreliable, and anti-technology. This is well-documented from the countless manufacturers who first moved their clinical studies outside the US. See Trend #2.
  2. R&D Investment. – US investment in new technologies has simply become too steep. For Class III devices, companies today must invest 8-10 years and $95M before seeing significant revenue.
  3. Growth Rates. – Revenue growth has slowed to 5% or less for the big five Orthos (Stryker, J&J/DePuy/Synthes, Zimmer/Biomet, Smith & Nephew, Medtronic Spine). The double digit revenue growth days are over.
  4. Distribution Establishment. – The Big 6 Orthos have already fully penetrated new first world markets with sales and distribution organizations. They now have feet on the street in the BRICs.
  5. Price Pressures. – Well-documented price points are dropping in the US.
  6. Reimbursement Challenges. – Reimbursement is becoming more challenging in the US.
  7. Surgical Training. – The BRICs train orthopedists at a faster rate than the US. The total number of US trained Orthopedists has become stagnant.
  8. Punitive Taxation. – Additionally, as if there’s not enough wind in the device companies’ faces—the Feds have installed a gross sales tax of 2.3% on device sales within the US. There are other financial challenges outside the US, but at least they don’t take 2.3% right off the top.
  9. Technology Leverage. – The move to BRIC markets does not require new innovation. Companies can leverage the technology they already developed, manufacture more technology and sell into new markets. The exporting cost is far less than the cost of new research and development.

The Four Challenges of going BRIC

  1. The price points of existing US products will not fly in BRIC, so the US has to develop more cost-effective implant systems.
  2. Big Orthos need more medical training, even though many are trained in the US.
  3. Orthos need more sales distribution, even though the big five Orthos have a foothold in the BRIC markets. These massive growing markets simply need more representation.
  4. It is difficult to repatriate the profits.

The BRIC Trend illustrated in the News

Medtronic announced they are growing to 2,000 employees in China. Smith + Nephew announced they will reorganize to strategically focus on BRIC; they are pumping more R&D money into BRIC products. Smith and Nephew makes an emerging markets move into Brazil.

China recently became the #2 Orthopedic market in the world. Stryker recently bought a Chinese device maker for $765M. China received 6 Drivers for their expanding market. Zimmer made an acquisition into China.

What is your company doing to compete in a BRIC world?

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