Orthopedics ≠ Spine Surgery

When I entered the world of venture capital, I was perplexed how interchangeably investors used the terms “orthopedics” and “spine surgery.” It was as if the multibillion dollar orthopedics industry was one and the same with the spine device industry. “With good reason,” some of you may argue. After all, substantial acquisitions (St. Francis Medical, Kyphon, Spine Solutions and Spine Core) and spine-only IPOs (Kyphon, NuVasive, Alphatec and TranS1) don’t happen for no reason. Companies catering to spine surgery have benefited greatly because of the higher assigned DRGs and a less CMS-based patient population compared to joint replacement surgery. Ok. Fair enough. Let’s face it – spine surgery is where the money has been for device manufacturers (giving them more margin for error on execution) and investments in spine companies have produced some impressive shareholder returns.  But it’s time to think outside the box and get away from the dangerous herd mentality.

Orthopedics is Rich with Investment Potential

Some facts. The worldwide orthopedic device industry is $30B+1. At 40%, joint replacements make up the majority of the market while spine devices account for a quarter of that same market2. Consider your own experience with orthopedic care. Does it surprise you to learn most of orthopedics is done outside the operating room? True. And did you know orthopedics used to be a nonoperative speciality focused on correcting bone deformities unique to the pediatric population?  Indeed it was – hence the Tree of Andry (above) as the symbol of orthopedics.  (A future blog will be devoted to this fascinating history.)  Many nonoperative interventions are still performed on a daily basis – casts, splints, prosthetics, therapy, injections and medications – and, although impactful, don’t make it onto charts investors review.

Let’s add one more fact. In the US alone, the direct cost of caring for musculoskeletal diseases is $500B3. Relative to the $2.8T direct healthcare expenditures, a minimum of 16% is spent directly on the care of musculoskeletal disorders. At the risk of stating the obvious, if investors only consider spine devices, clearly they’ll underoptimize their opportunities. “That’s all fine,” you muse, “but how does expanding my definition of orthopedics make me a better investor?” Consider these facts:

  • Almost half the adult US population reports they have a musculoskeletal condition, 75% of whom are younger than 654.
  • The most common conditions (in order) are arthritis/joint pain, spine conditions, osteoporosis and injuries, most of which are managed non-operatively5.
  • The #1 source of disability in the US is a musculoskeletal condition6.

Lots of opportunity there! For instance:

  • If your investment model has been high margin surgical devices (which, notably, are often used in end-stage conditions in the CMS-based population), look to more upstream preservation of function in younger patients and away from the more commoditized field of reconstruction.
  • If your investment model is leveraging economies of scale in fragmented markets with low margins, look to ways of consolidating services for all those interventions occurring outside the operating room.
  • If your investment model is cost containment in healthcare, look to inventive ways of reducing the occurrence of long-term disabilities.

Metal and Plastic and Fusions: B’Bye

Recently I sat on a panel where an audience member asked if there was anything left in which to invest in orthopedics. My response? If you think orthopedics is all “metal and plastic” and if you think fusion is a good outcome, then you have reason to be skeptical of the industry’s future. But if you see it as a comprehensive cradle-to-grave specialty whose purpose is to maintain or restore function of the musculoskeletal system and you subscribe to a conviction that we will get better at earlier detection, less invasive intervention and joint preservation, then you see nothing but opportunity. In my opinion, evidenced-based medicine will skew our therapeutic and interventional efforts upstream. Proportionately, we may even see a shift to better nonoperative care. Additionally, if we are ever to be successful in controlling healthcare costs, we simply have to get better at preventing disabilities stemming from orthopedic disorders. That’s where future orthopedic innovation has its greatest potential and, deducing, it will not involve metal and plastic and fusions. Your arbitrage opportunity is out there.

In a later post, I’ll reveal to you the single greatest orthopedic innovation of the 20th century. (It’s actually my nomination for the single greatest medical innovation of the 20th century, but feel free to debate me.) And I’ll then disclose to you what my prediction for the greatest orthopedic innovation of the 21st century will be. Here’s the good news: it’s likely to occur in your lifetime! Contrarian investors in orthopedics (not just spine) will be rewarded.

References

1,2: Canaccord Genuity Musculoskeletal Conference and AAOS 2011 Highlights, Plovanic, Quick & Rose, March 2011.

3,4,5,6: United States Bone and Joint Decade: The Burden of Musculoskeletal Diseases in the United States. Rosemont, IL: American Academy of Orthopaedic Surgeons; 2008.