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Orthopaedic Device Industry Business Models: 2020 and Beyond

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During last year’s closing keynote, Dr. Wael Barsoum underscored the importance of producing transformational, innovative products to stay competitive and maintain a strong company and a healthy supply chain. This year, Dr. Bill Tribe will shine the “innovation lens” on the value of transforming your business.

Dr. Tribe co-authored the often-cited “Medical Devices: Equipped for the Future?” study in which the orthopaedics sector is called out specifically as facing an extreme combination of forces — none of which come as a surprise or are new, but when viewed holistically (as in the image below), paint a rather obvious picture of the need for companies to respond. As you can see, orthopaedics is the only sector with 4 of 5 “hot” areas…and in this case, the odd one out (regulatory scrutiny) is still marked “critical.”

From a top-down view, the five “disruptors” listed above are acute (power shift to payors, regulatory scrutiny, unclear sources of innovation, new healthcare delivery models, need to serve lower socio-economic classes). They impact the overall orthopaedic industry intensely – but how are they impacting you? Dr. Tribe’s Keynote Address will take into account the uniqueness of the OMTEC audience: large and small OEMs, Suppliers and Service Providers.

As stated in the A.T. Kearney study, “Each company faces a different set of headwinds…while the macro-factors held true, individual experiences and prioritization depended on factors such as market geography, product life cycles and go-to-market strategies. The most effective strategies are therefore likely to be company specific.”

What will be your business model in 2020? 2025?
Will you be considering cost-structure, deployment of inventory, commercial logistics, quality and regulatory frameworks, R&D, innovation and data collection?

Dr. Tribe will break down the issues and share potential approaches to help you navigate toward a more relevant and lucrative business model – regardless of where you are in the process.

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Orthopaedic Device Industry Business Models: 2020 and Beyond

  1. 1. Bill Tribe, Ph.D., Partner, A.T. Kearney E-mail: bill.tribe@atkearney.com – Phone: +1 847 422 3930 June 15, 2016 Opening Keynote Address Orthopaedic Device Industry Business Models: 2020 and Beyond
  2. 2. OMTEC Keynote ■ Industry / Sector Specific Challenges ■ Potential Responses ■ Q&A
  3. 3. Industry / Sector Specific Challenges
  4. 4. 0% 5% 10% 15% 20% 25% 30% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Disruptive change is just beginning – eroding 5% of margin if left unaddressed Actual Forecast Global Medical Device Margin Trend (USD, as % of Sales) -5% +2% -1% $34B value at stake Source: A.T. Kearney
  5. 5. Volumes and overall market size are projected to continue growing for orthopaedics … Source: ORTHOWORLD, A.T. Kearney Global Orthopaedics Revenue ($M) 0 10,000 20,000 30,000 40,000 50,000 60,000 1 2 3 4 5 6 7 8 9 10 2.5% 2.0%
  6. 6. … but prices and margins will continue to face strong downward pressures in U.S. and abroad Source: Deutsche Bank, A.T. Kearney -3% -2% -1% 0% 1% 201420132005 2006 2007 2008 2009 20112010 2012 U.S. Joint Reconstructive Pricing (Estimated % Change Year-over-Year)
  7. 7. Interviews coupled with our research and experience suggest five combined forces are likely to disrupt orthopaedics Source: A.T. Kearney The confluence of these disruptors is forcing unattractive economics on the traditional orthopaedics business model
  8. 8. Orthopaedics market is already experiencing the power shift among the value chain players Source: A.T. Kearney Power shift to players and providers Before Fee-for-service, specialized care After ACO/IDN, coordinated care, increased quality and transparency, narrower product choice Before Negotiated contract rate, risk mitigation After Merging for scale, pay for performance, real world evidence Provider Payer
  9. 9. Source: A.T. Kearney Regulators have focused on orthopaedics for the last few years and that has driven increasing burdens Heightened regulatory scrutiny Orthobiologics UDI Sterilization Instruments 2007 FDA Amendments Act 2010 - 2011 510K Revisions 2012 FDASIA: MDUFMA revisions 2013 Medical device excise tax 2007 FDA ordered to implement UDI 2011 Class 1lb classification created 2012 Registration requirements change 2015 CMS voices concerns about UDI 20102008 20142009 20152013201220112007
  10. 10. US VC Medical Device Companies (% of total VC) Innovation in the sector has slowed down and funding is becoming more challenging Unclear sources of innovation 2015 (1H) 6 2013 7 2012 10 2009 15 0 5 10 2004 2006 2008 2010 2012 2014 -8% Orthopaedics PMA (#) 0 50 100 150 2004 2006 2008 2010 2012 2014 +11% Orthopaedics sPMA (#) Source: A.T. Kearney
  11. 11. Healthcare models emphasize outcomes and bundled solutions with a clear focus on reducing procedure overall costs Source: CMS, A.T. Kearney Example: Hip Replacement Value Breakdown New healthcare delivery models Bundled payments (CJR) Healthcare systems Represents only 3% of total cost Cost of implant & equipment Cost of operation (hospital based) Post op care (hospital based) Post discharge (short term) Post discharge (long term) 3% 22% 29% 19% 27% 3% 25% 54% 73% 100%
  12. 12. Coverage, affordability & accessibility will drive growth in underserved segments of developed markets Source: A.T. Kearney US Healthcare Spend vs. Insurance Coverage by State ‘000$/capitaperstate Need to serve lower socio-economic classes Multi-tiered product portfolios Differentiated market access models 80% 85% 90% 95% $0 100% $6 $8 $10 $12 0% DE LA MA MI MT NV RI UT VT VA AK AZ CO CT DC Private or Public Insurance (% of population) IA FL GA HI ID WV $6B potential
  13. 13. Potential Responses
  14. 14. Hospitals: 3-5% Majors: 1-2% CMOs: 5-10% Majors: 20-30% Challengers: 10-15% OEMs Suppliers / CMOs Distributors Payers & Providers 1. Distributors: based on Cardinal Health, McKesson & ABC; OEMs: majors based on Zimmer Biomet, Stryker, Smith & Nephew, challengers based on Nuvasive, Amplitude and Exactech; Hospitals based on American Hospital Association and Kaiser Permanente; CMOs based on Greatbatch, Symmetry and estimates for private players 0% 10% 20% 30% Current orthopaedics value chain margins are concentrated on OEMs but that will be increasingly challenged
  15. 15. OEMs are increasingly challenging traditional models to deliver a differentiated customer experience … Source: WSJ.com, Company News, A.T. Kearney Distinct Customer Experience Concepts Select Examples Post-op CareLink Network Less return visits and proactive issue identification Center for Advanced Recovery™ (CARE) In-decision ExamplesValue Commitment to patient-centric care Surgery Destination Centers for Superior Performance Streamlined end- to-end patient journey Manufacturers Customized Implants and Rep- less Models Pre-op Simplified steps and surgical environment
  16. 16. … with personalized surgery and implants becoming more relevant in their value proposition Personalized Orthopaedics Select Examples Manufacturers Source: Stryker, Zimmer Biomet, A.T. Kearney Robotic Personalized Surgery Personalized Implant Systems
  17. 17. At the same time, distributors are moving upstream in the chain and offering new delivery models Distributors Business Models Select Examples Direct-to-patient / hospital distribution Distributors Source: Cardinal Health, Millstone, A.T. Kearney Expansion into orthopaedics
  18. 18. Payers & Providers Initiatives For payers and providers, partnerships with OEMs and bundled payment models are rapidly expanding Select Examples Source: Zimmer Biomet, HBR, Hoag Orthopedic Institute, A.T. Kearney Payers & Providers Bundled payments for commercial insurers OEM – clinic holistic partnership
  19. 19. Winning orthopaedics business models will leverage an end-to-end perspective and interactions across the value chain OEM Manufacturers Suppliers / CMOs Distributors Payers & Providers How do portfolio choices help manage supplier relationships? How can you define differentiated supply chains to serve different markets & segments effectively? How can you enhance end-to-end cost efficiencies? What drives a more scalable & efficient supply base? What upstream relationships can create the most value? What services truly enhance your products and the ability to provide value? How can bundling be managed?
  20. 20. Restructuring already underway in adjacent sectors Current M&A activity just scratching the surface Big names will disappear New and unexpected ones will emerge Multi-billion $$ value at stake Are you equipped for the future? The change has begun, and the winners will address the challenges early…
  21. 21. This document is exclusively intended for select audiences. Distribution, quotations, duplication, and excerpts are not permitted without A.T. Kearney’s prior written consent. The content compiled in this report is for presentation only and does not represent the complete findings or total documentation on the topic represented.
  22. 22. Americas Atlanta Bogotá Boston Calgary Chicago Dallas Detroit Houston Mexico City New York Palo Alto San Francisco São Paulo Toronto Washington, D.C. Asia Pacific Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Taipei Tokyo Europe Amsterdam Berlin Brussels Bucharest Budapest Copenhagen Düsseldorf Frankfurt Helsinki Istanbul Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Middle East and Africa Abu Dhabi Doha Dubai Johannesburg Manama Riyadh A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission- critical issues. For more information, visit www.atkearney.com.

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