Call Notes & Replay | Executive Insights | How COVID-19 & Digital Health are Shaping Orthopedics

Overview

Highlights

1. It's likely that there are 5-10 percentage points of incremental surgeon capacity to absorb the backlog of cases and manage a persistent wave of orthopedic cases that predates the pandemic due to a massive supply/demand imbalance.
2. OEMs are investing in how the devices are implanted vs. putting tech into the implants, as well as creating an ecosystem around the patient that allows doctors to manage cases more efficiently. Navigation will grow.
3. Stryker's Mako and Zimmer's Rosa are leading the pack. Marketing is key to adoption and it works very well (i.e., it drives patient volume).
4. Procedures have been moving to the ASC setting, which is where the action is. Smaller but growing companies such as Sano Surgery and PriceMDs are engaged in direct contracting, OrthAlign sells single-use disposable hand-held surgical navigation systems, and new manufacturers like Total Joint Orthopedics are focused on ASCs. 

Lightly edited for length and clarity, emphasis added.

Can you start off with a bit about your role and the day-to-day role of a Chief Medical Officer at an OEM?

• In pharma, the CSO/CMO position is a well-established position that drives R&D strategy, lends credibility to the development pathway, and these executives are often trained in specialty areas. In orthopedics, the role hasn’t been as “clinical,” but it’s evolved. I have some P&L responsibility, some of the tech development (~⅓ of time is spent there), and then some business development responsibility. I have a competitive advantage because I can look at a company quickly and evaluate the use case (i.e., will MDs use whatever "it" is). I also do some compliance/regulatory work. Being an experienced clinician and former customer is helpful.

From your times on the front line, and seeing what's happened w/ COVID from your seat now, can you share your thoughts on our fairly well-developed view of pent-up demand? There's a little bit of a ripple here in Michigan, but there are people that say, "We're back to trend, and there isn't more time in the day;" vs. us thinking, "30%-40% of people have deferred or delayed something..."

• If you're a mature - late 40s, early 50s - orthopedic surgeon, then you were doing as much as possible pre-COVID, optimized down to the minute. Most surgeons are very efficient. We will do 7-8 surgeries a day, pushing ourselves. Those surgeons were/are at full capacity. There's not really another minute; however, there could be an extra case or two per week.
• The "backlog" discussion dates back to 2007-2008. Dr. Ioriao's "Orthopaedic Surgeon Workforce and Volume Assessment for Total Hip and Knee Replacement in the United States: Preparing for an Epidemic" paper said that by 2030 there would be demand for 3 million knees per year, and we were already way behind (looking at the burden and incidence of disease). Surgeons that are "full" can't really do too much more, so the backlog will stay for a while. 
• Remember, with arthritis, everyone knows someone that has it, and it's painful to live w/ the problem. Yes, it’s elective, but everyone has a different pain tolerance. There is not a perfectly defined population of people that need or don't need surgery. For every patient that has a knee done, there are 10 more with adequate pathology.

Lower volume surgeons, can they pick up a knee or hip? 

• Yes, younger surgeons may have some capacity. But there are people that aren't even in the front-end of the funnel. The under 55-65-year-olds are the fastest-growing group of patients/candidates for [orthopedic] surgery. Multiple things are driving that: sports injuries, implant longevity, and a bunch of other pre-COVID things that have been feeding the arthritis surgery funnel - i.e., there's plenty of demand for several years.

Volume and price - we get ASP or mix, and there have been cementless and gender-specific implants over the years. What do you think the trendlines have been or are or pricing? What's the innovation cycle around devices themselves - is the tech going into devices (robotics) or after-care?  

• First - it's no secret - ASPs for hips or knees are down a lot since the mid-2000s. I used to help providers save money through supply chain initiatives at McKinsey. There have only been so many differentiators since ~2000. Smith & Nephew had the Oxinium knee, which was cool, and there was metal-on-metal (ended up being a failure), ceramic ball heads, etc. The point - from 2000-2012, OEMs maintained ASPs by putting more tech into the implant(s).
• In my opinion, implants, everyone makes good ones...people aren’t dying from them. In Australia, the joint replacement registries are great. They track every implant in Australia and over any time frame they all perform within a few percentage points of each other. There are limited opportunities for differentiation. 
• What we’re doing now is changing how the devices are implanted because some of the best-performing implants are 25-30 years old w/ limited tech. IT's clear that placement is more/most important. 

Why haven't generic implants been more widely adopted? 

• Most hospital systems and high-volume practices don't have the staff to keep up with 6-7 joint replacements per day, nor do they have the incentive to. There are several complex trays, dials, etc. that must be managed for the surgeon, and that's why the sales agent/rep is always a  part of the day. That salesperson's function/expertise is not well-duplicated in the hospital system.
• For a generic model to work well, the institution must be able to absorb labor, logistics, etc. That's why the generic model can only work in certain institutions (a limited number). Ambulatory surgery centers (ASCs) are one area. In orthopedics, many surgeons have a significant ownership share of the practice. Because the surgeons own the business, they hire the staff and can provide incentives (on volume). It’s a 7am-3pm hourly staff, anesthesia, etc. in the ASC, so there's plenty of incentive to get 8 knees done per day and you don't have to donate a kidney to the hospital CFO to get the implant you want (i.e., the surgeons can negotiate directly. Also, you can incentivize staff to run the day. Price pressure, again, changes the mix. 
• In the ASC, the use of advanced tech can take a hit - adoption is slower. The technology is expensive, and when surgeons own the facility, they tend to be more judicious w/ spending. the value proposition changes.
• Given a shift to ASCs, can manufacturers recapture some of the pricing?
• I'm not sure. When dealing/negotiating w/ a doctor - they’ll pay what they pay. When there's a giant supply chain organization, there's some opacity in pricing. The Kaisers are incredibly good at minimizing price. And, even though ASCs may not have the same level of volume,  the doctors know that the implants are commoditized. They will try to minimize costs too and negotiate hard. They watch costs like a hawk.
• It's hard to spend a couple of million dollars on a capital purchase at an ASC - it's not like having a capital budget at a health system.

What do you think the rebound will look like (i.e., how long will it take to absorb backlog if there's an uptick in capacity)?

• 20% of surgeons do 80% of the cases, and they are likely maxed out. If you look at hospital bed capacity, there's some slack, but not much. Maybe they add a Saturday, but the other "feeders of the funnel" are there - younger patients, etc. Best, case, even w/ 10-15% uptick in capacity - at least a year, maybe 2. Some people say we'll never catch up because there aren't enough surgeons to keep up with demand.

• As public fear recedes, there will be some people that were hiding out coming back with some knee, hip, or shoulder pain.
• We think 5-10 points of incremental are possible to get back to true trend, plus address some of the backlog(s). Could the trend line be 10-15% above today?
• I think so, maybe. That could last - a combination of virtual care/after-care, robotics (although that can impact the productivity of surgeons (recall that surgeons resisted Mako because the cases took longer - now, physicians seem to like it).

What are the technologies you’re looking at that are making a difference? Is Stryker/Mako running away with the market? Also, app downloads are hard to find.

• One thing - look at robotics. Medicine is marketing whether it's to a front-line, already busy surgeon or someone fresh out of fellowship. Marketing matters, full stop.
• I used to do Makoplasty back in the day. That marketing effect is real. If you're the first hospital in North Dakota to have a robot, that works. The data and experiences are clear - I remember when Zimmer's gender-specific knee came out because women would come in and with a Women's Home Journal article and show it to us.
• It's important to distinguish between robotics and navigation.
• Clinical outcomes are good w/ hip and knees. How much better can we make that? We were talking about the backlog of surgeries - there are patients that choose not to have surgery or wait, and they need self-management tools - digital platform assets include virtual PT, sensors, wearables.
• If a surgeon has a 5-month waitlist, patients need something, which is why we see big growth of non-operative wearables that enable patients to self-manage. Physical activity helps arthritis pain, and it's becoming increasingly difficult for high-volume surgeons to manage post-operative in person visits. Assets that allow for remote management post-op offer several benefits and help offices to run more efficiently. If 50% of routine post-op can move to remote/virtual, it frees up the office to see more patients. CMS approved 5-6 CPT codes for remote monitoring that now proliferate into orthopedics.
• Zimmer and Stryker are going all in with Rosa and Mako, respectively. Zimmer rolled in mymobility - patient management/engagement with the Apple Watch and Canary Medical's smart implants. It's a package - the robot, an engagement platform, etc. It's a good story.
• Stryker has been heavy Mako since 2013 and recently acquired Orthosensor, which makes smart intraoperative pressure measurement sensors and has a wearables division. They are trying to build an ecosystem too. Smith & Nephew has Real Intelligence and its CORI "quasi robotic" system. The theme is clear - all the companies are creating ecosystems. We bought Muvr for the same reasons - it's exciting and the wearable tech is cool.
• All the companies are trying to build a good story around the ecosystem. Very little has to do w/ the implants (Dr. Kusuma noted that the companies telling the best stories/marketing have the highest expected growth rates - which is telling).

It sounds like everything is targeted at making the surgical suite and doctor's office more efficient - not necessarily pointed at consumers directly? Is there a scenario where Stryker owns that continuum after the procedure, or is it better for a PT or telemedicine-type app?

• You can argue that robotics or computer navigation make things move faster or slower in the OR. Generally speaking, adding robotics or navigation slows the procedure a bit but the provider makes up for it due to the marketing (patient volume).
• the second thing is the efficiency of the office. A surgeon doing 600 joint replacements per year is worth $3 million to them as a customer. For that amount, it's easy to argue that the OEM should provide additional services to make the client's life easier. With that volume, you're seeing 2k patients in office, dictating, dealing with administrative labor, documentation, etc. If a system can save an hour a day in the office, you'll pick that system.
• Think about the whole surgical episode and fact that people do well overseas when surgeons only have/use an implant, scalpel and cement. The best "convener" of the surgical suite of solutions is the implant company. The first asset is the implant - that's a must have and everything else emanates from it.
• The problem I see is with growth of independent apps - e.g., mymobilty; trying to generate revenue streams without an implant is impossible. Patient recovery apps can't be monetized independently. Doctors won't write a check for that but a bundle will work.
• Note, we didn't include a slide w/ app data for the various players because it was sparse, at best.
• Implant companies can't charge much more for the ecosystem - it's a differentiation play vs. a standalone revenue generation thing.

The move to ASCs - is that change a move toward taking risk?

• The economics change for surgeons that own an ASC. The hospital is paid a facility fee - a surgeon puts in a knee and might get $1,500 (procedural fee) but the hospital gets $15k. The ASC gets both, so the surgeons don't have to do the same volume to make the same amount of money (or they can make a lot more). The economics are driving cases to ASCs.
• Assuming risk... there is interest from employers in contracting w/ high-quality hospitals or surgery groups. It's a small but growing trend/segment with companies like Sano Surgery and PriceMDs engaged in direct contracting. All-cash, bundled prices mean that the ASC or provider group assumes the risk if there's a complication.

Can anyone knock off Mako? Is there an equivalent challenger?

• I'm not sure. What I think will happen is that within the next 5-7 years, some form of [computer] navigation will be used in all orthopedic procedures (i.e., using it will be standard of care, w/ out saying it's the standard of care). Computer navigation does 90% of what robotics does and it's been around since the late 1990s. Orthopedics moves very slowly. OrthAlign sells single-use disposable hand-held surgical navigation - "the backup camera of choice for joint surgeries worldwide" - and is doing $30 million - $40 million of revenue. 
• da Vinci surgeons - how far are we from surgeons doing the procedure from 20 miles away vs. 10 feet away? Orthopedics is different though - you must manipulate the limb. It's hard to have a robot do that.

What will be most exciting in the future state (looking out 1-3 years)?

• There are some nice, honed in models like Total Joint Orthopedics focused on ASCs. They make high quality, low cost implants. I think we'll see more of that. 
• Disposable tools like OrthAlign's are interesting - Exactech has something too. I think the focus on computer assistance/navigation where providers can't afford the robot is something to watch.
• The other thing - companies w/ sensors that monitor patient movement - we made a big bet on Muvr.
• Strive is an app, Canary puts the tech in the device (will grow as remote monitoring becomes more necessary), and then there are a ton of AR startups. I would challenge anyone saying they can apply AR outside of radiology. Marketing is hugely important, and we must ask what problem AR is solving in the operating room that current computer navigation and robotic systems are not?
• Also, nobody can give you the story of how to monetize all the data - AI or ML. You need well-defined clinical use cases, clean populations, well-defined pathology, etc. Look at IBM Watson - the largest spend ever. Palantir does great work, but health care and medicine are different - the data sets are dirty.

ABOUT THE SPEAKER

Dr. Sharat Kusuma, FAAOS, MBA, is the Chief Medical Officer and a Senior Vice President at Exactech, a global medical device company that creates and markets orthopedic implant devices and surgical instrumentation to hospitals and physicians. Prior to Exactech, he worked at Apple where he led the development of digital health product lines and partnerships between Apple and various healthcare companies. Dr. Kusuma also worked as a Senior Engagement Manager at McKinsey and Company in the healthcare provider, payor, pharma, and Medtech space. Notably, he led several engagements and large project teams at top 15 US health systems for supply chain transformations to generate >$50 million in savings. As a board certified and fellowship-trained orthopedic hip and knee surgeon*, he has been involved in and around academic orthopedic surgery for >20 years. Dr. Kusuma studied medicine and business at Vanderbilt University and completed orthopedic surgery training at the University of Pennsylvania School of Medicine, Rush University Medical Center, and Queens Medical Centre in the United Kingdom.

*Dr. Kusuma was a high-volume Attending Orthopedic Surgeon and Associate Chairman of Adult Reconstruction at OhioHealth Group from 2009-2015.