More from the Orthopedic Intelligence Conference...
BY JOHN CHOPACK, AUGUST 8, 2005
John Cherf, M.D., a clinical advisor for Sg2, presented the top ten trends in orthopedics. This included:
1) Specialty Hospitals Resuscitated
2) Eradicating Wrong-Site Surgery
3) Medical Malpractice Reform Is Still Alive
4) Payment to On-Call Specialists
5) The COX-2 Saga Tarnishes Pharmaceutical Industry
6) Implant Costs Continue Escalate
7) DOJ Subpoenas Orthopedic Device Records
8) Osteoporosis Undertreated
9) Artificial Discs Approved
10) PT Seeks Independence
Dr. Cherf's presentation was great, primarily because it provided a surgeon perspective on the industry. The most interesting aspect of his presentation was his prediction of a move of orthopedic procedures to specialty hospitals. There are currently 36 orthopedic specialty hospitals which represents 39% of all specialty hospitals. He stated that 26 new specialty hospitals are under developmental and that 35 new applications for specialty hospitals have been submitted to CMS. One related topic we have been following is the on-going discussion related to limiting Medicare/Medicaid reimbursement to these specialty hospitals (see posting here).
One point that we believe was unfairly portrayed was the slide "artificial disc income statement doesn't add up". The margins of 96% for an artificial disc depicted during the presentation are misleading. The margins, excluding previous R&D costs, would look more like this:
| % |
| Revenues | $11,500 | |
| Cost of Goods | $(1,150) | (10%) |
| Sales & Marketing | $(2,875) | (25%) |
| General & Admin | $(2,300) | (20%) |
| Post Marketing Studies | $(350) | (3%) |
| Operating Margin | $4,825 | 42% |
| Taxes | ($1,689) | (15%) |
| Net Profit | $3,136 | 27% |
Considering the approximate $30 million investment in clinical trials and other research & development it takes to gain an FDA approval of an artificial disc, an orthopedic manufacturer would need to sell approximately 9,500 implants before they broke even on their investment. If the orthopedic manufacturer bought one of these discs for approximately $300 million, which most did, they would need to sell close to 95,000 devices before breaking even on their investment. Therefore, it will be a couple of years before most of the orthopedic manufacturers actually make money on their investment.
