A State of Conformity
By: Robbie Sparrow
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Over the past few years, 3D printing has rapidly entered the medical device industry, and orthopaedic implants are at the cutting edge of this innovation. A young boy recently received a 3D printed vertebrae, and doctors are also able to now 3D print fully-customized facial reconstruction implants. While these advances promise to open up new markets and areas of research, 3D printing also poses a significant threat to the business models of the three largest orthopaedic companies: DePuy Synthes, Stryker, and Zimmer. Of the incumbents, Stryker Corporation is in the weakest position to meet the challenges of 3D printing and should expand its traditional knee implant product line through the acquisition of ConforMIS, Inc.
Orthopaedics Industry
Over the last few decades, the orthopaedics industry has been quite profitable, with 5% annual growth and 20-25% operating profit margins. The main driver of this growth has been an ageing population in developed markets. Although the industry is predicted to continue growing at 4.9% until 2019, this growth will be accompanied by shrinking margins. In fact, AT Kearney predicts a fall in margins to 16% by 2020 as a result of health insurance companies trying to reduce their surgical reimbursements to hospitals. Hospital consolidation is occurring at double the rate of five years ago, which is slowly increasing their purchasing power. Moreover, purchasing decisions are slowly moving away from surgeon preference, towards evidence-based medicine. This is all an attempt to provide favourable patient outcomes that are also cost-effective for hospitals.
Medical device companies have begun lowering prices on knee and hip implants in an effort to maintain market share and continue growing unit sales as a result of industry maturation. These trends are driving consolidation within the industry. In 2012, Johnson & Johnson bought Synthes and merged it with DePuy; similarly, Zimmer recently purchased Biomet Inc. for $13.4B, making it the market leader in the joint replacement market. Stryker has also recently made a number of successful acquisitions, but has suffered from a large recall of one of its first 3D printed products.
3D Printing and Orthopaedics
3D printing technologies offer the ability to customize different aspects of an orthopaedic surgery to a patient’s unique bone structure and are poised to disrupt the value chain of traditional orthopaedics. For Stryker, there are three major applications where 3D printing technology could help it better compete in the massive knee and hip implant market:
Patient-Specific Instruments (PSIs) – Customized guides that surgeons place on a patient’s knee or hip to ensure optimal drilling and cutting during surgery.
Mega Hip Implants – Individuals who have bone cancer or severe fractures often need to have portions of their hip bone cut away and replaced by implants customized to the shape of their previous bone structure.
Personalized Knee Implants – Physicians take a CT scan of a patient’s knee, and an implant is customized and printed exactly for the patient’s anatomy.
All of the major orthopaedics manufacturers are taking advantage of 3D printing technology to some extent. Stryker has previously developed a 3D printed cutting guide PSI system for its traditional knee implants called ShapeMatch. Unfortunately in April 2013, it was recalled due to software defects. This has put Stryker behind in 3D printing innovation, with DePuy Synthes and Zimmer having subsequently released similar products without such defects. Although PSIs have shown promise in improving the surgical process, they have failed to show significant improvement in patient outcomes. Increased cost of surgery to hospitals without significant improvements in surgery outcomes, coupled with its recent recall, make this segment less attractive for Stryker to focus on as the core of its 3D printing strategy.
Contrarily, 3D printed mega hip implants have been shown to significantly improve patient health. However, despite high margins on these implants, the market for such devices is small compared to total hip and total knee procedures, which are the core of Stryker’s business. Therefore, the most promising application of 3D printing technology for Stryker is the personalized knee implant segment – coincidentally the largest orthopaedic implant market. Knee implants are also one of Stryker’s core competencies, comprising 15% of Stryker’s $9B revenue in 2013, and acting as one of Stryker’s largest revenue drivers.
The American knee surgery market is large, with over 719,000 surgeries performed in the United States every year. Further, as a sub-segment of orthopaedics, this market is expected to continue growing, leaving significant room for Stryker to use new innovation to claim market share. Despite its financial and technological resources, developing a proprietary system to be approved by regulatory agencies, and amassing a sizeable set of convincing clinical data to gain hospital approval represents a substantial market entry barrier for Stryker. This process could take years, and Stryker is already lagging in the 3D printed patient positioner segment.
A Novel Approach to Knee Implants
A recent 2010 study reports that up to 37% of patients are not satisfied with the outcome of their total knee surgery three years after the operation. An innovative orthopaedics company called ConforMIS, Inc. has set out to change that. Currently, ConforMIS is the only American company offering fully customized knee implants using 3D printing technology. Its 3D printed implants are made of cobalt chromium molybdenum alloy, a common orthopaedic metal, and polyethylene. This gives it the same structural integrity as a traditional implant with the benefit of full customizability. Nineteen studies commissioned by ConforMIS have demonstrated that personalized implants can produce better patient outcomes. So far, ConforMIS has achieved a compound annual growth rate of 118% over the past three years, with sales growth from $6M to $29M. As ConforMIS collects more favourable research data on patients who use its implants, it will be able to create key data sets to more effectively market to hospitals using evidence based purchasing methodologies, driving growth. In addition, ConforMIS owns more than 375 patents on items such as imaging software, implant design, manufacturing, and surgical techniques. Its patent portfolio was ranked as one of the most powerful in the medical device industry in 2014 and will protect its technology over the course of its growth in the coming years.
In most cases, a total knee replacement surgery is paid for by insurance providers, who provide a fixed reimbursement to hospitals. Hospitals then have to purchase the implants and negotiate the price with manufacturers. Due to the persistent cost pressure on hospitals, it is important that ConforMIS implants are cost competitive. Currently, ConforMIS implants are covered by private health insurance providers along with Medicare and Medicaid under the same reimbursement as off-the-shelf implants. After analyzing all relevant expenses, it was determined that the total cost of the surgery to a hospital is virtually the same despite the customized implants being slightly more expensive. This includes all costs related to hospital stay-duration, the need for blood transfusions, and surgery complications. This gives the ConforMIS technology a significant advantage going forward and the potential for large scale organic growth as hospitals begin to seek out this technology.
Strategic Acquisition of ConforMIS
The best way for Stryker to enter the personalized 3D printing knee implants segment is through the acquisition of ConforMIS. This will allow Stryker to effectively provide proven custom implants to the mass market while addressing the needs and motivations of patients, doctors, hospitals, and insurance companies.
Following the ConforMIS acquisition, Stryker will be able to use its size and broad sales reach to solidify the technology’s number one position in custom knee implants. Stryker gives ConforMIS access to a global distribution network, a skilled sales team, better access to international markets and an established brand, which will help streamline operations. Specifically, Stryker will be able to improve the workflow process for doctors and technicians. It currently takes ConforMIS six weeks from the initial CT scan to the custom implant arriving at the hospital. Over the course of this process, ConforMIS must receive CT scans, design the implant, go through an iteration process with physician approval, and have the implant printed in its Massachusetts facility.
Stryker can improve the process by improving the system integration of CT scanning facilities with ConforMIS’s iFit Image-to-Implant® software. CT and MRI scan files use a common DICOM file format across manufacturers, however system integration can be a challenge. ConforMIS currently interacts with scanning facilities by accepting files via upload onto their website, secure connections to a hospital’s Picture Archiving and Communication System (PACS) and even mailed scans on a CD in some cases which slows the process considerably. Stryker can use its size and influence with CT scanner manufacturers and PACS software developers, such as GE Healthcare, Phillips, and Siemens, to integrate native functionality into its systems. This will better and directly integrate the CT scan transfer process from hospital’s PACS to ConforMIS. Developing a seamless end-to-end custom implant process will further solidify Stryker and ConfrMIS’s relationships with surgeons and make them less inclined to switch implant suppliers as the 3D knee implant market grows. Over time, ConforMIS will be able to improve the quality of its incoming scan data to improve the precision of its 3D printing capabilities and the definition of each implant, eventually providing an end product that traditional off-the-shelf implants can’t match.
Stryker’s breadth of legal resources will also help ConforMIS defend its crucial patent portfolio throughout its expansion and sales growth. This is an effort to make it more difficult for other large competitors to duplicate the technology and enter the market. The reality is, without this acquisition Stryker would have to work around all of ConforMIS’s patents to develop its own tech – easier said than done. It’s better for the company to work together, rather than fight each other.
Overall, Stryker has a huge opportunity to capitalize on the growth of knee orthopaedics implants in the coming decade. With the promise of better patient outcomes with similar total costs to hospitals, ConforMIS’s implant technology is ideally suited for Stryker. By investing in 3D printing technology today, Stryker will be able to protect its market share going forward. Instead of waiting for customized implants to become the norm, Stryker can set it – with the help of ConforMIS that is.
