Other Articles

The Match Process…Part II: Interviews
By Elizabeth Hofheinz
This week we are checking in with medical students Matt Popa and Scott Tucker, who are moving through the residency match process. Learn their thoughts on scheduling interviews, the interviewers, and how they handled unusual questions.

How a Recession Might Affect Orthopedics
By Robin Young
With Citibank and Merrill Lynch waking up from their sub-prime party and realizing with growing horror that they wrecked the house and with stocks signaling a recession, it’s time to consider how past and imminent recessions might affect orthopedic product manufacturers, surgeons and hospitals. Here’s our analysis.

FDA Homes in on Postmarket Off-Label Marketing in Spine
By Walter Eisner
Staff shifting at the FDA from premarket to postmarket offices has raised the agency’s expertise level to monitor off-label marketing of spine devices. What’s it mean for you?

Nucleus Replacement: Perspectives Regarding the Gap in the Continuum of Spine Care and Degenerative Disc Disease
By Matt Menze
Confucius said, “Do not use a cannon to kill a mosquito.” In spine, the admonition could become, “Do not use fusion to treat an early stage degenerated disc.” Nucleus replacement may become an alternative for early stage degenerative disc disease.

So You Want to Write or Edit a Textbook…
By Elizabeth Hofheinz
While not financially lucrative, writing or editing an orthopedic textbook brings other rewards. The chance to contribute to the field and establish oneself as an expert are just two of the benefits of participating in this interesting process.

Biggest Order Ever for a Stem Cell Product
By Robin Young
To load $224.7 million of stem cell products, more than one semi-tractor trailer will have to back up to the loading dock on Aliceanna Street in Baltimore, Maryland. Last week the Department of Defense issued a landmark purchase order for stem cell products. The business of stem cells is gaining momentum. The implications are huge. Read on.

Fallout From Arkansas
By Walter Eisner
Dr. Chan’s guilty plea in Arkansas adds fuel to the fire of the remaining civil cases. Blackstone Medical is clearly in the plaintiff lawyer’s crosshairs. Read about the fallout from Arkansas.

Nailing the Rotator Cuff Market
By Dev Joshi
Rotator cuff sprains and ruptures count as two of the top five reported shoulder diagnoses in the PearlDiver database. Out of 3.7 million patients in the PearlDiver extremities database, 1.6 million are there due to shoulder pain complaints. What’s it all mean? Read on.

Recruiting Residents: Formal Strategies and Gut Instincts
How to home in on the residents who will be most successful in your program? Read what the experts have to say. Sharing their wisdom and experience are Dr. Robert Pedowitz, Professor and Chair of the Department of Orthopedics and Sports Medicine at the University of South Florida, and Dr. Ken Yamaguchi, the Sam and Marilyn Fox Distinguished Professor of Orthopaedic Surgery at Washington University School of Medicine.

Stem Cells Beat HA for Knee Pain Relief—Updated Chondrogen™ Results
New one-year data shows that a single, direct injection of Mesenchemal Stem Cells (MSC) beats multiple injections of hyaluronic acid (HA). Beyond pain relieve, the study also delivered evidence that stem cells reduce subchrondral sclerosis and osteophyte formation in OA patients. The evidence FOR stem cells keeps piling up.

Mike Mahoney: A Steady Hand for DePuy
New DePuy Group Chairman Mike Mahoney has one goal: make DePuy the clear leader in orthopedics. How? OTW talked with Mahoney and DePuy Spine’s Gary Fischetti. Here’s what they had to say.

How to Get the Surgeon’s Attention
Understanding relationship dynamics and having the chutzpah to put your best creative foot forward can garner you real success as a sales rep. Find out how to bring inventiveness to the sales process so as to attract and retain the surgeon’s attention.

Death Spiral
Since January, ReGen Biologic's stock has fallen from $0.95 per share to $0.04 per share. The number of shares outstanding is up 45% in 9 months. In one case, the company paid a $24,000 vendor bill with 68,572 shares of stock. Still, a couple of particularly savvy orthopedics investors have bought roughly 7% of the stock. Can ReGen survive?

Diving in to the Future
Since 1996 total knee procedures have risen 77% to 455,000 annually. A study presented at AAOS estimates that by 2030 that number grows to 3.48 million knee replacements a year! If infection rates continue to rise at current rates, however, that future will not be nearly as rosy for either patients or industry. Read on.

Selling Yourself: Career Advancement for Sales Reps
Are you considering becoming a distributor or do you plan to advance within a company? Either way, you need to be ready. You will want to know how to make product line choices, hire a sales force, and lead others, among other things.

Mission Unaccomplished: Are the Wheels Coming Off at the FDA?
The FDA is no longer able to fulfill its mission and its wheels are coming off. So says the FDA’s own Science Board in a scathing report. We looked under the hood of the report and here’s what we found.

“Back” to the Future Part II: Technology and the Vertebral Compression Fracture Market
In Part I, our inquiring analyst, Matt Menze, highlighted opportunities for spinal implant manufacturers in the vertebral compression fracture (VCF) market. Now he tackles the thorny issue of new and emerging VCF technologies. What’s on the horizon? Read on.

So, where’s Adam Smith’s enlightened self-interest when you need it? For about the length of the average U.S. presidency it’s been clear to anyone who could read either an income statement or market trends that one important sector in orthopedics was in need of consolidation. That sector is the allograft industry.

But for 16 excruciating quarters, the companies in this industry have been content with excessive capacities and the low gross margins that resulted, overly high SG&A expenses, and a distinct aversion to that wondrous five-letter word—profit.

Last year, allograft products (including DBM) in one form or another were used in approximately 320,000 orthopedic procedures. The largest supplier is the Musculoskeletal Transplant Foundation (MTF) which, we estimate, generated more than $300 million in revenues in 2006.

So, assuming the not-for-profit companies are, in fact, “non-profit” (which meets the generally accepted deconstruction of the word “assume”) and adding up the total profits for all public and for-profit allograft companies since 2004, we find that this vital and important industry has generated $3.1 billion in aggregate revenues and lost a reported $19 million.

Yes, $3.1 billion in aggregate revenues and $19 million in aggregate reported losses.

How much overcapacity is there in this industry? The tissue processing capabilities of five companies: Osteotech, Regeneration Technologies, IsoTis, Tutogen, and CryoLife could all be consolidated into, we estimate, two large processing facilities—whether in Florida, New Jersey, or Atlanta.

The market has noticed. Since 2004, the total market value of the five major public allograft companies has grown exactly 29%. Four years ago, the market value of Regeneration Technologies, IsoTis, Osteotech, Tutogen, and CryoLife was $668 million. As of the end of the third quarter of this year, that value was $859 million. The single biggest gainer of the group was Tutogen, which had risen from $72 million to $216 million.

The best solution to this painful (for shareholders but not, of course, for senior managers) situation, in our view, has been consolidation. More efficient use of current production capacities means higher gross margins. Consolidated SG&A means higher operating margins. And with that, finally, miraculously, should come consistent and sustainable profits.

The only for-profit allograft supplier to have achieved that is LifeCell.

Now Tutogen and Regeneration Technologies plan to merge. Both boards have approved a definitive agreement to combine in a tax-free, stock-for-stock exchange.

Tutogen shareholders get 1.22 shares of newly issued RTI common stock in exchange for each share of Tutogen common stock they own. That means two things:

• The value of the equity offered is $205 million (the market dropped RTI’s stock price on the news of this transaction so the value has now fallen from $263 million to $205 million).
  
  
• Tutogen shareholders get 45% of the combined company and RTI shareholders get 55%.

The following charts illustrate how the product mixes will change once the two firms merge. Tutogen’s strong dental and international business adds welcome diversity to RTI’s spine and sports medicine business, for example. The first two pie charts show the current product mixes for both companies, and then the third chart shows the combined product mix.

Source: Robin Young Consulting Group

Source: Robin Young Consulting Group

Source: Robin Young Consulting Group

Additionally, both companies were overly dependent on single distribution agreements. In RTI’s case, it was with Medtronic Sofamor Danek. In Tutogen’s case it was with Zimmer. Certainly, another benefit of the merger is a broader distribution footprint.

The transaction is expected to close in the first quarter of 2008.

So far, Wall Street hasn’t been enamored with the transaction. The stocks of both companies declined with the announcement.

However, the industry has been, we think, ripe for this kind of consolidation move. So, with greater product diversification, operating efficiencies and higher overall revenues (the combined companies should generate about $150 million in revenues), the two companies should be able to demonstrate the advantages of greater consolidation in the allograft industry.

Certainly, shareholders are hoping.