Don Urbanowicz of Urbanowicz Consulting interviews John Pracyk, MD of DePuy Synthes, Adam Wollowick, MD of Stryker Spine, and Bob Kinsella of Kinsella Group regarding trends and transactions in the spine market in a pre-NASS panel discussion entitled “From the Operating Room to the OEM.”
Capital One, BioMedGPS and Kinsella Group sponsored a panel discussion prior to the 2017 NASS meeting covering a variety of topics. The discussion, featured in the excerpt below, focuses on “From the Operating Room to the OEM” with John Pracyk, MD, PhD, MBA, FAANS, FACS, Spine Franchise Medical Leader at DePuy Synthes; Adam Wollowick, MD, MBA, Senior Director of Business Development at Stryker Spine; Bob Kinsella, President of Kinsella Group; and Don Urbanowicz, Principal of Urbanowicz Consulting (Moderator).
Don Urbanowicz: Thank you and welcome everyone to the fifth annual pre-NASS Reception. It’s a pleasure to have two former spine surgeons as panel members, so let’s start our discussion tonight with John and Adam. John, tell us, why the move from the hospital to an OEM?
John Pracyk: Having risen to the level of Center Director -- Multidisciplinary Chair -- in the nonprofit healthcare sector, this was the beginning of my transition that started with consulting. My ultimate destination of working for a large well-respected multinational healthcare company was a logical fit for a neurosurgeon scientist with a consulting and business background.
Don: Share with us your journey from the OR to industry, Adam?
Adam Wollowick: I originally decided to pursue an MBA in order to learn the skills needed run a large clinical department or to participate in hospital administration. Once I got to business school, my eyes were opened to an exciting world filled with new opportunities and challenges. While the practice of medicine is never mundane, I had been seeking ways to reach more patients. I became fascinated with mergers and acquisitions as a means to combine finance and business principles with my knowledge of spinal disorders, medicine, and healthcare. Halfway through my MBA, I decided to leave the clinical practice of medicine and have not looked back since that moment.
Don: Adam, what were the biggest changes you were seeing or feeling at your former hospital employer over the past several years and why?
Adam: One of the most frustrating changes that I felt in the hospital during the last few years of my practice was a lack of emphasis on the patient. I was increasingly forced to spend more time on administrative tasks and less on the actual delivery of clinical care. The mantra seemed to be one in which physicians were being asked to see more patients faster and with less resources. This was troublesome to me as I wanted to spend more time with my patients. Cost containment was becoming a more significant paradigm as well. Both the hospitals and the insurance companies seemed to be looking for ways to reduce spending, which is reasonable -- as long as it does not impact patient care.
“One of the most frustrating changes that I felt in the hospital during the last few years of my practice was a lack of emphasis on the patient.” –Adam Wollowick, MD
Don: John, let’s hear your perspective on the most significant changes you saw at the last hospital you were employed.
John: The shift to employment from private practice, the loss of entrepreneurial opportunities through fair market value restrictions, reimbursement challenges, and roll out of the electronic medical record all contributed to a challenging patient care environment. As a result, I decided to look for opportunities to help change patient care within this new environment, while delivering a global impact.
“The shift to employment from private practice, the loss of entrepreneurial opportunities through fair market value restrictions, reimbursement challenges, and roll out of the electronic medical record all contributed to a challenging patient care environment.” –John Pracyk. MD
Don: John and Adam, please share with our audience -- what were your biggest highlights and challenges as you transitioned from the OR to the orthopedic device industry?
John: The biggest highlight was being able to return to academic-like environment as I get to teach anatomy and clinical spine surgery to a very motivated group of engineers who can think intuitively in 3D. The biggest challenge was learning all the unique regional differences on how spine surgery is practiced all over the world. For obvious reasons, my prior professional experience was very US focused. I would equate the inquisitive culture at J&J to that of a university or my post-doctoral research fellowship at the National Institutes of Health.
Adam: Having been out of clinical medicine for three years now, the biggest highlight for me has been completing my first deal from start to finish. Previously, the transactions that I supported had been in process when I came into my current role. The first time that I was able to lead a deal from the initial contact with the target through closing was a real thrill. There is an excitement about the process that keeps me motivated to do more deals.
The biggest challenge that I faced upon entering the medical device industry was to learn the various components of bringing a product to market. I had to quickly develop an understanding of the processes related to regulatory, quality, manufacturing, operations, and intellectual property, to name a few. There are so many subtle nuances to each of these areas that come into play when launching a product to market or completing a transaction to acquire a company or product. Fortunately, my colleagues at Stryker have been great teachers, and I was able to develop the knowledge base required by my position.
Don: Let’s pivot and discuss some of the winds-of-change you’re seeing in the spine space, John, and why?
John: The most significant change refers to the Medical Device Regulation set to be enacted by 2020. The equivalent comparator route for CE marking will “effectively” be eliminated; thus, requiring each medical device to have their own unique clinical evidence. If you want to use another company’s device as the comparator, then you will need complete and unrestricted access to their entire technical file or provide comparative evidence of substantial equivalence. That is unlikely and many devices will not meet this new standard for the EU. The ripple effect may have a chilling impact on innovation in the EU, potentially drive up the cost of care, and likely force many smaller companies to merge or be acquired to satisfy the stringent new clinical evidentiary requirements.
“The most significant change refers to the Medical Device Regulation set to be enacted by 2020…… The ripple effect have a chilling impact on innovation in the EU, potentially drive up the cost of care, and likely force many smaller companies to merge or be acquired to satisfy the stringent new clinical evidentiary requirements.” –John Pracyk, MD
Don: Adam, how about you, what changes are you seeing and discussing within Stryker Spine?
Adam: The spine market seems to be in a very interesting place at this moment in time. Pricing pressure on implants and other surgical devices seems to be higher than ever. Many hospitals are consolidating vendors and limiting access to only a few companies. Innovation continues to command a price premium, but there seems to be an overall lack of true innovation in the products coming to market. There is a large amount of incremental innovation, but not a significant amount of game-changing technologies being developed. Hospitals have increasing control over purchasing decisions, and surgeons are increasingly willing to switch vendors or use products from multiple companies. In addition, insurance companies seem to be pushing back harder than ever on spinal fusions, making it more difficult to gain approval for surgical procedures. As a result, the growth of the spine market has slowed over the last few quarters.
“Innovation continues to command a price premium, but there seems to be an overall lack of true innovation in the products coming to market. There is a large amount of incremental innovation, but not a significant amount of game-changing technologies being developed.” -Adam Wollowick, MD
Don: Let’s shift now to the transaction front. John, J&J has admittedly lost spine share due to portfolio gaps – what is the Company doing to fill those gaps?
John: We have just introduced the VIPER PRIME System, which brings a new technique to inserting pedicle screws with a minimally invasive approach that combines multiple instruments into one screw inserter tool. The VIPER PRIME System cuts the number of instruments and steps in the process of screw insertion and stabilization compared to traditional techniques. There was an unmet need for being able to place percutaneous pedicle screws without the constraints of having to manage multiple K-wires. The VIPER PRIME System addresses this unmet need and builds upon our very successful Viper product line of MIS pedicle screw systems. Following our acquisition of expandable cage technology from Interventional Spine, Inc, we will introduce the next-generation CONCORDE LIFT Expandable Interbody Device with enhancements, in key markets around the world in the near future.The CONCORDE Clear MIS Discectomy Tool, is a single-use disc-clearing device designed for minimally invasive spine surgery. CONCORDE Clear is designed to reduce the number of instruments and instrument passes required in the discectomy procedure. The device is designed to reduce surgery time and costs, and reduces the burden of reprocessing for hospitals. It was also an acquisition. Taken together, these three devices constitute a Procedural Solution for MIS bundled together with the specific intent of addressing today’s outcomes-driven, surgical climate.
Don: Adam, SYK has several spine portfolio gaps as well – tell us about your recent acquisitions, including Safewire’s MIS products and Bio4 -- how did they fill Stryker Spine’s gaps?
Adam: The Safewire deal was one of the first that I led at Stryker. When we began speaking to the company, we were seeking a product that was complementary to our MIS screw system, ES2. We found the increased safety, decreased radiation exposure, and increased efficiency of the Safewire and Tiger Needle products to be very persuasive. Following the acquisition of the Safewire products, our R&D integrated neurological monitoring capabilities into the Tiger Needles, and we recently obtained FDA approval on these versions of the products.
Even before we acquired exclusive rights to market Bio4, Stryker had one of the broadest biologics portfolios of any spine company. Our marketing team identified cellular allografts as an emerging area that was rapidly growing and becoming more attractive to our surgeon customers. Cellular allograft was a gap in our portfolio, so we looked for targets in this space. The excellent handling and angiogenic properties made the product very attractive to our team.Bio4 has increased the breadth of our biologics offerings, and we have been very pleased with the product thus far.
Don: You’ve been a very patient listener, Bob. How about sharing with us the valuation trends you are seeing -- how are spine companies being valued today?
Bob Kinsella: We see spine companies in four categories: disruptive technologies; public companies and IPO candidates with scale; profitable companies with a range of products and solid distribution; and small “life style” companies. Companies perceived to have disruptive technologies – like Vertera, sold to Nuvasive -- command extraordinary premiums at multiples of trailing twelve month (TTM) revenue. Public companies and IPO candidates with scale and growth are being valued at four to six times TTM revenues. Profitable companies with a range of products and solid distribution are being valued at multiples of TTM EBITDA. And life style companies will find value to be a function of fit and deal structure with a mid-market acquirer. Seems home run valuations are being seen by companies that offer major players an opportunity for product differentiation supported by strong IP which can have impact on market share.
“Seems home run valuations are being seen by companies that offer major players an opportunity for product differentiation supported by strong IP which can have impact on market share.” -Bob Kinsella
Don: Bob, you made several predictions at last year’s NASS. The first was that more private equity firms would enter the spine market and acquire assets -- has that happened, and if yes, can you provide examples? The second was on the supplier side -- this time last year, you mentioned that there were as many as eight transactions ready to conclude, including three in Europe -- what actually happened?
Bob: Private equity has found the spine sector as predicted. Zavation was sold to a Private Equity firm. Kohlberg added to its portfolio company Amendia by acquiring Spinal Elements. Corelink backed by Stephens continues to be active as a buyer among OEMs. I said that 11 transactions would be completed in the supplier sector over the 12 months from NASS 2016 to NASS 2017. In fact, 12 were completed. For the next 12 months we again have visibility on 11 companies we think will transact. We expect European buyers will have an increasing interest in acquiring US companies.
Don: Adam, 3D printing will be highlighted at this years NASS. Stryker has been most aggressive on the 3D printing front -- share with us the latest on your Tritanium lineup, including the Posterolateral and Cervical Cages?
Adam: Tritanium is inspired by the microstructure of cancellous bone and enabled by AMagine™, Stryker’s proprietary approach to implant creation using additive manufacturing. Tritanium is a novel, highly porous titanium material designed for bone in-growth and biological fixation. The unique porous structure of Tritanium is created to provide a favorable environment for cell attachment and proliferation. Tritanium cages feature ‘precisely randomized’ pore formations, in contrast to other technologies with longitudinal channels and transverse windows that result in a uniform structure, as well as cages that offer porosity only on the surface. The Tritanium PL Posterior Lumbar cage was launched in 2015, and we have received terrific feedback on the implant. The Tritanium C Anterior Cervical Cage will be introduced at the 2017 NASS Annual meeting. We have a steady cadence of other Tritanium products in development for use in spinal surgery.
Don: John, rapid-fire questions -- does 3D printing have sustainability in spine and will its popularity continue?
John: Yes, if it delivers a superior functional clinical outcome at a lower cost. Will it continue? Yes, I expect it will accelerate.
Don: Bob, who are the big contract manufacturers on the 3D printing/additive manufacturing side?
Bob: 3D SYSTEMS with locations in Switzerland, Israel and Denver is an important supplier with as many as 30 machines among the companies providing contract manufacturing services to US and European orthopedicOEM’s. C&A Tool, recently sold to a Japanese owned acquirer, also has a strong presence in the sector though less than 3D. Most of the 3D printing capacity in the US is held by the OEM’s suggesting an opportunity for major suppliers to enter the market to serve the increasing number of smaller OEM’s coming to market with 3D printed products.
Don: Final questions for Adam and John -- what advice would you offer those in our audience who want to approach SYK or J&J with a new spine technology?
Adam: First, I would say that Stryker is always interested in learning about new technologies that provide benefits to patients or clinicians. We welcome the opportunity to review concepts, intellectual property, or products that are currently on the market. To that end, I would recommend that early stage companies spend time defining a clear regulatory pathway. If possible, it is always good to begin discussions with the FDA prior to approaching a large strategic. In addition, think carefully about IP and understand the space thoroughly. Finally, it is always helpful to have generated some data around the product. This can include basic science data, mechanical testing, animal studies, or actual clinical experience, including outside the US. The more information that a company can provide, the more favorably a strategic partner will view the product.
“I would recommend that early stage companies spend time defining a clear regulatory pathway. If possible, it is always good to begin discussions with the FDA prior to approaching a large strategic. In addition, think carefully about IP and understand the space thoroughly. Finally, it is always helpful to have generated some data around the product.” –Adam Wollowick, MD
John: We have a procedural process specifically designed for this type of interaction. I would be happy to meet with anyone who would like more details on how to proceed, if interested, to access that pathway.
Don: Since you work with both suppliers and OEM’s, Bob, what advice would you offer those CEO’s in the audience seeking an exit?
Bob: For OEM’s who are IPO candidates, we partner with middle market broker dealer firms experienced in IPO’s to execute sales to the public market.
For OEM’s looking for a private equity partner or a merger with another spine company, we can help find a partner and fashion a deal that will deliver value to sellers and buyers.
For suppliers we believe sale to a strategic acquirer, whether independent or owned by a family office or private equity firm, is the best way to exit. Buyers are active in the US, Europe and we are seeing activity from Asia as well. Getting the best deal under acceptable terms will take good preparation and active negotiation.
Don: Nice job, everyone. I’d like to again thank our panelists, audience participants, and sponsors. We hope to see you at the 2018 NASS in September in Los Angeles.
