Spinal Care and its futureROBIN YOUNG

ORTHOPEDICS THIS WEEK

1

Today’s Presentation

� Robin Young – Introduction

� The Last Five Years

� Solid and Rising Demand for Spinal Care

� Deflationary Pricing

� Next Five Years

� Changing Practice Management

� Technology Trends

� The Urge to Merge

� Conclusion: Dawn of the Age of Data and Autonomous Treatments

2

Robin Young 3

Treating Musculoskeletal Diseases –

The last 5 Years

Between 2011 and 2015 Orthopedic Procedure Volumes rose 21% and surgeon incomes rose 18% and prices fell 11%. Highlights and lowlights:

� Affordable Care Act became law and…

� 11 million more patients received insurance

� The big Insurance companies began to merge into an oligopoly

� Centers for Medicare and Medicaid Services launched programs for controlling costs, rewarding or punishing hospitals

� Commoditization of implants and instruments became a reality and there was a notable decline in implant and instrument innovation

� Surgeon product champions became an endangered species and the surgeon-employee became the norm.

4

Y/Y Changes in spine implant or

instrument sales – 2011-2016

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

Q4

14

Q1

15

Q2

15

Q3

15

Q4

15

Q1

16

0.7%

-0.6%

-0.2%

-2.1%

0.7%0.9%

0.0%

3.1%

0.9%

1.9%2.1%

2.6%

2.0%

2.6% 2.5%

3.6%

2.0%

2.7%

0.7%

-0.1%

1.8%

Worldwide Spinal Sales

5

Deflationary for 21 consecutive

quarters

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

Q4

14

Q1

15

Q2

15

Q3

15

Q4

15

Q1

16

-1.7%

-1.3%-1.4%

-2.1%

-2.4%

-2.7%-2.8%

-2.5%-2.5%

-1.6%

-1.8%

-2.4%-2.5%

-3.4%

-2.7%-2.8%

-2.7%

-2.5%-2.4%

-2.0%

-1.5%

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Spinal Implant Sales averaged 1-2%

annual rates of growth last 5 years

Diversified Spinal Implant suppliers

(MDT, SYK, ZBH, JNJ)

(2.0)-(4.0)%

Average Annual

Growth Rates

Pure Play Suppliers

(NUVA, LDR, Globus, K2M)

8.0-16.0%

Average Annual

Growth Rates

7

Biologics, bone allograft, bone

graft substitutes, amniotic tissues

Viable Cell Allografts

� Living cell bone graft substitutes

� Osteocel, Trinity, Vivigen, etc.

� Where’s the data?

� PRP

� Too much variability

� Where’s the data?

� Payers coming around

� “Stem Cells”

� Inconsistent results

� Good safety record

Amniotic Tissue Allografts

� Wound care

� Clearly superior

� Too expensive, one company

dominates

� Injectables

� Amniotic Fluid Visco-Supplementation

� Powdered amnion – FDA issues

8

2011- 2015Orthopedic Surgical volumes, pricing

and sales

� Surgical volumes +21.9%

�Pricing (11.5%)

�Manufacturer sales +10.6%

9

Spinal Care 2016-2020� Changing Practice Management

� Technology Trends

� The Urge to Merge

10

2015-2020

Three Powerful Trends

� Changing practice management

� Shifting Technological Emphasis

� Fragmenting Points of Care

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Cost Pressure Points

� The pressure points for costs;

� Length of the hospital stay

� Implant cost

� Skilled nursing facility rehab costs

� There is NO doubt that the current deflationary medical environment will continue to put pressure on implant pricing, incentivize (pressure?) physicians to discharge patients earlier and put the spotlight on post op care.

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Collecting, mining and employingdata in new ways

� Beyond the Implant

� Sick patient vs Injured patient

� Artificial intelligence

� Predictive Analytics

� Figuring out the rehab black hole

Juan--José Gonzalez, President of DePuy Synthes Companies U.S.

� “What IBM Watson brings is very advanced data analytics capabilities. They actually have a significant level of expertise at capturing data, looking at patterns and trying to identify correlations which allow you to segment that patient”

� “When you combine the consumer expertise of Johnson & Johnson with DePuy Synthes’ orthopedics expertise and IBM Watson’s predictive analytics then the hospital has a tool which is very powerful and can help improve outcomes and patient satisfaction along with reducing costs.”

� “So, we understand and, of course, are excited about the potential with predictive analytics and IBM Watson.”

13

Shifting Technological Emphasis

Robotics

� Stryker

� Medtronic

� Smith & Nephew

� Zimmer Biomet

� Globus Medical

� Reduce errors

� Increase throughput

� Reduce the labor intensive nature of surgery

End of trays and

sterilization

� Disposable

instruments and implants

� Supports move to

ASC’s and Outpatient ORs

� Easier cost tracking and expense

management

Better Pain

Management

� Time release

Bupivicaine

� Time Release steroids

� The rise of Amniotic

Fluid injectables

� Longer lasting

� Step change better

pain relief

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Robotics

� 25% of U.S. orthopedic surgeons will be using robotic assistance 12 months from now

� 33% will be using a robot 24 months from now

� Why?

� Marketing

� Patient demand

� Increased accuracy

� More consistent results

� Increased OR efficiency

� Why Not?

� Cost

� Increased OR time

� No clear evidence showing superior outcomes

� Bottom Line: Autonomous, intelligent devices are the future in multiple sectors of the economy including surgery.

15

An Explosion of Mergers

Suppliers

� 6 orthopedic suppliers have made 37 acquisitions in the last 5 years

� The major purchases were:

� DePuy acquires Synthes

� Zimmer acquires Biomet

� Stryker acquires MAKO

� Smith & Nephew acquires ArthroCare

� Zimmer acquires LDR

� Smith & Nephew buys Blue Belt

� One purchase that did NOT happen: Stryker did not buy Smith & Nephew

Insurance Carriers

� Anthem to buy Cigna

� Aetna to buy Humana

� United Health Bought Catamaran

� Centene Bought Health Net

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2011 2012 2013 2014 2015 2016 TODAY

1 Alphatec's International Business Alphatec's International Business Alphatec's International Business Alphatec's International Business Alphatec's International Business Alphatec's International Business

2 Arthrocare Arthrocare Arthrocare Arthrocare

3 Berchtold Berchtold Berchtold Berchtold

4 Biomedical Enterprises Biomedical Enterprises Biomedical Enterprises Biomedical Enterprises Biomedical Enterprises Biomedical Enterprises

5 Biomet Biomet Biomet Biomet

6 Biotronic Neuronetwork Biotronic Neuronetwork Biotronic Neuronetwork Biotronic Neuronetwork Biotronic Neuronetwork

7 Blue Belt Technologies Blue Belt Technologies Blue Belt Technologies Blue Belt Technologies Blue Belt Technologies

8 Branch Medical Branch Medical Branch Medical

9 BST-Cargel BST-Cargel BST-Cargel BST-Cargel BST-Cargel BST-Cargel

10 DeOST LLC DeOST LLC DeOST LLC DeOST LLC DeOST LLC

11 DePuy DePuy DePuy DePuy DePuy DePuy DePuy

12 Ellipse Ellipse Ellipse Ellipse Ellipse

13 ETEX ETEX ETEX ETEX

14 Excelsius Surgical Excelsius Surgical Excelsius Surgical Excelsius Surgical Excelsius Surgical

15 Facet Solutions Facet Solutions Facet Solutions Facet Solutions

16 Globus Medical Globus Medical Globus Medical Globus Medical Globus Medical Globus Medical Globus Medical

17 Knee Creations Knee Creations Knee Creations

18 LDR LDR LDR LDR LDR LDR

19 Life Modular Life Modular

20 MAKO Robotics MAKO Robotics MAKO Robotics

21 Medizin-Technik Medizin-Technik Medizin-Technik

22 Medtech Medtech Medtech Medtech Medtech Medtech

23 Nuvasive Nuvasive Nuvasive Nuvasive Nuvasive Nuvasive Nuvasive

24 Olive Medical Olive Medical Olive Medical Olive Medical Olive Medical

25 Patient Safety Patient Safety Patient Safety

26 Physio Control Physio Control Physio Control Physio Control Physio Control Physio Control

27 Pivot Pivot Pivot Pivot

28 S2 Interactive S2 Interactive S2 Interactive S2 Interactive S2 Interactive

29 Safewire Safewire Safewire Safewire Safewire Safewire

30 Sage Products Sage Products Sage Products Sage Products Sage Products Sage Products

31 Small Bone Innovations Small Bone Innovations Small Bone Innovations Small Bone Innovations

32 Smith & Nephew Smith & Nephew Smith & Nephew Smith & Nephew Smith & Nephew Smith & Nephew Smith & Nephew

33 Stanmore Stanmore Stanmore Stanmore Stanmore Stanmore

34 Stryker Corporation Stryker Corporation Stryker Corporation Stryker Corporation Stryker Corporation Stryker Corporation Stryker Corporation

35 Synthes

36 Transplant Technologies Transplant Technologies Transplant Technologies Transplant Technologies Transplant Technologies

37 Zimmer Zimmer Zimmer Zimmer Zimmer Zimmer Zimmer

Orthopedic Supplier Mergers and Acquisitions 2011-2016

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Impact of Mergers and Acquisitions

Suppliers

� More standardization of implants

and instruments

� Course adjustments which reduce emphasis on implant innovation

and increase focus on logistical innovation

� Follow the market segmentation with products tailored to ASCs,

Urgent Care centers, Outpatient care

Insurers

� Continued cost containment

strategies (manage for the healthy policy holder, not the

patient)

� Less competition, more standardization of offerings

� Increased interest in alternative insurance strategies.

� Wal-Mart, Home Depot, Self

Insuring hip and knee

replacements

18

Impact on Group Purchasing Organizations – Beyond mere pricing?

� 98% of 5,000 U.S. hospitals use GPOs (U.S. Gov’t study)

� 27% of hospital purchases are outside of GPOs – purchased directly from the manufacturer, in other words.

� Fewer, but larger suppliers of orthopedic implants and instruments combined with ever larger and more integrated hospital systems, could the percentage of direct purchases (non-GPO) increase?

� Could GPOs become the intermediary of choice for smaller, more innovative orthopedic implant and instrument suppliers?

� Pacira Pharmaceuticals, for example, have only 3 customers. Cardinal and two GPOs.

19

Top Ten Spine Technologies for

2016ROBOTS AND 3D PRINTING

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Judges for 2016

� Neel Anand, M.D.: Dr. Neel Anand is Clinical Professor of Surgery and Director of Spine Trauma at Cedars-Sinai Spine Center in Los Angeles, CA. He is also certified by the Royal College of Surgeons in England and American Board of Orthopaedic Surgery.

� Bradford L. Currier, M.D.: Bradford L. Currier, MD, is an orthopedic surgeon at the Mayo Clinic in Rochester, MN. He completed his medical degree at Georgetown University and then did a residency in orthopedics at Mayo Graduate School of Medicine. Dr. Currier's spine fellowship was at the University of Miami in Miami, Florida.

� Richard Guyer, M.D.: Richard Guyer, M.D. is the Co-founder of the Texas Back Institute and Director of their Spine Fellowship Program. Dr. Guyer is also co-director for the Center for Disc Replacement at Texas Back Institute.

� Gil Tepper, M.D., F.A.C.S.: Dr. Gil Tepper M.D., F.A.C.S. of the Valley Spine Center in Santa Monica, CA is one of the top practicing surgeons in the United States. He is the director of the Valley Spine Center in Los Angeles and oversees both the surgical practice at Valley Spine and an array of non-surgical services.

� Philip S. Yuan, M.D.: Dr. Yuan is the Chairman of the Department of Orthopedic Surgery at Long Beach Memorial. Currently he is the only physician at Long Beach Memorial that has focused his practice solely on spinal surgery; allowing him to keep up to date on all less invasive surgical options.

21

Surgical Assist Devices (Robots):

Mazor and Medtech

Mazor X

� Mazor X seamlessly integrates

preoperative analytics, intra-operative guidance, real-time

verification, and other standalone technologies. As a result it offers

the spine surgeon a suite of solutions for minimally invasive

spine procedures, complex deformities, revisions, and single-

position lateral decubitus procedures.

� Corporate Partner: MEDTRONIC

Rosa

� The robot allows physicians to

precisely execute minimally invasive surgeries according to

highly accurate planning based on intraoperative images. Robotic

arm can easily reach the targeted areas. Rosa’s dynamic guidance

system tracks the patient’s movement in real time.

Intraoperatively and maintain planned trajectories.

� Corporate Partner: ZIMMER

22

Robotics on the cheap – 3D printed

surgical guides. Mighty Oak

� What happens when you marry 3D printing with pre-op planning using a CT scan?

� Answer: a mechanical guidance system specific to each cortical screw.

� Surgeon can pre-surgically plan midline trajectories in thoracolumbar spinal fusion surgery. No complex and expensive computer navigation or robots required.

23

3D Printing: K2M, Vertera

K2M� 3D-printed titanium interbody implant

that provides surgeons with a full range of anatomically designed interbodies for oblique placement through a transforaminal approach.

� Designed to match sagittal lordosis in an oblique orientation while accounting for the anatomic structure of the endplates.

� 35° angled posterior wall to accommodate the vertebral anatomy.

� For treatment of patients with degenerative disc disease (DDD) and degenerative scoliosis.

� Step up in interconnectivity and bone growth support

Vertera

� Three-dimensional interconnected

porous PEEK implant with 60% porosity, 250 um average pore

size, and over 99% interconnectivity. It also mimics the

structural transition of cortical to trabecular bone.

� Will osseointegrate, will not shield

or subside, and will not produce any imaging artifacts.

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Alternative to Infuse (Cerapedics) and Idiot Proof Pedicle Screws (Spine Guard)

i-Factor

� Peptide Enhanced Bone Graft is

based on the biological activity of the synthetically derived 15-amino

acid peptide found naturally in type I human collagen. This 15-

amino acid peptide (P-15) is responsible for the attachment

and proliferation of osteogenic cells.

� FDA approved for cervical use

DSG Screw

� Pedicle screw system with a

breach anticipation sensor located at the tip of the screw.

� Real-time screw guidance and the

ability to insert directly into the pedicle without drilling a pilot hole.

� Merges Dynamic Surgical Guidance bipolar sensor with a

pedicle screw.

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Dawn of the Age of Data and Autonomous Treatments

� Treating Musculoskeletal Disease, which cost $20 billion in 2016, will rise inexorably over the next 4 decades

� It is and will remain the largest sector in healthcare.

� But change is toward autonomous, data driven treatments:

� Treatment will be managed by predictive analytics, treatment algorithms and artificial intelligence driven devices

� Physician entrepreneurs will buck the scale-up trend and develop innovative business models

� ASC’s and Urgent Care Centers will gain increasing share of the back pain market

� Obamacare may be replaced with Donaldcare. Who the hell knows what that is.

� GPOs will chase scale, size and stature

� Practice Management will be a significant source of innovation

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Thank youROBIN YOUNG

ROBIN@RYORTHO.COM

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Appendix A:

CMS Reimbursement Notes28

CMS IPPS orthopedic reimbursement rules for 2017:

1. 3.8% y/y increase for non-fusion spine procedures with MCC, 5.8% with CC or spinal neuro-

stimulators, and 5.9% without CC/MCC;

2. 4.0% y/y decrease to 6.0% y/y increase for spine fusion reimbursement

3. 1.2% increase for hip or knee revision procedures with MCC, with CC increase 1.1%, and without

CC/MCC to increase 2.6%;

4. 0.9% y/y increase for lower Extremity joint replacement (including hip and knee) with MCC and

without MCC to increase 0.2%;

5. 0.9% y/y increase for upper Extremity joint replacement (e.g., shoulders) with CC/MCC