Medical Device Link.

Originally Published MX January/February 2005

MARKET ANALYSIS

When the dust settles, technologies and procedures for treating spine conditions will look very different.

Marc R. Viscogliosi

Throughout the world, musculoskeletal impairments and conditions are the most frequent causes of disability. Encompassing more than 150 diseases and syndromes, musculoskeletal conditions affect every age and socioeconomic group, and will affect every human being who lives a normal lifespan.

The musculoskeletal business sector as a whole—including all treatment, services, devices, pharmaceuticals, and biologics used to treat the six types of musculoskeletal tissues in the body—represents a market of approximately $350 billion, or roughly 10% of the global healthcare industry.

Figure 1. Composition of the 2004 global market for medical devices in the musculoskeletal sector, by type. Total revenues for 2004 are estimated at $22.4 billion. Source: Viscogliosi Bros. LLC (New York City). (click to enlarge)

In 2004, worldwide sales revenues from medical devices for the musculoskeletal sector were expected to reach $22.4 billion (see Figure 1). Of this total, sales in the United States accounted for approximately $13 billion, or about 57%.

This article focuses on just one part of the overall musculoskeletal marketplace, the segment devoted to technologies and products for the treatment of conditions of the spine. Over the past 15 years, the global spine segment has grown dramatically. In 1990, the global market for spine products generated less than $100 million in annual revenues; in 2004, worldwide revenues in the spine market were expected to reach $3.5 billion. After the joint-implant segment, the spine segment is today the second largest in the musculoskeletal market, representing approximately 16% of overall revenues.

Even with today's dramatic growth rate, estimated to be 15–20% annually, the spine segment remains relatively small when compared with the market potential suggested by the incidence of back pain reported each year and the worldwide prevalence of chronic back pain. At present, for instance, the spinal-implant market derives more than 70% of its revenues from procedures and devices that facilitate fusion for treatment of disorders in the lumbar region of the spine. This leaves considerable room for market expansion by way of treatments for the cervical spine, new indication-expanding nonfusion technologies, and other procedures. In some regional markets, manufacturers have begun to tap into these unmet needs, with the result that certain niches of the spine segment are growing at rates of 40–100% annually.

A Competitive Landscape

The spine segment is highly competitive, and is dominated by just five companies. Taken together, these large global medical device and technology companies control more than 80% of the spine market.

As might be expected, the companies that have evolved from the pioneers of the spine industry—Acromed (now DePuy Spine), Danek, and Sofamor (now both owned by Medtronic)—continue to exert strong influence over the marketplace. Medtronic Sofamor Danek controls 35% of the spine market, while DePuy Spine, a Johnson & Johnson company, controls another 20%.

However, these pioneering companies are also facing increasingly stiff competition from the other companies in the top five: Synthes-Stratec (13%), Stryker Corp. (8%), and Zimmer Holdings (5%). Also battling for a share of the spine market are Biomet and Smith & Nephew.

More important than their dollar share of the market is the large proportion of surgeons' mindshare owned by Medtronic Sofamor Danek and DePuy Spine. By attracting and holding the attention of spine-surgery thought leaders, these two companies continually reinforce their industry-leading market positions. One example of the dominance of these two companies is their 'podium share'—the percentage of professional presentations about a company's products and technologies. Approximately 70% of all such presentations to professional audiences in the field of spine surgery focus on these two market-leading companies.

Companies seeking to capture significant market share from the two market-leading companies will be challenged to find ways to ensure that their technologies and products are at the forefront of surgeons' minds.

Fusion Focus

Figure 2. In 2004, spine implant devices were responsible for generating 60% of the revenues in the spine segment of the musculoskeletal device sector. Total revenues were estimated at $3.5 billion. Source: Viscogliosi Bros. LLC (New York City). (click to enlarge)

The market-leading companies in the spine segment achieved their dominance by focusing almost exclusively on the development and refinement of surgical procedures and products for spinal fusion (see Figure 2). Indeed, today's global spine industry continues to be predominantly interested in improving fusion-based therapies.

Such a concentration of effort has resulted in substantial revenue growth for the spine segment over the past several years, and has also brought about significant changes in technology and medical practice. Advances in spinal fusion have influenced the marketplace in three areas.

New Products. Many new medical devices have been developed for use in spinal fusion surgery. Major advances include interbody fusion cages, cervical plating systems, devices used in performing kyphoplasty, and electrical stimulation instruments to improve fusion outcomes and relieve pain. U.S. manufacturers have also invested heavily to improve biological products used in spinal fusion (i.e., allografts and synthetics), as well as to develop bone morphogenetic proteins (BMPs). With the emergence of devices that permit 360° fusions and the use of BMPs such as Medtronic Sofamor Danek's FDA-approved InFuse (rh-BMP-2), surgeons now regularly achieve fusion success rates of 95–100%.

Surgical Techniques. The community of spine surgeons has been extremely active in developing new approaches, procedures, and techniques for spinal fusion. New procedures for lumbar fusion include posterior lumbar interbody fusion, transforaminal lumbar interbody fusion, and anterior lumbar interbody fusion (ALIF) as well as its variants, mini-ALIF and laparoscopic ALIF. Other novel techniques include posterolateral interbody fusion, endoscopic diskectomy, percutaneous diskectomy, percutaneous pedicle screw implantation, and vertebroplasty. In some instances, newly developed procedures rely on medical device technologies outside the usual scope of orthopedic devices, as in the case of thermal modulation devices employed to shrink annulus tissues, greater use of intraoperative x-rays, and the increased deployment of frameless stereotactic surgical navigation.

Clinical Capabilities. The growth of the fusion marketplace has also resulted in a greater number of surgeons specializing in spine surgery, and new groups of healthcare professionals being trained in certain novel interventional techniques. With such cross-training, neurosurgeons are learning to perform lumbar procedures, and orthopedic spine surgeons are learning to perform cervical procedures.

Industry in Transition

In spite of the apparent vitality of the spine fusion market, however, the spine industry has changed dramatically over the past three years. Influenced by the introduction of new categories of spine products, the segment has begun a gradual transition away from its previous focus on fusion technologies. In the United States, this trend has led to increased R&D spending on bone growth factors and biologics. But in overseas markets, and particularly those of Western Europe, the new emphasis is on nonfusion and motion-preservation technologies. The emergence of nonfusion technologies as an important growth area for the spine segment is illustrated by trends in several areas.

Research and Development. Medtech companies, surgeons, and clinical researchers are extremely active in conducting R&D activities into nonfusion approaches for the treatment of spinal disorders. Worldwide, more than 60 nonfusion projects or technologies are being worked on. More than 40 of these companies or technologies are recent entries to the field, having emerged since 2001 (see Table I).

In the United States, more than 150 surgical institutions are involved in conducting FDA-approved investigational device exemption (IDE) studies for approximately 10 different nonfusion products. By the end of 2005, it is expected that 15–20 nonfusion products will be undergoing IDE studies.

Professional Training. The adoption of nonfusion technologies is being advanced by training for professionals in the field. Leading the way in this endeavor have been markets outside the United States, where more than 2000 spine surgeons have been trained in the philosophy, biomechanics, and surgical techniques of nonfusion technologies such as total disk replacement (TDR), nucleus replacement, and posterior stabilization devices. Training for U.S. spine surgeons has lagged somewhat. Nevertheless, it is estimated that more than 200 U.S. surgeons and clinical thought leaders have been trained in various nonfusion implant technologies.

Clinical Adoption. So far, patients outside the United States have had greater access to nonfusion procedures and technologies than patients in the United States have had. Over the past four years, more than 50,000 patients worldwide have received nonfusion spinal implants. However, the number of U.S. patients is increasing in step with the growing number of spine surgeons who have received training in the United States. To date, more than 3000 U.S. patients have been treated in FDA-approved IDE studies of nonfusion products.

Acquisitions. The recent success of nonfusion technologies in markets outside the United States has provided an opportunity for innovative companies to seize leadership positions in this emerging area. Not to be left behind, however, the market leaders in the spine segment have been very active in acquiring companies with nonfusion products, whether already approved or under investigation. Over the past three years, the three market-leading spine fusion companies have completed nearly $1.4 billion in acquisitions of nonfusion companies or products.

Revenue Growth. Industry thought leaders and clinical researchers are turning away from their focus on fusion and are 'thinking arthroplasty' now more than ever before. And with good reason. Over the past three years, nonfusion markets outside the United States have grown from less than $5 million in annual revenues (2001) to nearly $75 million (2004). If the same number of nonfusion procedures performed outside the United States had been reimbursed using the U.S. average selling price, the value of the international nonfusion market would be equivalent to $300 million. By 2010, the overall U.S. spine industry is expected to earn more than $10 billion in sales, with sales of nonfusion products contributing more than 90% of those revenues.

The TDR Shakeout

Outside the United States, nonfusion is a tangible market that has demonstrated dramatic growth. Nonfusion technologies have been embraced in Europe, South America, and Asia (except Japan, because of regulatory barriers). And in all of these parts of the world, command over the nonfusion marketplace is already being contested.

Key competitors (and products) vying for command of the international nonfusion marketplace include Abbott Laboratories (Wallis), DePuy Spine (Charité), Fixano (Interspinous U), Medtronic Sofamor Danek (Diam), Raymedica (PDN), Synthes-Stratec (ProDisc), and Zimmer (Dynesys). Each of these products is implanted several thousand times a year outside of the United States. Collectively, the number of nonfusion spinal implants outside the United States totals more than 20,000 annually.

Although it has been slow to get started, the U.S. spine segment is now poised to make the transition to nonfusion technologies. The shift is almost certain to be the most revolutionary changeover for the segment since the rise of the metal 'cage rage' of the 1990s. And the stakes are just as high. The United States represents approximately 70% of the worldwide spine market, and reimburses implants at an average selling price three times higher than the average in overseas markets. With such a large market potential in sight, it is easy to understand the impact that the shift to nonfusion technologies is likely to have on the U.S. spine market.

The avant garde of the U.S. movement toward nonfusion devices is represented by the category of total disk replacement (TDR) products. Until recently, only three major U.S. spine companies had TDR products: DePuy Spine (Charité), Medtronic Sofamor Danek (Maverick, Bristol, and Bryan disks), and Synthes-Stratec (ProDisc and ProDisc-C). However, Stryker Corp. has reestablished itself as a player in the spine industry through its 2004 acquisition of SpineCore, whose Flexicore product was the fourth TDR to receive FDA approval for an IDE study.

For companies seeking to enter the U.S. market with TDR technologies already available outside the United States, the starting gun has already sounded. In October 2004, Depuy Spine's Charité TDR device became the first such product to receive FDA approval to enter the U.S. market. Companies next in line to launch spine nonfusion products into the U.S. market include Synthes-Stratec (ProDisc), St. Francis Medical (X Stop), and Zimmer (Dynesys). For fusion applications, the Zimmer device has already received FDA clearance via premarket notification (510(k)), and the company is engaged in an IDE study for nonfusion applications.

The commercialization of TDRs in the United States will have a dramatic effect on the spine segment, creating significant market-share shifts among the leading competitors. The new products will expand the market for patients that would not ordinarily have been operated upon or would not have been candidates for a fusion procedure. And in short order, such nonfusion products and procedures will begin to displace existing fusion technologies, capturing the majority share of spine procedures. As this shakeout continues, current market leaders that do not have nonfusion devices near market will be forced to take a back seat as they watch their market share deteriorate over a very short period of time.

Conclusion

The current standard of care for conditions of the spine is a continuum that begins with conservative care (bed rest, medication, physiotherapy), continues through diskectomy procedures, and eventually ends with fusion surgery. But this continuum includes several gaps—phases during the cascade of disk degeneration when both patients and surgeons are hesitant to move toward the next, and much more serious, form of intervention. The limits of the surgical options available today—especially in the U.S. market—mean that significant unmet needs still exist in the spine surgery segment.

The introduction of nonfusion technologies—beginning with TDRs—promises to change all of this by offering new treatment options that may truly be minimally invasive, tissue sparing, and life changing. Although many surgeons still consider TDR procedures too invasive for use on patients who are in the earliest stages of disk degenerative disease, extensive use of TDRs in markets outside the United States has demonstrated that they can be safe and effective for patients in the most degenerated segment of the spine surgery continuum.

The success of TDRs will ultimately open the door for other nonfusion technologies to enter the marketplace. Further development of technologies and procedures for nucleus replacement, dynamic posterior stabilization, facet replacement, and annulus repair will provide spine surgeons with a much greater range of options for treating patients with all varieties of pain. And along the way, such new technologies and procedures will result in the creation of a completely new spine care continuum.

U.S. industry has thus embarked on the path toward disk arthroplasty. But competition for mindshare among surgeons who have previously been educated and trained to 'think fusion' has just begun.

Over the coming years, the expected transition from spinal fusion procedures to spinal nonfusion procedures will drive a significant expansion in the worldwide market for spinal devices. As nonfusion technologies and procedures become more prevalent, both the number of surgeries and the size of the entire spine surgery market will increase dramatically. In the not-too-distant future, as proper indications for each technology are studied and better understood, many procedures that are not being performed today will become commonplace.

This period of transition from fusion to arthroplasty represents a window of opportunity for new entrants to gain a foothold in the industry, and for industry leaders to solidify their market position. A number of companies are continuing to develop such nonfusion technologies as nucleus replacement and dynamic posterior stabilization devices, which have the potential to be used earlier in the treatment continuum. Companies such as these, whose technologies are likely to expand the patient population for which treatment options are available, will be attractive targets for would-be acquirers.

Inevitably, the competitive response to this window of opportunity will be another round of nonfusion acquisitions. Existing market leaders will seek to fill out their product portfolios and close the door on their competition by snapping up companies that are developing nonfusion technologies. While great acquisition opportunities exist this year, however, it does not seem likely that the window will remain open for long. After all, the spine market is the fastest-growing segment of the musculoskeletal sector, and large-company suitors have already served notice that they intend to be active acquirers.

Marc R. Viscogliosi is a cofounder and partner in the firm of Viscogliosi Bros. LLC (New York City), an equity merchant banking firm dedicated to the orthopedic sector of the healthcare industry.

Copyright ©2005 MX