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What is your business? BY EDITOR, DECEMBER 1, 2003

Peter Drucker asked that question fifty years ago in his seminal book The Practice of Management. While his generic answer (“the only function of a business is to create customer value and to innovate.”) remains as valuable in 2004 as it was in 1954, it has also had the interesting and insidious ability to stimulate new, creative and durable business strategies.

As we enter the fourth year of the first decade of the 21st century, what exactly is the business of the typical orthopedic device manufacturer?

To make money?

That's certainly Wall Street's opinion. Which, when combined with an overriding focus on quarterly earnings, can lead to mistakes of both the predictive and valuation type.

We would prefer to think that orthopedic device manufacturers are in the patient treatment business. That implies that the overriding business purpose of the typical orthopedic manufacturer is to create treatments with predictable, effective and painless outcomes. Oh, and with zero insurance or Medicare hassles.

Interestingly enough, the sector in orthopedics where we see business models that come close to achieving such an encompassing vision is in... bracing. Where else, for example, do we find manufacturers funding huge departments to fill out reimbursement forms for patients? And where else are we seeing an explosion of multi-functional products that may well have crossed the line into therapeutics? It's almost as if the modern bracing company is saying to the surgeon - “get the patient 85% there, and we'll take them the rest of the way!”

What is a brace? What's its function? What else can it do? Can it increase surgical predictability, safety and outcome? Is it a therapeutic device? Can the modern, multi-function brace change patient outcomes in a statistically significant manner? Could enhanced bracing do for orthopedics what the drug-coated stent did for cardiology?

A stent is, essentially, a $900 medical grade Bic Pen Spring. By adding a fraction of a drop of paclitaxol or rapamycin a new therapeutic implant emerges. The device cost to the patient's insurance company then rises from $900 to $2,500. But, it's economic value skyrockets because this new, multi function product reduces restenosis rates from 30% to 5% or less – meaning that successful outcomes rise from 70% to 95%.

How much can therapeutic bracing improve outcomes? We were fascinated to note the role of electro-magnetic stimulators (which, in our world view, qualify as therapeutic bracing) in Sofamor Danek's cost justification for the $3,500 price tag for InFuse®. According to the poster presented at this past NASS conference, without post-surgical external stimulation, fusion failures rise to the point that the cost justification for InFuse® is likely to fail. How much InFuse® relies on post-surgical stimulation wasn't clear... but it looked key.

Decades ago, the most innovative material in bracing was neoprene from surfer wet suits. Today it is electromagnetic stimulation, pneumatics, TENS, pain relief through cold or heat and multi-dimensional motion capability.

Bracing is, increasingly, being defined as a therapeutic and an effective way to lower complication rates and improve patient outcomes.

Over the last several weeks DJ Orthopedics has been holding conference calls and delivering presentations at investor conferences explaining the practical and strategic ramifications of its purchase of OrthoLogic's bone stimulation business. We think the sales and earnings impact will be significant. The strategic impact of blending a bone stimulation business with a bracing business could be huge.

Then Orthofix, which has pioneered such non-invasive therapies as pneumatic bracing for the low back pain (and failed fusions) and bone growth stimulation (marketed via Sofamor Danek, incidentally) announced its intention ten days ago to acquire Breg, Inc., the innovator of cold therapies and a supplier of a broad line of traditional bracing for the orthopedist. Why are these two leaders increasingly moving to non-invasive therapeutics – aka high tech bracing?

Maybe they've been pondering the question “what is your business?”

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