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Medtronic to Acquire Responsive Orthopedics BY ANDREW VAHRADIAN, JUNE 7, 2016

Medtronic announced the acquisition of Responsive Orthopedics, a developer of low-cost primary joint replacement systems.

In order to address the various macroeconomic changes taking place in the U.S. health care system, Responsive Orthopedics has focused on developing a platform of low-cost/discounted primary hip and knee implant systems. The company's implants have fewer size options (less than 10) than other competitive hip and knee systems, however, the company maintains that their implants will be of similar quality and cost 40% less.

With this transaction, Medtronic aims to confront the ongoing transition to the “bundled payment” models being implemented at hospitals and other care facilities, which is creating a new market for low-cost, standardized medical devices.

At the end of last year, the Centers for Medicare & Medicaid Services (CMS) finalized its Comprehensive Care for Joint Replacement (CJR) payment model, a bundled payment initiative that holds hospitals in 67 metropolitan statistical areas (MSAs) accountable for the quality of care they deliver to Medicare fee-for-service beneficiaries for hip and knee replacements. CJR aims to improve patient care by rewarding hospitals with additional payments if the quality of the services they have provided is strong, and if the spending performance over the entire episode of care is kept low relative to its peers. If a hospital does not perform well in regards to CRJ's quality and cost metrics, than the hospital potentially will have to repay Medicare for a portion of the spending for care.

Hip and knee replacements are the most commonly performed inpatient procedures for Medicare patients. In 2014, Medicare paid approximately $7 billion for more than 400,000 hip and knee procedures. The organization pays roughly $13,000 for a standard hip or knee replacement procedure. On average, hip and knee implants cost $4,300, or up to 40% of the total procedure costs. Therefore, an area that holds great promise for hospitals to lower their cost metrics is the implant itself.

Responsive will be able to sell its systems at lower rates because the company has developed standardized implants that fit 90% of the patient demographic (made under contract by American third-party manufacturers), and by utilizing a unique distribution model that sells directly to surgical centers and hospitals only, not through doctor-owned or other third-party distributors which tend to markup implants prior to the sale to the end customer.

Medtronic will incorporate Responsive's platform into its new Orthopedic Solutions initiative, a comprehensive offering that seeks to improve patient outcomes and reduce costs for hospitals/patients across an entire episode of care. Along with Responsive's implants, Orthopedics Solutions will provide complication management (Medtronic's low radio frequency devices), as well post-acute monitoring (Medtronic's Cardiocom technology) solutions.

Responsive received 510(k) clearance from the FDA for its Total Knee Arthroplasty system in June 2015, and expects to receive FDA approval for its Total Hip Arthroplasty system before 2018. Medtronic anticipates to launch the primary knee system in 1H:17, followed by the primary hip system in 1H:18.

Management noted that Medtronic will not offer the implants through direct sales representatives, but rather via non-employee physician partners (key opinion leaders that will be compensated by retaining a portion of the bundling programs' shared savings) and the company's sales management outreach to hospital management/executive teams. Medtronic will utilize clinical representatives however, which will be onsite during hip/knee cases.

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