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March 28, 2003•www.OTAOTR.com

Declassified > POWERED ORTHOPEDIC SURGICAL INSTRUMENTS Report CLEARED FOR GENERAL DISTRIBUTION 5/03

C O M PA N I E S D I S C U S S E D :

EXECUTIVE SUMMARY

CNMD, MDT, SYK

Stryker Leads as Cordless Trend Grows With a strong sales force and many years of entrenchment in the market, Stryker Corp. maintains a strong lead in powered orthopedic surgical instruments. ConMed Corp.’s Linvatec Corp. and Medtronic Inc.’s Midas Rex are secondary players in terms of usage and name recognition. However, Midas Rex has an edge in some specialty surgeries. Stryker’s System 5 and Linvatec’s Hall Surgical PowerPro are moderately familiar to surgeons and purchasers, though many physicians did not express brand preferences. Greater use of battery-powered tools is expected, but some sources await improvements in ergonomic features and battery strength. More delicate work such as spine surgery often demands electric tools for their lighter weight and more refined design. The process for purchasing these tools involves dedicated trials, product comparisons and price negotiation, and few sources anticipate or are aware of brand switches for 2003. The few sources who do anticipate a spending increase generally were purchasing Stryker products.

REPORT HIGHLIGHTS

INDUSTRY STATUS

4The purchasing cycle for powered surgical instruments generally is every two years or more. Preferences develop slowly as manufacturers modify tools and physicians use various models in trials. COMPANY PERFORMANCE

4Stryker products account for more than one-half of all brands used in large and small bone surgeries among sources. For specialty surgeries, Stryker and Midas Rex are evenly split. Linvatec figured variably among surgery types, and was a distant third in specialty procedures. AREAS TO WATCH

4Stryker sales representatives and hospital contracting were considered very effective; however, Linvatec’s recent co-distribution agreement with Johnson & Johnson’s DePuy Orthopaedics Inc. may help improve their market standing.

SOURCES & BACKGROUND

24 experts comprising 13 orthopedic surgeons, 8 hospital purchasing specialists, 1 operating room nurse, 1 physician’s assistant, and 1 distributor source (not included in the tally) Interviews Mid-March

INDEX > Purchasing Decisions > Cords or Batteries? > Stryker Leads > Future Spending Unclear > Quotes > Tally

2 2 3 4 5 6

Background Orthopedic surgeons use electric or battery-powered instruments for cutting and drilling bone tissue. Powered instruments generally are categorized as large bone, such as hip replacement procedure; small bone; or specialty procedure, such as foot, hand and spine.


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“For pure cutting of large bone, you cannot beat the corded instrument.”

March 28, 2003• www.OTAOTR.com•Page 2

Purchasing Decisions Take Time, Focus Powered orthopedic surgical tools often are purchased because of repair issues or when a superior model becomes available. Instruments typically are ordered only every few years and the decision-making process varies by institution. While physicians often are involved in the hands-on evaluation process, the final purchasing decision generally is determined by the hospital. Indeed, the selection process can be lengthy, and a number of physicians were unfamiliar with the actual name brands of the tools they use. “A drill is a drill,” said one surgeon. Hospital purchasing managers have a different perspective. “We like to buy things in big groups rather than here and there,” said one source. “We purchase powered surgical instruments every five years.” Sources note that such purchases can run in the range of $300,000. A Northwest distributor described the purchasing and decision-making process in his region, noting it often is initiated by a sales representative who also may sell orthopedic implants and other surgical devices. Orthopedic sales representatives frequently attend surgeries and then have the opportunity to suggest a new surgical power tool trial. According to the distributor, this can lead to a more comprehensive evaluation process with the operating-room staff and the hospital’s purchasing department. Therefore, while physicians may recommend particular power tools, hospital purchasing departments typically place the final orders. In addition, the cost of consumables strongly factors into the powered surgical instrument market, both from the hospital’s and manufacturer’s standpoint. “You have to realize that the cost is not in the instrument itself but really in the consumables, such as blades. That cost is huge,” a source said. For marketers, this may mean lowering the instrument price with an eye toward revenue generated from consumables. The distributor noted Linvatec and Stryker instrument prices start fairly equivalent, but then aggressive discounting may kick in to get the sale.

Surgeons Cutting the Cord? Power, reliability, ease of use and sterilization were top preferences in orthopedic power tools. However, specifically regarding battery powered tools, sources’ opinions were somewhat mixed. Four of the 13 surgeons were happy with any tool as long as it was reliable. Those with clear preferences cited the power of corded tools as an advantage, particularly in large bone cutting. One source said, “For pure cutting of large bone, you cannot beat the corded instrument.” Several physicians said the electric tools have greater torque and last longer. The drawback of cords is they sometimes hinder movement as well as catch on or knock over items in the operating room. Maintaining sterility is thus problematic; if the cord passes out of the sterile field, contamination forces a delay in surgery while the surgical team awaits a sterile replacement unit. “It’s a physical thing; the cord drags around, always getting contaminated, and knocks things over,” said one source. Stryker Tops in Instrument Use Among powered tool brands in use, sources most often identified Stryker, which was strongest in all categories: large bone, small bone and specialty surgical tools. Midas Rex was named second most often, followed by ConMed (including Linvatec and Hall Surgical responses). Midas Rex was singled out as a preferred tool for specialized procedures requiring finer movements but also captured a few mentions for instruments used in large and small bone procedures, as did ConMed. “For more delicate surgery such as hand and spine, the cord is acceptable if it means the instrument is smaller and easier to control for fine motor


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functions,” said one source. The Anspach Effort Inc. also was mentioned for small bone and specialty procedures. One-half of sources consider battery-powered tools an improvement over traditional corded tools — enough to justify increased future purchase of batterypowered products. Some surgeons said battery-powered tools are less cumbersome or “easier to move from hand to hand.” However, others find cordless tools bulky and difficult to maneuver. “Things that impact use are sizes of the equipment. If it’s too large, bulky and unwieldy, it’s hard to use,” a source said. A distributor said most surgeons are moving or have moved to battery-powered tools but tend to get frustrated if the battery wears down and they have to wait for it to be recharged or resterilized.

Sterilization Methods Many sources expressed no concern about sterilization methods. One said, “As long as the infection rate is low and the equipment is sterile, steam versus autoclave [sterilization] should make no difference.” Only four sources had any familiarity with Linvatec’s SureCharge system, which uses steam to preserve battery sterility during the charging process. However, several said the concept of sterilizing the battery within its canister, rather than removing the battery for autoclave sterilization, is a worthwhile idea. Several sources said because the canister itself is sterilized and not the actual battery, this should extend the life of the power source. “The PowerPro has interesting sterilization options. Anything that lengthens the life of the battery is an improvement,” said one source.

“Stryker still owns the market, but Linvatec has some good pieces of equipment.”

Developing Tools Offers Choices Vendors are progressing toward manufacturing the lighter-weight and stronger battery-powered tools sources seek, and most sources who responded were more familiar with Stryker. One said, “The newest instruments from Stryker are a significant improvement in torque and speed. System 5 has much more torque and speed than System 4.” Fifteen sources were somewhat to very familiar with Stryker’s System 5, while eight were familiar with Linvatec’s PowerPro. Four knowledgeable sources currently use Stryker’s System 5, and one uses Linvatec’s PowerPro. “ConMed did not come out with their technology until many years after Stryker,” said one source. “For years, Stryker was the company we always used.” Linvatec products, however, have potential for market gain, some sources said. “Stryker still owns the market, but Linvatec has some good pieces of equipment,” said a distributor. The SureCharge battery system is a possible selling point for some sources. Several said they would give Linvatec products greater consideration if they had increased exposure to the products. “It depends on what the trials show. We haven’t bought anything from Linvatec for four years,” said one source. A purchasing expert said, “We are trying Hall Linvatec’s PowerPro now. We will try Stryker’s System 5 later this year. Our DePuy rep is coordinating the trial of the Hall Linvatec drill.”

Stryker Sales Reps Lead the Pack Stryker’s sales representatives are significantly more effective than those of other companies, sources said. “Stryker is very service-oriented. This whole week the rep has been assisting us with the transition,” said a source whose institution recently purchased the System 5. Few sources mentioned interaction with Linvatec sales representatives; however, there is some confusion regarding the various company divisions and names. “We have a contract with Stryker. I never see the ConMed rep,” one source said.


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In 2002, ConMed signed a co-distribution agreement with DePuy Orthopaedics to market Linvatec’s Hall Surgical line. Five sources reported visits by DePuy Orthopaedics, with varying effectiveness. One source recalled a DePuy representative visiting, but the source could not recall which brand was presented. Another source said, “I have not been contacted by DePuy; I have the Linvatec guy.” A hospital purchasing expert, however, noted DePuy is helping coordinate her institution’s Linvatec trial. Another said, “We have a DePuy sales rep here all the time.” Several sources have had neither hands-on nor marketing exposure to the PowerPro. “I have seen it advertised in some of the journals but have never had a chance to see the instrument in surgery,” said one. Another source echoed this viewpoint: “You have to see the instrument in action before you can make a judgment.”

Spending Forecasts Unclear Most sources were unable to anticipate future spending trends. Many were not involved in the purchasing process and had difficulty identifying when purchasing decisions would be made. Of five sources who responded, two expect an increase in overall spending on devices and accessories year to year, while three said spending likely would be flat. Accessories are a key factor, with one source noting that growing patient volumes likely would drive purchasing increases. Consumables were noted by two sources to have significant effect on cost. One materials management specialist said, “The manufacturers are practically willing to give the instrument away for a consumables contract.” Of future trends, one distributor said, “In terms of overall volume, we have an aging population and more and more orthopedic procedures are being done. This would certainly have an effect on the amount of accessories and blades and such being purchased.” A purchasing specialist concurred, noting an increase in consumable spending because of increased hip and knee procedures. Again, while most sources were unsure of spending trends with particular manufacturers, six expect minor to moderate additional spending on Stryker products during 2003 compared with 2002. “Stryker has something in the works. We will probably see it in the near future,” said one source. One purchasing expert said his hospital had just completed product trials, which resulted in a decision to increase the supply of battery-powered tools. The institution likely would select the Stryker System 5, the source said. Some sources noted that Stryker’s contractual power may influence future instrument and consumable purchases. Two sources predicted minor increases with ConMed/Linvatec. A surgeon who was involved in his hospital’s last major purchase of power tools said the orthopedic surgery department might compete with other specialties for budget allotments. Regarding future spending, another physician source said, “I really do not know, but if we need an instrument the hospital usually responds.” The report was researched and written by Ruth Miriam Sullivan with additional reporting by Robert Cvengros and Fred Wilson for OTA•Off The Record Research. For a copy of a full report, please contact your OTA• Off The Record Research representative:

NY (800) 444-9097• SF (415) 675-7660•CHI (847) 283-9152•BOS (781) 431-6116

OTA•Off The Record Research is a division of OTA LLC. ©2003 OTA LLC. All rights reserved. This report was produced for the exclusive use of OTA•Off The Record Research (OTA) and may not be reproduced or relied upon, in whole or in part, without the written consent of OTA LLC. The information herein is not intended to be a complete analysis of every material fact respecting any company or industry or respecting the subject discussed, nor by itself is it sufficient upon which to base an investment decision. OTA uses a set of symbols to reflect the business conditions (which may include but are not limited to market share, product pricing, competition, inventory, sales and orders) of a given company or industry: Thumb Up denotes that the business conditions are getting better, Thumb Down denotes worsening business conditions, and Neutral Thumb denotes business conditions that are mixed or staying the same. As such, these symbols are not a recommendation to buy, sell or hold a security. OTA and/or its principals, employees, clients, or researchers may have an interest in or be a market maker in the securities of the issuer discussed herein.


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QUOTES “One of the main problems with corded sterilization is having to wait while the unit is replaced.” “I’m just looking for something to drill holes with.” “I don’t have a whole lot of time to mess around. I need something right on the table.” “The more durable [battery-powered tools] become, the better it will be.” “Battery-powered sometimes has a little less torque, so it takes more time to cut bone.” “I use electric tools because for spine surgery the power in the battery tools is often not enough.” “Usually you buy one system and stay with it for a while.” “Neuro is completely dedicated to Midas Rex.” “These new battery-operated instruments continue to get better and better.” “We do not use the PowerPro and never see the rep.” “It’s what the handle feels like, how much power they have, what the hassle factor is — the bigger the cord, the more hassle factor.” “ConMed is trying to catch up with Stryker and can’t do it.” “I don’t use Midas Rex, but many people do and like it.” “I hate Midas Rex because you have to be certified and they’re cumbersome, not comfortable.” “Stryker is very current with the advances in the orthopedic space. It seems like they always have a new product or product improvement.” “When we do a major product conversion, we do look closely at what’s on the market.” “Stryker gives us the best price, and that’s all we have in-house.” “Some of these orthopods may have a brand preference, but it really comes down to getting the proper bit or saw blade.” “I will use Midas Rex. They are very good for hand surgery.”


0 TALLY

> POWERED ORTHOPEDIC INSTRUMENTS 1.

March 28, 2003• www.OTAOTR.com•Page 6

What manufacturer’s powered surgical instruments do you currently use? (Some sources gave more than one answer. Some sources, because of their surgical specialty, did not answer all categories.)

LARGE BONE SMALL BONE Stryker: ConMed*: Midas Rex: Anspach: Smith & Nephew PLC: Zimmer Holdings Inc.: Other: Don’t know: No response:

14 4 4 1 1 1 5 3

16 5 2 1 1 1 3 2

SPECIALTY 8 2 8 2 1 2 8

* The ConMed responses also include specific mentions of subsidiaries Linvatec and Hall Surgical.

2a.

How familiar are you with the ConMed’s PowerPro and the Stryker’s System 5 line of battery-powered tools? (Some sources gave more than one answer.) Very familiar: Somewhat familiar: Not familiar: Don’t know: No response:

2b.

POWERPRO

SYSTEM 5

2 6 8 7 -

5 10 4 3 1

Are you using either of these systems? Currently using: 1 Not currently using: 17 Don’t know: No response: 5

4 14 3 2

3.

Are these new battery-powered surgical instruments a significant improvement over traditional corded tools? Significant improvement: 9 Moderate improvement: 3 No difference: 6 Not an improvement: 5

4.

Are these new battery-powered surgical instruments significantly improved to warrant future purchases? Yes: 12 No: 5 Don’t know: 5 No response: 1

5.

Do you expect your total spending on powered surgical instruments (the devices, accessories and consumables such as bits and blades) to change during 2003 compared with 2002? Up 41%–50%: 1 Up 1%–5%: 1 Flat: 3 Don’t know: 18* * Many sources either were not involved in the purchasing process or were not able to determine volume and timing of spending.


0 TALLY

> POWERED ORTHOPEDIC INSTRUMENTS 6.

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Do you expect a change in your spending on ConMed, Stryker and/or Midas Rex during 2003 compared with 2002? Moderate increase: Minor increase: No change: Moderate decrease: Don’t know: No response:

CONMED

STRYKER

MIDAS REX

2 1 19 1

2 4 2 15 -

5 1 17 -

* Many sources — particularly physicians — were not involved in purchasing. Additionally, the buying cycle for these tools typically is one to three years, limiting sources’ ability to predict annual purchasing changes.

7.

Which sales representatives — ConMed, Stryker or Midas Rex — are most effective? Stryker: 7 Don’t know: 8 No response: 8

Profile for Ruth Nasrullah

Stryker Leads as Cordless Trend Grows  

A report on market trends in orthopedic power tool suppliers, written for OTA-Off the Record Research.

Stryker Leads as Cordless Trend Grows  

A report on market trends in orthopedic power tool suppliers, written for OTA-Off the Record Research.

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