John Marotta made Synthes, Inc. a lot of money after he joined the company in 2004 as a Trauma Sales Consultant in Arizona and later as a Regional Manager.
According to court documents, when Marotta first arrived in Arizona, Synthes was selling $389, 000 worth of its product, per year. By 2008, Synthes sales in the state had increased by 15- fold to $6 million per year.
Marotta Competes
Marotta resigned in March 2010 and later that year became CEO of Colorado-based Emerge Medical, Inc. Emerge incorporated in January of the same year. The company was formed to produce and sell generic device fixation hardware (generics) such as drill-bits, guide-wires and screws for the orthopedic trauma market.
legal.comSynthes didn’t take kindly to Marotta’s departure and competing with them, so in March 2011 they sued him and Emerge Medical.
Breach of Contract or Monopoly
Synthes accuses Marotta and Emerge of, among other things, a breach of fiduciary duty; breach of contract under the Non-Competition and Non-Disclosure Agreements; tortious interference with contracts and fraud. Eric W. Brown, Zachary W. Stassen, and Charles Q. Powell were later added as defendants in an Amended Complaint.
Marotta and Emerge fought back by not only denying Synthes’ allegations, but filing a counterclaim in federal court in Philadelphia, accusing Synthes of, among other things, antitrust violations, making misleading statements to Emerge customers, and trying to crush Emerge through litigation.
That’s where this story gets interesting. Why would Synthes, a multibillion dollar company pull out a bazooka to swat away a fly?
A Synthes spokesperson told us that the company doesn’t comment on ongoing litigation. But others spoke to OTW on and off the record.
A Bazooka for a Fly
It turns out that Synthes has pulled out the litigation bazooka in similar cases with similar charges against defendants 19 times since 2007, according to an analysis of Synthes lawsuits reviewed by OTW.
According to Marotta and Emerge, “this tactic stems from Plaintiffs’ [Synthes] dilatory ulterior motive: ‘to continue Synthes[‘s] well established litigation plan against start-up competitors…[by] driv[ing] up the costs of litigation and wear[ing] down its young opponents with a call for an unnecessary preliminary injunction…[and then] mov[ing] to amend their complaint.’”
Synthes says nonsense and they deny any such legal gamesmanship and claim they filed the amended complaint based on the limited information gained from their own investigation.
The court declined to find that Synthes engaged in any “undue delay or dilatory tactics.”
Supply Chain Disintermediation
But legal gamesmanship aside, there is more at stake here than just a few generic guide-wires, screws and drill-bits.
Disintermediation in the orthopedic implant supply chain is taking place in an environment that the former CEO of Medtronic, Inc. called the “End of the Surgeon Champion”. Hospitals are swallowing independent orthopedic practices and buying decisions, particularly for generic hardware items, are coming from hospital committees and group purchasing organizations instead of individual surgeons.
Just last month Emerge announced a deal to sell its devices to Premier, Inc., the nation’s second largest healthcare group purchasing organization (GPO) with over 2, 500 hospital members at specially negotiated pricing and terms. Emerge guarantees customers annual cost reductions for the term of their contract.
Marotta and Emerge acknowledge that their generic hardware is fully interchangeable with Synthes hardware and can be used with Synthes inventory management systems and surgical sets. The competition is getting fierce.
Synthes claims that by November 2010, Emerge representatives began placing labels for reordering Synthes’ surgical drill bits in Synthes’ inventory cabinets, directing Synthes’ customers to reorder surgical drill bits from Emerge instead. As a result, those Synthes customers have begun to order replacement drill bits directly from Emerge rather than from Synthes.
Fair Competition
Synthes’ lawsuit, claim Marotta and Emerge, is an “effort to crush infant Emerge and punish former Synthes employee Marotta for daring to form a company that competes, no matter in how small a part, with Synthes, and to ensure that Synthes has no real competitors in the market for Generic Device Fixation Hardware.”
Synthes has, according to the suit, “wrongfully and intentionally attempted to thwart Emerge’s rise in the orthopedic device business by engaging in a continuous course of conduct involving disseminating false and malicious information about Emerge’s personnel and products while using oppressive litigation tactics aimed at intimidating and eliminating Emerge.” They also accuse Synthes of, “Wrongfully obtaining trade secret and other confidential information from Emerge, and unfairly competing in the orthopedic device business.”
“In an attempt to maintain a controlling monopoly, Synthes engaged in predatory anti-competitive conduct that is harmful to the market for GDFH, the consumer, and contrary to the universal public policy goal of lowering the cost of healthcare in the U.S.”
“Synthes is engaging in this conduct to drive competitors, specifically Emerge, out of business. There is a dangerous probability that Synthes will achieve a monopoly in the market.”
Trauma Market
What market are they fighting over? How big of a deal can guide-wires be?
Angular Stable Locking System (ASLS)/ © SynthesThe approximately $3 billion orthopedic trauma market (in 2011) is comprised of products like screws, plates, nails and drill bits used to repair broken bones and is led by Synthes, which Johnson & Johnson is buying for $21.3 billion. According to Orthopedic Network News, a publication that tracks device costs, individual devices can be relatively inexpensive, but a trauma case with a variety of parts can cost thousands of dollars.
Synthes DLS – Dynamic Locking Screw/ © Synthes’Low-cost orthopedic parts are cheaper versions of existing products and the company typically doesn’t send sales representatives into operating rooms to advise surgeons, which is a common but cost- and labor-intensive practice.
Squeezing the Middle Man
“In certain cases the reps are getting paid more than the surgeons, and they‘re also trying to up-sell pricier wares, ” said Itai Nemovicher, president of another recent start-up called The Orthopaedic Implant Company in a Dow Jones interview with Jon Kamp in 2011. Nemovicher is a former Smith & Nephew PLC, representative.
In the same article, Gene Kirtser, president and CEO of Research Optimization & Innovation, the supply chain manager for the non-profit Sisters of Mercy Health System in the Midwest, said, “Providers are looking for more and more ways to take costs out.” Kirtser said Emerge will get a tryout in one of the system‘s 30 hospitals, and could go system-wide.
Marotta says the company can save their hospitals’ customers up to 50% off their current costs. He told OTW in an interview last year that the company‘s vision is to apply its generic device platform to the larger orthopedic, sports medicine, and spine market and ultimately to the entire $92 billion medical device industry.
One of the big manufacturers, Wright Medical Group, Inc. has also gotten into the generic game by launching a business called “White Box Orthopedics” in 2010 that offers cheaper versions of the company‘s replacement hips and knees through a more bare-bones sales approach.
Cost of Sales
Stan Mendenhall, publisher of ONN, wrote in August 2010 that the largest component of a medical device is not research and development or manufacturing costs, but “SG&A” (selling, general, and administrative expenses). The average SG&A for seven orthopedic companies was 43.3% in 2009, with the largest element of that being payment to the sales group.
Mendenhall says that many hospitals that he talks to question the value of the rep in the first place.
“I have heard from some manufacturers that hospitals treat the reps as ‘unpaid’ labor, and dump all sorts of responsibilities on them, which would normally belong to the hospital.” He notes that the labor costs are, of course, included in the price of the product.
He says the rep service that seems most valuable from the hospitals standpoint is training hospitals and surgeons in the use of new implant systems. However for generic products and disposable hardware, there is less need for training.
The Value of Instruments
Mendenhall wrote in 2011 that in recent years, the number of disposable instruments has soared as hospitals have reduced the costs of implants. The net result is an ever-growing percentage of the OR budget dedicated to instruments.
He found that instruments accounted for less than 3% of the total implant costs for joint replacement and spine cases; however they accounted for almost 13% of the implant costs in trauma cases.
At the high end trauma cases with nails, cannulated screws and hip pins all had over 20% of their costs assigned to instruments.
The parts identified as instruments were the second highest dollar value of components charged to hospitals after cortical screws in trauma cases. The types of devices assigned to this code are predominately drill bits and guide-wires, with a smattering of saw blades.
The major manufacturers selling trauma devices to hospitals, according to Mendenhall, had over 10% of their sales of trauma cases in instruments, with Stryker Corporation having the highest (18%), and Zimmer Holdings, Inc. with the lowest at 10%. Sixteen percent of market leader Synthes’ sales were attributed to instruments.
The “top 10” instruments by sales in Mendenhall’s analysis were led by Stryker’s guide-wire used for implanting a femoral nail. Other devices in the top 10 were 5 drill bits sold by Synthes, a Stryker modular shaft for a reamer, a Synthes guide-wire, and two Smith & Nephew devices.
No court date for a hearing has been announced. But if Marotta and Emerge win this case, the opportunities for disruption in the manufacturing and distribution of generic devices, instruments and hardware in orthopedics will be richer.
