By: Drue De Angelis
As you probably know, I work almost exclusively with small orthopedic companies and while conducting a search on behalf of one of my clients, I often hear people say, “oh, it’s a start up? I don’t know if I want to take on that much risk.” Their assumption is that earlier stage companies are riskier than larger orthopedic counterparts. My experience over the last 27 years tells me this is simply not the case. The reality is that there are risks present in every company, however the risks that exist in a start up are simply more obvious to the onlooker. Smaller companies are often venture backed and have a burn rate that they must maintain until they can “break even” and become profitable. When people see this, they too often assume that this means the startup’s risks are more significant to their career than in large companies like Zimmer, Biomet, Medtronic, Stryker or Smith & Nephew for example. To the contrary, we have seen literally thousands of layoffs from these orthopedic giants in the past several years alone. You would expect layoffs after an acquisition, yet many of the large layoffs were not related to any new acquisitions but rather merely addressing doing business in a market that has experienced a higher cost due in part to new tougher regulations and higher taxes
Does “Big” equal “Safe?”
I believe people have largely bought into the myth that big companies are safe havens for employees when we have clearly seen that not to be the case. Perhaps that was true 10 plus years ago, but not in our current economy. Before Obamacare, Big Ortho seemed impervious to the financial pressures that hospitals put upon them for lower prices. Sure there were those heavily “managed care” areas where hospitals strong-armed companies to play in their sandboxes managing to extract fairly deep discounts for some level of compliance to a limited vendor list. Yet with each new large acquisition, the pendulum of leverage swung back to the manufacturer. Yet today everything is different. Companies like Zimmer have disrupted their sales organizations and discounted the long standing relationships of their independent sales force. Smith and Nephew also recently floated out their “no frills” pricing strategy that will provide repless options. Of course we’ve also seen Microport Orthopedics with Implant Partners pimping out their white box implants with significant cuts in prices and corresponding sales reps. Acts like these have moved more business to the fringe with small companies that have a lower cost structure.
Outsourcing an advantage
With the “Affordable Care Act,” prices are dropping faster than ever before and the companies who feel the greatest pain are the big, publicly traded orthopedic companies who must show consistent quarterly performance to keep their stock price high by hitting expected earnings. This reality amounts to unprecedented pressures on Big Ortho to manage the bottom line. In recent years, we have seen thousands of layoffs as a result of new FDA regulations and the 2.3% Medical Device Tax which stripped $1.4b from the bottom line of medical device companies in the last year alone. In Big Ortho, positions tend to be “silo’d” where there is often room to cut back and allow others to pick up the slack. This forces companies to take a hard look at Org. Charts to see which positions can be eliminated. By comparison, start-ups tend to be lean out of necessity and each hire is a critical value generator for the company. Smaller, less complex organizations must justify each hire and tend to expect individuals to perform well beyond their typical job description. Hires tend to be made only when they are critical to the continued growth of the company. Start-ups also don’t typically have the complex infrastructure such as HR, Sales Training, Regulatory and other departments that are not essential to a small company. These activities are easily outsourced to consultants putting a lower burden on the company financials and providing a quick and easy way to scale back if necessary. Small companies tend to run leaner and if done well, can compete very favorably with Big Ortho.
