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The spine market and smarter diversity and inclusion policies

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The spine market is challenged by the physical and digital worlds converging
Lucrative traditional markets are slowing, and large emerging markets are growing
Environmental, social and governance (ESG) issues are growing in significance
Future clinical and financial success will depend on industry leaders pursuing smart and aggressive diversity and inclusion policies, but it won’t be easy

- Low back pain and the global spine industry -

The spine market and smarter diversity and inclusion policies

Spine companies are predominantly manufactures led by White males who find themselves on the cusp of a transformation driven by the continued convergence of the physical and digital worlds, slowing traditional Western markets and growing emerging markets, and an increasing need to provide patients with the best outcomes at the lowest cost. This raises the bar for spine companies to demonstrate differentiated clinical and economic value. Over the next five years, the spine market is likely to face disruptions and opportunities that impact its core and emerging businesses. Industry leaders are tasked to discover ways to own their disruptions and find solutions to challenges associated with change. Given the projected nature and speed of this transformation, spine leaders’ quest for answers is unlikely to be satisfied by pursuing business as usual. To benefit from the opportunities presented by market challenges, industry leaders will need to recruit new talent with capabilities and competences relevant to an evolving ecosystem. Smarter and more aggressive diversity and inclusion policies, as part of a wider environmental, social and governance (ESG) focus, will be essential to stand a chance of hiring such talent.

Environmental, social and governance issues

Environmental, ‘E’ issues, include the energy a company consumes, the waste it discharges, the resources required to address these matters and the impact ‘E’ questions have on people (e.g., radiation emissions). Social, ‘S’ issues, include a company’s diversity and inclusion policies. ‘S’ emphasises the fact that companies operate within a broader diverse society and addresses an enterprise’s relationships with people, institutions, and the communities where it does business. Governance, ‘G’ issues, represent the internal processes and controls an organization adopts to make effective decisions, comply with the law, and meet the needs of their stakeholders.

In this Commentary

This Commentary focusses on the significance of social, 'S', issues to spine companies and suggests that adopting more aggressive diversity and inclusion policies could help them adapt their business models and strategies to become more clinically relevant and commercially successful in a rapidly changing ecosystem.

Changing emphasis

Historically, ESG issues have been of secondary concern to corporate leaders and investors, but this has changed because ESG matters can provide insights into factors that impact on a company’s financial performance and thereby inform investment decisions. In recent years, institutional investors and pension funds have grown too large to diversify away from systemic risks, which has obliged them to consider the ESG impact of their portfolios. The possibility of commercial enterprises being held accountable by shareholders for their ESG performance puts pressure on managers to prioritize such matters. Already, public companies in the US are being encouraged to: (i) publish statements of purpose, (ii) provide investors with integrated financial and ESG reports, (iii) increase the involvement of middle managers in ESG matters, (iv) invest in robust IT and data management systems, and (v) improve internal practices for measuring and reporting the ESG impact on financial performance.

ESG issues and spine companies

A spine company’s environmental ‘E’ footprint is comprised of instruments and devices, which have a variety of impacts and lifecycles. For example, imaging and guidance equipment eventually becomes electronic waste, surgical instrument sets require sterilisation before reprocessing and infected single-use devices add to recycling challenges.

Spine companies’ play a role in the populations they serve and derive significant revenues from governments: S issues. This is demonstrated in an analysis of Medicare [a US national health insurance programme] data by researchers from the University of Michigan and Harvard University Medical School and published in the July 2014 edition of the Spine Journal. Findings show that between 2000 and 2010, the US government spent >US$287bn on fusion-based spine surgeries.

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The research also suggests that for patients covered by Medicare, the rate of complex spine surgeries increased 15-fold between 2002 and 2014, and concludes that, “despite these large expenses, there is no consensus on the accepted indications for which spinal fusions are performed”: an issue discussed in a previous Commentary.

Governance, ‘G’ issues, for spine companies are dealt with at the sector level, and involve safety testing of their implants and devices, monitoring outcomes and manufacturing quality, safeguarding patient information, and ensuring marketing compliance. However, the future focus of governance ‘G’ issues will likely be company specific, and more attention is expected to be paid to companies’ cultures and ownership structures.

Short supply of relevant talent

As spine enterprises adapt and change their business models and strategies to remain competitive, and as ESG issues increase in significance, corporations will need new expertise, new roles, and new employees to assist them to take a fresh look at legacy issues and turn disruptions into opportunities. The skills required to create and develop future clinical and commercial success include digital expertise, and data management abilities or STEM subjects; [science, technology, engineering, and mathematics] and a knowledge of international markets. However, such capabilities are in short supply, and millennials [people born between 1981 and 1994/6] and older generation Z’s [people born between 1997 and 2015], who tend to possess such skills, prefer to work for giant tech companies, which have untraditional work environments.

A 2018 Forbes study describes the US as having, “a significant high tech STEM crisis”. Another recent study suggests that the greatest demand for STEM workers is from the healthcare industry, which is among the fastest growing sectors, and therefore is expected to face the greatest shortage of STEM talent. Thus, it seems reasonable to assume that, over the next decade, MedTech’s will be challenged to recruit and retain an adequate supply of appropriate talent to help them transform their businesses and this will oblige them to increase their search for capabilities among women and minorities.

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Diversity and inclusion as investment criteria

Currently, MedTechs have a predominance of White males in their workforces. 2020 data from the US Bureau of Labor Statistics show that US MedTech’s employ ~660,000 people, of which ~40% are women; ~77% are White, ~8.4% Black/African American, ~11.5% Asian and ~13% Hispanic or Latino, with women and minorities significantly underrepresented in leadership positions.

Company initiatives to promote diversity have recently gained impetus following the death of George Floyd. On 25 May 2020, Minneapolis police officers arrested George Floyd, a 46-year-old Black man, after a convenience store employee called the police and told them that Floyd had bought cigarettes with a counterfeit US$20 bill. Seventeen minutes after the first police car arrived at the scene, George Floyd was pinned beneath three police officers and was dead. This triggered condemnations from the CEOs of the biggest US banks and the world’s largest asset managers, and turbocharged their intention to make ESG assessments critical to investment decisions.

Reflecting on racial injustices in the US, Larry Fink, chairman and CEO of BlackRock, the world’s largest asset management firm, said that protests following George Floyd’s death, “are symptoms of a deep and longstanding problem in our society and must be addressed on both a personal and systemic level. . . . This situation also underscores the critical importance of diversity and inclusion within companies and society at large”. A similar reaction came from Jamie Dimon, chairman and CEO of JPMorgan Chase, the largest bank in the US and the forth largest bank in the world, who said, “we are watching, listening and want every single one of you to know we are committed to fighting against racism and discrimination wherever and however it exists”. This signalled a corporate shift to a more proactive stance, leading to policy initiatives focused on board refreshment, board gender diversity, and holding boards accountable to a higher standard of ESG practices.

Striking a different note, Omar Ishrak, a Bangladeshi American business executive, Chairman of Intel, and former CEO of Medtronic, stressed the importance of diversity of thought. According to Ishrak, it is not just important to have different people in your organization, but more significant is what you do with the difference. “What happens when you leave the room? How does diversity challenge your thinking and impact your customers?”, asks Ishrak. Such pressure from investors and key opinion leaders serves as a catalyst for change and a greater emphasis on ESG issues, which will become the new normal.

White men rule

Outwardly, all companies, generally agree on the importance of diversity across organizations, and executives promise to rebalance their workforces. However, it is not altogether clear whether such promises lead to tangible outcomes. For example, as of 2021, only ~7% of Fortune 500 company CEOs were women, despite the fact that there were ~77m women in the US labour force, representing close to half (47%) of the total labour force. Similarly in Britain where the 100 largest companies (the FTSE 100) have only six female CEOs, which is the same number as between 2017 and 2019. Also, Black individuals are particularly under-represented in the higher echelons of corporations. According to Equilar, a clearinghouse for corporate leadership data, ~30% of companies on the S&P 500 do not have at least one Black board member, and currently, there are only five Black CEOs in the Fortune 500.

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Available data suggest that women and minorities are significantly underrepresented when moving up the corporate ranks. Tracking such progress is difficult since corporations are not required to disclose information on the composition of their workforces. However, a 2020 report from Mercer, a human resources consulting firm, suggests that the problem of diversity in companies begins early, with minorities not advancing at the same rate as their White colleagues. ~64% of workers in entry level positions in large US corporations are White, ~12% are Black, ~10% are Hispanic, ~8% are Asian or Pacific Islander and ~6% are other races. The share of positions held by White employees increases with seniority. At the executive level, ~85% of positions are held by White employees, while Black and Hispanic employees make only ~2% and ~3% of these positions, respectively. This suggests that minorities face a significant promotion gap in US corporations.

Economic consequences

According to Haim Israel, a Bank of America (BofA) analyst, increasing diversity has significant commercial benefits. According to studies undertaken by Israel, diversity means higher sales and lower earnings volatility risk. “Companies focused on gender diversity at a board, C-suite and firm level consistently achieve higher ROE [return on equity] and lower earnings risk,” says Israel; while highlighting the fact that corporate executives, “don't forcefully step-up their diversity efforts”. S&P 500 companies with above-median gender diversity on their boards see ~15% higher ROE, and the ROE in companies with ethnic and racially diversified workforces is ~8% higher. Israel suggests that the continued lack of diversity inside corporate America, “could cost the US economy ~US$1.5tn in lost consumption and investment over the next decade". If US business and government leaders had decided more than 30 years ago to act on diversity and inclusion, about US$70tn would have been added to the nation’s economic output, says Israel.

Diversity and company performance

The BoA’s findings on diversity are supported by research from several global consulting firms. For instance, a 2018 McKinsey study suggests that there is a significant correlation between diversity in the leadership of large corporations and financial outperformance. More diverse companies outperform their more homogeneous counterparts. This is supported by findings of a 2020 report from the same consulting firm. The research shows that, “companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile - up from 21% in 2017 and 15% in 2014”. Findings were more compelling for ethnic and cultural diversity, where companies in the top 25% outperformed those in the bottom quartile by ~36% in terms of profitability. These conclusions support a 2018 study by the Boston Consulting Group, which found that companies with more diverse management teams had ~19% higher revenues.

Diversity and spine companies

It seems reasonable to suggest that spine companies have been behind the curve when it comes to attracting and promoting women, Black, Asian, ethnic minorities, and people with disabilities. Over the next decade, this could change; not because of imposed quotas, guilt, or shame, but because within these groups, there is a wealth of diverse experience, talent and thought, which could help companies adapt and change. Not only is greater diversity and inclusion expected to help spine companies develop optimum solutions to such issues as the convergence of the physical and digital worlds, but also help them to take advantage of the growing spine market opportunities in emerging economies.

Emerging market opportunities

For the past three decades US corporations have dominated the spine market, but this is beginning to change. American market rule can be attributed to suppliers’ ability to manufacture sophisticated surgical implants and devices relatively cheaply and market them expensively, predominantly in the US, EU-27, and a few other wealthy regions of the world, with highly developed healthcare infrastructures, generous reimbursement policies and well-trained physicians.

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However, over the next decade, the US spine market is expected to slow, and the Asia Pacific (APAC) market is projected to grow at a much higher compound annual growth rate (CAGR). This is partly because the US has a shrinking working-age population to provide for the vast and escalating spine surgery costs required by the large and rapidly growing cohort of >65-year-olds with age related spine disorders. This has led to the tightening of previously benign reimbursement policies and more stringent regulations, which has squeezed spine companies’ revenues. APAC countries, on the other hand, have ageing populations and a consequent increase in the incidence rates of low back pain (LBP) and degenerative disc disorders, but they also have improving healthcare infrastructures and reimbursement scenarios, increasing numbers of trained clinicians, and increased affordability due to rising per-capita GDP.

Recent policies enacted by several Asian governments are positioned to support the growth of healthcare spending. China represents the largest and fastest-growing market in Asia-Pacific, having already surpassed the combined market value of most nations that make up the EU-27. China is seeing some of the fastest growth in healthcare spending, which support sales of spinal implants and devices, which are growing at a CAGR of 9%.

China has broadened its healthcare insurance coverage and is working on an ambitious programme of reforms, which include the government raising medical subsidies, and improving the quality and range of services of its ~9,000 tier 1, and ~11,000 tier 2 hospitals, which serve townships in rural areas and medium size cities throughout the country. Health expenditure in China has soared from <US$72bn in 2000 to >US$690bn in 2019. According to OECD data, in 2016 China surpassed Japan in total healthcare spending with US$574bn compared to Japan's US$469bn; and surpassed the US in hospital beds per 1,000 persons, with 3.8 for China and 2.9 in the US.

While such changing market dynamics are expected to exert further downward commercial pressure on US spine companies, they also present opportunities for American corporations with the capabilities to fully leverage the fact that by 2022, >30% of the global healthcare expenditure is expected to arise from emerging economies. To put it into a spine perspective; the global spinal surgery market’s competitive landscape is maturing and consolidating while serving an increasingly demanding healthcare sector. Spinal implants and devices represent ~US$14bn global industry projected to approach US$18bn by 2023. Industry leaders are tasked to achieve growth in developed markets and to capture market share in emerging countries. This will require a more diverse employee base with capabilities to develop cost-efficient products, with improved medical outcomes, tailored to local needs. To increase share of emerging markets over the next decade, it will not be sufficient for MedTech companies to simply duplicate what is already being sold in traditional developed markets, both due to cost, resource, and competence reasons in diverse market segments. The spine industry will therefore increasingly need to be agile enough to adapt solutions to local needs.

Takeaways

The bar for spine companies to demonstrate differentiated clinical and economic value has risen over the past decade and is likely to continue rising over the next decade. This new “value bar” increases the pressure on enterprises to rethink their legacy strategies and business models. ESG policies that increase diversity and talent pools could help them do this. The economic consequences for companies that are slow to adopt and pursue ESG policies and promote diversity could be significant.

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