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Issue Date: November 23, 2022 |
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Announcements:
Last week FAN received a flurry of emails alerting us about a report released by a NY activist investment firm that is taking a SHORT position against TREACE. FAN normally focuses on device technology within F&A, but we felt this report deserved some coverage. It is text heavy, so curl up on the couch and dig in.
Please send any comments to footandanklenews@gmail.com
Have a great Thanksgiving,
Big Foot
THE TREACE REPORT
Culper Research, a self-described activist short seller, last week set their targets on Treace Medical by releasing a 21-page report accusing Treace of promoting fraudulent billing practices to support the cost of the of the Lapiplasty product. In addition, Culper claimed that Treace’s marketing team and consulting surgeons were using “cherry picked” data to engineer deceptive DTC marketing practices to bolster the success of Lapiplasty versus traditional osteotomies. Up to this point, the fraud allegations are completely unsubstantiated, and the rest are negatively skewed, well-crafted opinions supported by their research and anonymous quotes.
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Who is Culper Research?
We seek to expose companies which have misrepresented their operations, failed to disclose significant risks, misappropriated capital, possess accounting irregularities, or otherwise deceived investors.
Based out of New York, Culper Research has produced 19 short reports since 2019, many in the Med-Tech space. Christian Lamarco, the 20 something principle of Culper, has been named in defamation lawsuits as a result of some of these previous reports. It should come as no surprise the allegations in the report are designed to devalue the stock by providing some eye-opening reasoning to lay doubt on the future of one of the biggest rocket-ships in the history of foot and ankle.
Before we jump into the report, lets take a look at where Treace is at today.
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Is Treace Vulnerable?
Treace, received FDA approval for the Lapiplasty system in 2015, went public in April of 2022 (TMCI) and today has over a $1.2 Billion market cap. Treace has focused on one product and created a market that all the largest medical device companies in the foot and ankle space are now trying to compete. Treace believes there is a massive runway of potential in the bunion market, this is from their Q3 earnings report:
“We have identified an addressable $5 billion U.S. market of 1.1 million annual surgical candidates, of which only 450,000 undergo bunion surgery each year, mainly due to limitations associated with current standards of care.”
And the sales numbers can speak for the year over year growth:
“Strong, steady increases in the number of new surgeon users, ending Q3 with 2,218 active surgeons, up 39% year-over-year; a year-over-year increase in trailing 12-month surgeon utilization with 10.1 kits per surgeon in Q3, up from 10.0 kits a year ago; and strong blended average selling prices of $5,794 per case.”
Stryker, CrossRoads (now DepuySynthes), Medartis, and Fusion Orthopedics all have rotation jig systems available for use today. You can bet Arthrex, DJO, and a handful of others have plans to launch further competition in 2023. These well-funded competitors see this space as a growth market.
Just 5 years ago, the Lapidus CPT code showed about 25,000 procedures performed annually and about 300,000 for distal osteotomy codes. Treace is projected to do about $135m to $138m in sales this year, that is roughly 23,500 Lapiplasty procedures alone in 2022 based on ASP. Treace has influenced the market significantly and the Rotational Lapidus trend will continue to grow, however is the addressable market really as large as Treace believes and are the ASP’s sustainable?
Treace is currently sold at higher ASP's than other conventional fixation options and they are doing it in a healthcare environment which is looking to increase profitability by reducing implant cost. As of now they are all-in on Lapiplasty which is great for focus and the core belief of the company. However, the high ASP requires higher reimbursement to be sustainable. As Treace grows, the scrutinization by insurers will most likely follow. Bunions are an outpatient procedure and Lapiplasty is not allowed in most ASC settings, it simply isn’t profitable.
If the ASP on Lapiplasty gets slashed overnight, the company’s revenue would of course be negatively impacted. That is not difficult to understand. However, it won’t happen overnight, it will most likely be a slow burn that Treace hopes can be offset by an increase in procedural volume and decrease in operating expenses. John Treace and his team are way smarter than this keyboard warrior. I would bet have they have contingency plans that includes a pipeline of product technology if the ASP’s trend downward drastically in the future.
Having all of your eggs in one basket is no doubt risky, and a report of this nature potentially exposes those risks to investors outside of the industry.
Let’s dig to the report and you can decide.
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Accusation 1 - Fraudulent Coding
“Physician adoption is accompanied by implementation of dubious billing tactics such as unnecessary complexity adjustments, unbundling, and billing for procedures that simply never happened.”
– Unnamed Podiatrist Quote from Report
“The big Treace sin was telling people to bill their Lapidus as a transverse multi-midfoot fusion ...That’s not unbundling – that’s fraud”
– Unnamed Podiatrist Quote from Report
Is it possible that various levels of the Treace organization from reimbursement specialists down to sales has insinuated creative coding suggestions? Of course, but hard to prove. Ultimately, Treace doesn’t bill insurance, it bills the hospital for the implants. The surgeons code the procedure and if you are receiving billing advice from your rep, that’s probably not the best way to go.
It’s not hard to believe that codes can be manipulated and amplified to increase billing. Happens every day. How many physicians have resentments about the current state of diminishing insurance reimbursements? Everyone! Does that mean they are juicing their billings? Of course not. Can you see how a small minority of Lapiplasty users reading this may be a little concerned if payors start to dig in and review these cases?
If a deep dive is done and this reveals a massive case of fraud across the board by the majority of Treace users, then I would be shocked. It is my belief that the vast majority of Treace users are coding as they should. The reality is that foot and ankle surgery is complex and so is the billing. Grey areas exist due to the wide variety of modalities and treatment options available for corrective Foot and Ankle procedures.
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Accusation 2 – Deceptive Marketing Practices
Direct to Patient
Treace claims that its competition, namely traditional osteotomy, has “up to 78%” recurrence rates, which we view as a highly disingenuous and cherry-picked figure cited from a single outlier study. More recent and comprehensive meta-studies suggest that patients are overwhelmingly satisfied with competing surgeries, and recurrence rates are just 0% to 10%.
What Treace has done better than anyone up to this point is their direct to patient marketing campaigns. Anecdotally, the buzz is that these multimedia campaigns drive patients to offices asking for the Lapiplasty procedure. Is overselling Lapiplasty as a “silver bullet” to patients unethical? Are they in fact overselling it? Not for me to decide.
They were not the first to enter into DTC campaigns. Most companies have some form of antiquated surgeon finder on their websites for big ticket, indication specific products. Robotic Knee Replacements, Ankle Replacements, and even Hammertoes created the blueprint Treace is using to some degree. Treace has taken DTC marketing to another level in Foot and Ankle and it is obvious that other companies are trying to emulate this strategy today.
One more thing, the negative patient comments from Facebook highlighted in the report can be found in every indication specific Social Media Group or Online Forum. Go find the Ankle Arthritis Groups and review the patients with failed Arthroplasty implants or non-unions of Hindfoot Fusions. All procedures have complications, and the loudest patients are those with outcomes that did not meet their expectations. Are some of the complaints valid? Potentially. Did they all sign consents prior to surgery? Yes.
Surgeon Level
Lapiplasty was created to make bunions more reproducible, and the Lapiplasty System has without a doubt proved a need for a jig system. It can be argued that Treace targets surgeons who do not have the experience, confidence, or prior training to perform a traditional Lapidus procedure well. The job of the Treace sales force is to identify any and all bunion surgeons (high or very low volume) and convert them to their “new gold standard.”
The literature on any surgical procedure can and is skewed all the time by industry to support arguments for or against the efficacy of a desired outcome. White papers and the existence of several industry funded foot and ankle journals exist specifically for this reason. They are supported by most, if not all foot and ankle device companies. No one is exempt. Surgeons determine which are valid and which are bullshit.
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Final Thoughts
Treace has executed a recipe that every company uses. Pump the marketing dollars, load up on MedEd lead by high profile KOL’s, and if the product has market fit, you’ve got a winner. Treace became a $1.2 Billion dollar company in 5 years. The product has raving surgeon fans and it works well for those looking for what it offers. That is genius business acumen accompanied by hard work, good timing, and some luck…capitalism at its finest.
Focus, which is what Treace has preached since the beginning, may be its downfall. The massive success of Lapiplasty in such a short period of time has lead to scrutiny from competition and as a publicly traded company, investors trying to manipulate the market. I do not know if the fraudulent billing practices are truly going to be an issue for Treace in the future. I do believe it may be time for Treace to expand their portfolio forward as they transition to a W2 sales force to offset the risk and attention brought on by the higher ASP’s.
The bottom line is that the foot and ankle industry need companies like Treace to continue to innovate and create new markets. If improprieties did in fact occur, Treace and their shareholders will suffer. I hope Treace and other niche trailblazing F&A companies continue to thrive. If more comes from this report or it simply goes away, it is important to realize that the accusations laid against Treace are practices that exist now and have for a long time. Treace has just done it better and it may end up being their downfall.
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Foot and Ankle News is curated roundup of the most impactful news for Foot and Ankle Doctors, Rep’s, and Exec’s delivered weekly directly to your inbox.
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