Research and development skills were once considered one of the most valuable and protected assets of a medical device manufacturer, but as the outsourcing model evolves, OEMs are finding that third-party service providers can play an integral if not crucial role in their efforts to bring products to market. In fact, small and large manufacturers are increasingly tapping into the know-how and experience of outsourced R&D partners to gain a competitive advantage.
|Verification and validation of products are some of the services that contract research organizations provide. Above, an employee performs tests at Proven Process Medical Devices’ facility in East Walpole, MA. Photo courtesy of Proven Process.|
A broader acceptance of outsourced R&D services is still more evidence of the industry’s transformation from being manufacturers to marketers and distributors. Once regarded as an OEM’s core competency, research and development capabilities are slowly being transferred to outside organizations, some of which also offer manufacturing capabilities. While many device manufacturers continue to conduct their own development programs and would never consider outside intervention, others view these groups as valuable resources that can shorten time to market, lend expertise in unfamiliar territories and act as a benchmarking tool against their own R&D groups. By outsourcing to these organizations, the industry is clearly redefining its strategic strengths.
Entire Products Outsourced
“What we’re seeing, which we haven’t seen before, is a lot of the large OEMs are outsourcing more of their core technologies than in the past,” said Ken Fine, president of Proven Process Medical Devices in East Walpole, MA. “In monitoring systems, in the past we might have been able to contribute to portions of the peripheral design. Now we are asked to do the whole product.”
However, outsourcing R&D can carry its share of headaches. Squabbles over intellectual property rights can flare up when contracts are vague. Outsourced partners are typically paid on an hourly basis so they might not develop a sense of urgency to complete projects quickly. Additionally, there is less internal control when a third party is in charge, which can lead to misdirections in project direction. Even strong proponents of contract research recommend that OEMs maintain a hands-on approach with outsourced partners to ensure continual progress and that the progress is the right kind. Even when medical device companies turn over R&D responsibilities to a vendor, they need to help oversee projects.
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While the R&D needs of medical device companies vary, they share a common goal: to get products on the market as soon as possible. Even startups with exit strategies are eager to reach milestones—whether that’s securing regulatory approval or arriving at a proof of concept. In these instances, outsourcing partners can offer OEMs a leg up in the race against time.
Some smaller startups often have little resource to staff an internal R&D team; many have just one chief scientific officer to oversee product development. As a result, they must turn outward for industrial design, proof of manufacturability and prototyping help. By doing so, these medical device companies can reach their goals much more quickly than if they went at it alone.
While medium and larger companies boast more resources, they are nevertheless outsourcing R&D functions as well. Often times, third parties are able to complete projects more quickly because they have less bureaucracy. In some instances, companies unwilling to add to their headcount hire contract research organizations at a significantly lower cost than adding employees. Observers point out that consultants are only kept on until the end of the project. This approach bolsters an OEM’s ability to take on more work without additional capital investments.
“I do see that [OEMs] have a fixed-cost structure within their core competency and they don’t want to add to that because of cost constraints,” said Walter Gilde, the marketing manager for Merrimack, NH-based KMC Systems, a contract medical device design and development firm. “They have an x number of opportunities and they have limited resources.”
Today, medical device manufacturers outsource a broader array of R&D projects compared with past years. In addition to industrial design or mechanical engineering, they are also asking for help in feasibility testing, fleshing out core concepts and developing line extensions. In this age of combination products, genomic applications and other bio-engineered products, medical device companies often look beyond their capabilities when brainstorming ideas. This is one reason why companies are more willing to partner with other firms with complementary technologies. It’s also why they are looking to outsource more facets of their products than ever before.
According to AdvaMed, the largest medical device trade association in the U.S., the industry continues to invest heavily in R&D as a percentage of revenues. In its 2004 report on the industry, R&D spending accounted for 11.4% of sales in 2002, the latest year from which data were available. It was the third highest level in the 13 years since 1990.
With medical device manufacturers willing to invest in R&D, it’s no surprise that they are turning to outside partners to help nurture the process. Funding startups is one approach, but more and more contract research organizations are being employed to transform ideas into products, especially in emerging therapeutical areas.
“With the explosion in the past five years in genomics research, there’s interest in multiplexing capabilities and microfluidics,” said Gilde. “You see these platforms on the research market and in drug discovery. You will eventually find these platforms in the diagnostics market.”
Indeed there is pressure on medical device manufacturers to churn out innovative products. In 2003, then-FDA Commissioner Mark McClellan told a gathering of medical device executives at the Cleveland Clinic that industry was not doing enough to turn basic research into practical medicine, citing a drop off in the number of premarket applications in recent years. He urged the industry to leverage recent discoveries in genomics and proteomics in developing useful new medical treatments.
The agency, along with the U.S. Department of Health and Human Services (HHS), in 2004 launched an initiative to promote innovation in medical devices, drugs and biologics (see story on p. 40).
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Partnering a Logical Choice
Establishing partnerships, whether with another smaller, technology-driven medical device manufacturer or with a contract research group, has become a necessity for some OEMs. Working in parallel with these partners can accelerate their efforts. Larger companies find that their smaller counterpart are often more agile and can introduce new technology more quickly.
“Many of the technologies that customers want are new technologies being developed by small entities,” said Peter De Bakker, business development manager at Waltham, MA-based Foster-Miller, a contract product and equipment development firm that specializes in medical devices. “I think big companies are really looking for that innovation, especially in the medical device industry where innovation is of the essence.”
De Bakker said there is clear evidence that some medical device manufacturers are undertaking a dramatic transformation because they continue to cut internal R&D capabilities in favor of outsourcing those functions. In fact, he observed, some companies are close to losing their core competencies because of sharp cutbacks in R&D.
Jeff Dubois, vice president of business development at Nova Biomedical in Waltham, MA, recalled how one large in-vitro diagnostics manufacturer used to support one of its key platforms with numerous engineers, chemists and R&D staff members. Today, he said, all of those functions are outsourced.
“It’s hard to be vertically integrated anymore,” he said. “Few companies do that, so to get the talent to solve engineering problems, they have to go outside.”
Perhaps it is because of this approach that contract research organizations are asked to work on a broader scope of projects. As OEMs cut back their internal resources, they continue to shift more work to their outsourced partners.
Service providers, on the other hand, must make greater investments in technology and staffing to keep up with their client’s requirements. As they make these investments, both sides become more familiar with each other’s R&D efforts.
“We do find customers who continually want to push the envelope to develop more automated equipment,” said Dan Kasprzyk, the CEO of Machine Solutions Inc., a Flagstaff, AZ-based developer of process and testing systems used in catheter andstent manufacturing. “We are also getting opportunities to look at R&D projects that they are working on.”
Kasprzyk said medical device companies’ willingness to entrust outside firms with developing key programs and processes is a dramatic departure from past practices. While they still impose limits on how much disclosure they will provide about proprietary technology, many are at least working much more closely with their consultants.
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IP Concerns Remain Real
Still, medical device companies have numerous concerns about outsourcing R&D. One of the reasons that companies often cite for not outsourcing is to protect their intellectual property. In a survey conducted by Waltham, MA-based consulting firm PRTM last year—the results of which were published in the July/August issue of MPO—OEMs cited a loss of IP as the primary reason for not outsourcing. Nearly half mentioned IP concerns. “There certainly is still the internal political issue of protecting that IP,” said Fine.
Despite the wide use of non-disclosure agreements in partnerships, some OEMs remain uncomfortable with outsourcing R&D. In those instances, service providers say, it’s a matter of earning the client’s trust.
Other problems can crop up as well. Ron Sully, marketing director for Irvine, CA-based Omnica, noted that unrealistic expectations on both sides can occur if the statement of work specified in the contract is ambiguous.
“I think the biggest problem is people don’t understand the process. Product development is not a linear process,” he added.
An overlooked consideration is the time needed to manage outsourced projects, warned Mulsim Tyebjee, vice president of product development at BC Tech in Santa Cruz, CA. He said managing numerous external projects requires companies to have a strong organization in place and an appropriate coordinator who understands how R&D is performed; OEMs simply cannot walk away from their oversight responsibilities once they sign a contract.
While contract R&D firms can be a valuable resource to help speed medical devices to market, OEMs need to be mindful that these relationships require attention to make them successful. Required of any outsourcing arrangement, both the device manufacturer and the service provider must maintain open channels of communication and be aligned in their respective goals. Without this collaborative element, contract research and development projects may yield little practical results.