Photos in illustration courtesy of Avail and TriVirix.
You can't pick up a business publication today without reading about China's appeal to manufacturers of all stripes. But the stars and stripes of the U.S. continue to attract expansions of domestic and foreign companies seeking top-notch technical talent, research collaborations, venture capital funding and other business incentives.
Experts say there are a number of reasons why nearly all regions of the country expect to see double-digit growth in the life sciences sector for the foreseeable future.
First, while some countries promote low-cost labor, many medical devices are complex, high-value, low-run products that can be produced just as cost effectively within America's borders while avoiding some of the problems common to offshoring production.
"The general consensus is you have to save so much money to offset the cost of logistics of going outside of the U.S.-some of our customers have told us you must be able to reduce your per-unit cost by 40% or it doesn't make sense to offshore," reported Robert Thatcher, senior vice president of sales and marketing for TriVirix, which has facilities in Durham, NC; Milaca, MN; Copenhagen, Denmark; and Belfast, Ireland. Thatcher noted that logistics concerns such as language barriers, getting products and supplies through customs in a timely fashion and time zone differences can be daunting.
Also of concern is facility quality and protection of intellectual property. "A facility in the U.S. inspected by the FDA still carries a lot of weight (domestically) and internationally as well," said Geary Havran, CEO of NDH Medical in St. Petersburg, FL.
Danielle Zito, business development manager for medical technology and biotechnology for the Pinellas County Economic Development in Clearwater, FL, added: "Regulatory issues and protection of intellectual property are concerns. A lot of things aren't patented in other countries; the regulations aren't as strict in product development, so a firm may end up seeing lower-cost duplicates of its technology manufactured soon after sending production to an offshore facility. Stolen IP can be a big problem in some parts of the world."
Choosing a Location
Several years ago, medical device companies reported that they often chose a location based on its proximity to customers. That is, many companies would try to locate facilities within, say, 60% of the population of the U.S. or close to their suppliers. No longer is that the case. Overnight shipping services-with more hubs cropping up monthly, it seems-and instantaneous information sharing via the Internet have made this concern a non-issue.
"From a manufacturing/engineering perspective, companies are more interested in getting their products produced with high quality, on time and at the right price. Few care if you're located across the street or across the country," Thatcher noted.
Indeed, when locating facilities today, medical device manufacturers and their suppliers say the following are their top considerations:
- Proximity to a knowledgeable, highly trained and productive workforce;
- Being part of a cluster of other medical device or high-tech companies to share in the infrastructure built to support such industries (e.g., consultants, distribution channels, networking opportunities).
Medical Product Outsourcing recently spoke with medical device manufacturers and suppliers in four regions of the U.S.-the Northeast, the South, the Midwest and the West-to determine how they chose their sites, as well solicit the input of economic development organizations to determine some of these regions' top attractions and newest offerings in the areas noted above.
"Finding people is our single biggest challenge," reported Randy Keene, president of Avail, which has facilities in Fort Worth and Dallas, TX; San Diego and Santa Ana, CA; Asheville, NC; and State College, PA as well as six manufacturing facilities in Tijuana, Mexico and a new plant opening in China later this year. His sentiments echoed those of all other medical companies interviewed: proximity to a large population of well-qualified, highly trained employees who are familiar with the workings of the medical device industry is the top concern when establishing a facility.
While California is known for its strong base of skilled workers, and has attracted a lion's share of U.S. medical device operations, hiring can be problematic today. "It's now extremely hard to hire people in California, especially those who have a medical focus," Keene said. Many highly trained, knowledgeable workers are being courted by numerous industries in the Golden State. "It's much easier to hire in the Dallas/Fort Worth area in regard to compensation requirements and the supply-demand equation," he continued. "On the West Coast, people prefer the little start-ups. They want lots of stock options. While nine out of 10 don't make it, the one that does is very exciting to be a part of. We're an established company, so operating in that climate can be difficult."
In Florida, medical manufacturers benefit not only from a well-trained workforce but also from wages that are lower than the national average, according to Zito. In Pinellas County, medical device industry workers earn an average of $45,000 a year, and in the state of Florida, the average is $49,000 a year, she said, pointing out this is much lower than the cost of skilled, high-tech labor in California. She pointed out that the state's low cost of living, absence of state income tax, tropical climate and numerous tourist attractions combine to serve as excellent recruiting tools.
Clusters of Innovation
Convergence of technologies such as medical device-drug and device-biologic combinations is a huge trend today, and this commingling of knowledge seems to be intensifying the "clustering" of device, biotech and other technologies within certain regions of the country. When similar companies congregate in a particular area, often a supporting infrastructure evolves as well, making business life easier for all.
"The clustering effect of life sciences companies is very prevalent today," said Erin Heston, senior communications manager for Enterprise Florida, an economic development organization. "There is a strong tendency to consolidate in some areas to network and perform research and lab work together. There is a lot of synergy that develops, and this collaborative environment creates a lot of energy and innovation for the involved organizations. We expect to see a lot more of the clustering effect in the coming years."
Florida is second only to California in the number of FDA-registered medical device companies, Heston reported.
Officials at Curlin Medical, LLC in Huntington Beach, CA say they consider the human capital available as well as the cluster of like-minded companies located in its backyard a chief asset for doing business in Orange County.
"We developed a product for which we needed outside consultants who were knowledgeable in the industry, and without having a cluster of companies in this area, the consultants wouldn't have been available," said Les Kristof, president and COO. "It's a symbiotic relationship. We've also been able to take advantage of a lot of knowledge from other medical device startups and other well-established companies."
"Both the large and the small companies need access to a strong workforce and infrastructure," said Don Gerhardt, president and CEO of Medical Alley/MNBIO, a trade organization representing more than 550 medical device and biotechnology organizations in Minnesota. "Whether it is IP lawyers or reimbursement consultants or manufacturing or engineering expertise, companies can get everything right here."
In addition, by meeting with their counterparts at other nearby technology companies, medical device manufacturers are able to glean insights into best practices in other industries that might help them further streamline their own processes. The benefits extend beyond technology convergence.
"Companies are not just specializing in one area now. There is a convergence not only of technology, but a convergence of how products are packaged and delivered," said Ann Rozelle, a principal of Growth Solutions Providers, an Irvine, CA-based consulting firm that helps medical device companies with commercialization and growth issues.
Massachusetts' Center for the Integration of Medicine and Innovative Technology, along with the Massachusetts Institute of Technology and Massachusetts General Hospital, are helping to further the state's technology convergence and related research activity.
Certainly, a focus on R&D and clinical trials is paramount for nearly every medical device company, and many U.S. cities, regions and states are focusing their efforts on facilitating relationships between educational and research institutes and private industry to enable faster commercialization of new and advanced technologies.
In addition, Florida and other states are instituting undergraduate, graduate and continuing education courses that will help ensure that workers stay current on emerging issues and that additional new talent will enter the workforce each year. Last fall, the University of South Florida in Tampa introduced a graduate certificate program in medical device regulatory affairs. It's the first program of its kind in the country; all others are pharmaceutical-based.
"This program will morph into a master's degree, specifically targeted toward the medical device industry," Havran noted.
In 2003, the University of California at Irvine introduced a biomedical engineering department at its school of engineering. "It's the fastest-growing department in the university," said Ed Doyle, principal of Growth Solutions Providers. He anticipates that the department will have a large impact on the medical device community.
Show Them the Money
Access to venture capital, so critical to start-up companies, also can be important to more established firms. As a result, many economic development organizations throughout the U.S. are serving as a liaison in putting investors and companies together or in starting their own funds.
Consider Massachusetts' success in this area: "We have a large number of venture capital firms that are interested and investing in early stage medtech ventures," reported Tom Sommer, president of MassMEDIC, a Boston-based association of medical device manufacturers and suppliers. "PricewaterhouseCoopers' Moneytree survey-a quarterly analysis of venture capital invested-consistently ranks Massachusetts near the top of its list. We're second in venture capital only to the Silicon Valley area."
A key reason for the strong showing could be due to high growth in innovation. CHI Research Inc. reported that Massachusetts outscored all other states with the largest increase in the number of medical device patents filed from 2001 to 2003 (the latest years for which data are available). In 2003, Massachusetts medical device companies filed 559 patents compared with California's 1,927 and Minnesota's 616. The New England state reported a 24.5% gain in filings from 2001 to 2003, compared with 10.4% for California and 9.2% for Minnesota.
To encourage continued innovation, MassMEDIC hosts an annual investors conference during which up to 25 early-stage or emerging companies give 10-minute presentations to an audience of about 450 VC firms, angel investors and corporations.
Medical Alley/MNBIO also assists early-stage and emerging companies with introductions to investors. In addition, the group has created Alley Ventures, a $50 million early stage VC fund focused on life sciences and biosciences projects in Minnesota and the surrounding region.
Closeness to Customers
For companies headquartered overseas, having a presence in the U.S. is often based on a desire to be physically closer to customers. One of those is Ireland's Creganna Medical Devices, which established facilities in Minnesota five years ago.
"The Creganna facilities in the U.S. are mostly sales and customer-service focused with little manufacturing," explained Brad Edworthy, vice president of sales and marketing, North America. "We chose to locate a sales office in Minneapolis because it is a key hub for the U.S. medical device industry-most large medical manufacturers have significant manufacturing operations within the Minneapolis hub. Our decision to locate an office here means that we can be closer to our customers."
To further fuel growth, Creganna opened sales offices in San Diego in early 2004 and a contract design services business unit in Boston this year-again, to be near a large cluster of potential customers.
Australia-based Invetech CEO Paul Wright announced in the company's August 2002 newsletter that it was opening an office in the U.S. because "more than 60% of our contract R&D service is with overseas clients, driven by the strength of the North American medical instrument sector." Its new facility in downtown San Francisco's Victorian Government Business Office (Victoria is the Australian state in which Invetech is located) was chosen so that two members of the company's design and development team could be close to existing and potential U.S. customers, reported Janice Sanford, new business development manager at Invetech. The company now has five U.S.-based employees.
"Three years ago Invetech sent a couple of its top business development executives here to the U.S. as an experiment. That experiment is now a proven success story, and Invetech plans to stay," Sanford noted.
The Cost of Doing Business
While workforce concerns top the list of must-haves for both OEMs and their contract manufacturers when choosing a facility location, the bottom line cannot be ignored.
According to Reis, Inc., a real estate market research firm, in the first quarter of 2005, the national cost for renting office space was $24.20 per square foot (psf). In the Northeast, asking rents were $31.77 (Boston came in at $29.08); in the South Atlantic, the average was $22.79 (Washington, D.C. was $39.49, and Miami came in $23.31); the Southwest averaged $17.77 (Dallas was $17.66); the Midwest was $20.66 (Minneapolis, $20.7; Louisville, KY, $14.64); and the West averaged $23.43 (Orange County, $24.48 psf).
The National Association of Realtors reported in March that the lowest office vacancies were in New York City; Long Island, NY; Ventura County, CA; Washington, D.C.; and Orange County, CA, all with vacancy rates of 11% or less.
Earlier this year, TriVirix moved its Engineering Services Design and Development Center of Excellence from Indianapolis to Fishers, IN to expand and take advantage of lower costs. "When the company started, we planned to put facilities in different geographic locations," explained Thatcher. "Over time we realized we didn't need those facilities to win business so we changed our strategy to one of consolidating as much as possible under one roof."
Ticona, the technical polymers business of the Celanese Corp., also consolidated facilities earlier this year, constructing a new 133,000-square-foot headquarters and R&D center in Florence, KY and moving its New Jersey operations to the new site.
All of the regional organizations that spoke with MPO noted that their states greatly value the presence of medical device manufacturing in their areas and are continuously working with local and state governments to achieve favorable conditions.
A state's proximity to foreign markets can also factor in a company's site selection decision. "We've been in California for nearly 15 years, largely because of its proximity to Mexico," Keene said. "Manufacturers need the ability to efficiently handle the life cycle of a product from infancy to manufacturing to mass production, and often that requires offshoring some portion of the cycle."
While each region of the country has its own compelling business case for locating medical manufacturing facilities there, they all stand united in providing this industry with solid growth opportunities.