A New Charge
Demands for full-service offerings and growth opportunities in the home healthcare sector are changing the face of the electronic manufacturing services market.
Michael Barbella, Managing Editor
In the 1950 science fiction story “U-Turn,” Eric Frank Russell (writing under the pseudonym Duncan H. Munro) describes a world of interplanetary colonization whose inhabitants live a life of forced order,
The medical device market poses a number of challenges to EMS providers but also represents a source of tremendous growth opportunities for them. Photo courtesy of Jabil Circuit Inc.
As he awaits his fate at a “death chamber” (which is not a death chamber at all but a “Star Trek”-like transporter that will irrevocably send him to one of Jupiter’s moons), Mason complains about the tedium of modern society. “For centuries the Chinese used an ancient curse: May you live in interesting times!”
Though it is frequently used by the press, in literature and in speeches to provide perspective during extreme crises or challenging situations, the phrase, “May you live in interesting times” did not originate in ancient China. Some scholars have theorized that it is Egyptian or Scottish, but the earliest verifiable reference to the phrase is in Russell’s short story.
Whether Russell created the “curse” for his story or simply referenced an obscure but similar proverb may never be known. But calling the phrase a curse was appropriate, since interesting times are frequently the most trying times.
However, the most difficult times also can be the most rewarding. Difficult times challenge us. They test us. And occasionally, they even bring out the best in us. Thus, living in “interesting times” can be a bittersweet experience.
Perhaps no other industry understands the irony of existing (and making a living) during “interesting times” as well as the electronic manufacturing services (EMS) sector. Over the last several decades, EMS companies that once served only the consumer electronics or automotive industries have crossed into the medical device sector and partnered with OEMs to help design and manufacture next generation medical equipment. In most cases, the crossover has paid off—EMS firms have found a wealth of new opportunities (and profits) in the growing medical device industry.
Such new opportunities may be harder to come by though, once the nation’s healthcare system is overhauled. A provision in the healthcare bill to tax device manufacturers $20 billion over the next decade (to help fund the reform effort) will most likely exacerbate the pressure EMS companies already face from customers to reduce costs, industry experts told Medical Product Outsourcing.
“No matter what comes out of this healthcare plan, there is going to be cost pressure pushed around. I don’t think anybody knows how it’s going to play out,” said Joseph Horvath, vice president and general manager of Sanbor Corporation Medical, an Allentown, Pa.-based firm that provides design services and turnkey contract manufacturing of medical devices, printed circuit board assemblies and custom cables, wire harnesses and molded plastic components. “There could be a tremendous negative impact on device manufacturers due to a significant increase in taxes on the industry, or there could be a tremendous strong upside for the suppliers as established companies look to outsourcing to cut costs, but we don’t know yet because we don’t know how the device manufacturers are going to react.
When it comes to growth opportunities and customer demands, it’s a couple of paragraphs worth of question marks. There’s a quote that continues to pop into my mind: ‘May it be your curse to be born in interesting times.’ I think these are very interesting times.”
Busting Through Challenges
As Russell noted near the end of his short story, interesting times can be both a blessing and a curse. “We’re scientific and civilized,” Mason states as a bureaucrat processes his death wish. “We’ve got so many rights and liberties and freedoms that one can yearn for chains for the sheer pleasure of busting them and shaking them off. Reckon life would be more livable if there were any chains left to bust.”
Fortunately, EMS companies have plenty of chains left to bust in the medical device industry before they will experience the kind of banality that drove Mason to suicide in “U-Turn.” One of the more obvious chains is that of risk.
While OEMs have been more willing in recent years to make EMS outsourcing part of their business model, some electronics manufacturers are still hesitant to partner with a device firm, industry experts contend. A number of factors can be attributed to this hesitancy, but one of the most compelling reasons is the risk associated with medical products.
The U.S. Food and Drug Administration (FDA) always has subjected medical device manufacturers and suppliers to high quality standards. But those standards have been questioned and criticized over the last year by the FDA’s own scientists, the U.S. Government Accountability Office and the Project on Government Oversight. The criticism has prompted the FDA to more closely scrutinize the approval process and conduct more audits of manufacturers and suppliers to ensure they adhere to quality regulations.
In a speech she gave last summer at the Food and Drug Law Institute, FDA Commissioner Margaret Hamburg, M.D., advised companies to make a “commitment to compliance” or face prosecution by the agency.
Hamburg’s stern warning is precisely the kind of statement that fuels some companies’ trepidation of the agency. Such trepidation, in turn, can discourage companies that are unfamiliar with the medical device industry or rarely deal with the FDA from entering the market, experts said.
“The thought process a lot of people have is ‘if I am building a device that goes into a Class III implantable for example, and something goes wrong, then I as the manufacturer of that device or as a manufacturer of that device could be faced with untold punitive damages and legal ramifications,’ ” noted Andy Hyatt, medical market sector vice president at Plexus Corp., a global provider of electronics design, manufacturing and testing services. “Another direction is the FDA part of that. Once you build a finished Class II or Class III device, you have FDA audits and oversight to consider. EMS companies don’t own the product, but if they’re building a finished device, there’s some degree of guilt by association that can be brought into it if something goes wrong. I think a lot of companies in theEMS industry are reluctant to jump into that to some degree.”
Even if companies are willing to take the plunge into the medical market, however, they may be discouraged by long product development life cycles. EMS companies used to the relatively short development cycles of consumer products (approximately six to 18 months for laptop computers, according to one estimate) or networking programs may not have the patience to wait years for a return on their investment in a medical device, industry experts said.
“We can win a program today and not see any revenue of a measurable degree for two years,” Horvath explained. “That requires an immense amount of patience, understanding and business planning.”
For some EMS companies, EOL issues represent the ultimate curse. Medical devices—unlike consumer electronics—can have a lengthy life span, often reaching a decade or more (some pacemakers are built to last up to 12 years). Such longevity, however, can make it difficult to find parts and assemble devices when the electronic components of those products are obsolete.
Compounding this issue is a general reluctance among OEMs to make product changes, particularly if a device is functioning properly and has been approved by the FDA. Changing a product’s design costs money and requires resubmission to the FDA for approval—two factors that affect speed to market.
While EMS providers often have planned for and stockpiled older electrical components, neither move is a long-term solution. “Many manufacturers are not making some of the older [components] because they just don’t have the demand or the volume for that particular product,” said Tony Allan, vice president of global services for the medical and instrumentation unit of $11.7 billion Jabil Circuit Inc. “A lot of medical products are designed with very specific electronic components and those components are not mainstream. So, they’re not readily available. Many medical products can last in the market for 10 or 15 years, but the life span of the electronic component might be seven years. That means there’s a good probability that many of the devices on the market have end-of-life components in them, or were designed using old catalogs. End of life is the curse of the medical industry. It’s wrapped in a number of products that we build today.”
Jabil helps medical device manufacturers avoid the pitfalls of using obsolete components by removing older technology and materials from the supply chain and working with designers on the selection of materials.
Choosing the proper materials can help companies cut development costs as well as remain in compliance with FDA regulations, experts noted.
Room to Grow
Though it poses a number of challenges to EMS providers, the medical device market remains a copious source of new growth opportunities for these firms. Demand from the orthopedic, cardiovascular, neurology, single-use devices, optics, respiratory, patient monitoring systems, sensors, and diagnostic sectors is expected to push EMS penetration levels in the medical industry to 13 percent in the near future, according to estimates from global research and consulting firm Frost & Sullivan.
“OEMs have become aware of the competitive edge EMS providers can bring, especially in a market scenario overshadowed by increasing price pressures and lowering profit margins; this has opened up new avenues for EMS providers.”
One of those new avenues is home healthcare devices, a sector that was valued (domestically) at $4.5 billion in 2009 and is expected to grow at a combined compound annual rate of 4.3 percent over the next two years, reaching $5.2 billion in 2012, according to a Medtech Insight report.
“There’s a huge growth market in in-home medical devices. One of the trends in medical now is that medical care providers are trying to cut costs, and not just the cost of the product but also the cost of service,” said Susan Mucha, president of El Paso, Texas-based Powell-Mucha Consulting Inc., a strategic planning consultancy for EMS providers. “There’s more emphasis on patients doing at-home monitoring, or doing their own injections versus going into a facility and having a doctor or a nurse do that. It reduces costs and it provides more consistent results. That creates a whole group of products that need to be manufactured. In some cases, it opens the door to EMS providers that haven’t been traditionally medical but maybe have really good RF [radio frequency] expertise or the ability to help integrate communications into medical devices. In other cases, it’s opening the door to companies with expertise in miniaturization.”
It also opens the door to various growth options. Respiratory therapy products, for example, account for the largest segment of the home healthcare market. This segment—which includes mechanical ventilator systems, nebulizers, obstructive sleep apnea (OSA) therapy systems and oxygen therapy systems—is expected to generate sales of nearly $1.8 billion in 2012.
Within the respiratory segment, OSA therapy systems provide manufacturers and suppliers with the largest and fastest growing opportunity, Medtech Insight’s report stated. OSA therapy system sales are expected to reach nearly $1.2 billion within the next two years.
Other home healthcare products that could help EMS providers achieve solid growth over the next few years include infusion pumps, blood glucose meters, X-ray equipment, magnetic resonance imaging systems and computed tomography scanners. In recent years, infusion pump technology has advanced to the point where pumps now employ microprocessor controls and sophisticated software.
The technology associated with blood glucose meters has grown more sophisticated as well, with some systems featuring a technology that codes each strip to the meter and others containing a single code that reduces the risk of the device miscoding.
“There are a lot of different growth opportunities that are opening the door for EMS providers with different kinds of expertise,” Mucha noted. “These growth opportunities have the potential to increase volumes and revenue as more [in-home] products end up at the consumer level.”
The Electronics Chameleon
The plethora of growth opportunities available in the medical device market in recent years has led EMS providers down a path of perpetual service evolution. Once tapped strictly for their technological prowess, EMS companies are now providing a full range of services to OEMs in an effort to become the main conduit for end-to-end product life cycle support.
While EMS firms have assumed this new role to solidify their footprint in the medical device market, their willingness to change has been driven in part by OEM demands for “one-stop shopping” services
OEMs that form outsourcing relationships with EMS providers typically look for partners that can cut costs and are compliant with international quality standards, experts said. Photo courtesy of Jabil Circuit Inc.
and constant pressure to reduce costs. As a result, EMS companies are offering their outsourcing partners design and engineering services, manufacturing, assembly, and supply chain management. Some have even ventured into aftermarket services, providing repair, after sales customer service, warranty, re-manufacturing, asset recovery, logistics, refurbishment and recycling, and disposal of materials.
“One of the trends I’ve seen over the last two years is that people want a one-stop shop,” Mucha explained. “In some cases, if a company has a supplier that they really trust, that company will go to the supplier even if there are no electronics capabilities there and ask them to manage their process. Relationships are evolving more than they were five or 10 years ago. It used to be that the company that managed the integration of the final product was automatically the EMS provider because they had the best system in place to do that. That’s not necessarily the case now. It might be somebody that is doing a critical component portion of it with a non-electronic subassembly. The integration doesn’t automatically have to be done by the EMS provider. If there is trust built into the relationship and the capability is there to either manage the total product or manage the total process, people are going to go with the company they trust the most.”
That shouldn’t be surprising, considering trust is one of the fundamental components of any outsourcing relationship. Without it, relationships (of any kind) cannot exist.
Trust is just one of the basic building blocks of any outsourcing relationship. Other critical components include honesty, integrity, a commitment to quality and an understanding of each partner’s core competency. However, OEMs considering partnering with EMS providers for part of the manufacturing process also look for the ability to cut costs and evidence of compliance with international standards, industry experts said.
“Obviously, OEMs want to know that [EMS providers] have experience in the medical market and have a good understanding of the regulatory requirements associated with the market,” Hyatt from Plexus noted. “They also want to be convinced that you are financially secure because risk and change is something medical device companies do not have an appetite for. That is primarily what [OEMs] focus on.”
Jabil’s Allan agreed, but added several other components to the mix: an understanding of the OEM’s products and technology, knowledge of the medical device market and proof of capability. “They want a partner that can demonstrate capabilities…someone who understands their technology, their product and their market,” he said.
EMS companies that have entered the market have captured the attention of medtech manufacturers by offering a variety of services, fulfilling OEMs’ desires for “one-stop shopping” services. Partnering with EMS firms has helped OEMs improve efficiency, responsiveness to demand fluctuation and time to market. As one industry executive noted, “There’s more of a convergence now. Years ago, people were very selective. Now the lines are blurred a bit, and what is driving that is a desire to stay with a service-oriented, one-stop approach. And that is a very interesting trend.”