R&D and Design Landscape Shifts With Economy
Industry executives say large OEMs are increasingly outsourcing projects in the early stages.
Tim Sohn, Associate Editor
Large medical device OEMs increasingly are outsourcing research and development (R&D) and design work, and startup companies are requesting quicker turnaround times because
funding plummeted during the economic downturn, according to industry experts who spoke with Medical Product Outsourcing.
Jahnavi Lokre, director of marketing at Irvine, Calif.-based Aubrey Group Inc., which designs and manufactures electrochemical, electromechanical and disposable medical devices, said large medical device companies are using outsourcing as a way to increase their capacity, rather than hire new engineers.
Lokre added that Aubrey Group always has seen demand for full-service manufacturing (from product concept to manufacturing) from emerging companies. “We become their ‘bricks and mortar,’” she said, because of their virtual nature.
Craig Berky, vice president of research and development at Milford, Ohio-based Interplex Medical LLC, said he has noticed companies are more likely to spend additional time up front with potential service providers to learn as much about their processes and experience in designing similar products before issuing purchase orders. He added that there is a real need for companies to reduce their product development cycle in order to provide products to the market quicker. Berky, who co-founded the contract engineering and manufacturing firm in 2004, believes there are proven methodologies in product development that meet the need of reduced time to market without sacrificing quality.
“Our customers need to get products to the market as soon as possible. At times, they have challenged the need for proper verification and validation activities in order to reduce the development time, and we need to provide processes that meet the regulatory requirements as well as our customer’s needs,” he said.
Paul Mulhauser, president of New York, N.Y.-based FactorsNY, which previously was known as Human Factors Industrial Design, said that time to market, trade show introductions, promises to investors and meeting critical milestones become increasingly important when funding is tight. FactorsNY designs medical, surgical and home healthcare products.
BC Tech, a full-service product development and contract manufacturing firm in Santa Cruz, Calif., has many startup firms as clients. Ben Clawson, CEO and president, said his potential client pool was reduced in 2009 because of the significant decrease in venture funding.
“During this recession, many potential clients were cautious, risk average and slow to approve new projects…It was a buyer’s market. We’re happy to see venture capital funding in the medtech sector has recovered, and we’re looking forward to a great 2010, ” said Clawson.
Another effect of the recession has been a slowdown in new product development.
Andreas Knaack, director of biomedical instruments and devices at Invetech, based in Melbourne, Australia, said that in the last year a number of small and large companies have reduced investment in new product development. Knaack also said OEMs are reducing in-house investment on R&D “quite drastically."
However, industry executives said there is at least one factor working in their favor during a recession: More skilled workers are available. “The ability to grow an R&D team is quite good currently given the overall stressed labor market and thus reasonably good availability of skilled labor,” said Jari Palander, executive vice president of business development at Invetech.
During every economic downturn, Mulhauser receives an increased number of phone calls from inventors (often physicians) and start-up companies (often comprised of clients) preferring to invest in their own ventures rather than in the stock market. “We also see larger companies, still expected to meet quarterly expectations, that are procuring smaller companies for innovative new products and technologies, rather than developing their own. Many are now unable to, having downsized their own R&D resources,” he said.
Joel Bartholomew, OEM/international product development manager at Bethlehem, Pa.-based B. Braun, said his company has a mix of smaller and larger clients, and the mix has remained consistent. “Across the board, things just seemed to slow down a bit,” he said.
Benefits to Outsourcing R&D
Contract manufacturers say there are several benefits to outsourcing R&D and design, including expertise, reduced overall cost, quicker time to market and creativity.
“It’s been very popular with start-up companies for years as it’s a very effective means to quickly garner
Medical device contract manufacturers say outsourcing research and development and design makes sense financially, especially during tough economic times. Photo courtesy of Proven Process Medical Devices Inc.
expertise without having to incur the time and expense to recruit large staffs,” said Tom Burns, vice president of business development at Franklin, Mass.-based Tegra Medical, which focuses on precision machining and contract manufacturing services.
Keith Checca, director of business development at CIRTEC Medical Systems, based in East Longmeadow, Mass., said customers of his firm have needs for products that cannot be met internally due to resources or from a lack of expertise in an area of product expansion. CIRTEC offers full-service manufacturing, focusing on minimally invasive systems and active and passive implants.
The Ideal R&D Customer
While there are no perfect outsourcing partnerships, most industry experts agree that competent and effective partners must possess three basic qualities: good communication skills, a stable funding source, and a wealth of product development experience.
“The ideal outsourcing partners are companies that have a clear idea of what they want, communicate freely and provide their own personnel who are experienced and capable project managers. During a dynamic product development process, the level of communication required is huge,” said Burns.
Clawson at BC Tech said there is a connection between risk and levels of funding.
“We consider a project to be ‘high-risk’ when it kicks off with a large percentage of undefinable product specifications. This is common. Many complex projects require an exploratory research and development effort in order to establish technical and financial feasibility. The projects’ schedule and budget remains elastic during thise phase and is only finalized once we can define product specifications and mitigate risk factors. While this approach might look more expensive up front, it prevents overruns during the formal development cycle and reduces total project cost and risk substantially,” he said.
Mulhauser said he finds that individuals are often stronger outsourcing customers for product design than their companies.
“While company relationships may extend over many programs and years, such relationships also easily shift with increasing frequency of corporate management changes. Close relationships with individuals last longer, often renewing through a succession of companies,” he said.
Kenneth Fine, president and co-founder of Mansfield, Mass.-based Proven Process Medical Devices, said mitigating risk is an important part in the development process. “The most significant challenges that we face in R&D and design relate to establishing customer expectations in the face of the uncertainty of predicting the unknown,” he noted. “Our solution is to mitigate technical risks as early in the development process as reasonably possible using techniques such as hazard analysis, modeling, rapid prototype and emulation to rapidly iterate design embodiments so that we can quickly weed out unsuitable design options.”
He also said outsourcing provides transparency for the OEM in terms of real cost and that many medical device manufacturers don’t have a good handle on the true costs of product development because expenses often are buried.
Miniaturization Increasingly Popular
Contract manufacturers are seeing requests for smaller and tighter tolerance components that bring its own set of challenges. “We continue to see demand for smaller and tighter tolerance components that can make it a real challenge to develop manufacturing processes and achieve aggressive price targets. This requires both parties to work closely through the prototyping phase to settle on a product design that is manufacturable,” said Burns.
Berky said Interplex Medical is seeing a trend toward catheter-based devices that are inserted into natural orifices and delivery devices that insert proprietary implants into the body through a minimally invasive approach.
Clawson at BC Tech has noticed a lot of interest in disposable camera technology. “We’re seeing interest in disposable camera technology as a replacement for endoscopic systems. We’re also seeing more combination devices,” he said.
Lokre said more companies are showing an interest in embedding wireless technologies in medical devices–from cardiovascular to neuro-stimulation–in order to monitor patient status, usage patterns and treatment compliance.
Fine is seeing minimally invasive devices become smaller and more automated. “In therapeutic devices, we are seeing further developments in three areas: miniaturization, visualization and automation. These technologies are especially becoming prevalent in minimally invasive surgical instruments and equipment.”
Due to the economic downturn, R&D and design projects have slowed down, especially for venture capital-funded operations. Some have even shut down. Large OEMs are increasingly outsourcing in these areas to find expertise and reduce costs on individual projects.
There has been a reduction in the release of new medical device products because the uncertainty associated with healthcare reform legislation is causing companies to be more reluctant to develop new products. (See sidebar).
“It’s not enough to create great new technology anymore, it has to offer good value to the hospitals and payors as well…This also is a key driver for companies to manage product life cycles aggressively, introducing design changes to improve performance as well as to reduce manufacturing costs as products mature and competition increases,” said Burns.
And as customers want product development done faster, new leadership at the U.S. Food and Drug Administration (FDA) could slow that process down as they more closely scrutinize product approvals.
“In my experience, the downturn in the economy has not affected medical device R&D and design processes so much as the change in regulatory climate with the new leadership at the FDA and the increased political scrutiny,” said Fine.
How Will Healthcare Reform Affect R&D and Design?
Medical Product Outsourcing asked several medical device company executives how they think healthcare reform would affect research and development and design. These are their responses:
Ben Carlson, BC Tech: “When these discussions turn to healthcare reform, most executives express serious concern (and often disdain) at any change in ‘business as usual.’ Many support this sentiment with a strong critique of the president and his agenda. While we understand that uncertainty and new regulations will change the way we all do business, we at BC Tech believe these changes are good for the country. The current healthcare system is simply not sustainable, and efforts to drive down costs and improve access are socially responsible. We anticipate more single-use devices, more point-of-care diagnostics and, most interestingly, more specialized tools for the general practitioner. All told, the industry will be held to a higher standard. ”
Kenneth Fine, Proven Process Medical Devices Inc.: “On one hand, with more people accessing the healthcare system, there should be an increased demand for medical devices resulting in a demand for R&D. However, there will be significant pressure to reduce the cost of medical devices or to find alternatives to high cost, leading-edge medical devices, which will reduce the capital available for research and development. We are seeing this in the biotech industry now.”
Keith Checca, CIRTEC Medical Systems: “Overall, it is my opinion that medical device R&D will be under pressure to reduce development and product costs, and there will be more competition for limited R&D funding. However, there should be R&D opportunity with novel lower cost devices that supplant higher cost devices. We see some burden developing for the device companies as reform kicks in. It could drive to a more consistent standard of care model, where fewer therapy options are reimbursed, and they are done so based on performance data. CIRTEC Medical Systems hopes to apply our experience both designing for procedure ease and quality as well as system cost to meet that challenge."