Better focus on the user environment and device functionality during the R&D process is key to successful product development.
It didn’t take David Cocke very long to realize his mistake in choosing a career on Wall Street.The 1987 stock market crash and ensuing fallout over program trading was not the motive behind Cocke’s early career change, nor was the foundation of arrogance, corruption and greed that spawned the evil deeds of Paul Mozer and, decades later, Bernie Madoff. No outside influences, really, hastened his exit from the financial world.
In the end, Cocke’s muse for abandoning his Wall Street profession actually was quite simple:
The job was just not making him happy.
“In investment banking you make good money but literally at the end of the day what are you really doing?” he asked. “You’re moving 100 million dollars from one account into another account and that’s not very emotionally satisfying.”
Cocke eventually found professional satisfaction in the medical device world, joining Kinetic Concepts Inc. (KCI), a company in his hometown of San Antonio, Texas, that develops and manufactures products for wound care, tissue regeneration and therapeutic support systems.
In 1996, the company introduced a technology that helps promote wound healing through granulation tissue formation. The science, better known as negative pressure wound therapy, is used to treat and manage hard-to-heal sores, ulcers and partial thickness burns.
“At KCI we’d get letters that would say, ‘because we used your device we cancelled the amputation of my wife’s toe because it healed her diabetic foot ulcer,’” recalled Cocke, who now is general manager at NuPak Medical Ltd., a contract manufacturing and packaging firm also based in San Antonio. “That’s meaningful.”
And relatively rare. Successfully commercializing a medical product requires both teamwork and a sound development strategy based on a thorough understanding of the end user as well as the problem (or health issue) the device is attempting to solve. A steady stream of new technologies pouring into an already crowded healthcare market has made the research and development phase of a company’s product development process of tantamount importance to its overall success, industry experts told Medical Product Outsourcing.
One of the first hurdles medical device firms must overcome when researching a possible new product is funding. Most OEMs realize that significant investments in the research and development (R&D) of new technologies potentially can lead to healthy profit margins down the road. Medtronic Inc., for example, spent nearly $1 billion last year ($843 million) to expand its product pipeline in the biologics and cardiovascular markets. Over the last few years, the Minneapolis, Minn.-based medtech giant steadily has increased its R&D spending, going from $1.33 billion in fiscal 2008 to $1.45 billion in fiscal 2009 (data for FY 2010 was not available). Likewise, B. Braun upped its R&D spending by 6.8 percent in 2009, while healthcare conglomerate Abbott Laboratories funneled an additional 5.4 percent of its dollars into R&D during that same time period (the Abbott Park, Ill.-based company spent $2.74 billion on R&D in 2009, compared with $2.68 billion in 2008). The numbers were up as well at St. Jude Medical Inc., which reinvested about 12 percent of its net sales in R&D during the last two years of the ‘00s; this year, the St. Paul, Minn., company intends to up the ante by as much as 13.5 percent.
Some companies, however, scaled back R&D funding when the global financial crisis took hold. Johnson & Johnson, for instance, reduced its research spending money by 7 percent in 2009 and C.R. Bard Inc. cut its R&D budget by 11.3 percent, according to its 2009 annual report. Orthopedic firms such as Stryker Corp. had little choice in the matter—with reimbursement rates falling and more patients postponing their joint replacement surgeries, the decision to slash R&D spending practically was a no-brainer (Stryker, by the way, reduced its R&D budget by 8.5 percent in 2009 to $336.2 million).
Overall, life sciences R&D funding fared poorly in 2009, having been hacked an average 11.4 percent, according to a report on global R&D funding from Columbus, Ohio-based Battelle Memorial Institute and R&D Magazine. Research dollars fell from $63.2 billion in 2008 to $56 billion in 2009, the report noted. Funding rebounded slightly last year to $59.4 billion, boosted in part by economists’ rosy prognoses of the nation’s fiscal health and measurable strengths in the manufacturing industry.
Some device experts have noticed an increase in funding to early-stage companies and biomedical firms over the last few years as larger firms look to startups for the innovation and technology that will help them achieve long-term growth. However, government funding and venture capital dollars dried up as nervous investors channeled more money into projects with fail-safe investment returns.
The level of R&D funding though, is just one part of the product development process. Equally as important—and a factor that has become more challenging in recent years—is determining the proper market or technology in which to invest.
“There’s more concern now about how to use those R&D dollars. Even though more money is being thrown into research and development, the landscape has grown more treacherous,” noted Dan Reifsteck, chief operating officer at Ximedica, a Providence, R.I.-based medical product development firm. “Healthcare reform and greater regulatory constraints are making people more nervous about where to put their R&D dollars. If you have a certain bucket of money, the question becomes what types of products, what initiatives, what markets do you put your research money into? It’s also getting more costly because of competition, the need to reduce costs and, in many cases, the price squeeze. R&D costs related to the release of a product are going up because the landscape is so difficult, so where you end up putting those R&D funds becomes increasingly more important. I think that's one of the biggest challenges that companies and executives are facing—how to make a decision about where to invest the R&D money.”
The Human-Centered Approach
Once a company chooses a “bucket” for its R&D dollars, it must then devise a strategy for successful product development and commercialization. Many device executives recommend an integrated approach to product development, claiming such a tactic can help companies create merchandise that is cost-effective, functional, efficient and practical. This approach incorporates several key disciplines that span the product development lifecycle: the marketing team, which provides data on the end user market; the design team, which produces a rendering of the new product; engineers, who integrate new technology or innovation into the design; and the manufacturing team, which determines the best mass production method. Excellent communication and interaction between these disciplines is crucial to the commercial success of a product, industry experts said.
Perhaps just as important as the integration of various disciplines within the product development process is an understanding of the end user (patient, doctor, healthcare professional, etc.) and the environment in which the new product will be used. Without such an understanding, device firms have little chance of launching a commercially successful product.
“There’s an interesting connection to be made between R&D and whether we are asking the right questions in regards to solving the big [healthcare] problems. Is there enough of an understanding of the end user, whether it’s a hospital or a physician or a nurse or a patient? Are companies taking a human-centered approach when developing and designing medical devices? Generally, I think the answer is no,” Ximedica’s Reifsteck said.
“In the medical device space, companies sometimes lose sight of who is using a product, how and where they are using it and why they are using it. And that’s huge,” he continued.
“We have to do a better job of making sure that we’re developing and designing products that are solving problems effectively, efficaciously and in a way that is going to allow a user to either do a job or provide a better treatment in a safer, more effective way. Understanding the human factors and how a product will be used and making sure those concerns are part of the design and development process very early on is critical. You have to take the time to really understand through the design lens the interaction between all the actors in the play— if you don't understand that, there is no possible way you can design and develop the right product.”
To help companies better understand the end user and the “human factors” involved in a new technology or treatment, R&D directors must spend more time planning and talking to potential end users to discover the kinds of features they want incorporated into the product, industry experts said. User needs analyses, human factors studies and focus group studies can provide companies with a wealth of data about potential customers.
R&D directors also should identify the ways in which a product fits into their business model, both from a manufacturing standpoint as well as a consumer standpoint.
While most device executives agree that end users play a critical role in the success of a medical product, they acknowledge that regulatory bodies—both foreign and domestic—are significant market drivers as well. Companies that are unfamiliar with the FDA’s regulatory requirements (and those of such foreign agencies as the European Union and China’s Ministry of Health, for instance) most likely will be tripped up when they attempt to market their product design. NuPak’s Cocke said he advises neophytes to the FDA’s device approval process to retain a consultant to help guide them through the system and avoid acquiescing to regulatory requirements they cannot afford to meet.
“A good regulatory consultant can be a godsend to some of the folks that we deal with. If you walk into a meeting with a regulatory body and you ask what is needed, they may throw the kitchen sink at you and if you’re not experienced or well-versed in dealing with that regulatory body you’re not going to know where you can push back on them,” he explained.
“If you over-commit to the regulatory body, your project can remain in limbo because you agreed to do something you can’t fund yourself, and you’re not going to get investors to fund.”
For companies that cannot afford to hire a consultant or dare to venture alone down the yellow brick road to the Land of Regulatory Oz might want to follow two pieces of advice from product development specialists: Be your own advocate with the FDA, and talk early and talk often.
Choosing the Right Partner
Such sage advice also could apply to the outsourcing partnerships R&D directors often form to obtain new knowledge or manage parts of the product development process. Companies focused on new technologies must decide early in the product development process whether to conduct their own R&D (often a lengthy and risky process) or simply buy the knowledge from another firm through an acquisition. Factors that influence this decision include the ability to protect the innovation, its timing, and naturally, its cost.
Technology that is protected by patents, trade secrets and non-disclosure agreements is considered proprietary and has a higher value than knowledge that cannot be protected. For companies that develop their own technology, high-level R&D efforts are justified, experts argue.
Firms considering outsourcing R&D work or parts of the product development process must balance innovation in a slow-moving market with the need to provide solutions to current healthcare problems. Such a balance can be obtained, experts claim, with a combination of technologies that easily can be adopted in a short time frame as well as those that may take longer to develop.
Like any outsourcing process, partner selection is vital to the subcontracted R&D relationship, executives at West Pharmaceutical Services Inc., a Lionville, Pa.-based manufacturer of drug delivery components and systems, told MPO. To select an appropriate partner, they say, clearly defined selection criteria must be established that address skills, systems, structure, site, strategy and culture, where:
• Skills represent the breadth and depth of the partner organization with respect to a company’s R&D needs. Check the potential partner’s portfolio of recent work to determine a match for specific needs.
• Systems represent the processes and methods, and the information systems employed by the firm in its day-to-day operations. Such methods include high-level systems such as Quality Management Systems, Project Management Systems and Enterprise Resource Planning Systems as well as the actual management information systems that are used to exchange data and information.
• Structure represents the formal hierarchical organization structure as well as the informal social structure within the partner. Structure covers the division of work and responsibility and often is depicted in a RACI (Responsible, Accountable, Consulted, Informed) matrix.
• Site represents the facilities and equipment including the grounds, office and lab equipment. Lab equipment includes computer systems, testing facilities, software, etc. Companies must be cognizant of reinvestment in facilities and capabilities.
• Strategy represents whether the potential partner is a long-term fit and match. Is the partner focused on medical devices, is it diversified into other industries; is it solely a contract organization; or is it seeking proprietary technology and intellectual property?
• Culture represents the gut feeling when deciding if the potential partner ‘gets it.’ Does the partner understand the company’s needs and regulatory requirements, and can it appreciate the size and scope of the firm’s overall goals?
“When a company gets ready to kick off a project, it should be sure to capture the deliverables,” noted Eric Resnick, vice president of engineering at West Pharmaceutical. “Stay in ‘objective mode’ and do not get caught up in ‘activity mode’. While R&D projects are about discovery and are next to impossible to nail down in terms of fixed project schedules, it is necessary to establish objectives. Pick the right partner, break the project into manageable phases, and focus on objectives.”
Both sides need to focus on communication, too. It is essential for the outsourcing partners to have a comfort level with each other that will foster the free flow of ideas, project specifications and honest feedback, experts said. Companies that outsource R&D services ideally want a partner that will not hesitate to deliver bad news (delays, cost overruns, etc.) or “push back” when defining a project’s specifications.
“A common misconception is that outsourcing is like throwing something over the wall,” noted Jahnavi Lokre, marketing director at the Aubrey Group Inc., a product development and contract manufacturing firm based in Irvine, Calif. “Communication and coordination between the internal and outsourced project teams is a must to ensure a successful outcome. The degree of communication depends on several factors—the time to complete, the clarity of the product requirements, the complexity of the design, the potential for change as well as the culture of the integrated team.”
Cost is a consideration as well, but experts warn against basing outsourcing decisions solely on dollar values.
“Planning, organizing and qualifying your manufacturing needs are critical first steps to any outsourcing strategy. Then you can look at cost, lead times and available resources. These are key issues you must consider and balance to determine your realistic deliverables,” said Shem Fischer, manager of medical contract manufacturing/packaging at Oratech, a Riverton, Utah-based private label manufacturer of medical and dental products. “You can’t look at cost alone. If you focus on cost only, you may indeed find the most value-priced R&D outfit, but you may also jeopardize your lead time, quality of service or both. In most cases, if someone is consistently the least expensive option for R&D services, it’s usually an indicator that they don’t have comparable quality or lead time. Or, if someone has an excellent lead time, they probably reflect that in their cost. The same is true for service capabilities.
Experience tells us that it all has to be covered and paid for somehow.”
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Integrating various disciplines in the product development process can boost a company’s chance of successfully marketing a new medical device. But it doesn’t guarantee it (nothing is guaranteed when the FDA is involved). Still, device firms can further improve their odds of successful product launches by taking time during the R&D phase of development to better understand the end user. Such an understanding not only can help solve society’s monstrous healthcare problems, it also can help improve the quality of healthcare itself, which eventually will benefit patients. Such a trickle-down effect is guaranteed to put a smile on the face of even the most staunch medical device executives. It certainly did for NuPak’s Cocke:
“The most rewarding thing for us at NuPak is when we hear from one of our customers—whether it is a hospital or a clinician—that one of our devices helped save a patient’s life or prevented an amputation. That’s what it’s all about at the end of the day. That’s why we do this.”
R&D Tax Credits: A Boon or Bust for the Device Industry?
It was touted as a victory for middle-class families, but the new law extending Bush-era tax cuts through 2012 potentially could benefit other groups as well: college students, parents, the unemployed, business owners and, the very politicians who voted for it (the irony is almost ludicrous).
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010—signed into law on Dec. 17—extended the sweeping tax cuts enacted under President George W. Bush that were set to expire on Jan. 1. The $858 billion package received bipartisan support in the House of Representatives (a rarity in Washington these days), though Democrats zealously fussed about it before reluctantly surrendering their votes.
Considered the most significant tax legislation in nearly a decade, the new law sets lower rates for the rich, middle class and working poor; establishes a $1,000-per-child tax credit; provides tax breaks for college students and enacts a one-year cut in Social Security payroll tariffs. It also includes a series of business tax breaks designed to encourage investment, the most notable of which is the research and development (R&D) tax credit. The law reinstates R&D credits for 2010 and extends them through Dec. 31 of this year. In addition, the legislation allows businesses to fully recoup the cost of capital expenditures for investments made between Sept. 8, 2010, and Dec. 31, 2011. Next year’s investments are eligible for a 50 percent reimbursement, according to the law.
The Obama administration claims the R&D tax credit extension will help keep the U.S. economy at “the cutting edge of 21st century technologies, while expanding high-tech jobs, encouraging innovation, and increasing future productivity and growth.” Political rhetoric aside, the R&D tax credit possibly could do all those things—proponents argue that fully reimbursing companies for capital expenditures can indeed increase productivity and foster growth. Electronics firms, for example, constantly are buying new equipment to stay competitive in the market. The R&D tax credit, experts claim, will allow these firms to purchase equipment and write off the investment at a faster rate.
As U.S. Treasury Secretary Timothy Geithner put it: “This legislation is good for growth, good for jobs, good for working- and middle-class families, and good for businesses looking to invest and expand their workforce.”
But is it good for the medical device industry? Good question.
Some industry experts believe the R&D tax credit ideally is suited for early-stage device firms with limited financial resources and those that have mastered R&D work.
“The tax credit certainly is a plus for companies like ours that are looking to do more projects than we have R&D dollars to spend,” said Shem Fischer, manager of medical contract manufacturing/packaging at Oratech, a Riverton, Utah-based private-label manufacturer of medical and dental products. “It will help us directly by freeing up some capital for our R&D team to pursue more projects. And that will certainly increase our finished products to the end market, which increases our line extensions, which ultimately increases sales and has a trickle effect all the way up.”
Others, however, are skeptical of that “trickle up” effect. David Cocke, for one, is not convinced that the tax credit will be a significant motivator of R&D investment. He believes such programs as the Qualifying Therapeutic Discovery Project (created by the Affordable Care Act) and the Emerging Technology Fund in Texas are better investment stimulants.
The Qualifying Therapeutic Discovery Project program, established last year, was designed help create jobs and advance U.S. competitiveness in biotechnology, pharmaceuticals and life sciences. The program’s $1 billion in total funds was spread among 2,923 biotech firms with 250 workers or less; these firms currently are working on projects that potentially could produce new treatments, reduce long-term healthcare costs, or advance a cancer cure within 30 years. The credit or grant covered up to 50 percent of the cost of qualifying biomedical research, up to a maximum credit of $5 million per company. Credits and grants were available for investments made in 2009 and 2010.
The Emerging Technology Fund in Texas has a similar goal: create jobs and develop the Lone Star State’s economy by expediting the development of new technologies and attracting top-notch research talent. Lawmakers established the program in 2005 and reauthorized it twice since then; during its brief five-year lifespan, the program has allocated more than $173 million to 120 early stage companies, according to Texas Gov. Rick Perry.
“The Therapeutic [Discovery Project] was great because you had a check wired directly into your bank account,” noted Cocke, general manager at NuPak Medical Ltd., a contract manufacturing and packaging firm in San Antonio, Texas. “The Emerging Technology Fund provides equity-related funding to startups, and some of our customers have been very successful using that financing to further their product development efforts. Since our customer base is typically in the development phase and not paying taxes, the [R&D] tax credit doesn’t really get them any further down the road.”
Maybe not, but it at least gets them to the starting gate, some experts argue.
“The [R&D] tax credit is fairly narrow, but it’s a start,” said Dan Reifsteck, chief operating officer at Ximedica, a Providence, R.I.-based medical product development firm. “It’s not going to be as big a boon as proponents think it will be and it’s not going to be as big a bust as the opponents make it out to be. I think it provides companies with one more funding opportunity and there needs to be more of that. We face monstrous healthcare challenges in this country and there is limited government incentive available to solve these massive health problems. Providing incentives for invention and innovation, will lead to better answers and greater business opportunities and hopefully, more jobs, increased productivity, and a healthier population.” — M.B.