While the IVD industry has not been crippled bythe slow economy, it is under some cost pressures,which the right outsourcing decisions can help alleviate.
Despite a down economy and payers who are trying to skimp on reimbursement, the in-vitro diagnostic industry is healthy and robust, thanks to improving technology and the fact that diseases always need to be diagnosed regardless of what’s going on in the world.
But in many cases, the IVD device companies that are thriving the most are the ones who have found reliable outsourcing partners able to take over tasks that aren’t part of their core competencies. This is particularly important in the IVD segment because much of it consists of large equipment with a long product life cycle. It takes a lot of engineering effort to sustain these products during their period of use, but it’s not a good idea for IVD firms to become too distracted from innovation and new designs. A good outsourcing relationship is crucial to achieving a proper balance.
The IVD market is one where new ideas and new projects are churning all the time. The slow economy put a bit of a damper on this, but not as much as you’d think, suppliers said.
“IVD markets are growing and, despite the down economic times, we’ve remained busy,” said Brian Jarvis, U.S. director for BIT Companies, a global contract manufacturer and product developer based in Schwalbach, Germany. “Fortunately, we are niched in a specialized market with widespread applications ranging from small handheld devices to extremely complex standalone instruments. Additionally, we’re in the medical industry—people still get ill, regardless of the economy. And, in IVD, the wheels never stop turning to aid people to determine and resolve their condition.”
At KMC Systems, a contract manufacturer and product developer based in Merrimack, N.H., the same trend has been noticed, said Walter Glide, business development manager. KMC Systems is a subsidiary of Kollsman Inc., a supplier of electro-optical instruments to the aerospace and defense industries.
“We saw a slowdown in our own business in late 2008 into early 2009 in the manufacturing of products and the volume of new product development opportunities. Since late 2009, we have seen a steady stream of new development programs,” he said. “It’s stretching our own resources. Established OEMs may have been holding off on new development until they understood how the slowdown impacted their business. If what we have seen parallels the entire IVD sector, that’s a good omen. Our partners who play in the medical device area say they are seeing a similar trend.”
There has been less activity related to IVD startup companies, however, according to Glide.
“Some of them are still struggling with getting sources of funding. We don’t see as many deals there as we did three or four years ago. But in general, things seem to be moving in a positive direction,” he noted.
Another trend with the potential to crimp activity is reimbursement difficulties, said Jack Kessler, senior principal systems engineer for KMC.
“The economic environment around the world is affecting everything, and medical devices are not exempt,” he said. “For example, Germany is taking steps to systematically lower its device costs. The German government is saying it will reduce their unit costs by 8 percent.
There is a move toward systematic pricing for devices and diagnostics in Europe, similar to what they do for drugs. A great number of our customers are international, and this trend will play a part in their thinking.”
Regardless of how well the economy is doing, improvements in IVD technology are being developed and rolled out all the time. Instruments are getting faster and smaller, and more emphasis is being placed on developing tests that don’t have to be performed in a laboratory.
"Point-of-care is the driving force of IVD technology and will be for years to come,” said Jarvis. “Large instruments will continue to exist in order to perform mass volume tests.
However, many common tests outsourced to labs are—or will soon be—done at the doctor’s office while the patient waits. New advances in nanotechnology and microfluidics areas are allowing for instruments to be smaller and faster.”
Improving existing technology seems to be more of a focus than developing novel concepts, according to experts at KMC.
“I have seen no disruptive technologies in the last few years for the clinical laboratory,” said Gilde. “I think the reason for that is that a lot of OEMs have significantly sunk capital in current technology, and they are still trying to squeeze cash out of it. There are areas that are getting a lot of buzz, but no one seems to understand what to do with the data you get from them, and if they are reproducible from laboratory to laboratory.”
“There’s not an established business model for it, nor an understanding of the regulatory burden and costs associated with getting to market,” added Kessler.
Spencer Lovette, program manager for KMC, noted that this trend could be a byproduct of startup companies having trouble getting funding. “Traditionally, that is where the disruptive technologies come from,” he said.
What is being accomplished, said Gilde, is more designs to automate manual processes.
“As there becomes more of a dearth of qualified personnel for the laboratory, there is a higher need for automation,” he said. “Not just in the performing of the tests, but all the way through the process. Even the medium-sized and smaller labs have a need here, because they can’t get enough skilled personnel.”
“A number of years ago, (IVD OEMs) were looking to us to automate the assays. Now, they want to automate the prep work as well,” added Lovette. “It’s as much an issue of labor reduction as anything else.”
Another priority has been the development of tests that are more specific and more sensitive, said Jari Palander, executive vice president of business development for Invetech Pty. Ltd., a contract manufacturer and instrument developer based in Melbourne, Australia.
“Numerous lateral flow techniques that provide higher sensitivity and specificity are hitting the market,” he said. “These are not read by the naked eye but by a reader, which can be fluorescent, magnetic, etc. Some such lateral flow type cartridges are starting to encapsulate reagents for more complex assays.”
Palander also, notes, “New sample prep technologies are popping up for molecular sample prep, and heavily multiplexedassays are starting to become real competitors.”
Partners and Cost Savings
Given the economy and the reimbursement climate, costs have become a focus like never before. And that is why IVD OEMs are depending on outsourcing partners more than ever to help with design, manufacturing, and sustaining engineering.
In fact, outsourcing sustaining engineering can provide huge savings for IVD OEMs, according to a study recently completed by Celestica Inc., a global supply chain and product life-cycle management firm based in Toronto, Canada.
“We work with one client that was able to reduce costs by 21 percent during a two-year period by outsourcing the sustaining engineering on an ultrasound model, so we did the study because we wanted to see if we could apply that kind of change across all instruments in the IVD space,” said Sandra Ketchen, vice president of Celestica’s healthcare division.”
“We found two major things,” she explained. “One, there is a significant opportunity for cost savings and reduction. We saw a very fragmented supply chain. OEMs can have as many as 15-20 connector suppliers, for example. There was no cohesive long-term supply chain strategy. The more suppliers you have, the less leverage over costs you have. Also, the supply chain structure tended to be regional. They would just pick someone down the street that they were comfortable with, with no thought toward a long-term global supply chain strategy. You have to think of total costs, focus on quality, and develop strong supply chain relationships.
The second thing Ketchen noted was that IVD firms really benefit from a risk perspective when implementing a long-term supply chain strategy. (For more information on supply chain issues, turn to this month’s feature on page 70.)
“Typically, more than 10 percent of a system’s components are going obsolete or heading in that direction,” she said. “It’s an ongoing battle. How do you keep in front of it? We know from experience that takes a significant amount of time and resources from an engineering team. Companies are battling between sustaining engineering versus investing in next-generation products. It takes a lot of effort to consolidate suppliers and design a supply chain strategy.”
IVD firms may not have the time or the resources to keep abreast of these issues, but they benefit if they have a partner who does, she noted.
“There is a long list of tasks for sustaining engineering. A major one is obsolescence management. You have to keep on top of that,” she said. “You need an instrument to service its market for many years, and over time, you are adding more tasks to the base technology, but how can you sustain it? You must have a plan in place. If it is a regulated product, a lot of work must be done planning around the validation and verification processes. If you make significant changes to the product, what does that mean? Is it worth it from a cost-benefit perspective, and how can you maximize that? We work on building those kinds of opportunities throughout the product’s life. What will you do to prepare for the next generation of products coming down the path?”
What a good partnership also can do, Gilde said, is help OEMs get their products to market more quickly. Because market conditions have changed, there’s more of an urgency to get to market than there was ten years ago, he explained.
“As a contract developer and manufacturer, we have developed our own tools that are capable of providing plug-and-play for our customers and providing a rapid-development environment that enables them to get to market quicker,” he said. “More customers have asked us to do work like that, which creates value for the OEM.”
Specifically, said Lovette, “the industry continues to use more advanced modeling and fabrication technology, e.g. solid modeling (3-D computer-aided design), computational fluid modeling (CFM), 3-D printing, dynamic simulation and advanced requirements and documents management tools to reduce development time. Rapid development processes have been adopted. Where two to three design spins were typical before, we are achieving higher quality designs in one to two design spins. Cost, quality and time to market have all improved.”
A key to making a partnership work is figuring out which tasks should best be performed by the partner, said Ketchen.
“IVD customers are taking a harder look at what management considers their ‘crown jewels.’
They are looking at what it is they can bring to the table versus what others could do better,” she said. “For example, maybe production of user interfaces is not a core part of the business, and someone else could do it better. There has also been an increase in the amount of partnerships we are seeing at the design level. Companies may want to get so many products into so many markets, but don’t have the scale to do all of it.”
A number of other considerations go into finding the right partner with the right skills and tools to accomplish this, said Ketchen. First, things must be compatible from a people perspective. She recommended doing business with people that you come to know and trust.“It’s important to remember that this is a collaborative relationship,” she said.
“Second, you need someone with whom you can collaborate on for ideas and approaches, and who can help you take the business to a different level than what it was when you first crossed paths. Make sure everyone agrees on the objectives and measures them on a fairly formalized basis. We like to sit down on a quarterly basis with all the teams, and talk about what’s important to their objectives. Is it cost? Quality? Getting a new product out? In regulated environments, are there any compliance issues? Make goals, and see if you reached them when you meet in the next quarter. You also have to review if things are operating at the right scale for the company’s business model. A small company may be the next big company, and the partnership has to account for those plans. They may need global support eventually, and you have to plan for that four or five years out.”
It also helps if the partner is involved from the earliest stages of development, said David Bach, systems engineering manager at KMC. “At the outset of a project, we put together a multi-talented team, including chemical and electrical engineers, to look everything over. We get the requirements up front. Then we go into the development process,” he said. “We do all that work up front currently. We have to have everything from the customer specifications to the verification efforts mapped out. The content is so large, we can no longer do that in Word or Excel. We have to use other solutions. Also, we are able to look at risk analysis early. We can identify what risks are present in a particular project and account for them right in the product.”
None of this is possible without simulation tools, Kessler said.
“Simulation has led to better designs and product architectures and solutions,” he said. “It is painful and costly to design yourarchitecture, manufacture and build it, and find out that it
doesn’t do what it needs to do. Now that we have modeling, that almost never happens.”
In this era of belt-tightening and reimbursement challenges, it is imperative that IVD firms develop a smart approach to technology development and cost containment. Often, that approach will be executed best when firms can leverage the strengths of outsourcing partners to help bring new products to market more efficiently or take on tasks that are too costly or time-consuming for the OEM.
“IVD technology is an advanced science, yet everyone always wants more for less,” said Jarvis. “We have to be creative andinnovative with our services to provide the best solution at acompetitive cost.”
Erik Swain is a freelance writer based in Phillipsburg, N.J. He has covered the medical device industry for 13 years.
Q&A: Andy Fish, Executive Director, AdvaMedDxAccess to the latest and best diagnostics technology is one of the hallmarks of a strong healthcare system, but it’s not always easy to get governments and third-party payers to understand why that is. With getting that message out in mind, more than 70 in-vitro diagnostics firms have formed AdvaMedDx, an advocacy group that aims to communicate the value of innovative diagnostics technology and promote policies that expand patient access to it. The group is an offshoot of the Advanced Medical Technology Association (AdvaMed), based in Washington, D.C. Andy Fish, the executive director of AdvaMedDx, spoke to Medical Product Outsourcing about some of the challenges facing the industry.
MPO: How has the economic slowdown impacted the diagnostic industry? Is the effect different from that of the medical device industry?
Fish: Certainly, it is a challenging time for the economy as a whole, and others are better positioned to speak to the overall economic circumstances and prospects of the diagnostic industry. While policy challenges remain, including the need to modernize payment systems, the industry is well positioned to deliver the technology advances and innovations in diagnostics that increasingly are recognized as a key driver of effective healthcare.
MPO: Are procedures using new diagnostics technologies being properlyreimbursed in the United States and around the world? In cases where they are not, what are the obstacles?
Fish: We have longstanding concerns about the way new diagnostic tests are reimbursed in the United States. Medicare, whose policies also guide other payers, often ties payment rates to a set of lab charges that were developed in 1983. Medicare also does not factor into payment rates the value these technologies provide in terms of management of patient care and overall benefit to the healthcare system. This means that payment rates do not recognize continued innovation and the technology breakthroughs in diagnostics that are helping to transform healthcare. Payment systems for diagnostics must be modernized to ensure that robust investment continues to deliver innovative new diagnostic technologies that are the key to prevention, early detection, accurate diagnosis, effective treatment, and successful management of health conditions.
Diagnostic tests are reimbursed in many different ways in various countries. In emerging markets, patients often pay out-of-pocket because of lack of government reimbursement or private insurance. In developed countries, like Japan and Europe (where each county has its own payment system), diagnostic tests often face the same challenges as in the United States. Payment rates do not reflect recent innovation and the value that new technologies bring to patient care.
MPO: AdvaMed has made a strong effort to publicize the benefits of new diagnostic technologies. What has that campaign achieved? What challenges remain?
Fish: The world’s leading diagnostic manufacturers recently established AdvaMedDx as a new advocacy organization focused on creating a stronger understanding of the value of diagnostics and advocating for healthcare systems that support robust innovation and ensure timely access to safe and effective in-vitro diagnostic tests. With a membership of nearly 70 companies and growing, AdvaMedDx is making it a priority to partner with a wide range of stakeholder organizations to advance our mutual goals of promoting wellness, improving patient outcomes, and advancing public health in the United States and abroad. To help build these partnerships, AdvaMedDx is sponsoring a day-long symposium on the use of diagnostic technologies and their impact on patient care and public health. This symposium will take place on June 22 in Washington, D.C., featuring key leaders from industry, patient advocacy organizations, healthcare professional societies, government and academia.
MPO: In the next few years, what do you think will be the biggest issuesfacing U.S. diagnostics companies?
Fish: To ensure that patients in the U.S. have access to the latest advances in diagnostic technologies, as well as to fully realize the promises of personalized medicine, we must have a competitive industry supported by an efficient regulatory process that supports innovation. We also must have a payment system that recognizes the full value of diagnostics to patient care and to the healthcare system.
Patients in the U.S. continue to wait, often for years, for access to breakthrough diagnostics that are approved in other countries much earlier than in the U.S. AdvaMedDx has long advocated for a modernized, risk-based approach to the regulation of all in-vitro diagnostic tests to assure timely patient access to safe and effective diagnostics. This flexible, transparent approach would better align submission requirements, focus [U.S. Food and Drug Administration] resources on novel technology with the highest risks, and support the overallreview process.