Building Partnerships & Going Global
To mark MPO’s fifth anniversary, a group of industry insiders takes a look back at the issues and trends shaping the medical device industry over the last five years and makes predictions about the road ahead.
Christopher Delporte
How quickly time flies. Five years ago, Medical Product Outsourcing published its first issue. To celebrate the occasion, seven leading medical device industry executives sat down with MPO to discuss the varied topics and trends that have shaped the outsourcing and medical technology markets since 2003.
As you’ll gather from their insight and feedback, some things haven’t changed much, while other issues are notably different. A few themes highlighted by this group of device professionals remain constant. One is that the market for outsourcing service providers has expanded significantly and—not surprisingly—is expected to continue to make impressive gains, even as the economy currently teeters on unsure footing. Another common theme we see often within the pages of MPO is the globalization of medical device markets and manufacturing. Nearly all of the roundtable participants agreed that being able to meet the challenges of a global marketplace—being able to sell, source and produce products abroad—would be one of the keys to success in the next five years and beyond. The impact of consolidation and mergers and acquisitions (M&A) on outsourcing and the medical device market during the last few years also was noted by most panelists.
Where some of the opinions diverge provides the most interesting reading. Experts described evolving technology niches and product categories to keep an eye out for in the future. The impact of increased regulatory scrutiny by the FDA and international regulatory requirements also provided fodder for some differing points of view.
Ultimately, whether or not they were on the same page regarding industry drivers and obstacles (past, present and future), optimism about prospects and opportunity was unanimous.
The following industry professionals contributed their time and expertise to this discussion:
• Thomas Bienias, president and CEO of Ethox International. Headquartered in Buffalo, NY, Ethox is a full-service contract manufacturer serving the medical device and pharmaceutical markets.
• George Blank, president and CEO of The MedTech Group, a contract manufacturer based in South Plainfield, NJ. In addition to its facilities in New Jersey and Connecticut, The MedTech Group has manufacturing sites in Puerto Rico, Costa Rica and Singapore.
• John Carey, vice president and general manager for Foliage in Burlington, MA. Foliage helps medical device companies design, implement and integrate complex and embedded software systems.
• Benjamin Dunn, managing director of Boston, MA-based Covington Associates, a specialty investment banking firm with a focus on the healthcare industry—medical technology and outsourcing companies, in particular.
• Brian Moore, president and CEO of Symmetry Medical. The Warsaw, IN-based manufacturer provides implants, instruments and cases to orthopedic device firms. The company also supplies products to the arthroscopy, dental, laparoscopy, osteobiologic and endoscopy markets.
• Chris Oleksy, president of ATEK Medical, based in Minneapolis, MN. The company is a full-service contract manufacturer that recently opened a new manufacturing facility in Costa Rica. ATEK also has a manufacturing plant in Grand Rapids, MI.
• Paul Touhey, president and CEO of Fujirebio Diagnostics Inc., headquartered in Malvern, PA. Fujirebio produces in-vitro diagnostics and biomarkers, specializing in manual assay products and custom-developed products.
Following are excerpts from conversations with these industry thought leaders:
How do you think the medical device industry has changed in the last five years?
Tom Bienias: A steady growth and reliance on outsourcing continues. It seems to be reasonably strong. I base that on the plenty of opportunities we’re getting and some opportunities from companies that, heretofore, held a lot of the manufacturing close at hand. One of our largest clients, for example, had been purchased in the last couple of years by a large private equity firm, and prior to the purchase, it was closely held as to what they made available to manufacturing partners. With the trends of the day, looking for low cost, high value and not wanting to invest in brick and mortar, and seeking a higher rate of return, the firm wanted to take advantage of what’s out there now. It keeps them from having to put up another factory to take care of expansion and, fundamentally, get cost down. So we’ve seen opportunity that we haven’t seen before over the last few years.
George Blank: In the last five years, there’s been an increased willingness to partner and outsource. We’ve also witnessed a much higher demand for efficacy and technology in manufacturing. New and more complicated requirements were established and are necessary to participate in the medical device manufacturing sector. The level of reliability has increased significantly because we are now mandated by FDA and ISO to use all sorts of technologies and risk-avoidance methodologies prior to a product being manufactured. As a result, the standards and the costs of getting started in medical product manufacturing have significantly increased. From my vantage point, that’s a very favorable development because, in the end, the safeguards for the patients are much higher.
Brian Moore: We’ve been doing a five-year strategic planning exercise, so we’ve been thinking in these terms. We’ve almost doubled the size of our company in the last five years, and the question is whether we can do it in the next five. I think we can.
Speaking from the orthopedic perspective, I think there’s been more globalization. That’s been the buzzword, hasn’t it? Companies are focusing on the global marketplace, and orthopedic OEMs certainly are starting to catch up to the idea that there is a bigger market out there. They’ve been dominated by America, but now they’re looking at low-cost economies and innovation in global markets. What’s happening is that the quality and value propositions are becoming far more important. We’ve also seen a more austere regulatory environment develop over the last five years.
Ben Dunn: Over the last five years we’ve seen a continued move toward globalization—device companies attacking global markets and using clinical trials now globally, and there certainly has been a rise in outsourcing. We’ve seen the greater acceptance and use of outsourcing in new and broader ways. Third, we have an oligopoly structure that’s still too strong. There’s a huge dichotomy between the very large device players and the smaller ones and what I call the struggling mid-tier. But the big guys keep getting bigger. Innovative technologies start with small companies that are then sold to larger companies because of the distribution muscle.
Paul Touhey: Two things come to mind immediately. Reimbursement in diagnostics hasn’t kept up with the pace of innovation, so companies are less interested in getting into the field. The majority of the time—about 75%—diagnostic tests are used to determine the kind of care to be implemented. And diagnostic products—X-rays, blood tests, CT scans—amount to 5% of healthcare costs. So there should be some incentives in the form of reimbursement to get companies to really get behind diagnostic products. Right now, the return on the investment is difficult to justify.
I also think the way the device industry has worked well with the FDA in terms of funding has been an important trend over the last five years. Despite the good work industry and the agency have done, the FDA remains under-funded. The agency is not keeping up with the mandate it was given by Congress. I think it is in everyone’s best interests—patients, doctors, industry—to get the FDA what it needs because we all benefit from a properly funded agency, with oversight.
Chris Oleksy: The consolidations within the space at the OEM level creates some turmoil within the supply base. One minute you’re working for one company that you may have created great working relationships with, and now you’re working with their acquirer, which you may or may not know. There will be many, many more consolidations to come, so suppliers need to be prepared to manage these transitions.
The focus on cost over quality is concerning. Washington and consumers are pressing for cost downs, etc. Wall Street is interested in increased profits. As the old saying goes, “Something’s gotta give.” Although there are productivity gains, etc., that can be achieved, there are only so many things that can be done. As in other industries that have faced this, the end result could lead to suppliers, OEMs and providers cutting quality in order to meet cost down edicts. In other industries poor quality may lead to an unhappy customer. In this industry, it could lead to patient injury or death. Medical device “value” needs to be considered over “price.”
As far as anything unexpected, the issues in China such as the heparin topic are surprising. Sabotage can happen anywhere, as was seen in the Tylenol recall from store shelves years ago. But this level of issue at the manufacturing end is not to be expected.
John Carey: Companies have really grown significantly over the last five years. Some of the big companies have gotten bigger through merger and acquisition activity. And after the mergers have taken place companies then try to manage the inefficiency caused by those types of transactions by turning to third parties.
What are some of the trends that have characterized the device space in recent years?
Moore: There’s been a lot of focus on cost and quality. As part of that, in our industry, there’s been far more outsourcing. Most of the large OEMs are going to the outsourcing channels more and becoming more global. When you’re talking about going global, I think it’s important to distinguish between emerging markets and low-cost sources. A supplier has to understand the difference between the two. Our customers need to go into emerging areas such as China or India, which gives them a low-cost advantage and proximity to markets. But, as a supplier, you have to think about whether you follow them in and for what reasons. Are you going in to address emerging markets or to supply a customer? Or are you going in search of low-cost sources—which you have to be careful about because you could end up chasing your tail? Today it’s China. Tomorrow it could be India or Vietnam. So you have to have a pretty substantial infrastructure requirement and cost driver to support that constant chase. You need to understand why customers are going into markets. Why are you following? What are your reasons? They’re not always the same.
We’re also seeing more FDA inspectors being recruited, and they’re looking deep into the supply chain. Customers have higher demand for our performance and the need to adhere to the strictest FDA requirements. That’s accelerating. There have been more changes in the last two years than the previous three. It comes from, I think, recall issues and litigation. They have a way of motivating people.
Dunn: Continued industry consolidation is clearly one of them. Within that is a trend of smaller companies and innovative technologies being acquired. I think there has been a lot of pressure on the industry and we’ve seen the push for speed of development and time to market. So if you can buy a company that has a technology, that’s obviously much faster than running your own development project. I also think that smaller companies often struggle in a global market. It’s much harder for a smaller company to attack a global market; some don’t even try. They get to a certain level and then sell to someone who already has a distribution channel. The growth of outsourcing is another one. Medical device companies are focusing on their core competencies, which they have identified as research and development, regulatory, sales and marketing and support. Then they reach out to outsourcers to provide other services. I think a lot of that has been driven by the continued need to be more competitive and to innovate more rapidly.
Touhey: Especially in the diagnostics space, there’s been a lot of consolidation, a lot of M&A activity. And what you see happening, is companies such as Siemens, with the scale they have as an organization, are able to take management of a patient from soup to nuts. These companies can take the diagnostic process all the way from testing through to electronic medical records. It is nice to see some of these companies that have the resources, such as GE and Philips, starting to work on medical records, the accuracy and the portability of them. There is an important convergence of devices, diagnostics and electronic record keeping taking place that can save lives and money.
Carey: I think there also is a trend that we see emerging in our business—a process improvement trend. Medical device companies want to improve many aspects of their product development process. Requirements management, design, testing and the automation of testing—these types of process improvements are critical as companies try to speed their time to market. I think the medical device space is one that has had a lot of latitude over the years compared to other marketplaces where time to market is everything. The medical device space is highly regulated, and there has to be a focus on quality. With some process improvements, you can improve on a five-year time to market very easily. Process improvement leads to better time to market without sacrificing quality.
Another trend is wireless—trying to get to wireless aspects of delivery. We see companies trying to get their devices to integrate wirelessly, to operate wirelessly or report wirelessly. Other industries have been quicker to adopt, and now we see medical devices hopping on that trend.
Bienias: In general, we’ve seen far more innovation. There seems to be far more creative, novel technologies. There are some really clever products and they’re challenging from a design and development and manufacturing standpoint. It is a lot of fun. From my point of view, the merger and acquisition activity has had a big impact. A year or two ago, it was pretty clear for companies like ours who had what niche. And now you look at a big acquisition like Avail by Flextronics and all of a sudden you don’t know how that changes the landscape. Does that mean opportunity for us, for example? There’s a changing of the niche of the markets we’re in. Obviously, another trend that has grown over the last few years has been the focus on FDA and product safety. You look at what recently happened with heparin in China, and it calls into question all the healthcare manufacturing done in China. I think it is great that the FDA is putting some more people there. It will help accelerate how rapidly Chinese companies will advance to a state of a control similar to their partners on the other side of the ocean.
Blank: There’s been a continuous trend toward OEMs driving down costs and have their contract manufacturing partners participate in ongoing improvements. You don’t raise prices; you find ways to lower costs and prices.
I think there’s also been a trend to go offshore. And more OEMs are comfortable with that. They’re more comfortable than they used to be because of the necessity to drive costs down and being close to other markets. Also, an increasing percentage of OEMs’ sales are coming from outside the United States as smaller international markets develop. Other trends include prevention and risk avoidance, and a push for quality.
What overall market forces have impacted the device industry in the past five years?
Carey: I think it is a fallacy that the healthcare industry is insulated from the general economy. There is still a slowdown factor that the industry has to deal with. When things change in Washington, when managed care first came on the stage, for example, nobody really understood it. But they did understand that it would have some sort of effect—positive or negative—on reimbursement. And that was enough to send a chill through the healthcare marketplace, and medical device manufacturers certainly felt that.
There also has been a tremendous amount of opportunity globally—Latin America, India, China and other places that haven’t traditionally been real consumers of medical device technology are really going to put the most demand on the industry. But that could be a really positive development for medical device manufacturers that figure out a way to do a lot of business in those areas.
Oleksy: Competition and patent expiration similar to what has taken place in pharma. As patents expired and technology improvements had diminished return, as in the PC industry, more competition surfaced, making it tougher for the large OEMs to maintain their growth and profit objectives. This will continue in the years ahead.
Moore: The thing that drives the orthopedic sector at the end of the day is that people are living longer; they’re wearing their joints out quicker, and they have more disposable income to get them fixed. If you look at those as a combination, I don’t think it’s a surprise that the majority of the market is concentrated in the United States, where the disposable income is higher, elective procedure choice is greater and there’s more of a desire for a quick fix. One of the things about orthopedics—it’s one of the few branches of medical devices where you have a nearly 100% chance of success. You can literally go from canes to dancing in weeks. That’s powerful for the informed consumers.
The push for lower costs is another force at work. One of the things people don’t fully understand, however, as they talk about the gloom and doom of a low-cost process, is that if you reduce prices, then basic economics will tell you that your addressable market becomes greater as prices become lower. There are a lot of people in the world [who] would benefit from orthopedic procedures, but [they haven’t] been available because of prices or healthcare policies, etc.
Blank: We have seen a lot of M&A activity. Several customers have consolidated. There’s been consolidation in our competition as well. Where there used to be 10 to 12 competitors, now there are only three or four—and that can be good and bad. Now we have greater concentration of business with bigger companies, which you find when you grow. If you’re willing to take risks as a contract manufacturer and get involved with newer ideas—where you don’t know if they’re going to succeed or not—there are plenty of new areas to pursue.
Which medical device market sectors have been notable in the last few years? Will those continue to grow? Will there be others?
Oleksy: Orthopedics, diagnostics and pain/medicine delivery systems have been key. And there are many untreated areas that still exist. This will also continue as the baby boomers enter the “treatment space.” Cardiovascular has had some diminished return due to the technology saturation that has taken place in items like stents or pacing. Although these are very important areas and will be in high demand for years just like PCs, the technology saturation and patent expiration will slow down new products a bit and replacements of older technology will not be as common. Evolving areas are prevention diagnostics and gene therapy.
Carey: When you look at different sectors, the cardiovascular sector certainly has had tremendous growth and success—even despite recent stent setbacks—and I think it will continue to grow, particularly as people continue to develop awareness of cardiovascular health.
There have been tremendous gains made in patient monitoring—not necessarily bedside monitoring, but monitoring of implantable devices, monitoring of diseases such as diabetes. That type of improved monitoring is going to deliver healthcare in a more efficient fashion, and we see a tremendous amount of growth in the monitoring space. When you look at the populations out there that suffer form chronic diseases, they are demanding more freedom. There is a tremendous amount of innovation that should lead to improved patient outcomes but also in just-in-time medicine, where you can have true monitoring of these patients in a more real-time fashion. So when there is a problem, the decision to seek help and design treatment is going to be enhanced by a lot of these devices.
I think another sector that has had a tremendous amount of growth, and M&A activity, has been diagnostics—imaging diagnostics through to clinical chemistry diagnostics. There has been a lot of convergence going on there. Companies like Siemens and GE and Philips are recognizing how this continuum of diagnostics really drives the experience of the patient, and those types of device companies are looking to get out in front. But it also leaves room for smaller, innovative, more nimble companies to make improvements, maybe with the hope of getting acquired themselves.
Moore: In orthopedics, there has been more minimally invasive surgery. We’ve also seen changes in metal-on-metal products. Resurfacing has been big, and we’ve seen lots of growth in the spinal markets. Technical and litigation risk seem to have eased a bit, and people are pushing the frontiers of the spinal market. There has been a big increase in the last one to two years in startup companies doing spine and trauma products. Large-joint is pretty saturated. There’s a whole world of startups that we’re keeping an eye on. Right now, metal implants offer the quick fix. The biologics, ultimately, will be the answer. But we’re a long way off for that one.
Dunn: I think if you look at orthopedics there has been a lot of development particularly in the spinal market and with reconstructive implants, companies have been extremely innovative over the last five years—a lot of interesting companies and technologies that have been introducing a wide range of new devices. I also think the imaging space has seen a rapid rise in innovation. The number of different applications utilizing imaging has increased dramatically.
Blank: The cardiology market is still growing faster than other markets. Orthopedic market growth is centered in spine, while larger joints are fueled by organic growth. The general market for devices is probably growing around 6%, while cardiovascular and orthopedics have outpaced that. Minimally invasive surgery is another area that has grown significantly over the last five years and should continue to grow moving forward. The laparoscopic sector is changing, too, and there should continue to be nice opportunities there. Long term, diagnostics will see big innovation, particularly in electrochemical applications—miniature devices will provide diagnostic functions. There also will be greater emphasis on more predictive technology.
How have regulatory factors and reimbursement trends helped or hurt the industry?
Dunn: Regulatory and payment surely shape the industry. So some of the recent regulatory fast tracking of certain items has helped. I think the industry has done a remarkably good job of adjusting to changing regulatory hurdles and requirements. I think the payment situation has hurt certain sectors and helped others. Reimbursement can greatly affect markets where changes occur, and it is something we have to keep a close eye on, as there will be more pressure on companies to prove greater efficacy to get reimbursed over an existing device. So if you’re bringing out a new device and want to get paid, you’re going to have to really demonstrate efficacy in a number of different ways and cost benefit analyses. Reimbursement will be an even bigger issue moving forward.
Carey: On the regulatory side, it’s about improving quality. When a company is under the regulatory microscope it’s tough, but it encourages competitors to pay attention to quality. It goes back to process improvement. You certainly see a lot more news and attention given to device manufacturers when they stumble.
Payments—there’s good and bad there. As the reimbursements change, you will see a couple of things happen. It will probably change some of the market leaders as we know them. Certain procedures won’t be reimbursed the same way, and it will be tougher to move them. But, in a way, this does encourage innovation. There is a ripple effect. Companies rush to fill the void when certain types of procedures go up or down in reimbursement. Sometimes reimbursement changes can have a stifling effect when there’s a change, because the market stands still as it tries to understand the changes and how the healthcare delivery engine can deal with it. Once that’s understood, I think it encourages innovation. In the final analysis, even when reimbursement changes, it doesn’t go away; it moves to another space or another way of performing procedures. If you think of a marketplace where your reimbursement is changing, it’s like a tsunami hitting. It can be hard to adjust.
Bienias: I’ve been in this business for more than 30 years, and one of the sayings I’ve developed that we use here often is: We have to protect our customers; we have to protect ourselves from our customers; and we have to protect the customers from themselves. We have had a number of cases—not deliberately—where a customer would go down a wrong path. We’re careful to protect our customers. We take a pretty steady, applied approach to not sacrificing or cutting corners. The FDA does a great job in helping to protect the public health. I think they do need more resources. We see improvements there, too. The quality of the training and the field people is far better today than it was in the late ’70s and early ’80s, for example. I think that’s a good thing. It makes the manufacturers better. It gives us a level of competition in the world that, in a way, is a barrier to entry. It’s not easy to be in this business and stay in this business.
Blank: The payment situation is more threatening than the regulatory climate. I think the Medicare and Medicaid systems will continue to be under pressure, which will have an impact on what’s brought to market. Devices will have to show extreme benefit in patient outcomes and improved financial benefits. There will be a focus on continued reduction in hospital stays.
Oleksy: Regulatory has been an issue. Sometimes, by the time a product is approved, the therapy or technology is obsolete.
Over the past five years, what do you feel have been the major breakthroughs (products or processes) in the medical device industry?
Bienias: I would say cardiovascular and drug-device combination products. I think you’ll see continued growth in cardiovascular along with minimally invasive surgical techniques and robotics. Overall, we’ll need to address the aging of the population and the increasing number of patients [who] will need to be treated.
Dunn: One of the big breakthroughs has been the rise of combination products. The ability to put a therapeutic on a medical device has very wide-ranging implications for the industry. There’s the ability to take an old device and make it better, more effective. There can be two different developmental philosophies when you combine drug and device companies. Pharmaceutical companies can be much more staid in their philosophy. When you merge that with a device company’s much shorter time frame, it can get interesting. We’re hearing fascinating stories from development teams that have tried to merge those two together and the issues that they have faced in trying to take advantage of the huge opportunities.
Touhey: There are a few areas I find interesting that I think will continue to grow in importance. One is the area of artificial organs. For example, companies are able to come up with replacement bladders that are made from human tissues and cells. It’s truly personalized medicine.
Another area is the convergence of drugs and devices that can tell how patients are responding to therapy or that could predict what the outcome may be before a therapy is even administered. Right now, it is more in the concept phase than in actual practice, but we’re getting closer. A diagnostic company, for example, could work with a therapeutic company to come up with a diagnostic that will separate the population that will or will not benefit from a drug but also help determine if a drug is actually working.
Neuromodular stimulation is another growth area that’s getting a lot of attention right now. The idea of attempting to avoid drug therapy and work on a neuromodular basis for diseases treatment is a perfect place for the device industry to really make an impact.
Another one of the positive breakthroughs in the past five years has been in the area of biomarkers, which can act as indicators of risk for certain diseases, such as cardiovascular disease and different cancers. Being able to determine a patient’s risk prior to a cardiovascular event or a cancer diagnosis is a major step forward in disease management.
Carey: No doubt about it; the drug-coated stent could be considered a blockbuster. But certainly there’s been a lot of speculation and innovation in the robotic surgery area. That’s a space where companies such as Intuitive Surgical show a lot of promise—especially when you see how their stock is performing. There’s a lot of anticipation with those types of devices. And though not always device-driven, there’s a lot of change in the diagnostic space, with Siemens making such large investments. Diagnostics in years to come has “blockbuster” written all over it.
Blank: Of course, the drug-coated stent is a major device breakthrough. I know there have been recent questions about it, but these devices remain a major step forward in patient care. There have been notable breakthroughs in cancer treatment and diagnostics. In surgery, I really love computer-aided robotic surgery systems that are now available. They have significantly improved the outcomes of surgery—for prostate surgery in particular. The accuracy is incredible. Manufacturing processes continue improving. We’re better able to ensure that processes are repeatable and able to be validated—thanks, in large part, to software improvements. I see a continued trend toward devices becoming smaller and smarter. In diagnostics, we’ll see more sophisticated procedures that lead to earlier diagnosis and that can predict outcomes, allowing for earlier treatment.
Oleksy: Robotic surgery, DNA/gene mapping and minimally invasive surgery.
Outsourcing certainly is a big (and growing) part of the medical device manufacturing industry and its success. How has the sector grown or changed in the last five years? How are OEMs using outsourcing partners now compared to years past?
Oleksy: The key is the word “partner”’ and not “vendor” or “supplier.” It is clear that medical device OEMs need partners to help them achieve their changing goals. The “two heads are always better than one” mentality has prevailed and will continue to prevail and be a competitive advantage for those that manage it well. With all of the impending changes coming in this industry, it is key that the two heads working together as partners to meet each other’s needs be a key focus of their strategy. OEMs must divide and conquer so that they do what they do best and the supply base does what it does best. In this space, which will get tougher, you need friends/partners to hold hands with and work together for the best needs of the patient.
Carey: We’ve got a unique perspective because we provide software development services for companies, whether OEMs or contract manufacturers. We’ve seen the [medical device] industry start to adopt the same characteristics as other industries that have come to terms with outsourcing a lot sooner. They’re finding what they do best—the physics, science, the chemistry—and getting efficient with that core competency. Then they look to another company to develop the hardware or software, or provide industrial design. I think the device manufacturers that have made the most strides in this area are the ones who have found their core competencies early and have identified suppliers that can provide best-of-breed services in areas they need to outsource. Companies have a lot of things to be careful about when looking for suppliers—particularly in a highly regulated environment. There’s a specialty to picking suppliers. Once companies adapt and really improve processes and get better at managing outsourcing, they’ll see an improvement in time to market and equal or better quality also as a result. When you look at other industries that have gone through this, that’s been the outcome. But there will always be growing pains to gaining those efficiencies.
Bienias: Number one, we’re probably getting more longer-term contracts than we have in the past. There’s a tendency where you used to have year-to-year or two-year [contracts]; now we’re seeing three to five. Companies are pairing up for the longer haul. Some of our clients have signed up for a long, long time. They realize that the process of jumping around isn’t that good for them. As companies get tighter with their controls, it makes more sense to have us on board as an extension of their internal processes. We’re looking for the right products and the right partners.
Dunn: Outsourcing has grown over the last five years in several ways—in the number of providers as well as the kinds of services they’re providing. There’s also been a much greater comfort level that device companies have reached in employing outsourcing, and they’re getting more sophisticated in how they use their outsourcing strategy. In the past, you might just have had a project engineer making an outsourcing decision for a specific product. Now you have companies with outsourcing teams that manage the outsourcing relationship. It’s a core part of their business. But as we hit tougher economic times, there will be pressure on outsourcers to make process improvements and reduce cost. If they fail to do so, they run the risk that companies would have an incentive to look for other solutions, including taking things back in house.
Touhey: Companies come to us to fulfill an outsourcing role. And we find that they, over the last few years, are being more judicious about manufacturing and tackling only what they’re good at. That’s one of the smartest ways to compete: Find the right partners for the parts of the process you may not do as well.
Blank: Over the last five years, progressively, customers have become more comfortable with outsourcing. Manufacturers also have become more competent and more sophisticated. We’re continually employing new technology that is repeatable and validatable and gives our customers a lot of confidence. Customers are more willing to allow their suppliers to participate in the design and development process—allowing us to keep an eye on how the device will be manufactured. This really benefits both sides. That wasn’t the case five years ago. We’re seeing a shallow and short recession here, I believe, which shouldn’t have too much of an effect on healthcare. If I’m wrong, there may be more of a cutback in design services, but OEMs will be driven to develop new products and we’re still part of that process. The average OEM should expect to cut their speed to market 15% to 20% by working with a qualified contract manufacturer. Outsourcing manufacturers are more nimble and as long as speed to market is still key, OEMs will still be interested in outsourcing.
Moore: Companies are sitting down with us at very early stages. They want us to do manufacturing, design and develop, get all the approvals—FDA and CE markings, packaging, marketing. We’re becoming an extension of their internal manufacturing process, and that’s accelerating. There are myriad companies knocking on our doors. Many are startups looking for help. They want us to walk them through the regulatory and the manufacturing process. So we have to do two jobs. One is to bond with the large OEM. The other is to be capable of putting our arms around the small company. Either way, these companies are in business for clinical excellence, and we can help with manufacturing, procurement, quality, etc.—all the pieces. They’re all looking for the regulatory and quality framework. Ultimately, I think, in the orthopedic sector, most OEMs are committed to longer and more intensive outsourcing activity. And many of them have facilities up for sale (Editor’s note: Symmetry recently bought DePuy’s instrument manufacturing facility in New Bedford, MA)
It’s fair to say the medical device industry has seen a good deal of success in the last five years. Do you see growth continuing?
Carey: I think the growth will continue, though a change in [presidential] administration could cause it to slow some. There is an artificial economy around the healthcare marketplace. Overall, demand is growing—not just domestically but across the globe. As healthcare delivery systems get better in other countries, we’ll see demand for the types of devices we use everyday in our healthcare delivery system.
Oleksy: Yes, yes, yes! So many things bode well for the device industry. Therapies are getting better. Technology is getting better. Life expectancy is expanding. Global expansion is taking place.
Moore: Again, from the orthopedic perspective, I think the fundamentals are good. I doubt there will be major evolution in large joint. The thing that will drive large joint in the next few years will be demographics and emerging markets as large countries like India and China open up. People forget that there are probably 100 million people in those countries that are upwardly mobile that would be interested in purchasing Western technology—though their own technology is quickly catching up—so that will be one trend. There will be gradual improvements to large-joint products, but I doubt that there would be a huge breakthrough on the metal implants front. We will see continuing acceleration in areas like spine and trauma.
Carey: I think the growth will continue, though a change in [presidential] administration could cause it to slow some. There is an artificial economy around the healthcare marketplace. Overall, demand is growing—not just domestically but across the globe. As healthcare delivery systems get better in other countries, we’ll see demand for the types of devices we use everyday in our healthcare delivery system.
Oleksy: Yes, yes, yes! So many things bode well for the device industry. Therapies are getting better. Technology is getting better. Life expectancy is expanding. Global expansion is taking place.
Moore: Again, from the orthopedic perspective, I think the fundamentals are good. I doubt there will be major evolution in large joint. The thing that will drive large joint in the next few years will be demographics and emerging markets as large countries like India and China open up. People forget that there are probably 100 million people in those countries that are upwardly mobile that would be interested in purchasing Western technology—though their own technology is quickly catching up—so that will be one trend. There will be gradual improvements to large-joint products, but I doubt that there would be a huge breakthrough on the metal implants front. We will see continuing acceleration in areas like spine and trauma. The growth in those sectors is outstripping growth in major joints. No matter what the market is, however, you have to link rate of change to the people delivering the products and the need to get them up to speed. And then, of course, you have to get backup systems, instrumentation, sterilization systems, cases, etc. You just can’t turn up with a new joint on day one. It’s not like rolling out a new computer. If every time you purchased a new computer, you had to go through a two-week training course, you’d see adoption slow pretty dramatically.
Dunn: I see the growth continuing. The demographics are such that we have a growing world population, better access to healthcare, and an aging population in developed countries. All of this suggests that the use of medical dedical devices should continue to grow, and companies will find innovative ways to serve that market. That isn’t to say there won’t be major pressures on device companies—certainly pricing—but there will be a premium placed on devices that have real benefits and are cost effective. Cost is critical. There’s only so much of the nation’s GDP [gross domestic product] that can be spent on healthcare.
Blank: The worldwide device market is still growing, and I think the rate of growth will continue to increase, and international markets certainly help with that. I anticipate the next five to 10 years to be another great time for medical devices.
Bienias: We’ve seen steady growth. Last year was the best year in the company’s 42-year history. And this year we’re off to an even better start. We’re looking for additional engineering talent to meet the demand. Every project now that’s coming in the door is examined far more critically. We have a number of excellent projects to select from.
If you were to describe the medical device industry in the next five to 10 years, what predictions would you make? What will companies have to do to be successful?
Dunn: Companies will have to be able to compete in a global market and outsourcers will have to be able to provide services to different markets. We’ve worked with early stage startup companies that have even bypassed the US market. They’re getting CE mark and attacking Europe or even Asia and then coming back to the United States. Companies that are able to maximize manufacturing efficiency and outsourcing relationships will have an advantage in an environment of increased pricing pressure. I also feel that device companies will need to employ a wider range of technologies, from nanotechnology to “smart devices” that not only act as a device but collect data as well that a physician can either monitor or review.
Oleksy: Three words: Partner, partner, partner. Other keys to success? Be global. Be thought leaders. Be excellent in quality, delivery and then cost.
Moore: The orthopedic industry will be more global. I think we’ll see another large consolidation in the large OEM space. I think the outsourcing base also will consolidate a little. There are more global macroeconomic trends at work.
To compete in the future, companies will have to develop mutually beneficial partnerships with customers; be very responsive; operate on a global basis; provide a wide range of combined products and services; anticipate market trends and emerging technologies; and ensure all this is delivered in an increasingly demanding regulatory and quality climate to ensure that customers get products to market quickly.
Bienias: We’ll probably have to look at and adapt to different technologies, such as miniaturization. There also will be innovation in processes for putting products together and implementation of higher manufacturing technologies. We’ll have to handle more products that are coated, medicated, etc. We feel good about being positioned to do that. To look at the future, I’ll look back. I’m approaching the tail end of my career, but in the years that I’ve been in this industry, I’ve watched the evolution of technology and the availability of outsourcing services grow and develop. I’m very optimistic about the future with regard to a blending of regulations and technology to make good products available and affordable. I think we’ll see more consolidation and outsourcing companies gathering vertical capabilities. You’re going to have to be able to meet customers’ changing demands and provide a wide variety of skills and value, or your customers just won’t stick with you. Going forward, the FDA will have to be more active in their inspections overseas. In a global market, that’s going to be more critical than ever before.
Carey: Companies will have to know their core competency and their customers. One area in which medical device companies have taken a great interest in the last five to 10 years is to better understand customers. And they also need to understand the competition better than they used to—better able to analyze their competition and the differentiators they need to have in their products to remain competitive. And firms will need to continue to develop more agile methods to speed time to market. If you can figure out a way to speed time to market without sacrificing quality, I think you’ll be a winner.
Blank: The demands on OEMs and contract manufacturers will continue to increase. The focus on profitability and effectiveness will be heightened. The main players—the larger contract manufacturers will benefit. There will be fewer people trying to get into this business.
Touhey: Industry growth will continue and there will be a particular focus on cancer. For people under the age of 85, cancer is the largest killer. Anything done that will help manage the disease—particularly in diagnostics—will see growth. There will be earlier testing done to determine disease states and vulnerability—before a patient is treated with costly drugs and procedures. The key will be whether reimbursement keeps up with investment. I do see it changing. Continuing to spend $10,000 a month on very expensive therapeutics that may extend the life of a patient for several months is going to overwhelm the system. More has to be done upfront—prevention and early diagnosis help people live better, longer lives and help with therapy determination. Early diagnosis is the key.
We’re doing robust cost effectiveness work upfront. And when payers see the impact of diagnostics on the healthcare system, I think it makes sense to start paying for early intervention, screening, and testing to spending money later in the cycle. The result will be lower cost and improved quality of life.
Going forward, the FDA will have to be more active in their inspections overseas. In a global market, that’s going to be more critical than ever before.