Investing in Tomorrow

Investing in Tomorrow

Gaining a Competitive Edge in Outsourcing Your R&D— Here Are Some Errors to Avoid

Stacey Bell
Editor at Large

As part of a highly competitive industry renowned for its innovations, it’s hardly surprising that medical device companies continuously search for that new technology, manufacturing process or business strategy that will propel their products to the next level. Increasingly, companies are finding that outsourcing their research and development (R&D) efforts can give them a strong competitive advantage in being first to market with a new gold standard of care.

The electronics department at Irvine, CA-based Omnica Corporation often takes time out for all-important brainstorming sessions. Photo courtesy of Omnica Corp.

For decades, OEMs have considered the R&D function part of their core competency. Recently, that mentality has shifted. Pressures to reduce costs while providing ever improved care, Wall Street analysts expecting ever better results and increased market demand have combined to spur more and faster product development cycles.

And while, in the past, a new product’s life cycle could span years, today that life cycle lasts about 18 months. Creating new products with new features and functionalities under such time pressures can be challenging—particularly since 80% of medtech companies have fewer than 50 employees. Today’s products also are increasingly complex—many include electronic components or software of some sort—which means staffers must be versed in more disciplines.

“If a company keeps a program inside and has to build a staff [to support a new technology], it can take six months to a year to get people on board and trained in a new competency,” said Robert R. Andrews, manager of Foster-Miller, Inc.’s Medical Division in Waltham, MA. “Plus, these employees will be distracted by other priorities. By going outside, a company could save significant time and dollars. After all, it’s time consuming and costly if a company heads in the wrong direction. If they’re working in a new area, they likely don’t know all the latest technologies they could employ, and that could cost them.”

Indeed, “several companies have eliminated their equipment engineering groups altogether in favor of outsourcing, saving millions of dollars and years in product development cycles in some cases,” reported Daniel Kaspryzk, president and CEO of Machine Solutions, Inc. (MSI) in Flagstaff, AZ.  

In addition to the benefits of being able to hire specialists only for the duration of a project, outsourcing offers other advantages. Often, an outside R&D firm has access to the latest technologies in a particular area, and the staff assigned to a project can concentrate on completing that task without having to navigate a company’s internal bureaucracy or politics.

Larger companies outsource R&D so that they can work on developing more products concurrently. Perhaps most important, because they work on product development every day, outside experts can draw on best practices and efficiencies that span a range of disciplines, saving clients significant dollars, time and aggravation.

Investing in the Future

While small start-up companies traditionally have leaned on outside firms for R&D assistance, larger organizations also have turned to outsourcing partners in increasing numbers in the past few years. The companies that spoke with Medical Product Outsourcing reported that their R&D service areas grew by 15% to 30% in 2005, and they forecast double-digit growth for 2006 as well. R&D funding remains strong, as does venture capital funding, which fuels growth in R&D from new medtech companies.  

Industry trade organization AdvaMed reported that medtech industry R&D spending, as a percentage of sales, climbed from 5.4% in 1990 to 11.4% in 2002, the latest year for which data are available. This figure is surpassed only by spending by the pharmaceutical sector (12.9% in 2002) and is more than three times the overall US average. Because medical device firms’ sales continue to increase by an estimated 10% annually, and more large companies are purchasing start-up companies to acquire their technologies, it becomes clear that more and more dollars are being poured into this area.

“Profitable medical device companies are investing heavily in the future, in R&D,” Andrews said.

That’s a good thing, since product development cycles are costing companies more money. A decade ago, moving a start-up medical device firm from concept to market typically cost $10 million to $20 million. Today, those figures have quadrupled.

Why? “It’s a parallel to personal computers,” explained Steve Maylish, director of business development for the Aubrey Group, Inc. in Irvine, CA. “Every time a computer’s memory and power increase, there are more software programs and applications to add. The same is true in medical devices. New technologies simplify some aspects, but they add another layer of complexity. There are more off-the-shelf solutions today, more electronics, more software, multiple user interfaces. But there are also increasingly high expectations for products and their capabilities.”

Defining the Future

As more companies outsource their R&D function for help in meeting and exceeding their own customers’ expectations, outside providers are seeing several trends develop. Among these is a tendency for some companies to skip a little too quickly over “R” in their hurry to get into “D.”

“We’re big advocates of innovation and keeping innovation alive. Too often companies come to the development side of the project too quickly, without fully considering alternative solutions,” noted Tor Alden, principal of HS Design, Inc. in Gladstone, NJ. “The research component is essential. You must spend time with the end users to find out what they want and how they’ll use the product.”

End users include everyone who makes contact with the product. In the case of a medical instrument, that would include doctors, technicians, patients and service personnel.

“Even companies with the best intentions still lose touch with a day in the life of the average user,” Alden continued. “For the product to succeed, you must consider if the technology is packaged in the best way for the end user, and you’ll only know if you conduct user research.”

Many companies today realize how essential it is to nail down a product’s features and functions with end users before the product proceeds into manufacturing. As a result, outside companies are building alliances with research companies or providing their own service in this area to help OEMs form tighter product definitions.

Designers at HS critique and discuss concepts during the development phase. Photo courtesy of HS Design, Inc.

Foster-Miller, which believes market research and focus groups are critical, has an in-house market research group. “Today the market research is more global; we need feedback from customers outside of the United States, too,” Andrews explained. “It’s also more complicated. We need potential users’ feedback, of course, but we also want to know: Who’s going to buy the product? Who will pay for it? What is the reimbursement code, or what is the pathway to acquire a new code? You need to know a product will make money and hospitals will be reimbursed for its use before proceeding too far into the development cycle.”

Ron Jellison, executive director of business development for KMC Systems, Inc. in Merrimack, NH, also reported that his company is seeing significantly more companies performing front-end research. “They’re asking for more help from us in developing elements of their product specification,” he said. “They also need help in defining the risk assessment, quality controls, etc.”

Walter Gilde, a marketing manager at KMC Systems, added that his company also actively encourages customers to conduct more front-end work. “We’re asking them what research they’ve done [and] what level of product requirements are defined and confirmed in the marketplace,” he noted.

Development programs within KMC Systems are primarily with start-up companies and midsize firms with revenues of less than $100 million. Few come to KMC with product definitions that are thorough enough to allow for entering the product development phase. The most common errors KMC sees in submitted product definitions are in unrealistic specifications and changes to a product that haven’t been thoroughly analyzed to see if the costs are warranted or supported by the market, reported Bob Evans, a marketing manager at KMC Systems.

Evans added that more higher-quality prototypes are being used to support market research activities. Today’s rapid prototyping processes allow companies to show a product’s final form and fit much more accurately—and in a more cost-efficient manner—than previous versions permitted. “It’s a double-edged sword, though,” Evans warned. “These prototypes give the perception that a product is farther along in the product development cycle than it actually is.”

Three-dimensional CAD programs and other software offerings have become quite sophisticated, allowing users to design ever more detailed models and prototypes. Also smoothing the design process are newer software programs that help designers convert bitmaps more easily and provide more drivers for graphics. Technologies such as VectorCAST help automate unit testing for software, a process which was previously manual and, thus, more time consuming.

On the hardware side, more integration of microcontrollers allows devices to offer more capabilities and functions without increasing their size. Maylish noted that these technology advances all contribute to the industry’s ability to create increasingly complex products in shorter timeframes. They also enable the overall trends toward continued product miniaturization and combination therapies—many for use in settings outside of traditional venues.

While many companies encourage their customers to fully develop their product definitions before seeking development assistance, BC Tech in Santa Cruz, CA, welcomes companies that have just a product concept. “I like it when they come to us with just a concept. That’s challenging; it’s fun and motivating,” said Ben Clawson, founder and CEO of BC Tech. “However, one of the biggest challenges we see is customers who are so in love with their idea that they have a hard time seeing the problems associated with the idea. There are always improvements that can be made on any concept. To have the greatest success with their products in the marketplace, customers must be willing to consider suggestions.” 

Equation Challenge

The top reason that OEMs haven’t outsourced R&D in the past was concern regarding who would own any new technologies created during the development process. Protecting intellectual property (IP), the lifeblood of any organization, is a must. Therefore, medical device companies must fully understand how their outsourcing partner deals with this issue—and get it in writing—before any proprietary information changes hands.

Quite a few companies assign all new technologies developed to the customer. “Our customer contracts typically are considered work for hire, so the IP is owned by the customer,” said Evans. “There are times we may request a license to use the developed technology in a noncompeting field.”

On the other hand, MSI holds the inventions and the IP. “We use four patented technologies centering around our specialties of stent crimping, tube processing, balloon pleating and folding as well as marker band swaging,” Kaspryzk explained, adding that MSI has another 33 process patents pending. “We have very advanced off-the-shelf solutions that we’ve patented. Some of our customers want to add bells and whistles for manufacturing reasons; others are plug and play. We can tailor our technologies to their specific needs. They own the IP around their product, but we own the IP around the process. If a company wants exclusive rights, we would consider that.”

Paying for R&D assistance can be a challenge for smaller companies. Fortunately, their potential outside partners understand the financing issues they face and are open to other options. For instance, KMC Systems noted that it will consider amortizing some of the development costs into the unit product cost if a long-term manufacturing commitment is secured. This arrangement gives the start-up time to raise funds through additional financing rounds.

CAD software provides a direct link to manufacturing, allowing companies to provide a database ready for production. Photo courtesy of HS Design, Inc.

In other situations, the company has negotiated a small royalty on the consumable revenue from the instrument. On occasion, outsourcing partners will accept an equity position in the company for the value of the service provided. Since it’s hard to pick companies that will succeed (“If we could do that, we’d all work in Wall Street firms!” Jellison joked), this latter option isn’t exercised often.

A third area companies should consider is who will manage the outsourced project from the inside. “If you haven’t done it before, it’s easy to underestimate how much time it takes,” Maylish cautioned. “It’s a full-time job because of all the communication, decision making and oversight that goes on.”

The person who interacts with the outside firm must be very knowledgeable in the project area to be able to make proper decisions and ensure the project progresses in the right direction. The project manager also must have access to his own CEO and CFO to ensure that large changes or decisions can be addressed promptly and with the proper authority.

The Future Starts Today

All indications are that R&D will continue to enjoy solid funding levels, and more outsourcing of this function will occur. As Don Archambault, director of business development for Omnica Corp. in Irvine, CA, noted, “There has been a tremendous amount of consolidation in both the medtech arena and among contract manufacturers, and a resulting rethinking of the outsourcing world. We’re in a revolutionary stage right now. There’s an abundance of work.”

Across the board, industry experts expect that abundance of work—accompanied by an abundance of innovation—to continue throughout 2006.

Stacey L. Bell is a freelance writer who specializes in business and marketing issues. She is based in Tampa, FL.