A Transformative Year

There’s something to be said for daydreaming. Actually, a lot has been said (and written) about daydreaming over the last century, from inventor Alexander Graham Bell’s theory of “unconscious processing” and author Lewis Carroll’s recipe for “mental mastication” to poet T.S. Eliot’s notion of “idea incubation.” Perhaps the most revealing, however, is the accidental discovery of the “default network”—psychology’s own Higgs boson of sorts—a lattice of brain neurons responsible for autobiographical mental imagery. Like Facebook for the brain, the default network is a bustling web of memories and streaming videos that fires up when the mind is not absorbed on more focused tasks.

Simply put, it’s the part of the brain in charge of daydreaming.

While active, the default network turns itself on and generates its own stimulation, essentially providing the brain with welcome respites from boredom. The network is literally and quite appropriately named: The mind wanders so easily and effortlessly that it appears to be a default mode of thought. That mode, however, should not be confused with an idle state. On the contrary, daydreaming, imagination, and self-referential thought are complex tasks for the brain.

As is analysis. Numerous studies have shown the brain’s “executive function network” (the area controlling such daily activities as planning, flexible thinking, focused attention and behavioral inhibition) typically is triggered when the mind’s analytical side is active. The executive network typically runs conversely to the brain’s default mode, but there are times both neurological grids function concurrently, leading to bursts of creativity and insightful problem-solving.

Creative folks, not surprisingly, tend to have overactive default networks; these hyped-up grids have propagated countless fantastical worlds, characters and creatures throughout the centuries, including but not limited to Moby Dick, Don Quixote, Huckleberry Finn, Camelot, Jumanji, Narnia, Oz (both the land and wizard), Whoville, and Wonderland. Indeed, Alice’s trip down a rabbit hole into a land of talking animals, eternal tea parties and angry playing cards seems like a befitting byproduct of Lewis Carroll’s default network.

So does the magic watch from “Sylvie and Bruno,” one of the author’s last children’s novels. In that story, Carroll describes a timepiece with the peculiar ability to control time: “…instead of its going with time, the time goes with it,” he writes. One watch peg allows the user to travel back in time by a month, while another limits past revisits to an hour, forcing all events to occur in reverse order. A dinner party, for example, regresses from washing up to forking food out of mouths to filling plates and finally wrapping potatoes back in skins for burial. Dialogue is similarly inverted. Carroll’s account of the party, consequently, sounds uncannily like a reverse trickfilm.

That watch likely would have made the past year in medtech significantly more interesting. Using the one-month time travel peg and some default network daydreaming, it is entirely conceivable to think the superbug outbreak from contaminated Olympus Corp. duodenoscopes (which sickened dozens of patients in a half-dozen cities and killed three in Los Angeles, Calif.) could have been prevented. A problem with contaminated bronchoscopes also could have been corrected before the U.S. Food and Drug Administration (FDA) learned of it.

The watch might not have stopped former FDA Commissioner Margaret A. Hamburg from resigning (her last day was March 31), but it likely would have given the agency a head start on finding her replacement. Stephen Ostroff, the FDA’s chief scientist and a former official at the Centers for Disease Control and Prevention, currently is serving as the agency’s acting commissioner.

Similarly, the watch wouldn’t really have stemmed the flow of industry consolidation (Medtronic Inc.-Covidien plc, Zimmer Holdings Inc.-Biomet Inc., Danaher Corporation-Pall Corporation, Becton Dickinson and Company-Carefusion, Hill-Rom Holdings Inc.-Welch Allyn, Cardinal Health-Cordis, Smith & Nephew plc-Blue Belt Technologies Inc., among others) or resolved the device tax battle in Congress, but it might have given companies and politicians the opportunity to correct past mistakes and, perhaps, conduct their affairs in a smarter, more efficient manner (this is a daydream, after all).

Since Carroll’s watch is pure fantasy, Medical Product Outsourcing turned to various medtech professionals to make sense of the past year’s events and assess the potential challenges that may confront the industry in 2016. Using only the executive function network areas of their brains, the participants included:

• Tim Durst, a partner who leads the medical technology consulting practice at A.T. Kearney, a global management consulting firm with offices in more than 40 countries. Durst has more than 25 years of experience in consulting for the industry—his areas of focus includes medical device, in-vitro diagnostics, medical imaging, pharmaceutical, consumer products and industrial. Before he joined A.T. Kearney, Durst was a partner with PRTM Management Consultants and PwC; he also has held leadership and technical positions at 3M Company, A.O. Smith Company, and Rockwell Automation.
• Mark Leahey, president and CEO of the Medical Device Manufacturers Association (MDMA), a national trade association in Washington, D.C., that represents hundreds of research-driven medical technology companies. Leahey has led the organization since 2001.
• Kevin Molloy, director of Advisory Services, Healthcare Strategy & Options at PwC, the world’s largest professional services network. Molloy also worked for two years as a manager at PRTM Management Consultants, was the director of R&D systems at Haemonetics Corporation, and spent nine years as an engineer.

MPO: How would you characterize the past year (2015) in medtech? Please explain your answer.
Kevin Molloy: Consolidation. Specifically with both the traditional medical technology companies acquiring and combining, and with new entrants coming into the space at a more accelerated level in 2015.

Tim Durst: Realization. Over the last several years we have seen major changes in policy affecting our healthcare system, with many of the implications understood but projected. It is now clear that most of those projections were correct. These include: Consolidation across all players (providers, payers, manufacturers); reimbursement reductions leading to a focus on cost often at the expense of innovation and advanced care; and insurance rates going up, not down, leading the consumer to be more active in provider and treatment selection. The expected transformation is no longer a projection.

Mark Leahey: Complex. 2015 has seen ongoing challenges and opportunities for the medtech sector. While there continues to be trends in a positive direction in the regulatory pathways, innovators are also making cutting-edge breakthroughs that have the potential to revolutionize healthcare. This, of course, presents challenges as new science and breakthrough technologies must be married with regulatory and reimbursement systems that can have difficulties striking the right balance. In addition, it remains a serious hurdle for medtech innovators to secure fair and adequate reimbursement for their products at a time where so much focus is being placed on securing efficiencies in healthcare delivery. Sadly, many of these short-sighted decisions are stifling ongoing investments in the cures and therapies of tomorrow.

At the same time, policy makers are taking steps to provide a stronger environment for medtech innovation. The [U.S.] House of Representatives overwhelmingly voted to repeal the medical device tax 280-140, and the [U.S.] Senate continues to build support to put an end to this policy. Both the Senate and the House are also examining legislation that would expedite patient and provider access to medical technologies and other treatments with a focus on the perspective of those who are afflicted with illnesses and diseases.

While there is no shortage of challenges and opportunities, I would characterize 2015 as “complex.” 

MPO: What was the single biggest issue facing the industry in 2015 (if there was one)? Why did this issue stand out above others?   
Durst: The biggest issue is reimbursement reductions, since it has a wide-ranging impact on medical device and diagnostic companies. This, combined with the medical device excise tax and a larger proportion of sales coming from lower margin international markets, has led device companies to conduct major operational cost restructuring to their businesses.

Leahey: As always, there are a myriad of issues facing medtech innovators at any given time, often dependent on their stage of growth. That being said, the medical device tax continues to divert billions of dollars away from job creation and patient care, and hampers an industry that leads the world but whose position is being challenged.  Hand-in-hand with the device tax, the nation’s reimbursement systems continue to present large challenges for medtech innovation. If medical technology is to continue driving down the costs of care and improve outcomes, it is critical that a fair reimbursement system is in place.

Our industry is also being challenged by efforts to weaken the nation’s patent system, which is why MDMA joined with other members of the life science ecosystem to protect the intellectual property rights of medtech innovators.

Lastly, there continues to be a lack of predictability as our members and the industry confront post-market issues with the FDA, and we hope to address many of these concerns in the upcoming Medical Device User Fee Amendments (MDUFA) IV negotiations.
As one can see, depending on the stage of growth and development a company is at, any one of these issues could present the “biggest” challenge to success, which is why MDMA prioritizes all of these issues.

Molloy: New entrants are disrupting the industry and are partly driving the consolidation. This disruption is pushing traditional medical technology companies to adapt and change their business model to an outcomes-based one. Specifically, we are seeing this stand out in segments such as diagnostics and diabetes care.

MPO: What were some of the other issues impacting the medtech industry in 2015, and how did they each impact the sector? Did these same issues plague the industry last year and in previous years? If so, why?
Leahey: While the device tax, regulatory and reimbursement challenges and others remain as major hurdles to boost medtech innovation, to a large extent they are impacting our industry as they have in the past. As you can imagine, many of these issues that innovators confront are facilitated directly with respective agencies, players, etc., and those parties are often siloed off from other components in the innovation ecosystem. But to the industry, these and other issues are viewed in totality, and can adversely impact the ability to grow and innovate.

When combining the ongoing threats to the patent system, market access and more, it is all the more impressive that the innovators and entrepreneurs who make up our industry remain so passionate.

Molloy: Some of these have been existing themes, but have been accelerated in 2015 and will continue into 2016. Moving towards an outcome-based business model, or risk sharing agreements, is one theme. This is becoming more important and is partly being driven forward as a result of the Affordable Care Act (ACA). The ACA promotes outcomes-based models so payment is not based solely on a product sale or on product use, but rather on a patient’s overall clinical outcome as compared to established clinical standards.

Also, new entrants have become more of a trending theme with new technologies that have been disrupting the industry. With devices, there is a trend toward smaller point- of-care equipment, which we have seen with utrasounds, X-rays, and of course, apps for iPhones that patients/consumers use directly. The democratization of medical care is an international trend and empowers the consumer with more information to make informed decisions on their own health and care.

In addition, overall care delivery is shifting, especially with new entrants and retailers entering the space. An example that embodies this shift is CVS changing its name to CVS Health, dropping the sale of cigarettes, and similar companies, like Walgreens and Walmart, providing flu shots and even wellness visits. In the past, care was more physician preference, but recently with companies that have significant consumer market share, large buying groups and non-traditional channels, the point of care model has resulted in an increase of patient preference.

Durst: The same issues are for the most part impacting the sector as last year but with continued pressure. We are a long way from stabilization in pricing, regulatory change, tax policy, emerging market maturation, and the world’s aging population served with overall less proportional resources. We have not hit the new normal. In addition to the general trends, a few areas have gotten more attention: device and data security, mega M&A, price and performance transparency, inversions and repatriating money held offshore.

MPO: Please assess the industry’s general health this year as compared to previous years, and explain how you came to your diagnosis.
Molloy: In general, the industry has remained healthy despite the ACA’s Medical Device Tax. Although, some companies and sectors are being impacted by new entrants, others, including diabetes care and in-vitro diagnostics are experiencing above average growth.

Durst: The general health of the industry relative to historic is not as positive. Growth rates of 2 percent or less when the world’s population is aging and requiring more care is clearly not where the industry has been. The focus was on technological innovation and patient care but now more of the focus is on solutions that support the overall cost of care management. That said, the industry needed to lose some weight and transform its business models and practices. This will lead to a more productive industry moving forward, but in the interim, it is not easy for providers, patients or investors.

Leahey: Medtech innovators by nature are flexible and adoptive, and despite the challenges that we face, it is clear that the industry is doing what it can to remain the global leader. Of course, the numerous challenges described above make this more difficult than it should be, but no one enters the medical device industry if they are not resilient and passionate. Perhaps one of the greatest concerns is how these challenges are stifling early-stage investments in the medtech companies of tomorrow. We know that these innovators are conducting some of the most cutting-edge research and development, and as venture capital and other resources shrink, it threatens job creation, innovation and patient care. Delivering on the promises of improved healthcare and a better quality of life remains the driving force of this dynamic industry, and while there continue to be many national—and international—headwinds, I strongly believe we are prepared to confront them head on.

MPO: What trends did you notice this year (in product design, manufacturing, packaging, outsourcing or otherwise)?
Durst: Product design: There is still continuing technological innovation but companies are broadening their solution sets and moving towards supporting new business models in the areas of mHealth, digital, and data analytics. Most companies are starting to get out of their historic comfort and capability zones. This is also leading to more collaborative development, partnerships and M&A. This is also requiring a change in what innovation means and the business practices to support it.
Manufacturing: Most of the larger companies have grown with many smaller acquisitions and most have not been deeply integrated. Consolidation of sites, moving to lower-cost countries and outsourcing are all being robustly considered. In addition, many device companies have not established best practices in manufacturing planning and scheduling, material flow systems, automation, and postponement, but are now looking at this very aggressively to improve inventory positions, reduce costs, and increase agility.

Sourcing: We have seen a lot of strategic sourcing. This industry has not built the capabilities to execute sourcing like other industries that have had more margin pressure and faster clock-speeds. That is changing significantly. With the need to counter reimbursement pressures, it is recognized that sourcing can deliver a lot of money relatively quickly compared to other operational changes.

Leahey: Beyond the heavy increase in mergers and acquisitions that everyone is aware of, we continue to see an increased amount of interaction and cooperation with new and existing members of the healthcare delivery system. Interoperability and communications between technologies continues to gain attention, and as a result, new companies and participants in healthcare are working to address these issues. In addition, as patients are getting more involved in their care and gaining assess to new information, it has been interesting to see tech companies that have not traditionally been involved in healthcare begin to make investments in its future. This is certainly an exciting time for medtech innovators as new possibilities present themselves, with new partners to explore how to improve patient care.

Molloy: There has been an increase in outsourcing, albeit not specifically in manufacturing but in product design. This increase can be attributed to companies establishing Centers of Excellence (COE) in product design overseas. In particular, Malaysia has witnessed a considerable amount of growth due to COE. Companies can leverage nearby manufacturing centers in these x-U.S. geographies to support existing products and for line extensions and minor platform projects in product development.

Another trend, although not new for 2015 but is tied to the COE strategy, is that companies are still looking to consolidate their R&D footprint, especially after the many acquisitions and mergers that have taken place.

MPO: How will this year’s issues/challenges shape the medtech industry in 2016? Please elaborate.
Leahey: Similar to previous years, the regulatory and reimbursement challenges will drive much of the advocacy and engagement for the medtech industry. While we certainly know the pivotal role we play in allowing patients and providers to coordinate their care, in recent years the industry’s collective voice has allowed us to show public officials and policy makers just how important it is to have the proper incentives and frameworks in place to support this unique American success story. More and more members of the medtech community continue to get involved in educating the public and others about just how complex it is to develop, design and improve the cutting-edge technologies that many often take for granted. Getting involved and sharing the amazing stories of increased life expectancies and improved productivity will help ensure that 2016 can be as bright as we know it should be.

Molloy: The medical technology industry continues to face multiple challenges entering 2016. Data informatics and cybersecurity remains a growing challenge and also an opportunity for firms, particularly in securing pacemakers and other life sustaining devices and protecting patient data. As more medical technology companies and firms continue to move into data analytics and cloud computing, they must understand the risks associated and available options to securely and safely protect this valued information. Diabetes remains a target area for new entrants as it continues to be considered a high growth area, along with obesity treatments. This will become a more crowded field as the new entrants take hold with their products and solutions in the market. A promising area is transcatheter aortic valve replacement technology for minimally invasive surgical procedures.

Durst: In 2016 we will see many similar trends in consolidation and cost-cutting. In the United States we will see the Affordable Care Act Cadillac Tax (a 40 percent tax on individual plans costing more than $10,200 and $27,000 for families) put in place. This will again add to the trend on premiums being increased and consumers becoming even more aware of healthcare costs. They will start taking even more control of their choices. This will put additional pressure on the industry to reduce costs and address the inevitable perception that device companies are disproportionately contributing to the costs. We will see more consolidation, more inversions, more cost cutting, and more focus on international and emerging markets.

MPO: What specific issues/challenges will confront the industry next year? Why?
Molloy: Changing business models will be challenges at the forefront of the industry in 2016. As new entrants continue to emerge, existing companies must be prepared to compete in specific market segments. Additionally, companies must be prepared to employ treatment-based outcomes business models. If companies and organizations prove successful in their risk-sharing agreements, the rest of the market must be able to quickly adapt to risk-based models.

Leahey: There continues to be serious challenges and concerns with the cost of care, and the role it has on individuals, families and our nation. With an aging population that is living longer, many policy makers and participants in the healthcare delivery system continue to examine policies and plans to rein in costs. We have a responsibility as an industry to share the powerful role we play in reducing costs, while simultaneously improving patient care. All too often policy makers and payers make decisions with short timeframes in mind, such as what is the most cost-effective delivery of care now. It is critical to look more broadly at the long-term benefits and improvements that a particular treatment provides, which all too often is not fully appreciated until many months, sometimes years out. Without question, the cost of care will remain a central issue that our industry will be fully engaged in.

MDUFA IV negotiations continue to move forward as well, and the various stakeholders and industry will remain engaged. It is important that we build off of what is working from MDUFA III, while improving parts of the regulatory framework that will increase access to patients and providers to safe and effective medical technologies.

There will be much ongoing work related to market access, compliance, patent reform and international issues in 2016 as well. This is why the MDMA team and the industry remain laser- focused on helping to ensure an environment exists where we can deliver on the promises of a better tomorrow.

Durst: Next year we should witness further “bulking up” in the healthcare system (insurers, hospital, retail pharmacies) that will all use their size to squeeze manufacturers. We’ll be in our third year of the UDI [unique device identification] rollout and should expect to see some categories affected by real world evidence of device efficacy. The leading story will still be the cost pressure on all manufacturers and the search for innovation.

MPO: Please discuss your predictions for growth based on the industry’s 2015 performance. What sectors (cardiovascular, sports trauma, etc.) will grow quicker than others? Why?
Durst: The industry should still expect growth in mature markets between 1 percent and 3 percent. Again, demographics and the ACA will still drive volume but reduced pricing, rationing, provider capacity constraints, and generally flat economic growth will counter this. Sector growth will still primarily line up with the aging population, non-discretionary chronic care. That includes heart disease, diabetes and similar conditions.

Molloy: Companion diagnostics is poised for significant growth. As gene sequencing companies consistently enhance their ability to sequence an individual’s genes cheaper, faster and with greater understanding, this information can result in more personalized treatments for the specific condition affecting the patient. Simply put, as we more thoroughly understand an individual’s DNA, therapies can be specifically developed and tailored to suit their needs.

Likewise, in-vitro diagnostics as a sector is growing faster than many subsets in medical technology. With the industry increasingly developing new tests and protocols for these devices to determine the best course of therapy, the potential for the development of additional and more detailed tests and instruments will only increase.