Repeat or Renewal?
Medical device industry professionals share their thoughts on the last12 months and discuss the sector’s prospects for a fresh start in 2012.
Those who cannot remember the pastare condemned to repeat it.
—George Santayana, Spanish-American philosopher,essayist, poet and novelist.
In F. Scott Fitzgerald’s classic novel “The Great Gatsby,” protagonist Jay Gatsby is willing to tackle the impossible to delight the love of his life—a beautiful but sardonic and somewhat cynical married socialite. Gatsby is determined to “fix everything” by recreating the era in which they were romantically involved, but is stopped short by the words of a trusted friend.
“You can’t repeat the past,” his friend, Nick Carraway, warns. Taken aback, the billionaire replies,
“Can’t repeat the past? Of course you can!”
In the fictional world, of course, anything is possible—even time travel. But such a concept, while fascinating, may not be too popular in the real world these days, given the length and extent of the latest global doldrums. To some extent, the world seems stuck on instant replay, mired in the same economic misfortune that significantly has reduced working class wealth, destroyed America’s housing market and prevented an overall robust recovery from taking place.
Some sectors of the economy are experiencing the sense of déjà vu more than others. Medical device manufacturers, for example, particularly have felt caught in a vicious cycle this year as they face many of the same challenges they encountered in 2010: healthcare reform, the U.S. regulatory process, the device excise tax, sluggish sales, pricing pressures and caps on reimbursement rates.
Over the last few weeks, Medical Product Outsourcing spoke to various industry professionals to analyze the overall impact of these challenges and determine whether device manufacturers can expect to remain in repeat mode in 2012. The professionals included:
• Mark Bonifacio, president of Bonifacio Consulting Services LLC, a medical device manufacturing consultancy in Natick, Mass.
• Mark B. Leahey, president and CEO of the Washington, D.C.-based Medical Device Manufacturers Association (MDMA), a national trade group that represents research-driven medical device companies.
• Daniel R. Matlis, president of Axendia Inc., a Yardley, Pa.-based analyst and strategic advisory firm focused on the life sciences and healthcare sectors.
• Alan Myers, vice president, Global Business Units at Jabil Healthcare & Life Sciences, a division of St. Petersburg, Fla.-based Jabil Circuit Inc., an electronic product solutions company that provides electronics design, manufacturing and product management services.
• Chuck Philipp, vice president of Value Plastics Inc., a plastic tubing component designer and manufacturer in Fort Collins, Colo.
• Rick Wise, CFA, managing director/equity research analyst for the Medical Supplies & Devices division of Leerink Swann LLC, an equity research, investment banking and asset management services firm with offices in Boston, Mass., New York, N.Y., and San Francisco, Calif.
• Mick Withers, head of the medical sector at Sagentia Ltd., a technology and product development company based in Cambridge, United Kingdom.
Use one word to describe the Year in Medtech. Please explain your answer.
Mark Bonifacio: Change. With Healthcare reform pending, in its existing form or in any form, change will be required. Doing business in the medtech world the way it has been done will not keep you at the forefront. Technologies and products that improve patient outcomes and reduce overall healthcare spending will rise to the top.
Mark B. Leahey: Challenging. It has been described by some as a “perfect storm” impacting medical device innovators today.There is an unpredictable regulatory pathway, venture capital funding continues to shrink, and the industry still faces—and is already planning for—a 2.3 percent medical device excise tax. This proud American industry is one of the only net trade exporters, but we are in danger of losing this position. Our elected officials note that we have to out-export, out-innovate and out-manufacture our competition, and the medical technology industry is one that can achieve all of these goals, but there are many challenges.
Daniel R. Matlis: Uncertain. That's the word I have heard medical device executives use most often when describing the current state of the industry. What are some of the issues that they often bring up?You have the 510(k) review process, the [Institute of Medicine] IOM saing it should be scrapped, while FDA and industry saying, "no no no"...it's like WinstonChurchill said:"Democracy is the worst form of government except all the others that have been tried."The same thing applies to the 510(k) process - it is not perfect, but it may be the best we have. The lack of clarity has caused a lot of uncertainty in 2011. Another issue that often comes up in discussions is healthcare reform and comparative effectiveness - how they are going to impact the industry. Another area of concern is the impact of globalization and outsourcing. There's a lot of angst by industry executives around that. Axendia did a research study on life-science global supply chains and what was very interesting is that 94 percent of the executives surveyed said that they're going to increase product sales worldwide and 78 percent say that they're going to increase global sourcing. But when we asked what they see as the greatest source of risks, 94 percent said that raw material supplied outside the U.S. represented the highest risk. The final issue that often comes up in discussions is the impact the excise tax will have on the industry and how it might stifle medical technology innovation. Add all these factors, and I believe I have justified my description of 2011 as uncertain.
Alan Myers: Evolving. Healthcare is evolving globally, and this means different things for different people, whether you're an OEM, whether you're in the contract manufacturing space, whether you're in Asia, in a BRIC country, Western Europe or North America, it's an activity that's evolving rapidly from my perspective. Having been in this industry for over 25 years, there's probably more evolution with the model than in a long time.
Chuck Philipp: Unpredictable. We saw month to month variations on the purchasing side with our customers. It was hard to explain why this happened, but our customers just seemed to be keeping a tight control on their inventory levels, similar to what we saw in 2009.
Rick Wise: Challenging because more than at any time in the several decades of observing the industry, it seems like every aspect of the industry is being challenged in multiple ways. Between the economy, an exceptionally complex and difficult regulatory environment, budgetary concerns at the state, local and hospital level, the pushback on innovation, the [medical device] world feels totally turned upside down. A lot of the innovative medical products are being sold in Europe first. There’s been a change in the mindset, a profound lack of understanding of how medical device innovation occurs. Medical devices occur in an iterative fashion. In addition, the FDA has a critical job to uphold the highest quality and safety standards possible. And as those standards and new regulatory processes evolve, it’s challenging for regulators and companies alike. Still, mechanical products are subjected to a great deal of abuse and wear and tear (products implanted inside the body) and you can’t expect these pieces of metal and plastic to be 100 percent forever. It’s sad to me that because of some real product performance issues—which happen—it feels like the pendulum has swung too far. We turn to doctors and medical technology for help with very challenging, complex disease states. No doctor is perfect, no device is perfect, no company is perfect, but this is a period where the pendulum has swung too far. It’s become all about products having to be 100 percent forever but that’s not realistic.
Mick Withers: Resilient. The macro-economic climate has been difficult in 2011 and this has clearly impacted the medtech industry. R&D [research and development] budgets are more constrained than ever with many projects on hold or subject to spending cuts. In parallel, the healthcare industry at large is under a cost cutting microscope resulting in increased pressure on margins and a more demanding sales process altogether. Despite this, the industry has shown great resilience. Most large medtech organizations are still driving their business forward by driving sales and continuing to invest as much as possible in their R&D. Whilst our general levels of interest remain high, there are signs that decisions processes are taking longer, i.e. clients are thinking longer and harder about the opportunities they are pursuing.
Please discuss the medical device design trends in 2011 and why those trends have come to the forefront this past year.
Bonifacio: MIS (minimally invasive surgery) and all the surrounding technologies have led to the miniaturization of many things. These trends will continue as in most cases they lead to better patient outcomes, shorter hospital stays/recoveries and better overall quality of life, which are all part of the healthcare paradigm shift that is occurring as we speak.
Withers: The trends for medical devices that we have seen in 2011 are cordless, disposable and easy to use. There are probably a couple of macro-trends behind this.The first is the convergence of the medical and consumer sectors. Due to both societal and economic drivers, there is a movement of products being used out of the hospital, into general practitioners’ offices and even in the home. This movement means that an entirely different set of users will be engaging with medical devices. This requires much more portable and intuitive products to be developed.
The second macro-trend is towards simpler remuneration models, which is increasing the demand for disposable medical devices as well as challenging the potential investment in larger capital systems. Finally, there is the opportunity presented by emerging markets. Most companies realize that now is the time to try and break into those markets but how do you get it right? China and India alone represent almost 40 percent of the global population and most of the emerging markets have experienced growth over the last few years versus the stagnation we have felt in the U.S. and Europe.
There is also increased disposable income and investment in healthcare, all making these markets important for the medtech industry. These markets require different design, different cost points and different forms of usability. They also generally require a more robust and portable delivery mechanism. I think these trends will absolutely continue in 2012 and will be even more apparent in research and development discussion rooms going forward.
Myers: At a macro level, if you think about the marketplace, there's a real challenge going on with global OEMs and how they manage growth. It's an industry where if you looked at North America particularly, surgical procedures are growing probably in the low single-digits or mid-single digits at best. Companies are trying to understand how to grow in this environment. I think there are two avenues from my perspective. One is organic growth and that's the multinational and the big OEMs in particular taking some of their cash and putting it in product pipelines. I think the second avenue from growth that we'll see is the continuation of consolidation in the industry. This consolidation will allow for investments in new technologies which treat for disease states that are growing more rapidly. The industry will continue to move investment away from the single-digit growth areas and move more rapidly into therapies and devices that are growing more rapidly and profitably than the rest of the industry.
Wise: Broadly speaking, the notion of the converging of drugs and devices through various delivery systems is not so much a design trend but more of an ever-present push toward minimally invasive approaches to addressing everything. The enormous secular trends that have been in place for some time are accelerating due to the desire to help patients heal more effectively and heal faster. I expect this trend will continue.
Matlis: One trend that has picked up steam in 2011 is the [Center for Devices and Radiological Health] CDRH's emphasis on the total product lifecycle (TPLC) approach. The FDA has been implementing TPLC for some time but we saw it really gain a lot of steam in 2011 with the CDRH putting it as its top priority for 2011 and then following shortly thereafter by including it as its top priority in its five-year plan. In addition we are starting to see requirements for more medical devices to follow that TPLC approach. The second one is somewhat related - the increasing difficulty for industry to collaborate with surgeons, doctors and healthcare practitioners in the development or improvement of medical devices. Having worked in the medical device industry, I know that many of the ideas for product improvements and enhancements come from healthcare practitioners - the surgeons, doctors, nurses and technicians who are using the tools every day. The perception from industry executives is that the flow is being curtailed right now, and when that flow is restricted it could impact innovation. The [U.S.] Department of Justice settlement with orthopedic manufacturers started the process. As a result industry has promoted the adherence to a voluntary Code of Ethics. AdvaMed's Code of Ethics on Interactions with Health Care Professionals is certainly a good framework, but these actions may be having a chilling effect on innovation. When a CEO tells you that before he can take a healthcare professional to dinner he needs to jump through a series of hoops or get approval from this, that and the other, this may have an impact on innovation.
Please discuss the medical device manufacturing trends that have occurred in 2011. Will those trends continue next year?
Withers: From a manufacturing perspective, medtech companies are still focused on cost reduction and increased yield. Equally, whereas China and India are increasingly attractive markets from a demand perspective, the manufacturing playing field is leveling out in terms of cost vs. benefit of having everything done out of China. The U.S. and Europe are still very much valid options and companies are going through a thorough evaluation process when determining the location of their manufacturing facilities and/or partners. There is a definite push towards operational excellence in the marketplace, with faster/easier decisions being made regarding cost efficiencies than more innovative developments.
Matlis: From a manufacturing standpoint, I think what we're seeing is a lot more outsourcing going on in the industry and we're also seeing more emphasis on gaining visibility from those outsource manufacturers and the entire manufacturing process. One of the drivers for this in addition to TPLC is the FDA's imminent release of the UDI(universal device identifier) rule. Even though UDI is primarily intended for tracking product once it leaves the manufacturing facility, many medical device manufacturers are taking the opportunity to leverage UDI to gain visibility throughout their supply chain and extending that level of traceability throughout the supply chain. This year, we welcomed IBM, Microsoft and Cisco into the medical device manufacturer category as a result of FDA's Medical Device Data System rule, which now classifies certain healthcare IT as a Class 1 medical device. So if you're making certain healthcare IT products, you're not considered a medical device manufacturer and you must register and list with the FDA as a medica device manufacturer.
Bonifacio: Commodity medical devices are moving the way of any other commodity market, with (good) quality assumed, and price being the driver. Outsourcing continues both domestically and abroad. These trends will continue, though the locations may change as China continues to grapple with rising wages, currency valuation, and freight/logistics issues. South America, the Dominican Republic, Costa Rica and Mexico should all benefit from this. In North America, automation, lean manufacturing and working on higher value-added products will help keep jobs and manufacturing in the U.S.
Wise: There’s been a continued push to manufacture offshore. Much like the rest of the American industry, for a whole host of reasons, cost among them, the medical device industry is moving offshore and that has an effect on innovation. Is it a trend that the regulatory bar and quality bar continues to be raised—as it should be—regarding record-keeping, comparative effectiveness and supplier management. Maybe. I expect the need for ever-better process controls, information-gathering and [data] transmission to the FDA to get tougher over time.
Myers: The globalization trend continues and accelerates. In earlier times when we thought about that in the industry we thought about moving to low-cost manufacturing countries and exporting back to western markets or North America. Increasingly as we work and poll our customers, they are more interested in manufacturing on a global scale for the purposes of penetrating a global market like Brazil, China and India. They are much more interested in that conversation than trying to go to a low-cost environment because they want to be synergistic with the markets they are in. Globalization is obviously not a new trend, but we see the urgency to find creative solutions for our customers. We also see our major customers working really closely to define what's core and non-core in their businesses where they can bring a product or technology advantage to the market and then determine what manufacturing processes are open to outsourcing. This industry compared to others we serve at Jabil has been relatively slow to outsource and I think most people would admit that from a regulatory perspective, there has to be a safe pair of hands doing this. There's not a lot of demonstrated track record of this in this industry. We see the doors opening more as we meet with our customers. The inquisitiveness, the curiosity and the deployment of resources to move things faster are definitely on the rise compared with past years in our experience for the people we embrace in the marketplace.
Philipp: There is always a trend toward more efficiency and cost reduction. For us, it is challenging because resin prices have been trending up each year, and the resin suppliers serve many markets, not just medical.
What major issues and/or challenges have impacted the medical device/medtech industry in 2011?
Bonifacio: [U.S. Food and Drug Administration] FDA reform/healthcare reform lead the way. While the impact in 2011 has been muted as many of the new directives are phased in over the next two years, you can see companies beginning to prepare for the “new normal” as it pertains to healthcare and to medical devices. The days of layering technologies and unnecessary tests and procedures may be seeing their last days. While this change will happen, it may occur over the next several years and will not happen overnight.
Myers: Business model changes in the device/medtech industry move slower than in other markets we serve at Jabil, and therefore, decisions to outsource move at a slower pace. I'm not suggesting that's a bad thing. I think part of the genesis of this is the fact that this is a highly regulated industry.The table stakes for compliance and the good reputations of our customers aspire to in the industry are vitally important to them. As compared to other industries that Jabil serves the decision to put one's trust and faith and really to back that up with the ability to verify is a big decision in this industry. While it's moving faster than it has in the past, it's still an industry that is measured in really long terms of product lifecycle. It's not an industry like consumer electronics, which basically rebuilds itself every 18 to 36 months. This is an industry that has a lot of staying power and the decisions therefore are somewhat longer and more long-term.
Philipp: From what we see and hear, the overall issue affecting the industry is the economy. With so many people out of work and with no medical benefits, any medical procedure that is somewhat elective is probably being delayed. Slowing medical procedures and slowing medical product sales affects those of us at the end of the supply chain that provide products to this industry.
Matlis: Product diversion, thefts and counterfeiting - there's been a significant increase in the number of medical device products that have been either stolen out of warehouses or trucks that have been stolen containing pharmaceutical products and medical devices. Boston Scientific reported that a shipment of medical devices was stolen on its way to the company's sterilization facility. We're seeing an increase in the number of product thefts and also the counterfeiting of some medical devices. Many companies have taken notice of that this year. I think this increase is caused by a combination of things. You have a situation where you're dealing with a high-value item that can be easily reinserted into the supply chain and by the same token the penalties associated with the theft of medical products are relatively low. Earlier this year, there was a proposed bill that would make the theft of medical products prosecutable under the RICO statute - the statute that is often used for organized crime. This is something UDI would help with. Right now you have no way of knowing whether the product is legitimate or note. There is no centralized database, which is what UDI would support. With UDI you would go and scan the universal device identifier and find out whether or not it came from where it was supposed to come from.
Withers: The economic pressures have had a direct impact on R&D budgets, making it more difficult to invest in innovation and reducing the funding for many programs. Increased regulatory burdens (eg. Usability Engineering ISO 62366) and confusion over the direction of the FDA. This has also had global implications with many other countries’ regulatory authorities following the FDA’s lead. Global product launches now need a very strategic regulatory plan with many threats of change in the year ahead. Reimbursement strategy has become particularly important, especially in the U.S. Products need to be more cost justified and organizations need to plan their reimbursement strategy at the outset of a new product development program. The global clinical trial space has been very active in the last year and organizations again need to synchronize and plan their clinical trial strategy at a global level. Are they going to have the right level of data for the right regulatory bodies in the right countries?
Leahey: FDA’s regulatory pathway has been the biggest challenge for the medical technology industry in 2011. Whether submitting Class 2 or Class 3 devices, there has been a chorus of complaints that the process has been unpredictable and unreasonable. This is leading to high paying manufacturing jobs moving overseas as American innovation is landing in Europe and elsewhere first. Ninety-eight percent of medical technology companies have less than 500 employees, and most cannot afford the delays and unreasonable requests that are leading to these decisions.Unfortunately, we also know of examples of companies developing promising technologies and devices that ran out of funding navigating the process and closed.
Components of the Affordable Care Act continue to be turned into regulations that could have negative impacts for medical device innovators. For example, final regulations for Accountable Care Organizations were issued recently which could lead to a lack of access to cutting-edge devices and technologies for patients and providers.
Wise: I think innovation, selling, marketing and the whole business model that has been in place is changing. The way new technology gets to market, the requirements for impeccable clinical data, the fact-based world we live in, the ever more transparent world we live in, are all serious challenges. But one of the major challenges is this: If you are a CEO running a medical device company, given the rapidly changing and ever more complex healthcare world, you have to think about how your company is going to adapt and change. The prescription going forward is pretty clear—you have to be more innovative than ever and I suspect you have to rethink the way that you invest in marketing and selling your product. There may be fewer bodies carrying the message to the doctor in the future than in the past. The environment is ever-more data driven. These challenges are evolving, and those who answer or solve them will be the winners.
The orthopedic industry has had a somewhat mixed record on quality. It feels like this past year or two in particular has been all about the controversy over metal-on-metal hips. It feels like this debate has been going on for several decades, even though it’s only really heated up in the last 12-18 months. I think that this year has also surprised analysts and doctors alike—it turns out that this was the year we all suddenly learned that the [orthopedic] reconstructive industry is also a consumer industry. With rising copays for COBRA benefits and the loss of [health] insurance due to high unemployment, I’ve heard from patients and doctors alike how people are reluctant to take time off of work to have a hip or knee replaced. It’s really taken a toll on procedures. It’s the same story for stents. I’m projecting a 9 percent to 10 percent decline for stents in the United States this year due to lack of growth in 2011. And it’s not looking like 2012 is going to be much better. We expect further declines in 2012.
How will these issues and/or challenges shape the industry in 2012?
Myers: Our interest from a contract manufacturing standpoint is to advance the validation of the outsourcing model.The model becomes more robust as our customers see a demonstration that the model works. This demonstration can be in the form of product, manufacturing, or after-market services. Clearly the pace of outsourcing for us particularly in this industry is tied to our ability to demonstrate great capability both at the individual company level and more importantly as an industry. I think we as an industry have to do a better job of being compliant and demonstrating capability in doing the basics well. I'm not suggesting we don't do them well but I suggest we can do a better job of basic quality of the product, execution around supply chain, manufacturing, and delivery. The ability to be a safe pair of hands and a trusted partner when a customer contemplates potential engagement with a regulatory agency such as ANVISA, FDA, or in a customer audit is essential. While there's evidence that the industry is moving in the right direction, the evidence in some cases is anecdotal. In this industry particularly given the stakes and the importance of doing it well, it's really important that this industry validate that we are a great alternative to our customers doing this in their internal operations.
Bonifacio: Think Lean, think patient outcomes, think lowered overall system costs, shorter hospital stays. While some of these things have always been talked about in recent years, escalating healthcare costs, especially in the U.S., are unsustainable in the long term.
Leahey: If the regulatory environment does not improve, we will continue to see devices and technologies being available to patients outside the United States first. Many practitioners we talk to refer to the “toolbox” they use to provide patient care. The more tools they have, the better. When safe and effective medical devices are available, we know these lead to a reduction in hospital stays and increased life expectancies. These are goals everyone agrees with, and as our economy continues to struggle, it is urgent that we address these problems so that 2012 can be a year with improved patient care, innovation and job creation.
Matlis: That's a hard one to answer simply because I don't think you're going to see major revolutionary changes. I think we're going to continue to see the industry continuing to address current issues. As much innovation as there is in medical technology products, as far as the industry itself, it tends to be an evolutionary approach, whether it's through regulatory compliance or reimbursement. I think we're going to continue on the current trends.
Philipp: I think most medical device companies will be very cautious about spending because of the lack of predictability in the market and the fact that market growth has not remained consistent.
Withers: Opportunities for growth will exist but medtech companies will need to be very selective in the projects and markets in which they invest. Discussions around how to get some of the growth from the emerging markets and how to tap into new niche areas in developed markets will form the basis of many strategy discussions.
What predictions do you have for growth in 2012 based on the industry’s performance in 2011?
Wise: I continue to be very cautious in thinking about growth predictions for the medical device industry’s major markets in 2012—hips, knees, spine, stents, CRM [cardiac rhythm management]. If people are unemployed, they don’t have insurance, they’re not going to visit the doctor as often and they’re not going to undergo [medical] procedures. On the other hand, if you have a job and you need your knee replaced, you may find it hard to be away from work. Until we get a more convincing recovery and until unemployment falls, industry growth rates are going to be challenged. Hospital budgets remain under pressure and insurers are pushing back hard on utilization. These challenges are not going to change simply because we flip a calendar page.
Bonifacio: Sheer demand for product and services and our aging (global) population growth will continue, albeit it may be at a slightly slower pace than prior years. 2012 will be a year to watch the unfolding reform of our healthcare systems (U.S. and globally) and how we position ourselves to meet these new demands. Global demand growth is inevitable as we continue to see middle class growth in the BRIC countries (Brazil, Russia, India, China), whose residents want the same quality of care and products as other developed nations.
Philipp: We expect moderate growth next year. The last few years it has become very difficult to predict, but if we see some recovery in the world economy, we will see demand increase.
Withers: I think that 2012 is going to start with a difficult macro-economic climate and industry growth will continue tobe constrained.
Myers: If you think about the end markets from a global perspective, the appetite for access to healthcare is unmistakable whether it's a BRIC country, the UnitedStates, Latin America, etc. The consumption and need for healthcare and more effective and better devices is unmistakable. Who's going to pay for that is still a question. In some economies like WesternEurope it's pretty well understood and in places like China it's still evolving. In the UnitedStates I think it's still up for debate. So I think the end market is somewhat understandable. The market overall in contract manufacturing in terms of revenue and bringing new business in will grow faster than our end customers' market. This means we'll convert more activity into the contract manufacturing outsourcing model than the overall market growth. I'm pretty comfortable that will occur. In the case of our company, we are quite certain that will occur. The thing we wish to do, obviously, is to make sure that we take every opportunity to grow quite a bit faster than the demographic growth. We hope that contract manufacturing as an industry, and Jabil particularly, will grow faster than the marketplace. From our line of sight we've got a pretty good view of how we intend to grow. From a macroeconomic perspective, anything that's going to create a change to the regulatory climate and reimbursement could change the landscape the way we see it.
We think this is an industry that's ripe for more diversified outsourcing for companies that are going to invest more heavily in core versus non-core activities and companies that are going to be better in rigorously defining core and non-core. We see the upcoming year as more opportunity than risk. We think the industry is moving in that direction. From a Jabil perspective, we've spent the last couple of years investing significantly in capabilities in our business and we've been in the middle of a pretty significant growth curve in terms of new customers. As we line up where we are right now, we feel pretty good about the business and the industry and we feel like we're well-positioned. The contract manufacturers that have gotten ahead of the curve a little bit and have made some investments in this space with capability, people, and with developing customer relationships right now are poised well to take advantage of the growth. People that are coming in now as entrants into this business are people that are not as global or people that may be more niche-oriented. However, the guys that positioned themselves two or three years ago are in a good position right now.
Leahey: The medical technology industry is a passionate and resilient group of innovators, but our concerns are that we will lose our edge with the headwinds facing this vibrant field. While there are always ebbs and flows facing industries, medical technology innovators tell us they have never seen such a challenging regulatory environment for developing new and innovative devices. Our hope is that we can see the return of a predictable and reasonable regulatory pathway, and with numerous stakeholders engaging in this process and bipartisan support in Congress, we continue to work towards this goal. With the emergence of new markets in Asia, Europe and other overseas populations, there continues to be opportunities for medical technology companies to expand and improve the quality of life for patients.
Please assess the general health of the medical device/medtech industry in 2011.
Bonifacio: I think medtech in general and the device industry will continue to be strong. This may vary from sector to sector on exact amounts but overall the general health and marketplace should continue to grow and be strong. Companies in the market need to focus on international growth and markets and really understand the needs of those emerging markets and work from there. Healthcare, medicine and devices in general may not be the same in all markets and it will be important for companies to establish themselves with a local presence in these markets to understand the needs and fill the demand. I also believe consolidation will continue among OEMs, contract manufacturers, and other service providers.
Matlis: I think overall the industry is in a good position, financially. The biggest concern we hear from executives regarding the health of the industry is the amount of taxation — if the industry is taxed at a higher level will those jobs remain here?And the uncertainty around reimbursement and comparative effectiveness analysis is a concern for industry executives. The health of the industry especially compared to some other industries in the economy today is good.The patient is in a stable condition.
Leahey: While many established companies are pushing forward in these difficult times, recent data suggests that there has been a significant downturn in venture capital investment in early stage companies over the past few years. Reports have shown that this downturn is directly related to the unpredictability with the regulatory process at FDA. Early company formation is the leading indicator for innovation and job growth. If new companies are not being funded, this is bad for healthcare and our economy. It also is concerning to larger companies who rely on these innovators to bolster product pipelines.
Myers: Again, the first thought is that it's evolving. If we look at the metrics of the industry, most companies are healthy, profitable, pay dividends, and have cash on hand. If we look backwards in our rear view mirror, these are companies that not that long ago were viewed as growth companies. They h ad great growth potential and people were betting on this industry because it was growing. I think that's evolving into a more mature industry and I think part of the psychological landscape of this industry, particularly with the large OEMs, is they're evolving into a different part of their product lifecycle. It's an industry that is starting to characterize itself more by generation of cash, stability, maturity and some of the descriptors around growth or earnings are changing a bit and that's having an effect on the whole industry, including contract manufacturers as well.
Wise: As far as the industry’s financial health is concerned, companies are in very robust shape. All the major companies have embarked on cost reduction and efficiency programs, everyone is rethinking how to conduct business to get more in line with the changing times. And it’s pretty clear the VC [venture capital] community has backed off the medical device industry based on the regulatory environment. But until we get greater clarity and certainty on the regulatory front, it’s tough to say the industry is in great shape. Take a big step back and look at the big picture. The work the FDA is doing to ensure quality and safety is positive. But until we get greater certainty about the process and how it works and the timelines involved in making it work, it’s hard to view the companies as being in robust shape. Every large company I cover is excited about the opportunities in emerging countries—China, Russia, India, Brazil, etc. That’s a major new opportunity. Offsetting that though, are concerns about Europe. The companies in this sector are outstanding companies by and large, and they will manage through these challenges, but 2012 has to remain another complex, challenging year for the industry as it works hard to adapt to a rapidly changing world.
Withers: Stable with focused areas of growth.
What issues and/or challenges will shape the industryin 2012?
Withers: Continued economic and regulatory uncertainty, as well as the need to have global strategies in place for product launches (clinical, regulatory, supply chain etc.). Many discussions take place around risk vs. reward of R&D innovation investment as well as which markets to focus on to capture growth.
Matlis: What's coming to a head is the need to find solutions to the issues. When you're dealing with globalization and outsourcing, what can medical device companies do to address that and gain additional visibility? We're seeing the trend for companies to begin implementing systems, technology and processes that go outside of their four walls. When these companies were vertically integrated and when everything was being done in-house, you had very good visibility into every step of the process and you could make decisions accordingly. When companies began outsourcing, they really lost a lot of that ability and control into what happens to those subassemblies or components, or even in some cases, the finished product because they outsourced the whole manufacturing process. We're seeing the trend for these brand owners to look for ways to gain more visibility and control into what happens in their supply chain. Looking for ways to look at what their suppliers are doing in a real-time basis just like what they could do in many cases when they were doing it internally. You could walk down to the shop floor and see what was going on or take measurements from your own shop floor. When you outsource, many companies will tell you that they can't give you that level of visibility because the processes are proprietary or because there are competitive issues and they're working with your competitor. As the brand owner, the FDA ultimately holds you accountable. The challenge is that often you don't have the data to find out when a problem is arising until you get that product in the door. That's a big challenge.
To give you an example, I had an inquiry from a client who was concerned about the fact that they currently don't have real time information, or batch-level information from their suppliers. Their suppliers apparently are willing to provide that data to them but the brand owner was concerned that if they get that level of information they would be liable if something goes wrong. The fact is they are liable today. If they don't have that data, they can't make the appropriate risk-based decisions. The analogy that somebody told me is that of somebody getting pulled over for speeding and the excuse they use is not that they didn't know what the speed limit was but that they outsourced the reading of the speed limit to the GPS. The GPS was telling them the speed limit was 75 and that's what they were doing, they were not looking at the signs on the road that said 65, for example. You can't outsource that responsibility. That is your responsibility. If your GPS is wrong, you're wrong. The same thing applies here. If you don't have information or your suppliers are not giving you all the information you need to make the decisions then you are still responsible ultimately for what happens to that product because the FDA has authorized you to market that product, it doesn't matter who manufactures it. That's the main trend from a manufacturing standpoint as it relates to outsourcing and brand owners that we're going to see. Interest or the need to exchange lot level information in near real time or as we've called it, on demand. 'If I don't know what's going on I'm not responsible,' but that's not what the FDA is saying. FDA is saying youre supplier is an extension of your quality system.
Leahey: I believe the challenges that the industry faced in 2011 will continue to face it in 2012. We continue to hear about challenges with FDA, and this simply is not a problem that can be fixed overnight. In addition, the medical device tax is scheduled for implementation in 2013, so companies will continue to address the negative impact of this tax on innovation. We have heard that most companies will either cut R&D, lay off workers or other negative outcomes to address this tax. In addition, reimbursement challenges will continue to shape the industry as Congress and other policy makers address the national debt and rising costs of healthcare.
Wise: It’s hard to answer that question. Metal-on-metal used to comprise a third of all hip implants, now it’s more in the 10 percent range. Specific issues may not be in the headlines as much, although we’ve seen in last week or so something about J&J’s metal hip implant. One thing to watch will be the changes coming to Washington, politically. Washington is about politics. A new Congress or a new balance of power might view the regulatory issues in a different light and that would be profound. A different light might mean “Yes we want all this regulation from the FDA but we’ve been underpaying for it.” Or, “No it’s too much, we’re exporting the medical device industry.” As in any election, there will be a lot up for grabs.
Myers: Anything that will occur at the macroeconomic level relative to reimbursement is going to be a big deal, particularly in North America. Any change to the way devices are regulated or entered into the marketplace, whether it's a change to the 510(k) process, a change to the PMA process, or the relationship with the FDA particularly will change the industry. Globalization will continue to shape the industry in 2012. North American and WesternEuropean companies will continue to take advantage of growth int he BRIC markets and emerging economies. As we spend time with our customers, they're all interested in doing more outsourcing of non-core activities and all of them have a huge appetite regarding how we can take advantage of these emerging markets. Closer to home, at least for us, is the continuing trend for types of products and healthcare that are rapidly moving from the traditional point of care in hospitals to the point of care away from the hospitals as healthcare costs and reimbursement change the scope of the landscape. We see a trend of moving to a less invasive and easier to use self-administered types of devices. There's opportunity there, but at the same time those devices have to be foolproof for compliance and from an ease-of-use perspective.
What changes will take place in the medical device/medtech sector over the next 12 months?
Withers: Increased growth in both the use of, and the development of, products for the emerging markets.
Myers: From where we sit, we don't see a lot of stark or significant changes. Legislative or macroeconomic changes could certainly change that. This industry tends to evolve rather slowly compared to other industries. If we're sitting here having this same conversation 12 months from now I'm not sure there would be an "a-ha" moment. We'll acknowledge that the industry is going to embrace diversification in looking at investing activities in core and getting out of non-core activities a little more aggressively than the past. There's clearly going to be intent to be more global, not just in terms of low-cost manufacturing, but in terms of being able to penetrate those markets. And I think consolidation will be a key in this industry. If you take the top 25 healthcare companies on a global basis, I wouldn't be surprised if that number if smaller and there are a couple of acquisitions by this time next year.
Bonifacio: From a manufacturing standpoint, cost and quality will continue to be king. Of course, cost for commoditized products and mature markets will be even more crucial. In some cases, I believe we may see a slight slowing in moving medical device manufacturing solely to China or the Far East as increased freight, currency fluctuations, and increased wages will all weigh on this part of the supply chain. With that said, manufacturing in the Far East for the local market demand remains a great opportunity for companies with the right mix of products and the appropriate cost structures.
Automation of surgical procedures and more robotics will continue to be deployed, telemedicine, and remote patient monitoring, using wireless and internet connectivity will also continue to grow and at a nice pace. The trend for MIS will continue to outgrow other medical markets and this, of course, will push more technology gains in micro and nanotechnologies. As healthcare reform in the U.S. and around the globe continues over the next 12 months and beyond, we will be able to get a better handle on how it will effect what we make, where we make it, and how we make it.
Leahey: It is difficult to identify what will happen over next year, but MDMA and our members are hopeful that efforts to improve FDA’s regulatory framework are successful. There are many stakeholders involved in these efforts, including patient groups and providers, and we all agree that we need safe and effective medical devices into the marketplace to improve care. Members of Congress have recently introduced legislation to address some of the challenges medtech innovators are facing, and FDA is currently examining some initiatives as well. It will be very interesting to see what comes of them.
Philipp: We expect the companies that lead the industry to continue to do well. They have the resources to provide the best technology, best service and best prices as they package their full offering of products in different ways.
Matlis: I think some of the issues we discussed need to be worked out. From a regulatory standpoint there's UDI and EMDR(electronic medical device reporting) requirements. Industry is wating with 'baited breath' to see when those final rules are going to come out. They're expected to come out in the very near future. I think the other trend is FDA's regulation of healthcare IT through the Medical Device Data Systems rule and the Medical Device Apps guidance that the FDA has issued. The requirements set forth forth for healthcare IT providers are much higher than they have been historically to the point where not only IBM, Microsoft and Cisco have registered - among others - but some hospitals have registered as medical device manufacturers because they have put together some systems that under the MDDS rule are considered a Class 1 medical device. That is going to have an impact in the industry, the convergence between traditional medical technology, information technology and consumer devices and their use by healthcare providers. An example of that might be a doctor with an iPad running a medical app to be able to read an MRI or X-rays and make decisions on that about patient care. Well, that app is now a medical device. Does that make the iPad a medical device?According to the proposed rule, FDA is not going to regulate Apple, but the app itself is a medical device and the manufacturer of that app is considered a Class 1 medical device manufacturer. In a way it's no different in what we see today. You use desktops or laptops to add a platform to view imaging data, now there's a new platform, a tablet or a phone. Now you're dealing with a consumer grade device and it needs to be managed accordingly.
Wise: The only change I’m interested in is the economy and regulation. My hope for next year is signs of stabilization for the economy—I don’t expect much on the regulatory front in terms of positive change for the industry. We’ll see. Like everything in life, the pendulum swings and the extremes are not the norm on a long-term basis. But we’ve been on an unhealthy extreme for too long and it doesn’t show any signs of easing.