Tony Freeman, President, A.S. Freeman Advisors LLC07.21.20
Over the past few decades, the medical device industry has seen waves of technological innovation. From the replacement of sterilizable glass and steel devices with disposable plastic in the 1960s to the rise of elegantly engineered minimally invasive devices in the 1980s, medical device OEMs have been open to fundamentally changing their offerings if good medicine and good economics align. Surprisingly, other far less technologically advanced industries were more willing to adopt computer technology in everyday operations than most of the medtech industry. While the sector’s imaging and diagnostic segments rapidly adopted digital systems, most other disciplines in the device world concentrated on technological excellence in areas such as electromechanical operation, part miniaturization, and the use of new alloys—thermoplastics and elastomers—to improve both products and bottom lines for OEMs.
The next 10 years will be different. Changes in healthcare economics and the ubiquity of easily accessible and universally connected digital technology is turning device computerization (a crude term) into a product standard rather than an atypical feature. The growth of digital devices and focus on network communication will almost certainly spawn changes to the medtech supply chain. Contract manufacturers that once prospered by providing sophisticated metal or plastic components may find themselves increasingly beholden to firms capable of integrating electronics and communication networks.
OEMs Go Digital
A review of new product announcements by the largest OEMs reveals the degree to which digital technology has been accepted as mainstream. Medtronic plc, the world’s largest medical device OEM, recently highlighted its recent market launches and new product pipeline at the Jeffries Annual Healthcare Conference. Of the 41 devices mentioned, 30 featured digital components. Edwards Lifesciences Corporation enhanced its HemoSphere monitoring system via a smart cable and software module to allow anesthesiologists to monitor oxygen saturation in the brain during surgeries and correlate it with hemodynamic parameters in real-time. Edwards goes further, linking HemoSphere to Acumen HPI software, an artificial intelligence (AI) product that predicts sharp blood pressure drops. Perhaps the most impressive demonstration of new digital technologies is rise of robotic surgery, where pre-operative planning, surgical precision, and patient monitoring are executed by computer.
Why Now?
Much of the digital technology being incorporated in medical devices is not new. Pressure sensors, wireless communications components, database interfaces, and graphic interfaces have existed for decades. What led designers to incorporate electronics in devices that appear to function well without them?
There are many possible answers to this question. Digital devices add new capabilities many doctors find appealing, and digital controls can help devices operate more consistently than traditional mechanical methods. But the most compelling arguments are economic and highly beneficial to OEMs—digital devices beget prosperity in a fee-for-value world, allowing OEMs to create mini-monopolies on data and analytics.
The rise of fee-for-value reimbursement requires OEMs to demonstrate that new devices deliver superior outcomes for patients, healthcare providers, and payers (insurance companies and government health agencies). Having devices capable of recording and tabulating the results of procedures allows OEMs to show potential buyers the superiority of their offerings.
Digitalization also offers OEMs another advantage—the opportunity to dominate certain forms of care by controlling data management and the provision of analytics. Digital devices provide a myriad of benefits but when linked together, they give healthcare professionals access to information never before captured. Case in point: Hill-Rom’s Connected Care suite of products. While many in the industry think of Hill-Rom as “those hospital bed guys,” the company’s strategy is centered on digital technologies for better outcomes. Its Centrella Smart+ Bed, tied directly to the nurses’ station, monitors a range of patient conditions, from respiratory and heart rates to incontinence and patient mobility (someone trying to get out of bed when they shouldn’t). Links to a patient’s electronic medical record set the warning functions appropriately for their conditions so intervention can occur when appropriate. There is little question the Hill-Rom suite can improve patient outcomes via shorter hospital stays and early notification of medical staff to potentially dangerous situations.
Beneficial as these capabilities are to the patient and hospital, the suite’s product features are also beneficial to Hill-Rom. Few hospitals will invest in such a comprehensive system from more than one provider. These institutions likely will stock their rooms with Centrella Smart+ Beds or buy supply from a competitor. Such a go-for-broke strategy only involves hospital beds. Consider more immediately life-critical systems. In the past, a surgeon may have been free to choose among surgical staplers from four or five OEMs in the operating room supply cabinet. But as operating rooms begin to be dominated by networked digital devices, only the products of a single OEM can be counted on to work in tandem to deliver the expected benefit. By building digital ecosystems that incorporate multiple devices, one OEM may have 100 percent market share in a given facility for specific types of care.
Artificial Intelligence
OEMs are starting to move beyond connected devices to offering predictive products based on AI technologies, with imaging and closely-aligned radiation therapy companies such as GE Healthcare, Siemens Healthineers, and Varian Medical Systems leading the way. Data from thousands of examinations, treatments, and diagnoses are fed into databases. In evaluating new cases, AI technologies search the system for similar diagnoses and successful treatments, and relay their findings to clinicians. Not surprisingly, the ability to provide this kind of outcome requires committing to a single vendor’s offering. At this time there is little communication between the offerings of competing OEMs. The purchase of one of these systems almost certainly ensures a monopoly for the winning provider.
The Supply Chain in an Era of Digital Devices
Just as supply chain companies that made multi-use glass and steel syringes in the 1950s were forced to adapt to new technologies, so too will today’s suppliers. The increasing number of digital devices will do more than prompt electronics and software companies to contact established suppliers more frequently. The concept of a critical or dominant supplier will move toward those companies that can deliver a complete digital device.
Shifting Focus
Few devices today are the product of a single supply chain company. Components and sub-assemblies from a few firms generally are assembled into a finished device by either an OEM or a designated contract manufacturer. This final assembler often has significant influence on the selection of sub-contractors and will strive to direct high-value parts manufacturing to their own plants. While OEMs may stipulate the sub-contractors to be used in device development, the final assembly house often has some freedom to steer business. Coupling this common practice with supplier consolidation has led to larger contract manufacturers with a broad portfolio of manufacturing capabilities capturing a greater proportion of medical devices’ economic value. Put simply, the larger contract manufacturers dine more richly at the profitability buffet by being at the head of the procurement line. Will this model apply to the manufacture of digital devices? Maybe. Compelling economic data suggests that large contract manufacturers offer OEMs the most profitable means of making their new devices. But it remains to be seen exactly who those firms will be in the future.
Some of the largest contract manufacturers of past year have had their origins in metalworking, plastics, or the assembly of non-electronic devices. While a few like Integer Holdings Corporation and Teleflex Inc. had some experience in electronic device manufacture or assembly, most of the storied names in contract manufacturing did not. As the value of devices is increasingly measured by their digital capabilities, it is reasonable to assume that firms with electronics assembly, integration, and software experience will rise to “prime contractor” role, assuming they can also make or source the non-digital components comprising the finished device.
Those suppliers already exist and are counted among the largest contract manufacturers. The rise of international contract manufacturers, most with roots in electronic device assembly, has been the medical device supply chain’s largest single disrupter over the last five to 10 years. Firms like Flex Medical, Jabil Healthcare, Plexus Corp., and Celestica Inc. have built their reputation on manufacturing electronic devices for companies like IBM, Hewlett-Packard, and other major business and consumer electronics companies. In addition to their digital expertise, they bring global sourcing services, assembly, and many traditional manufacturing capabilities. Their scale and “digital DNA” give them a considerable head start in capturing the manufacturing of the next generation of digital devices.
In Summary
Traditional supply chain companies are likely to see their parts ending up next to digital components that redefine the value of a device. Control of the supply chain will move to firms with digital expertise as electronics move into more OEM product offerings.
Tony Freeman is the president of A.S. Freeman Advisors LLC. The company provides merger and acquisition advisory services and strategic consulting to companies in the specialty materials and precision manufacturing industries. A.S. Freeman Advisors is located in New York City.
The next 10 years will be different. Changes in healthcare economics and the ubiquity of easily accessible and universally connected digital technology is turning device computerization (a crude term) into a product standard rather than an atypical feature. The growth of digital devices and focus on network communication will almost certainly spawn changes to the medtech supply chain. Contract manufacturers that once prospered by providing sophisticated metal or plastic components may find themselves increasingly beholden to firms capable of integrating electronics and communication networks.
OEMs Go Digital
A review of new product announcements by the largest OEMs reveals the degree to which digital technology has been accepted as mainstream. Medtronic plc, the world’s largest medical device OEM, recently highlighted its recent market launches and new product pipeline at the Jeffries Annual Healthcare Conference. Of the 41 devices mentioned, 30 featured digital components. Edwards Lifesciences Corporation enhanced its HemoSphere monitoring system via a smart cable and software module to allow anesthesiologists to monitor oxygen saturation in the brain during surgeries and correlate it with hemodynamic parameters in real-time. Edwards goes further, linking HemoSphere to Acumen HPI software, an artificial intelligence (AI) product that predicts sharp blood pressure drops. Perhaps the most impressive demonstration of new digital technologies is rise of robotic surgery, where pre-operative planning, surgical precision, and patient monitoring are executed by computer.
Why Now?
Much of the digital technology being incorporated in medical devices is not new. Pressure sensors, wireless communications components, database interfaces, and graphic interfaces have existed for decades. What led designers to incorporate electronics in devices that appear to function well without them?
There are many possible answers to this question. Digital devices add new capabilities many doctors find appealing, and digital controls can help devices operate more consistently than traditional mechanical methods. But the most compelling arguments are economic and highly beneficial to OEMs—digital devices beget prosperity in a fee-for-value world, allowing OEMs to create mini-monopolies on data and analytics.
The rise of fee-for-value reimbursement requires OEMs to demonstrate that new devices deliver superior outcomes for patients, healthcare providers, and payers (insurance companies and government health agencies). Having devices capable of recording and tabulating the results of procedures allows OEMs to show potential buyers the superiority of their offerings.
Digitalization also offers OEMs another advantage—the opportunity to dominate certain forms of care by controlling data management and the provision of analytics. Digital devices provide a myriad of benefits but when linked together, they give healthcare professionals access to information never before captured. Case in point: Hill-Rom’s Connected Care suite of products. While many in the industry think of Hill-Rom as “those hospital bed guys,” the company’s strategy is centered on digital technologies for better outcomes. Its Centrella Smart+ Bed, tied directly to the nurses’ station, monitors a range of patient conditions, from respiratory and heart rates to incontinence and patient mobility (someone trying to get out of bed when they shouldn’t). Links to a patient’s electronic medical record set the warning functions appropriately for their conditions so intervention can occur when appropriate. There is little question the Hill-Rom suite can improve patient outcomes via shorter hospital stays and early notification of medical staff to potentially dangerous situations.
Beneficial as these capabilities are to the patient and hospital, the suite’s product features are also beneficial to Hill-Rom. Few hospitals will invest in such a comprehensive system from more than one provider. These institutions likely will stock their rooms with Centrella Smart+ Beds or buy supply from a competitor. Such a go-for-broke strategy only involves hospital beds. Consider more immediately life-critical systems. In the past, a surgeon may have been free to choose among surgical staplers from four or five OEMs in the operating room supply cabinet. But as operating rooms begin to be dominated by networked digital devices, only the products of a single OEM can be counted on to work in tandem to deliver the expected benefit. By building digital ecosystems that incorporate multiple devices, one OEM may have 100 percent market share in a given facility for specific types of care.
Artificial Intelligence
OEMs are starting to move beyond connected devices to offering predictive products based on AI technologies, with imaging and closely-aligned radiation therapy companies such as GE Healthcare, Siemens Healthineers, and Varian Medical Systems leading the way. Data from thousands of examinations, treatments, and diagnoses are fed into databases. In evaluating new cases, AI technologies search the system for similar diagnoses and successful treatments, and relay their findings to clinicians. Not surprisingly, the ability to provide this kind of outcome requires committing to a single vendor’s offering. At this time there is little communication between the offerings of competing OEMs. The purchase of one of these systems almost certainly ensures a monopoly for the winning provider.
The Supply Chain in an Era of Digital Devices
Just as supply chain companies that made multi-use glass and steel syringes in the 1950s were forced to adapt to new technologies, so too will today’s suppliers. The increasing number of digital devices will do more than prompt electronics and software companies to contact established suppliers more frequently. The concept of a critical or dominant supplier will move toward those companies that can deliver a complete digital device.
Shifting Focus
Few devices today are the product of a single supply chain company. Components and sub-assemblies from a few firms generally are assembled into a finished device by either an OEM or a designated contract manufacturer. This final assembler often has significant influence on the selection of sub-contractors and will strive to direct high-value parts manufacturing to their own plants. While OEMs may stipulate the sub-contractors to be used in device development, the final assembly house often has some freedom to steer business. Coupling this common practice with supplier consolidation has led to larger contract manufacturers with a broad portfolio of manufacturing capabilities capturing a greater proportion of medical devices’ economic value. Put simply, the larger contract manufacturers dine more richly at the profitability buffet by being at the head of the procurement line. Will this model apply to the manufacture of digital devices? Maybe. Compelling economic data suggests that large contract manufacturers offer OEMs the most profitable means of making their new devices. But it remains to be seen exactly who those firms will be in the future.
Some of the largest contract manufacturers of past year have had their origins in metalworking, plastics, or the assembly of non-electronic devices. While a few like Integer Holdings Corporation and Teleflex Inc. had some experience in electronic device manufacture or assembly, most of the storied names in contract manufacturing did not. As the value of devices is increasingly measured by their digital capabilities, it is reasonable to assume that firms with electronics assembly, integration, and software experience will rise to “prime contractor” role, assuming they can also make or source the non-digital components comprising the finished device.
Those suppliers already exist and are counted among the largest contract manufacturers. The rise of international contract manufacturers, most with roots in electronic device assembly, has been the medical device supply chain’s largest single disrupter over the last five to 10 years. Firms like Flex Medical, Jabil Healthcare, Plexus Corp., and Celestica Inc. have built their reputation on manufacturing electronic devices for companies like IBM, Hewlett-Packard, and other major business and consumer electronics companies. In addition to their digital expertise, they bring global sourcing services, assembly, and many traditional manufacturing capabilities. Their scale and “digital DNA” give them a considerable head start in capturing the manufacturing of the next generation of digital devices.
In Summary
Traditional supply chain companies are likely to see their parts ending up next to digital components that redefine the value of a device. Control of the supply chain will move to firms with digital expertise as electronics move into more OEM product offerings.
Tony Freeman is the president of A.S. Freeman Advisors LLC. The company provides merger and acquisition advisory services and strategic consulting to companies in the specialty materials and precision manufacturing industries. A.S. Freeman Advisors is located in New York City.
