Looking in the Medtech Crystal Ball

The medical device industry recorded solid performance in 2008, but regulatory and financial uncertainty make expert predictions about the year to come less definitive.

MPO Staff Report

As 2008 draws to a close, financial markets and elections dominate the headlines. Overall, for the medical device industry, it’s been a prosperous year. But given the financial uncertainty gripping international commerce, medical technology manufacturers have questions about the future, too. Medical Product Outsourcing spoke with five experts to discuss themes in the year drawing to a close and the forces they expect to impact the coming year. While there are a few clouds in the immediate forecast, there should be plenty of good weather on the horizon, according to industry insiders. Gelston Howell, senior vice president of the medical division of Sanmina-SCI based in San Jose, CA, provided MPO with an analysis of the industry from a contract manufacturer’s perspective. While Howell said no “surprises” cropped up during the year, he noted that his company received “more requests for design engineering” than in years past. “We’re getting more of a clinical requirements document” for new designs from current and prospective customers rather than a product specification, he explained.
 
Though there have been no significant changes in the types of products Sanmina is making, Howell said he has noticed an increased demand from customers for disposable devices, which he described as “a high-margin product [manufacturers] wanted to keep.”

In general, Howell said price pressures continue to make contract manufacturing increasingly attractive. Several years ago, for example, hospitals would typically receive a pharmaceutical along with an IV set in a convenience kit. Now, however, hospitals tend to buy the components separately, he explained.

Howell foresees a “challenging economic year” ahead in 2009 and predicts that tight credit conditions could force companies undergoing a restructuring to conduct business with contract manufacturers. Howell said he did not see any regulatory trends that could become a concern next year. “FDA personnel are doing a very good job with an increasing workload,” he said, acknowledging the resource crunch the agency has worked under for several years.

In Howell’s opinion, the most significant development at the FDA in 2008 is its close examination of manufacturing contracts to ensure that the working relationship between a contract manufacturer and original equipment manufacturer (OEM) is clearly defined. The FDA’s registration requirements often can be confusing. According to Howell, a contractor making parts for a medical OEM does not have to be registered with the agency if the company is making a circuit board, for example, but contract manufacturers that ship finished products do have to be registered. He noted that OEMs increasingly are aware of the need to maintain compliance in an outsourcing situation, but “they have always been interested in compliance management.” Customers are “probably somewhat more concerned,” but it is not a new idea, Howell explained. Some of the warning letters over the past year hint at problems with systematic updates of the client company’s documentation, Howell noted. ”For the device master record not to match would be a serious issue because it would mean there’s no coordination,” he said.

Sanmina-SCI, according to Howell, “cannot make any component change [to a contracted device] without the OEM’s approval.” The company has developed a documentation system to ensure it receives an OEM’s approval before making any component change. Some of that documentation still is in paper form, but most device master records are electronically updated.

Regulatory & Legislative Musings

Another experienced observer of the contract manufacturing industry is Alan Schwartz, executive vice president at MDI Consultants, an FDA quality systems and regulatory compliance firm in Great Neck, NY. In his opinion, the recent spate of warning letters to contract manufacturers cannot be explained solely by growth in contract manufacturing, but rather by the exemption of certain contractors from routine good manufacturing practice (GMP) audits.

“The FDA’s current policy is that contract manufacturers do not have to be audited or registered unless they ship finished products directly to end-users,” he said. The exception is the for-cause audit. “I don’t agree with this policy,” Schwartz said, but even if manpower issues are at fault, it is “a terrible policy that does not provide consumers the protection they deserve.”

Third-party inspection companies have not caught on, partly because firms that want GMP and ISO (International Organization for Standardization) inspections often must go through separate audits instead of a two-in-one review, Schwartz noted. A further complication is that third-party auditors are sometimes bigger sticklers than the agency, Schwartz said. “FDA investigators have the option of auditing only a few items,” he added, but third-party inspectors are bound by agreements with the FDA to conduct “a more drawn out and detailed audit.”

Schwartz said the most significant regulatory development of 2008 involved personnel. “I think that Congress granting the FDA 1,300 new hires could create a major headache,” he said, but the problem originates with age of the FDA’s workforce.

Schwartz referred to an April 2007 speech by FDA Commissioner Andrew von Eschenbach, MD, who said that 29% of the agency’s employees were eligible for retirement or early retirement. Schwartz said those numbers clearly indicate the FDA is  “going to lose a lot of people who know what’s going on and have a handle on regulations and how to deal with industry.” The influx of inexperienced personnel could “create a real headache” because new members of the FDA’s staff “will interpret the regulations more strictly as they try to make a mark for themselves,” Schwartz predicted. Regarding pre-market approval applications and notifications, he said: “We are hearing from clients that the newer reviewers don’t seem to know the industry or the technology and ask questions that are simply not logical.”

Schwartz added that tighter congressional scrutiny of the FDA could boomerang. “What Congress doesn’t understand is that if they slow down the approval process, they’re providing a ‘monopoly’ for products that are already on the market and preventing potentially safer and improved products from getting to market,” he explained. That scenario would set back the industry nearly 20 years, Schwartz said, noting that Congress imposed measures in the early 1990s, which basically suspended the 510(k) process. The move “allowed all devices on the market to keep selling” and held “new technologies—ones that may have been safer or more effective—out of the market.”

Schwartz is not the only observer who believes Congress is taking more of an interest in device makers. James Ravitz, a partner at the law firm of Arent Fox in Washington, DC, discussed a movement on Capitol Hill to subject direct-to-consumer (DTC) advertising by device firms to closer scrutiny.

“I think that’s a hot area because there’s very little regulation,” Ravitz said. “I think where it will eventually go is toward an adaptation of some of the basic concepts we see in the drug area.”

Ravitz, who specializes in advertising and marketing for drugs and devices, noted that “there are strict regulations for dealing with DTC ads for prescription pharmaceuticals … but for OTC [over-the-counter] drugs, you don’t have that same type of regulation.” Congress could adopt a parallel scheme, but Ravitz pointed out that a straight OTC approach to 510(k) devices is unlikely to work because some 510(k) products are very invasive, such as joint replacements. “While a bright line is easily drawn between prescription and OTC drugs, there is not as bright a line in the device industry,” he said.

The doctor/device maker relationship will spend more time under the microscope, too, according to Ravitz. “Congress is really dissatisfied with the performance of the FDA and has been concerned that companies are tampering with experts, so I don’t think that area is going to go away any time soon.” The outcome of the presidential election, in his view, also may be especially pertinent. “Particularly in an Obama administration, I think they’re really going to shake the tree at the FDA,” he said.

Comparative effectiveness (evidence supporting an established medical therapy compared to up-and-coming approaches, is a small but growing element of the government’s strategy for assessing healthcare) will still be “a big deal” in 2009, Ravitz said, “and will have an impact on device development.” He said this emphasis is liable to persist for at least another five years. After the election, fraud and abuse issues will come to the forefront again, he predicted, remarking that the effect will be pronounced “particularly at the state level … regardless of which party wins the election.”

Will the Money Kept Rolling In?

Perhaps there’s been no greater story this year—and a particularly important one in the context of a presidential election cycle—than the meltdown on Wall Street and its consequences for Main Street. Medtech consistently has been the darling of private equity and other investors, but the current lending squeeze is sure to change the landscape.

Richard Ramko, US medical technology leader at the Boston, MA office of Ernst & Young (based in New York, NY), said the climate for investment in devices is in good shape despite the credit woes, but he echoed Ravitz’ comments that bang for the buck will continue to drive reimbursement and, by extension, investment.

Ramko assured small and midsize device makers that their industry “continues to be a very attractive space” for venture capital (VC), but warned “the bar has been raised.” Products have to be better than what is out there in order to win reimbursement, he said, and “the scrutiny is going to get more intense.”

All the same, the money flowed fairly well in 2008. Ramko said venture capitalists (VCs) plowed $1.7 billion into medical devices through first half of this year, which was “not quite on pace to match 2007, but a pretty good showing, all things considered.” Thanks to demographics, “we’ll continue to see VC dollars go in, but it remains to be seen whether Wall Street dollars will go this route” in the short term. (Editors Note: For more on Ernst & Young and medical device industry investment, see “Top of the News,” in the October 2008 issue of MPO.)

Despite the credit crunch, Ramko said, “good companies are getting funding. I’ve heard of larger deals where bank financing” was involved, but that kind of activity is tapering off. All the same, any product that reduces cost of healthcare, according to Ramko, will continue to attract investors because of the push to put a lid on healthcare inflation.

In the meantime, small and medium firms will have to resort to “more creative financing” until the credit crisis loosens up, Ramko said. “Instead of investing a big tranche [one of a number of related securities offered as part of the same transaction] up front, VCs will invest in milestones and will hold management more accountable” for meeting those milestones.

Maintaining the Value Proposition

Martyn Howgill, executive director of the Institute for Health Technology Studies, also called InHealth, in Washington, DC, said the device industry continues to fulfill the value proposition so fervently sought by policymakers and will stand up well to close examination by payers.

Still, he acknowledged that a healthcare economist often finds it tougher to measure the benefit derived from advanced technology than to measure the cost. An employee’s return to the workforce is an obvious help to the Gross Domestic Product (GDP), but he also said that a patient’s return to active retirement offers an economic benefit as well because of the effect on goods and services outside of healthcare. A study of healthcare economics often captures all the costs, but ignores the effect of improved therapeutics on gross domestic product, Howgill said.

Despite this GDP information gap, opportunities abound for device makers and associated industries because “many new technologies are less invasive and less costly on a per-case basis,” he said. According to Howgill, taking a look back at the not-too-distant past provides the necessary perspective.

“As you look at the history of cardiac care, bed rest was the standard of care 50 years ago,” then coronary artery bypass grafting, which was “horrendous for the patient,” he said. Then came bare-metal stents, which “tended to clog up again,” then drug-eluting stents arrived.

“For the right patients and the right conditions, this therapy is much less invasive and less expensive, and is as—or even more— effective. A pharmaceutical product may only disguise the problem, but a device repairs the problem,” he observed

Radiology is another sector that has hardly lagged, Howgill asserted. “We now have magnetic resonance imaging,” which renders images that X-ray technology could never produce, “and multi-slice digital imaging technology offers an amazingly high level of detail.” He said current technology “makes it possible to bombard tumors with higher doses of radiation with greater precision, which means less damage to the surrounding tissue” and a more effective attack on cancer.

When asked about orthopedics, Howgill said, “I think the resurfacing of hip joints probably is as interesting an area as any.” For patients whose conditions warrant this therapy, the procedure is less stressful than previous solutions and often provides a faster return to work.

Howgill said he believes the device industry brought innovation to the market in 2008.

“I believe the industry had a great year and delivered on the promise of innovation,” he said. On the other hand, he also confessed to uncertainty“that the public at large understands or appreciates those contributions.”

Howgill said 2009 and beyond will be good years for medical technology and cited the cardiovascular market as an example.

“I think there’s always potential for new types” of cardiology devices. “We’ve created a very rich environment for innovation,” he said, and when one adds diabetes and other co-morbidities to the picture, “I think the demand for services will grow.”