Rethinking Medtech RD

At this point in his career, Joseph Heanue should be used to change. The electrical engineer/inventor/business executive traditionally has embraced change, using it to his advantage to develop products in the medical device, bioscience and electronics industries. Heanue holds patents for detector and image processing, spectroscopy and medical system imaging architecture (the latter copyright currently is licensed to a major medical equipment manufacturer). Over the last dozen or so years, he’s helped design various medical imaging systems and scientific instruments, ranging from gamma ray detectors and low-noise analog electronics to signal and image processing equipment as well as high-speed data processing architectures. To say that change helped drive the success of those designs is an understatement—few medical products make it to market in their original concepts.
It might be a bit surprising then, to learn that a professional like Heanue can still be caught off guard by change. Particularly when that change is becoming an integral part of the product development process.

“Right now, we’re involved in the development of a large medical imaging system and the work is split roughly 50/50 between ourselves and a group in China that is working with our client,” explained Heanue, Ph.D., president of Triple Ring Technologies Inc., a product development firm based in Newark, Calif. “The intent is to develop a product that suits both the U.S. and Chinese markets simultaneously.
That requires us to understand the needs of the market in China and harmonize those [needs] with those of the U.S. market. That’s unusual in my experience. In the past, we have looked at adapting a U.S. product for an overseas market, but we’ve never developed a product for two different markets simultaneously. As a Silicon Valley-based engineering group, we don’t necessarily fully understand the unique needs of users in the Chinese market. Different sensitivities exist in terms of price points, design complexity and reliability. The fact that a lot of the [product] development with this project is being done synchronically is very interesting.”

It might be interesting to Heanue, but such a twist on product development is becoming more common as medtech firms turn to emerging markets in Asia and Latin America for growth. Over the last decade, the conventional U.S. market-fits-all model to medical device research and development (R&D) has been replaced with an approach that targets specific populations and healthcare providers in an effort to better tailor products to customers. Siemens Corporation, for instance, habitually links research and development activities to its manufacturing facilities so it can access local talent when it is developing custom products. This strategy enabled the company to design a pocket ultrasound device for the Chinese healthcare market that eventually also was sold in the United States.

To remain relevant in the medical device market, companies must spend their R&D budgets more wisely and focus on emerging markets. Photo courtesy of Invetech Pty Ltd.

Medtronic Inc. is considering building an R&D center in India for a similar purpose, though factors such as low wages, market value (the country’s medical equipment sector was valued at $2.7 billion last year) and patient-pay system (about 80 percent of healthcare costs are paid for out-of-pocket) indubitably are motivating the company as well.

“I think India’s got huge potential because the healthcare system [there] is unique. It is largely patient pay,” Medtronic Chairman and CEO Omar Ishrak told healthcare and life-science website MedCityNews.com. “I think the healthcare capability, at least to a certain extent, is very good. In many instances, you have institutions in India with a fair degree of scale where you have high quality outcomes with very low cost with a lot of volume. The cost of engineering talent in [China, India, Korea] is much lower for almost as good an output. Even in terms of basic R&D, there’s a lot of expertise in different countries in the world in niche areas that’s very high. We can structure basic science work in different areas of the world and we are exploring that.”

Remodeling for Relevancy

In its early days, Medtronic subsisted mostly on the dreams and inspiration of founding fathers Earl Bakken and Palmer Hermundslie. As a child, Bakken was fascinated with the concept of using electricity to heal the human body; as he grew older, he often fantasized about a technologically advanced age in which doctors routinely implanted tiny electronic devices on or in the body to treat or prevent disease. That dream became the inspiration for the company that eventually would be known as Medtronic (the name, coincidentally, is a cross between “medicine” and “electronic”).

Bakken worked out of a tiny, un-insulated garage in northeast Minneapolis, Minn., to turn his vision for healing diseases electronically into a reality. The garage doubled as both a workshop and a research center—Bakken and his brother-in-law used the space initially to repair electronic medical devices and then to design the world’s first external wearable, battery-powered pacemaker, which they created for C. Walton Lillehei, M.D., at the University of Minnesota. In developing the device, Bakken came up with the company’s first true R&D blueprint, a two-dimensional graph in which he listed every type of medical device imaginable, both functionally (prosthetic, therapeutic, monitorial and analytical) and physically (placement on the body—i.e., no contact, external contact, temporary entrance into the body, and permanent implant). He drew a diagonal slash across the entire graph from left to right and decided that Medtronic would create products only in areas below the slash. His reason? Those areas—catheters, transducers, blood flow meters, artificial hearts, brain stimulators and booster pumps, among others—encompassed devices that only could be used on or in the body itself.

For the most part, Medtronic has remained true to Bakken’s original R&D blueprint, never straying from the lower left half of his graph into areas like X-ray, thermography, lasers, closed circuit television, labor monitoring, ultrasonics or fiber optics. Yet it has broadened its focus somewhat to include technology for treating a number of chronic ailments and conditions, namely heart failure, sudden cardiac arrest, coronary artery disease, spinal deformities, diabetes, back pain, chronic pain and Parkinson’s disease.
“At one time Medtronic only wanted your heart,” Bakken reportedly joked during an employee recognition ceremony more than a decade ago. “Now they want every organ of your body.”

Even every organ though, may not be enough to generate the kind of growth Medtronic and other medical device OEMs have become accustomed to since their inception. Certainly, the world’s toxic economy, a more stringent (and oftentimes confusing) product approval process and pricing pressures have contributed to companies’ stagnant growth in recent years. But so has the R&D process, particularly models that do not address current changes in the medtech market, industry experts claim.

One of the most significant changes to impact the industry is the growth of emerging markets. Global investment bank Goldman Sachs is predicting 7.9 percent growth through the end of this year in Brazil, Russia, India and China (commonly referred to as the “BRIC” nations); in addition, the bank is projecting a $16 trillion rise this decade in the combined gross domestic product (GDP) of the BRIC countries, Indonesia, Korea, Mexico and Turkey. The increase is expected to be double the value of the U.S. and Euro zone area GDP.

Such growth would be difficult to ignore, especially for companies whose domestic revenue wells are running dry. To capture a slice of the emerging market medtech pie, device firms must fundamentally change their R&D business models, industry experts contend. That entails changing the focus of their R&D efforts from a developed markets perspective to one that embraces the needs, desires and regulatory requirements of emerging countries.

Smarter Spending

A stronger focus on the BRIC brethren and their worldwide counterparts certainly can help companies breathe new life into antiquated R&D models. But they cannot single-handedly rescue product development processes floundering in a whirlpool of hospital-dictated price cuts, shrinking reimbursement rates, expensive clinical trials, narrow-minded thinking and hefty investments in incremental innovation. To save themselves, companies must spend their R&D budgets more wisely than they have in the past.

Ideally, smarter spending can help device firms be more selective about the product development projects they fund. These projects, experts note, may not have all the latest features and benefits of other devices, but they nonetheless provide a greater value to both the company and the end user. For example, a carefully selected project might offer doctors and insurance carriers clinical evidence that shows superior efficacy, safety and cost-effectiveness, or it could include data that establishes better outcomes for patients. Some companies might even choose projects based on current industry trends.

Carbon Design Group is one of those latter firms. The Seattle, Wash.-based product development consultancy increasingly is helping customers design environmentally-friendly devices—those that minimize waste and optimize efficiency. Such products have long been a standard in other industries (it’s huge in the energy sector), but they have just begun to make inroads in the medical device realm as companies search for clever ways to reduce costs and endear themselves to a cynical public. Stryker Corp., for instance, operates a “Sustainability Solutions” program that sorts, cleans and disassembles devices that can be reprocessed and reused. All components of reprocessable devices are individually inspected; some may be replaced, depending on the product. Rebuilt devices are inspected and function tested based on U.S. Food and Drug Administration (FDA) procedures and standards before being sterilized, quarantined and shipped to customers. Stryker estimates its sustainability program has reduced the amount of annual medical waste by 2,150 tons and has saved hospitals $5.25 in costs per second.

“Sustainability is an area we are talking about more than we ever have. We encourage our clients to take the long view as they look at their product development ideas,” said Paul Leonard, Director of Programs at Carbon Design. “You can develop products that don’t do harm to the planet (as much as medical devices have historically) by paying attention to the disposable portion of the systems. Many medical devices we work on have durable portions that get reused and disposable portions. We try to minimize the amount that is thrown away after each procedure while still meeting patient safety standards. We like to have this conversation with all of our clients because we feel it’s important. But we’re hearing from more clients that it’s important to them, too. The world generally is moving toward sustainability. We like it because it’s a way to make a pretty large impact with our decisions here. We can recycle all our pop cans in the office here and never have the kind of impact that we can have if we can affect the products we’re designing. The impact of a good choice and a smart design process up front can be substantial.”

Questioning the validity of medical device designs can help as well. With limited R&D budgets, companies no longer can afford to spend the money or the resources to pursue product development projects that may not produce a marketable device. To stay relevant and thrive in the market, companies must closely align their designs with customer needs, regulatory compliance and health insurance reimbursement allowances. Many medtech firms are making investments in wireless medical devices or healthcare delivery systems in response to the massive digitization of clinical data and doctors’ increasing use of smartphones, computer tablets and computer software applications in their medical practices. A report from physician recruitment firm Jackson & Coker found that 80 percent of doctors use a mobile device and various software applications on the job. The report attributes several factors to the rise in mobile device use among physicians, including cost, ease of use and transportability, and the slow but steady movement to replace (paper) medical charts with electronic health records.

Other companies, meanwhile, are sticking to the more traditional technologies—innovations such as stents, pacemakers or catheters—and giving them a fresh update. Such enhancements not only help medtech firms fulfill an unmet market need, they also can help improve a device’s chances for reimbursement.

“There are some technologies that can be enhanced to create better flow, such as vascular catheters, which have been on the market for years. A more efficient crossing of the lesion in coronary stenting processes where you cross the lesion much faster can allow the clinician to get in and out more quickly.
That becomes important,” explained Kevin L. Bramer, President and CEO of MedVenture Technology, a Jeffersonville, Ind.-based developer and manufacturer of medtech products. “While the stent in itself is important, the ability to deploy the stent quickly is becoming an important part of the technology’s evolution. In many cases, the reimbursement for these procedures is going down so the clinician has to have the confidence that he can get a technology into the body much more efficiently and do more cases per hour or per day without compromising overall patient care. The enhancements of technology come about by looking at new ways of designing the product, and that can include various forms of coatings to create better flow to various materials or designs that allow us to get in and out of a physiological system without compromising care.”

Becoming Big Bettors

For years, innovation among the medtech industry’s larger players was a fairly straightforward process. Most companies would simply wait for a ground-breaking new gadget to come along and then purchase the firm that invented it. No fuss, no muss, no trouble.

Technological enhancements can help improve a product’s chances of reimbursement. Photo courtesy of Invetech Pty Ltd.

None, that is, until the Great Recession virtually wiped out venture capital funding that had been flowing freely into the sector. Overall, life sciences R&D funding practically fell off a cliff in 2009, having been hacked an average 11.4 percent, according to a report on global R&D funding from Columbus, Ohio-based Battelle Memorial Institute and R&D Magazine. Funding rebounded slightly in 2010 and significantly more last year, but financial analysts repeatedly have warned that R&D funding may never fully recover from its economic annihilation.

Device firms may never recover from the shock. Fewer funding sources has thinned out the number of venture capital-backed companies working on the next revolutionary new product. And the resulting drought in ready-made innovation has left the larger firms scrambling to find alternatives to new product development.

In many instances, the alternatives are internal ones. A number of firms are funding projects in their own research facilities that are significantly more speculative than those they would normally support. One industry observer said the change is forcing many medtech firms to assume more internal responsibility for the product development process, including making “key high-science bets and developing those bets internally.”

But other experts contend that innovation through acquisition remains alive and well. It just is approached in a different manner.

“Large companies are approaching R&D very differently these days.The top medtech companies have gotten very efficient operationally and have a lot of cash to undertake acquisitions or strategic investments,” noted Sean MacLeod, president of Stratos Product Development LLC, a Seattle-Wash.-based product development, design and strategy consultancy. “There is a trend to grow in the near-term with acquisitions while R&D budgets shrink as funds are redirected to increasing clinical requirements and a renewed laser focus on the company’s core competencies. This balances risk and uncertainties given the current economic climate while long-term organic growth through R&D budgets is very strategic. Venture capital funding is still tight and the current long term R&D approach by large companies opens up new opportunities for start-ups, early stage companies, and innovation providers to partner, license, take strategic investments or be outright acquired as these R&D groups stay lean while they combine different internal and external resources to pursue longer horizon strategic goals.”

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Medtech innovation over the last half century has provided the world with some of the most revolutionary life-enhancing and life-saving technologies. Many of the ideas for these pioneering solutions were born amid necessity within the confines of home-grown workshops and then developed through the ingenuity of doctors, scientists or engineers. Dutch physician Willem Kolff, for instance, built the first working dialyzer in 1943 during the Nazi occupation of the Netherlands. Due to the scarcity of available resources, Kolff was forced to improvise and construct the machine from sausage casings, beverage cans and a washing machine, among other items. For years, the research and development models that led to these inventions seldom changed. But a confluence of factors is forcing medical device companies (as well as the inventors behind these nifty widgets) to modify their R&D models to remain competitive in the market. Experts claim medtech companies must create a product development process that embraces the needs, desires and regulatory requirements of emerging countries. These remastered R&D models no longer will be based on a design-to-ideal approach, but rather on a design-to-value method in commoditized product markets. Amid all this change though, remains one constant—the need to outsource. Andreas Knaack, director of biomedical instruments and devices for Invetech Pty Ltd., an Australian company that provides product development and contract manufacturing services, perhaps provided the most sage advice for medtech companies looking to revamp their R&D models: “Medical companies cannot be good at and be experts in everything. It is simply efficient and beneficial to focus on your core know-how while outsourcing value-add activities that increase business risk. Expert service providers work across a number of industries and bring know-how to the project, which internally may not be available. Outsourcing R&D efforts can give a company access to wider knowledge and depth of expertise.”

R&D—America’s Fastest-Growing Export Innovation distinguishes between a leader and a follower. —Steve Jobs A seismic shift has occurred in the geography of innovation.For decades, the United States stood at the epicenter of new technology, developing the latest iterations in medicine, motorized transportation, computer operating systems, telecommunications, manufacturing processes, and medical devices. “Modern technology was made in America,” University of Pennsylvania technology historian Thomas P. Hughes wrote in the preface of his book, “American Genesis: A Century of Invention and Technological Enthusiasm, 1870-1970.” No other nation has displayed such inventive power and produced such brilliant innovators as the United States…” From a historical perspective, Hughes is correct. Between 1870 and 1970, American scientists, inventors and scholars concocted a myriad of modern-day marvels, from the rebreather (a type of breathing set that provides a breathing gas mix of oxygen and recycled exhaled gas), the telephone, the radio and photographic film to the airplane, manufacturing assembly line, nuclear power, and the Internet. During that 100-year period, innovation was as typically American as apple pie (which, by the way, is not a uniquely American invention, having existed long before the English colonization of the continent). Over the last four decades though, America has slowly lost its spot in the center of the global innovation universe. Two reports from the Boston Consulting Group (BCG) and the Washington, D.C.-based Information Technology & Innovation Foundation (ITIF) gave the United States less-than-stellar scores for innovation leadership. The BCG study, conducted in conjunction with the National Association of Manufacturers and the Manufacturing Institute, ranked America eighth among 110 countries for innovation leadership (though it was second among large nations); the ITIF gave the United States a slightly higher score, placing it sixth among 40 countries, behind Singapore and South Korea, but still ahead of European nations. The ITIF study, however, also included a category that measured a country’s overall improvement in its innovation capacity from 1999 to 2009, factoring in such measures as education, government funding for basic research and corporate-tax policies. The United States came in last on that list. Politicians and manufacturing pundits like to blame the rise of low-cost production in China and low-wage services in India for the slow erosion of American innovation leadership. But scholars believe that America has no one to blame but herself for her fall from innovation supremacy, claiming the country has failed to recognize the importance of globalization. The U.S. economy, the ITIF study noted, now competes with other nations, some of which no longer compete principally on low cost but rather on the basis of innovation and knowledge as they attempt to create, grow and attract business. The ITIF study advises American policymakers to implement a national economic development or competitiveness strategy to regain its title as innovation leader. Such an achievement may only be possible though, by embracing the very forces (and countries) that stole the crown. Emerging markets—Brazil, Russia, India and China (the “BRIC” nations) particularly—have become more than simple low-cost country options for many American manufacturers over the last 10 years. They now are viable sources of long-term growth, with robust economies and burgeoning middle-class populations that likely will increase demand for products and services, particularly health-related devices and treatments. To capitalize on this anticipated demand, an increasing number of medical device OEMs have made the BRIC brethren a cornerstone of their long-term growth strategies, building research and development (R&D) facilities in one or more of the markets to manufacture products for local patients. GE Healthcare, for example, is spending $500 million to create six R&D innovation centers in China through 2013, with the first three being built in Chengdu in Sichuan province, Xi’an in Shaanxi province and Shenyang in Liaoning province. The centers will closely be linked to GE’s current R&D operations in Shanghai, Beijing and Wuxi in Jiangsu province, and will focus on developing medical facilities to treat cancer, stroke and otherage-related diseases. Construction of the R&D centers is slated to increase GE Healthcare’s medical product sales in China to $3 billion by 2015. “The market has such big potential, it encourages us to invest more in developing new products for it,” Xi Shui, general manager of patient care solutions for GE Healthcare China, told the English-language newspaper China Daily. The market also is encouraging investments from other companies as well. Covidien plc will expand its R&D workforce more than eight-fold in July when it opens a new research center in Shanghai, China. The facility will contain laboratory space and operating theater simulation suites that can be used by visiting healthcare professionals involved in the development of medical devices. Two of Covidien’s rivals are setting up shop in Beijing, 663 miles to the north. Zimmer Holding Corp.’s R&Dfacility will foster the development of products and technologies for Asian patients and healthcare providers, while the center built by Medtronic Inc. and Shandong Weigao Group Co. Ltd., China’s sixth-largest medical care firm, will zero in on the design and development of orthopedic devices. “The influences are different in [emerging] markets—the sales systems are different, the reimbursement systems are different and the acceptance criteria of technology is different,” noted Kevin L. Bramer, President and CEO of MedVenture Technology, a Jeffersonville, Ind.-based developer and manufacturer of medtech products. “From what we’ve seen with our customers, they are interested in learning and understanding some of those influences so they can create products for those markets that may or may not fit in the U.S. market for various reasons. What they are specifically interested in is the clinical requirements associated with the market and how they can create technology to meet those clinical requirements. The clinical requirements may be decently different, or in some cases slightly different. Either way, those differences can cause a change in design or change in the overall requirements of the product that may be greater than or less than the requirements associated with the device here in the United States.” The need to better familiarize themselves with clinical requirements overseas is prompting an increasing number of OEMs to spend their R&D dollars developing population-specific products for emerging markets. Like its one adversary in Beijing, Johnson & Johnson’s innovation center in Suzhou, China, (located much closer to Covidien’s operation than either Zimmer’s or Medtronic’s) was built purposely to develop devices and diagnostic products for Asians. Population-specific designs, however, is just one of the many reasons companies are investing their R&D dollars overseas. Other contributing factors include access to lower-cost resources, a better understanding of local regulatory requirements, proximity to a multicultural workforce, and the predominance of diversified thought processes and fresh ideas. GE, for instance, is hoping to develop a close relationship with the Israeli technological community through the opening last summer of an R&D center in Haifa, its eighth such facility in the country. Research at the company’s newest center is conducted on water and clean energy as well as non-invasive medical devices, advanced diagnostic tools and medical navigation and guidance systems. “Israel has such a rich history of innovation and scientific discovery,” Michael Idelchik, GE’s global research vice president, advanced technologies, told the Israeli business daily newspaper Globes. “With the establishment of the new R&D center, we will be in a betterposition to build a close relationship with the Israeli technology community and identify new technologies that could become part of our portfolio.” — M.B.