The Value of the Relationship

You’ve probably heard people say, “I only know what I read.” I had a journalism professor who put his own twist on the familiar phrase. He would say, tongue-in-cheek, “I only know what I write.” His point was neither arrogant nor narcissistic, but to demonstrate to eager, inexperienced wannabe journalists that reporters often can get too close to the information they cover most often. Institutional knowledge is a good thing, clearly, when you’re covering a “beat.” However, in this age of e-mailed interviews, Skype, video chat, etc., it can be easy to feel detached from the very population you spend your days reporting for and about.

I had an opportunity recently to speak to an industry gathering sponsored, in part, by the Bartlett Area Chamber of Commerce (just outside of Memphis, Tenn.) about issues currently affecting the orthopedic market. The gathering included suppliers, contract manufacturers and a number of medical device company representatives (including my co-presenter) with varied job titles. After a brief discussion of current industry headlines and what’s making news today in our industry, I opened the presentation to a group discussion with the hope of getting solid feedback about the issues on the minds of people representing a broad spectrum of medical device industry perspective. Indeed, it was a perfect opportunity to come out from behind the computer and be on the receiving end of valuable face-to-face discussion.

OEMs reported having to confront—among other things—a rapidly changing global market, increased pricing pressures and an unpredictable regulatory system here in the United States. That’s not entirely newsworthy. We know most of that. But what was unique was to hear it from industry’s front line, not CEOs, CFOs, industry analysts, lawmakers or lobbyists. These folks have serious concerns about the way the U.S. Food & Drug Administration (FDA) is managing its device approvals, what it has in store for the 510(k) device review process, and what all of that could mean for new product introduction domestically. Is Europe the best place to launch a product now? What does that mean for manufacturing here? (Incidentally, check out Euro News on page 34 and the European market feature on page 82 for more perspective on these questions.)

One of the attendees, an industry veteran for more than 30 years and self-described “serial medical device developer” said he’s never seen anything like the current medtech market.

“There’s so much promise out there. The ideas haven’t gone away, but the funding has,” he told me. “How long before the technology advantage [here in the United States] goes, too?” Good question. We do live in a global economy. It’s one thing if market forces push this industry to a newer, more global model. It’s another thing if current regulatory practices hustle industry out the door.

One topic that had everyone nodding their heads during the meeting was the need for outsourcing. One OEM said his manufacturing process couldn’t survive without it—particularly with the increased pricing pressures currently being experienced. “My resources are better focused elsewhere, rather than in manufacturing infrastructure. That’s where finding the right suppliers and outsourcing partners is critical,” he said.Suppliers are being asked to do more, and attendees noted how their business has increased. So while device OEMs face their own challenges of market access and pricing pressures, the challenge for outsource providers is to offer the right mix of products, services and quality to ensure their spots on ever-shrinking supplier lists at OEMs—because while device companies may need more of their services, they’re also trying to keep their supplier rosters tight and manageable.

One obstacle for OEMs that could translate into opportunity for the outsourcing community is the tax imposed on device manufacturers as part of last year’s controversial healthcare reform legislation. According to a new report by Kalorama Information, the once-conservative medical device industry is outsourcing at an increasing rate, and the new 2.3 percent excise tax, which would put pressure on margins, would be one more factor in growing the $60 billion market for outsourcing medical technology and device parts.

“The tax itself won’t force a firm to outsource,” said BruceCarlson, publisher of Kalorama Information. “But since the law taxes revenues notwithstanding the cost of manufacture—it could add further pressure to bring costs down in order to restore profits.”

Although the tax—which includes a broad array of devices (and some that others might argue shouldn’t be classified as medicaldevices)—won’t take effect until 2013, it is a consideration now for many in the industry, and will be for the next few years as they await any further action on healthcare reform, the report noted. Lawmakers in the House and Senate already have moved to repeal the tax.

There’s good and bad on both sides, but ultimately each side of the manufacturing equation is impacted by the same factors. Tax or no tax, I think a host of other reasons will keep outsourced manufacturing a viable and preferred option for medical device companies. The true challenge going forward is how to seizeopportunity and solve problems together. The value of the relationship and its long-term benefits goes beyond margins.