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How Biomedical Companies Navigated Turbulent Economic Times


Posted in Biotechnology by mfontanazza on January 30, 2012

An analysis of 25 top independent firms in the biomedical device and technology industry.


While most giant corporations crashed during the worst economic climate since the Great Depression, the biomedical devices industry grew, invested, and prospered. The Great Recession (from 2007 to 2009) represents the worst downturn the western world has seen since the 1930s, a time when most companies saw revenue recede and profits disappear, and they resorted to widespread layoffs, investment freezes, and research cuts. In the midst of this storm, the worldwide biomedical devices industry went against the current. These companies grew their revenues and increased profits by investing in research and product development, increasing their marketing spend, and hiring new staff. They did this in all of their markets—North America, Europe, and Asia—and grew their profits without massive outsourcing, inventory liquidations, mass layoffs, or fire sale liquidations. This sector is not completely recession proof, as some firms did hit the bumps when consumers delayed expensive, elective medical procedures such as knee and hip replacements. But taken as a whole, the businesses that comprise this industry sector sailed through the Great Recession as if it never happened.

This industry review looks at 25 of the top independent biomedical device makers for an in-depth study that analyzes their business strategies, financial results, marketing investment, product portfolios, and research and development to better understand what drove growth and profitability in a time of worldwide downturn. The analysis sets out to discover why this particular sector thrived where others failed, analyze whether this success is sustainable over the long-term, and identify areas for improvement.
 
Summary and Key Findings
Why did so many companies in this industry sustain such growth, how have they achieved this success, and can they keep it up? We found three common characteristics shared by the most successful of the 25 biomedical technology firms that appeared to contribute to their growth during the recession and are still a factor today (see Table I):
  • High Value-Added Manufacturing. Building advanced technology products in developed markets while adding a high level of value to base costs has and will continue to do well for this sector. For highly differentiated products sold as customized solutions, the United States and Europe have been great places to establish and grow businesses.
  • Increased Marketing Efforts. These companies continued to increase spend on marketing efforts during the Great Recession.
  • Investment in R&D and New Products. The most successful biomedical device companies developed a robust pipeline of new products and R&D capabilities, which allowed them to navigate challenging times successfully. Even during the Great Recession they were increasing their R&D spend.
In short, the best of biomedical device makers succeed by making very little very well, for sale at very high prices.
Despite the unparalleled success of the biomedical device industry from a 10,000 foot view, our close study reveals operational fissures that, if left unchecked, could threaten future growth. For instance, some firms, having grown through acquisition of start-ups and by purchasing parts of organizations, now have too many plants and labs to be efficient. Based on our analysis of the firms and the industry, these companies could consolidate and restructure in order to achieve maximum efficiency by sweeping up the collections of purchased parts and turning these businesses into coherent and focused companies. The challenge is to rationalize and consolidate in a fashion that does not disrupt sales operations, disturb regulatory licensed manufacturing processes, or lose intellectual capital, while moving to a product portfolio mix that offers strategic diversification, builds on related technologies, and simultaneously adds complementary applications. Consolidation will be a key driver facilitating growth over the coming years. History shows that if the current management will not do it, then someone else will. Recall that Alfred Sloan was brought in 1920 to clean up the loose collection of parts that Billy Durant had assembled under the name General Motors, a firm that had a very meaningful and industry-defining run for 80 years after that.
 
The big opportunity for the biomedical device business is to move beyond the sometimes bumpy revenue stream from selling things, and migrate to a business model focused on selling systems that provide a point of control and differentiation (usually from software) or that yield sustained revenues from related consumable products used in caring for patients. It is the kind of strategy that worked for King Gillette when his business first adopted the razor and blades model; it is a strategy that has also worked for IBM as it has moved from a hardware business to one driven by sustained revenue streams from software and services.
 
Approach and Methodology 

High Value-Added Manufacturing

The biomedical devices sector is characterized by highly specialized manufacturing efforts that generally add a high level of value to complex products in processes subject to sophisticated quality control processes, subject to close regulatory review. High-value add is used here to mean the process of taking fairly inexpensive inputs such as metal, electronics, or materials, manufacturing them to build customized products that constantly evolve with advancing technology and practice, and then marketing them with sophisticated sales and distribution organizations to yield revenue that is a large multiple of the original input costs. Most biomed devices have been evolving at a fairly fast rate in the past decade, resulting in a fairly close pairing between the R&D function and the manufacturing operation; often the two functions are co-located.
Generally, there are three categories of products manufactured:
 
  • Internal or External Use. Devices or materials that are used directly on or in the human body. Unsurprisingly, these products are subject to the highest level of quality control and regulatory scrutiny of manufacturing processes. Because of frequent product evolution and advancement, R&D is co-located with the production process. The designs are often highly customized to individuals, or adapted to local markets of patient populations and local medical usage. As a result, manufacturing normally occurs in individual or small quantity batches at plants located in or near the target national market, with limited scope for economies of scale.
  • Treatment Devices and Controls and Electronic Diagnostic Units. These devices are used to diagnose or treat the patient, sometimes in direct contact and sometimes removed from the patient in a remote laboratory setting. Most devices can be compared to computers with materials handling capabilities. They are built in small batches on short runs, and customization is common. Quality controls on device performance are rigorous, while licensing authority is not as closely monitored. Because of generally rapid advances in product design, production runs tend to be in short batches and highly integrated interaction with R&D staff is required.
  • Consumables Used by Treatment Devices. This category includes fluids or materials used in a treatment process, usually in a treatment device built by the same company. Because these items are used in direct patient contact, quality controls are often as rigorous as those applied to advanced pharmaceuticals, and regulatory scrutiny and review are also at the same level. The design and content of these offerings coevolves with the matching treatment devices, although they may be built or processed at different plant sites. There is often a strong requirement for time-sensitive freshness that, coupled with varying local regulatory approvals on fluids and materials, leads to market-localized manufacturing.

The high level of value comes from the advanced quality controls and high degree of customization that are required across most of the sector. The requirement for regulator licensing of manufacturing processes can also form a protective barrier to the entry of new competitors.

There are several results of this combination of customization, R&D and manufacturing pairing, and regulatory control. Most manufacturing plants in this sector are specifically licensed by the local regulator to produce only a specific product or set of products at a particular site; moving that license, and the intellectual property about the conduct and control of the manufacturing process to another site can incur long lead times for planning and expense for the transfer. Often multiple key people with skills and knowledge must move with the process. Closings, moves, and consolidations can take considerable time and incur considerable expense. Geographic areas served tend to be limited to a country or continent rather than the worldwide scale of production from a single plant than can be found in other high-tech sectors. Because many firms in the industry have grown by acquisition of smaller firms, it is common to find a legacy of multiple small- to mid-sized manufacturing facilities scattered across the landscape, each plant with its own process, products, paired R&D function, and manufacturing quality and control staff. Because many of the BioMed 25 originated in the United States, most have a manufacturing footprint that is dominated by U.S.-based plants. Those that originated in Europe have their primary plants there, in the UK, Germany, or in what is arguably the highest cost manufacturing location in the world, Switzerland.
 
It is interesting to note what the BioMed firms are not doing with respect to manufacturing. With only a few exceptions, they are not moving to lowest possible cost labor markets and building large single plants to supply the world. They are not designing products and processes in one central high-cost, high-knowledge market, and then moving the actual production to a distant, low-labor cost manufacturing site. Where product standards differ across markets they are having limited success in getting regulators to agree to common product standards that allow common products and shared economies of scale. As a general observation, this is not (yet) an industry where everything you see or touch says “made in China”. However, many of the firms are opening or acquiring plants in China or India with the intent to supply those markets.
 
Yet this industry is not static; companies are attempting to control costs, consolidate processes, and increase efficiency. While few firms have what might be described as a grand manufacturing strategy that is worldwide in scope, most are trying to trim back around the edges and step toward a bigger strategy. Many are making the necessary and often expensive moves to consolidate many little plants in a smaller number of larger R&D and manufacturing centers. But these moves notably can take two to four years to plan and execute, and generate substantial expenses and write-offs for the cost of transition. Obtaining new manufacturing licenses can have long lead times. Several firms are working to develop common shared upstream product components that can be built at a single or at a few locations and shipped into local markets for advanced processing and local customization. It is the classic operations management manufacturing idea of delayed differentiation. Companies are working to rationalize their supply chains and often build merged, common distribution functions. And they are building new plants in new markets, which are then paired with or linked to original, developed market sites for R&D support.
 
Substantial further consolidation is possible and may become a necessity if the device sector starts to come under cost pressures from a changing healthcare marketplace. For instance, the electronic elements of medical devices and diagnostics could be fully outsourced to third-party manufacturers that could use the electronic assembly supply chain in Taiwan and China to lower costs and gain efficiency from consolidated volumes. Consumable fluids and materials could develop partially processed material components in concentrated form that could then be bulked up and adapted to local market needs. Internal usage medical components could be standardized for use across more markets, common manufacturing processes could be developed, or production for one product line could be concentrated in a single plant supplying the world while other products are produced in other markets and shared across a worldwide supply chain. There is considerable scope for an industry with such a plethora of small plants in high-cost manufacturing locations to begin to reduce costs.
 

Next: Investment in R&D and New Products

 

Yair Holtzman is director and global life sciences leader at WTP Advisors (White Plains, NY). He leads the firm's Business Advisory Services Group and co-leads the Research & Development Tax Services Group. He has twenty years of experience as a management and tax consultant focusing on Research and Development in the Chemicals and Life Sciences Industries. Holtman is a Certified Public Accountant in NY, NJ, IL and NH and holds an MBA degree from Cornell University’s Johnson Graduate School of Management, with a concentration in Operations Management and Manufacturing. He can be reached at yair.holtzman@wtpadvisors.com

At the time this paper was published, Tom Figgatt, Sr., was an associate with WTP Advisors, working in Business Advisory
Services and Tax Advisory practices. He spent more than 30 years working for IBM in leaderships roles involving
business and financial planning, strategic analysis, information systems, product planning, marketing
and sales, in business units involved information technology hardware, software, services and
consulting. He holds an MBA from the Harvard Business School, graduating with High Distinction,
as a George F. Baker Scholar, with concentrations in Finance and Marketing. He holds certificates
in accounting and taxation from Sacred Heart University, and a BA in Economics from Vassar
College.


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