1998 Business Outlook: Prospects for Growth

Medical Device & Diagnostic Industry Magazine
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An MD&DI  March 1998 Column

COVER STORY

Double-digit sales growth and a friendlier FDA are keeping prospects positive.

For the past few years the United States has enjoyed an exuberant stock market, low unemployment and interest rates, an expanding economy, mild inflation, and increased consumer confidence. Within the medical device and diagnostic industry, prosperity has reigned as well. Double-digit growth in annual sales volume coupled with a newly reformed FDA are keeping industry executives optimistic about prospects for the coming year, with 57% of respondents to MD&DI's annual business climate survey saying the current business climate for the industry is good or excellent.

"I continue to have great optimism for growth in the medical device industry during the next three years," says Thomas Britten, president of Scimedx Corp. (Denville, NJ). "Small companies especially will see some great opportunities because of the softening of FDA's impact on industry."

Despite the financial crisis that has hit Asia since this survey was conducted (last October and November), executives' expectations haven't dimmed. While some suppliers have noted a few cancellations of orders, most medical device companies say the Asia factor presents more opportunities than drawbacks, and they still anticipate solid growth in 1998.

"Nineteen ninety-eight should be very positive even though we're in a managed-cost situation where costs are a concern for health-care providers around the globe," says Ronald Dollens, president, CEO, and director of Guidant Corp. (Indianapolis). "There is a recognition that technology can be a part of that solution, and outcomes continue to get better. We expect high-single-digit growth from a dollars standpoint. I think we'll see double-digit growth in actual sales and patient utilization, though."

Figure 1. Respondents' rating of current business climate for the medical device and diagnostic industry as a whole.

Jack Wareham, president and chief operating officer of Beckman Instruments, Inc., a diagnostics manufacturing company based in Fullerton, CA, and a member of HIMA's board of directors, believes a number of medical device segments won't fare as well as others. "While the whole medical device industry might sneak into double-digit growth in 1998, some segments won't do well. Cardiovascular and orthopedic segments will see good growth due to the continued adoption of new techniques and expanded global use, but more hospital-based markets, like in vitro diagnostics, will probably remain relatively flat in terms of dollar sales."

Figure 2. Executive ratings of device industry business climate, 1993—1998.

Figure 3. Expectations of respondents for business conditions in the medical device and diagnostic industry, 1993—1998.

Most survey respondents thought that the business climate will stay about the same in 1998: 65% expected no significant changes, 26% expected improvements, and 8% expected worsening conditions. Respondents in the Northeast accounted for the most-dire predictions (Figures 1—3, Table I).

The sixth annual MD&DI business outlook survey, conducted by the independent research firm Readex, Inc., comprises responses from 188 industry executives, most of whom predicted a continuing favorable environment even before learning of the passage of the FDA Modernization Act of 1997 in late November. (For details on survey methodology, see the box on page 88.)

Table I. Manufacturers continue to enjoy double-digit sales gains, but reality has underperformed expectations in the past.

The typical respondent works for a company that has been involved in the medical device industry for about 10 years; he or she expects the company's total 1997 medical product sales volume to be $2.1 million. Respondents expect to see a 15% increase in sales volume in 1998, and the subset of manufacturers with sales volumes below $1 million are even more optimistic, anticipating a 20% gain.

Respondents to the 1996 survey predicted a good 1997, and they weren't disappointed. While 6% had reported declines in sales in 1996, no company reported declines in 1997.

Sales in 1997 were strong, with a reported median increase of 10%. More than half of all respondents' companies saw increased sales but, true to past patterns, fewer small firms experienced growth. Only 53% of smaller companies posted gains compared to up to 73% of larger ones. Then again, many smaller companies experienced stellar climbs in sales: Nearly one in five with annual revenues below $5 million saw sales increases of 50% or more.

A NEW FDA BODES WELL

FDA's efforts to speed times for premarket approvals (PMAs) and 510(k)s and increase efficiencies are reflected in this year's responses to the question, "How have changes in FDA attitudes and procedures affected your company's overall business?" This year only 23% of respondents experienced 510(k) clearance delays—the lowest number in the history of MD&DI's survey. Respondents' experiences confirm Center for Devices and Radiological Health's data that show the average 510(k) review time has fallen to less than 100 days, the lowest turnaround time in years and half of what the average review time was in 1994, when 54% of MD&DI readers reported clearance difficulties (Table II, Figures 4 and 5). In the past, up to 69% have reported problems in one or more areas, compared to just 38% in 1997. Further, nearly 6 in 10 industry executives indicated that they had experienced no problems with FDA in the past year, the highest level since the survey's start. A majority, 58%, said FDA didn't affect their business in 1997; 14% said business improved as a result of FDA policies; and 17% said business worsened.

Table II. FDA-related problems encountered by respondents during the past 12 months.

The passage of the FDA Modernization Act of 1997, the first major reform of FDA in decades, promises to solidify the gains seen in FDA's review times. The new law exempts most Class I products from the 510(k) review process (only high-risk Class I devices will continue to need review), and many Class II devices have been exempted as well. Further, the law requires FDA to review and make a determination on 510(k) notifications within 90 days of receiving them. With fewer, time-limited reviews, FDA will be able to concentrate its review efforts on Class III and high-risk devices, allowing more me-too and high-technology devices to reach the marketplace more quickly.

Figure 4. Percentage of survey respondents reporting that FDA policies were having harmful effects on their business, 1993—1998.

Figure 5. Percentage of survey respondents reporting delays in FDA's clearance of 510(k) products, 1993—1998.

Two other stipulations in the new law may make manufacturers' lives a little easier: the expanded scope of the third-party review program and more-streamlined clinical testing.

"One of the greatest benefits of the new legislation is the continuation and expansion of the third-party review process for most Class II 510(k) devices," says Peter Graham, executive vice president and chief operating officer for Maxim Medical (Clearwater, FL). "We submitted two products this past summer. The one sent to an outside reviewer was approved within three weeks; the one that followed the traditional route through FDA took five months to win approval. There weren't many differences between the applications. Until this law passed, FDA determined which review route a product followed. Now, the medical device company can make that decision."

FDA legislation may also spur some companies to conduct more clinical trials on American soil. "The export of the United States's intellectual property has always disturbed me," says Ronald Matricaria, chairman and CEO of St. Jude Medical, Inc. (St. Paul, MN). "Almost every company does its first clinical trials outside of the United States because product approval is much faster in other countries. Researchers in these other countries then present the clinical findings at medical meetings, so it appears that new technologies, which really started at a U.S.-based company, originated from Munich, Toronto, or wherever. This practice doesn't hurt companies so much as it hurts the U.S. economy, clinicians, and patients."

By allowing manufacturers to use PMA data from other manufacturers' studies, expanding the third-party review process, and instituting a statutory right for manufacturers to meet with FDA prior to beginning clinical trials and at defined points throughout the review process, the legislation should streamline clinical testing. "We used to focus on introducing products into Europe first, and it would be several years before the product came onto the U.S. market," says Graham. "Now we can launch a product in both places simultaneously and see a quicker return on our R&D investment."

"For us as a small company, facilitating the use of retrospective data in clinical trials will be very helpful," says Stephen Rudy, senior vice president for Somnus Medical Technologies (Sunnyvale, CA). "The new requirements will let us keep the number of patients used in trials down and will decrease time to market."

The act also calls for the creation of a resolution dispute committee, which will be composed of scientists from the private sector and is intended to provide an impartial forum for companies that have a scientific dispute with FDA. Hugh Sharkey, executive vice president and chief technical officer for Oratech Interventions (Menlo Park, CA), is one of many manufacturers who see value in this addition to FDA. "FDA can't be an expert on every technology that comes along," Sharkey says. "In the past, FDA's panels have been composed of consulting physicians and biostatisticians in addition to other professionals who are unfamiliar with new techniques and technologies. The scientific advisers for medical device [and in vitro diagnostics] companies, being familiar with the new technologies, can provide valuable insight for the reviewers and should be a part of the review process." FDA's new committee should help address this concern.

Despite the new legislation and more-cooperative relationship between FDA and industry, executives still see room for improvements. "Philosophically, FDA views its role as protecting the health and safety of the population of the United States. Industry would like to see FDA's role as promoting public health. There's a big difference," says Matricaria. "The FDA wants industry to ensure the safety of
the people who use a particular product. Under that philosophy, potentially no product could be approved because everything has a potential risk. Instead, FDA should promote a high standard of safety. We need to continue to work with Congress and FDA to further delineate this distinction."

Executives also caution the industry not to become complacent about the new FDA. "Now we must be diligent in encouraging Congress to maintain its oversight and enforcement of the new law," says Scimedx president Britten. "There are sections from the 1976 Medical Device Amendments that still are not in place. We need to make sure all the stipulations get implemented and work with Congress on CDRH funding so there won't be an excuse to impose user fees."

R&D: SMALL COMPANIES SET THE PACE

The FDA Modernization Act's changes to the PMA and 510(k) processes and clinical trials should encourage more small companies with innovative products to enter the marketplace. "We'll see a greater focus on R&D and more companies being established since there's greater inclination to make investments when they will generate revenues in a more timely fashion," says Guidant's Dollens.

Already smaller companies tend to outspend larger ones by nearly two-to-one in R&D as a percentage of total sales. In 1997, companies with sales of less than $5 million reinvested 10% of their revenues in R&D compared to just 5% for companies with sales between $5 million and $49.9 million and 6% for companies with annual sales topping $50 million. Similar spending is slated for 1998; however, Beckman Instruments' Wareham thinks that with the passage of the FDA Modernization Act, larger companies may reallocate to R&D some funds that were originally set aside for regulatory affairs.

MARKETING OPPORTUNITIES

Despite its past difficulties in providing an atmosphere conducive to clinical testing, the United States has represented a strong sales market for the medical device industry for years. Since the inception of MD&DI's business survey in 1992, the United States has consistently placed at the top of the list for markets representing the best opportunities for sales growth (Figure 6). Nineteen ninety-eight is no exception, since nearly three-fourths of respondents still say the United States offers the most-promising market. While appreciated for its ease in clinical testing, the second-most-popular market, Europe, drew thumbs-up from only 43% of respondents.

Figure 6. Expected high-sales-growth markets for the medical device industry for 1998, as indicated by survey respondents (multiple answers permitted).

Asia's financial crisis, while generating lots of press and sending the U.S. stock market on more-frequent roller-coaster rides, may offer some opportunities to medical device manufacturers. "The Asia—Pacific Rim region is still where it's at [for our company]," says St. Jude Medical's Matricaria. "The numbers of people in China, Singapore, Korea, and Vietnam are substantial, and they really need advanced technology. You need three things for commercial success: a need for the product, a conducive medical infrastructure, and currency to afford the product. Once these markets shore up their currencies, great things can happen."

Maxim Medical's Peter Graham agrees. "Asia offers some bargains right now. Building a plant could be a good opportunity for low-technology, labor-intensive products [such as surgical gloves]—although, from a sales side, continued turmoil will likely hurt consumption of products in that market.

"We're looking to South America for growth, specifically Argentina and Brazil," Graham continues. "These countries have stabilized a lot, haven't seen huge inflation in five years, and their citizens are seeing improved finances. With improvement in individual wealth comes a demand for better quality of life, which is where we fit in."

Scimedx's Britten encourages smaller companies to look into overseas market opportunities. "International sales can be easier than selling in the United States," he says. "In other countries, the distribution network is more sophisticated. My advice to a smaller company looking to sell overseas is to appoint one or two distributors in a country. They make a commitment to you, and then they handle everything."

U.S. companies are looking to sell overseas, which is reflected in how many companies have distribution and sales mechanisms in other countries (companies with annual revenues between $1 million and $4.9 million have the fewest overseas distributors, but still one-quarter of this category of respondents were represented). But few manufacturing activities are occurring offshore. Overwhelmingly, product R&D, product design, manufacturing, assembly, packaging and labeling, initial regulatory approval, and clinical trials are still being completed within the United States (Figures 7 and 8).

Figure 7. Activities currently conducted outside the United States (50% of the respondents reported one or more).

Figure 8. Percentage of respondents considering leaving the United States to establish foreign manufacturing sites, 1993—1998.

MANAGING MANAGED CARE

"I read somewhere that [FDA lead deputy commissioner] Michael Friedman, [MD,] was concerned because FDA is seeing a 12% increase in PMA submissions while they're only getting a 2% increase in budget. I thought 'Welcome to our world!'" says Oratech's Sharkey. The proliferation of managed-care organizations (MCOs) and buyers' groups (such as group purchasing organizations, or GPOs) is affecting the entire health-care industry, and medical device manufacturers, especially smaller companies, have seen their customer bases shift accordingly. When asked which customer expectations impose the greatest difficulties for their companies' product sales in the coming year, a number of executives cited price as an issue. For example, respondents said customers are looking for "more service at a lower price" and "while looking for a deep discount, [customers] still expect high levels of education and product samples."

Medical device companies are striving to meet these expectations by broadening product lines, bundling products, reducing manufacturing and other operating costs, and retargeting their marketing efforts. "We're working to widen our range of products based on what we provide already and on our sales patterns," says Peter Graham of Maxim Medical. "This whole trend is kind of like 'Wal-Mart Comes to the Medical Business.' You have a much better chance of winning a contract or making a sale if in one sales call to a hospital or buying group you can offer a selection of products."

Smaller companies can meet buying groups' desire for a broadened product line by partnering with several other smaller companies or one large one. "Partnering with a large company that in some way really needs a particular product or technology to fill a hole in its product line can be very positive for a small company," says Britten. "Small companies have much more impact than they might think."

Buying groups also are increasingly asking manufacturers to "bundle" products together for particular procedures. "As novel an approach as I've seen is a capitated program we're using with managed-care providers," says Dollens. "For an angioplasty procedure, we receive a set rate, and the provider can use any of our products to perform the angioplasty. In this economic partnership, we both have the same incentive to use the most appropriate, cost-efficient product. The managed-care provider gets a lower cost, and Guidant gets a commitment to a higher level of product utilization." While bundling requires a broad product line as well, smaller companies can again partner with other companies to compete on this level.

Just as other industries have worked to trim internal costs during the past decade, so, too, have medical device manufacturers. From finding creative ways to lower scrap, inventory, and space requirements to automating and using smaller runs and fewer subassemblies, manufacturers are continually searching for ways to streamline. Smaller companies are partnering with other small firms to share regulatory, reimbursement, and sales assistance as well as to create their own buying groups, strengthening their position when negotiating with suppliers.

Finally, manufacturers also are retargeting their marketing efforts to their varying audiences, but seem to be concentrating more on strategies for GPOs, MCOs, and physicians—who have very different concerns. GPOs and MCOs still tend to look for information on price and outcomes data when determining who will get their business, so manufacturers need to conduct studies that will demonstrate how a product contributes to a patient's health. Despite continuing consolidation in the GPO and MCO markets, many groups still exist, so it's important to determine which purchasers most affect a company's bottom line before mapping out a marketing strategy (Table III).

Table III. Direct purchasers of medical products manufactured by respondents (multiple answers permitted).

"We've narrowed the managed-care organization market down to what we think are the top 10 organizations based on whom our customers have contracts with," says Somnus Medical Technologies' Rudy. "We're now talking to [these organizations'] medical directors and other decision makers to find out what data they need, then we'll work on providing it."

Sharkey advises smaller companies to make personal calls on these decision makers. "Make inroads as early as possible and meet with the heads at Columbia, Tenet, and at managed-care groups as well," he says. "You can go to headquarters, but it's best to visit with regional administrators at local centers." Other companies are attending conferences that are geared to medical directors; whichever route a company takes, building relationships and providing data on costs and outcomes are key.

When marketing to physicians and clinicians, manufacturers should focus more on quality and advances in the product or technology being offered and describe the product's characteristics and any value-added programs. "We give physicians information on products and new technologies that they can then use in their own marketing efforts in their community," says Rudy. "If we can help them increase patient volume, we should increase our sales volume as well."

THE NEXT CHALLENGE

While 1998 seems to promise more good things for the medical device industry, executives warn that much work remains to be done to keep a sunny forecast for years to come. During the Medical Device Executive Forum (MDEF) held at the Medical Design and Manufacturing West Conference and Exposition in Anaheim, CA, in January, panelists addressed some of the new issues facing the industry. While FDA will still require attention to ensure that the Modernization Act is implemented as Congress intended, industry now is looking to its next governmental challenge—the Health Care Financing Administration.

"It takes an average of 864 days for HCFA to make a decision on reimbursement," Thomas Loarie, chairman and CEO of KeraVision, Inc. (Fremont, CA), told MDEF attendees. "For a small company like us to wait [more than] two years for HCFA to create a category so providers can get reimbursed for our product would be devastating."

"More and more companies are waking up to the realization that we'll get FDA approval for our product, but without reimbursement we'll still have no market for that product," said Richard Martin, president and CEO of Physio-Control (Seattle), another MDEF participant.

And, a final, cautionary note about FDA: "The next 12 to 24 months will be pivotal in making our future easier or in re-creating the past rocky road," said MDEF speaker Richard Piazza, president and CEO of Hepatix, Inc. (San Diego). "The first time [any medical device] company tries to 'slip one by,' we'll go back to the way things have been in the past." Piazza noted that not only does the medical device industry need to be vigilant that FDA carries out its responsibilities under the FDA Modernization Act, manufacturers need to be sure they carry out theirs as well.

Stacey L. Bell is editor of  MD&DI.

Illustration by David Tillinghast

Copyright ©1998 Medical Device & Diagnostic Industry