The medical device industry in the United States is a complex and wide-ranging entity that defies simple explanation. No matter how precise, numbers can tell only part of industry's story. For the rest, one must go to the top--to the executives who daily fret over regulatory delays and marketplace pressures, and whose decisions have helped to shape the industry into the commercial powerhouse it is today.
This year, MD&DI invited six such company executives to join in a roundtable discussion about the current status and future directions of the device industry. Brought together by phone last December, the panel was moderated by MD&DI editor John Bethune and managing editor Steven Halasey.
The six participants in the roundtable were John Borgos, president and CEO of Vasamedics, Inc. (St. Paul, MN); C. Raymond Larkin, president and CEO of Nellcor Puritan Bennett, Inc. (Hayward, CA); Thomas M. Loarie, president, CEO, and chairman of the board at KeraVision, Inc. (Fremont, CA); John A. Navis, president of Medigroup, Inc. (Aurora, IL); Phil Ralston, president of Surgimedics/TMP (The Woodlands, TX); and Roger Stoll, president and CEO of Ohmeda, Inc. (Liberty Corner, NJ).
What do you consider to be the most significant challenges to your company and to the medical device industry as a whole at this time?
Borgos: FDA. We've been in business for 10 years, so we've had constructive things happen with the agency; but I've had two disappointing experiences in the past year.
First, after two years of going sideways and up and down with a 510(k) notification for our blood pressure device, the agency ended up telling me that I had to file a premarket approval (PMA) application. It really would have been the end of our company as we knew it--except that somebody came in and bought our assets. But the interesting thing was the conversation that I had with the agency after the 1994 elections. Then, I was told to simply resubmit the 510(k) and they'd clear it. And the fact that they offered no explanation displays the arrogance of the agency.
That conversation made me think that maybe the agency had changed. But now we're struggling with an application for another product--a blood-flow sensor that we've been selling as a reusable device and want to sell as a disposable device delivered sterile, with slight modifications in dimensions. After eight months, we just found out two days ago that we have to do a significant amount of extra, unnecessary, and still undefined testing. We should have been told about this testing ahead of time, but what we were told to do was to run the same tests that we ran for the predicate device. That's exactly what we did, so now we'll have to have a meeting with FDA to sort it out.
This sort of arrogance and the incompetence at the agency is killing small companies like ours. For the sake of the rest of you guys, I hope our experience isn't representative.
Larkin: I think we face several challenges. Trying to figure out what FDA wants and how it wants it is certainly a challenge. This seems to be easing up now, but I don't know whether it's just the agency's tone that's easing up or whether the agency is really working to make it easier for companies to get their products to market and to understand current compliance issues.
Just keeping up with the changes on the customer side of the marketplace is an unbelievably significant challenge today. The consolidation that's going on in both the hospital and the home health-care sectors is creating new and different demands. For the first time, the hospital marketplace is shrinking, and patients are being treated in many places other than the hospital. So understanding the status of these various markets is a significant challenge.
Then there's the challenge of trying to figure out what customers mean when they talk about bundling, outcome studies, risk sharing, technology advancement guarantees, and so on. The language is starting to settle out so that everybody's using similar terms, but I don't think even our customers really understand them. There's no consistent definition among customers about what an outcome study is, or about what risk sharing is. For us, the real challenge is to figure out how all these terms are being used by customers, and then to determine how we can serve as an asset to them--as opposed to just another vendor with a product to sell.
Loarie: I would say that there are three major challenges, and on the horizon there are some additional challenges that could go away or could emerge as being very important.
The first challenge is FDA. Many people in Washington don't understand the dynamics of a small company in a nonrevenue situation. Today, the development process for a pioneering technology takes at least twice as long as it took in the early 1980s, and this extra time means extra costs. Last year we had an annual burn rate of $6 million, so a three-month delay in the product approval process means that I have to raise another $1.5 million. Three additional years in development would mean an additional $18 million. In the near future our burn rate will climb to $10 million, so the cost of delay will become even greater.
If U.S. industry is going to compete on a global basis, this process has to improve. Today, success in the marketplace is based on the speed of product development and commercialization. It is no longer the big eating the small, but the fast eating the slow. Companies that continue to develop products in the United States encounter severe risks not only in raising money but also in global competition. Companies outside the United States can move down the learning curve more quickly, putting a U.S.-based company at risk. The net result is that companies like ours will be forced to move development activity offshore in order to survive, to compete globally, and to keep investors enthusiastic about their prospects. Small, development-stage companies will also decide to initiate commercialization offshore. We will certainly be among them.
KeraVision has a very large market, which eases the task of raising money. But what about the small companies that make up the bulk of the device industry, and that don't have large market opportunities? I'm especially concerned about those that have the potential to develop a breakthrough technology, because in the early stages of developing that kind of product one frequently doesn't know how large its market opportunities might turn out to be. For example, when I was with American Hospital Supply we developed the Swan-Ganz catheter. We never imagined that it would ever amount to more than a $10-million market. But today, it's a $300-million-plus worldwide market. Products like that just aren't being developed now. Instead, the projects that are being funded are those that investors believe have large enough market opportunities to justify the long-term investment that's required.
The second challenge can affect both large and small companies, and that is the potential shortage of biomaterials and other critical component materials if tort reform legislation isn't enacted. This whole industry is at risk if biomaterials suppliers continue to be enjoined in tort actions, because they and other critical suppliers will, with good reason, withhold their products from the medical technology market. Companies like KeraVision would then have to vertically integrate backward in order to produce their own materials. That would certainly take resources away from applied product development, which is what we do best and where we add value.
The third challenge is the changing marketplace. Fortunately for KeraVision, our product is in a nonreimbursed category. Managed care restricts revenue generation for surgeons, but offers some substantial opportunities for revenue generation by nonreimbursed products. In this changing environment, it will be difficult to launch and gain acceptance for a new product as we have in the past. One of our greatest challenges is to understand the changing marketplace and to adapt accordingly.
Navis: FDA and the marketplace are potentially major problems. About two years ago, FDA gave us such a runaround that we just pulled our product application and did not introduce the product to the marketplace. In about three or four months we're going to be introducing a different Class I product; if FDA cooperates and our experience with this application is good we might consider reintroducing the earlier product. But the point is, we've withheld technology from the marketplace for two years because of FDA. Materials supply is not a major problem for us now, but it's lurking in the background and could become a really nasty one.
Ralston: There are a number of forces that are effecting some radical transformations in our industry, including FDA's expanded product review and approval process. It used to be a lot easier to get devices through the system. But as a board member of the Medical Device Manufacturers Association [MDMA], I've had a chance to observe the beginning of some changes at FDA that hopefully will continue. So, to my mind, FDA problems are a little bit secondary.
But the invisible hand of the marketplace has begun to rewrite the definitions of health-care delivery systems and their financing. Cost controls, the consolidation of providers, and new payment policies are all affecting us. For instance, Baxter's recent acquisition of the perfusion service group Psicor has really affected our segment of the industry. Acquisitions like this are decreasing competition, because the larger suppliers are able to bundle a larger group of products. Smaller companies have some real challenges in the marketplace.
Our expansive product liability system is really the cause behind the biomaterials issue. When we start losing silicone and other biomaterials that are fundamental to our basic product systems we really have a serious challenge.
Finally, having been involved with venture capitalists, it's clear that investors are concluding that the device industry is becoming less financially attractive because of the extended time required for product reviews and market pressures that increase the cost to get a product to market.
Stoll: We face some of the same problems that have already been cited. From my meetings with venture capitalists, for instance, it's clear that there is a flight of capital overseas. I am also concerned about the flight of technology overseas. The leadership position that U.S. industry has enjoyed for many decades is being seriously threatened, and a major cause is the fact that in the United States the hurdles that need to be surmounted to get a product approved and onto the market are very high.
Both FDA and industry recognize that there are problems; the question is how to solve them. Maybe FDA needs to look more closely at its charter and reconsider its objectives. The agency's current objectives revolve around protecting the public safety, and I'm certainly not against that. But if the agency would take a more active view of the practice of medicine and think about the patients that require medical aid, perhaps it would take a different approach to running the product approval process. The agency could, for instance, do things to promote public health, and state that its objective is to put the best possible medicine in front of the U.S. population--rather than allowing the United States to be second, third, or even tenth in the developed world. In the medical device area, the hurdles are way too high for the objectives we're trying to achieve.
The other major challenge I see is the changes in the marketplace. It is important for the U.S. system to somehow get a handle on reducing the cost of delivering medical care. Fortunately, that trend is now being driven more by the free market than by government edict. But the result is that the hospital market is contracting in favor of managed care, and since many of our products are intended for use in operating rooms and critical-care units, this change is going to affect us a great deal.
Our response has to be to become more efficient in the way we develop new prod-ucts and bring them to market. The cost-effectiveness of the product is one of the most critical areas we evaluate when we are deciding whether we're going to invest significant R&D dollars in it. The question isn't just whether it's a new therapy or whether it can do something not being done by other products, but whether it can do the task cost-effectively.
It isn't yet clear where these marketplace changes will end. There are so many changes occurring so fast that it's hard to know how to efficiently deliver the right product to the right site and to serve customers in the best way possible. We have to stay very flexible, and that in itself produces challenges.
A number of the topics you've raised--such as consolidation, risk-sharing agreements, and bundling--relate to changes in the health-care provider marketplace. What kind of strategies need to be adopted by device manufacturers or by the device industry as a whole in order to keep pace with those changes?
Larkin: In the short term I think device companies will be doing all of the things that have been mentioned. Companies will be willing to write long-term contracts, and perhaps not only to guarantee their prices but to consider rolling them back over the period of the contract. Companies will also be trying to assist their customers in figuring out the proper utilization of device technologies, so that they can determine whether they're over- or underutilizing products. I think we'll see lots of alliances and, in sectors where companies are attempting to broaden their product lines, even some acquisitions--but in very focused areas.
In the long term, however, I think we'll see some different types of activity, in two stages. In the first stage, we'll see more and more companies following the path of acquisition--along the lines of what Johnson & Johnson did with Cordis, or what Boston Scientific has done in its last six acquisitions. Device companies know that their sales presentations are no longer going to be made to individual cardiovascular surgeons, cardiologists, or urologists--they're going to be made to purchasing agents that represent health-care systems of considerable size. Companies will be looking to combine product lines strategically, so that their sales presentations can offer greater overall efficiency to those customers.
In the second stage, companies will have to become as efficient at moving multiple product lines as they were when they were only delivering single products. Regardless of how many products a company is handling, so far as the end-user is concerned the company is only delivering one item at a time--the one he or she wants. Customers will move in a hurry to a company that is more efficient.
Stoll: Unquestionably, decision making is rapidly shifting away from doctors and specialists in the direction of purchasing agents--people whose decision-making processes are economically driven. It's not clear to me how those decision makers intend to balance economics and cost-effectiveness against the quality of medicine that's going to be delivered. That question is in flux right now, and there's no good answer yet.
We're trying to change our approach to the marketplace as rapidly as we can. One strategy is to form alliances and partnerships with organizations that can increase our reach or penetration into consolidated health-care groups and that require only limited contact in order to have broad, sweeping contractual relationships. Another is to identify specialty groups that are spinning off from hospital centers, and devise a way to reach them directly and bring our products to them more efficiently.
Navis: With direct sales, it used to be that the doctor or nurse would say 'I want this product and we're going to get it, period.' Now, sales proposals go to a review committee that looks them all over and says 'well, these guys are a nickel cheaper'--and that's the end of it. Maintaining a direct sales force for an environment like that doesn't make much sense, especially for small companies like ours.
Instead, about nine months ago we began to switch over to an OEM or distributor setup for sales of our specialty drapes. Now, we have someone in there to represent us, saying 'yeah, these guys are a nickel more, but here are the reasons why you should buy their product.' Although we won't be totally out of direct sales, we expect that by the middle of this year about 80% of our sales will be via distributors or OEMs.
Loarie: The strategies probably vary from market to market and from company to company. One trend that is of great interest to us is the emergence of physician specialty carve-outs. These physician-managed groups may tilt the balance for surgical specialists and have a real impact on med-tech companies focused on a surgical specialty. In Texas, for instance, an ophthalmology-centered corporation called the Physicians Resource Group recently announced acquisition of another 36 ophthalmology practices, making it around a $300- million-a-year business.
If you take a group of ophthalmologists and put them together under one roof, they will probably come to some agreement about which intraocular lenses they're going to buy, and they'll probably be able to leverage some pricing considerations or risk-sharing agreements from their suppliers. In addition, they may gain economies of scale that will reduce their overall costs and enable them to compete more effectively than a monolith that's trying to do everything for everybody. Groups like this may provide our company with an opportunity to diffuse our technology more rapidly than we could 10 years ago. Once we get the attention of the ophthalmologists that are running the organization, the decision to adopt our products can be made fairly rapidly.
Oncology and cardiovascular surgery have also become candidates for the carve-out concept. It will be interesting to see if this trend spreads to these or other specialty areas, because carve-outs shift power away from the managed-care systems that have emerged over the past few years and back into a doctor-run system.
Are any of you finding that you are having to undertake cost-effectiveness or outcomes studies to demonstrate that your products meet your customers' needs?
Stoll: Certainly on our pharmaceutical side we're already conducting pharmacoeconomic studies that examine clinical outcomes and all the costs related to a new therapy, and then compare them to current therapy. We haven't done that yet on the device and equipment side, but we are starting to look at the possibility of doing so because the same kinds of issues exist there. You have to be able to legitimately identify the costs that are related to whatever equipment is being used.
Our catheter and cannula business is in a market sector that's pretty competitive. While there are small differences among the various products on the market, there aren't enough major differences that we've had to do a cost-effectiveness study. There, the cost of the product says a great deal about how it is positioned competitively. But certainly in other areas we're seeing a greater demand for outcomes and cost-effectiveness studies, and more of that is going to come.
Larkin: I agree completely. The thing I find most difficult is that what outcome study means at Barnes Jewish Christian Hospital in St. Louis may be entirely different from what it means at Yale University Hospital in New Haven, or from what it means at the Texas Heart Institute. What the hospital systems and some home health-care providers want is a way for device companies to back up the claims they make. But so far, I haven't seen any formula for how to evaluate products and services.
A few years ago it was easier for a company to make claims such as 'if you combine noninvasive ventilation with invasive ventilation on certain kinds of patients, you're going to move them out of ICU a day earlier and save a gazillion dollars over the next three years.' Claims like that made sense to the clinician, who would then agree to buy one or two of the devices and try to figure out along the way whether they worked.
Today, device companies have to be able to work with hospitals to determine how to prove product claims. But since the definition of an acceptable outcome study differs from system to system, it is a real challenge for manufacturers to fit their products into those kinds of studies.
Navis: When we introduced our peritoneal dialysis instruments and disposables about 10 years ago, we did so on the basis of both medical effectiveness and cost-effectiveness, so we've had to do some pretty in-depth tests. Since this level of testing can be quite expensive, we tried to make our tests fairly generic so that they would apply equally well throughout the country.
But Ray's right when he says that what works at Barnes Jewish Christian in St. Louis doesn't necessarily work in New York City, and that it may not be acceptable in Houston, and that Los Angeles wants something still different. All of that gets to be a real pain in the neck. Fortunately, we've been able to enlist the help of specialists and consultants in the dialysis field. But that also costs money, which in turn increases prices and creates a kind of vicious circle. It's an interesting challenge.
Are any of you aggressively expanding into Europe, and, if so, what are your strategies for doing so? Are you actually setting up facilities there, just conducting R&D, or what?
Stoll: We're already in Europe in a big way, but where we are expanding is in China, India, and the Asian Pacific Rim. There's tremendous economic growth taking place in those areas, and as econ- omies grow there's a commensurate desire for expanded and more-sophisticated health-care capabilities.
Europe is dealing with many of the same issues as the United States, except that the changes are frequently government-driven rather than free-market driven. The Europeans are also trying to take costs out and reduce redundancies, so that market isn't expanding as rapidly as we'd like. Virtually the entire developed world--Europe, the United States, and Japan--has become a stable market with some nominal growth due to population increases and aging populations. The really dynamic growth in health care is taking place in the rest of the world.
Loarie: I see a little different twist because we have a pioneering product. The developing economies of the Far East and other countries are really of no interest to us, but Europe is of great interest to us. We're moving development there because of the high costs of development in the United States. We also have an opportunity to commercialize several years ahead of what we could do in the United States.
We plan on selling directly to a new group of vision-correction specialists, and since there is no controlled channel we'll have an opportunity to develop our own. We will be making a heavy investment in education, rather than just selling. The products in development at KeraVision today fall outside most government reimbursement schemes--both in Europe and in the United States. We will be dealing with the free market and pricing accordingly.
In Europe, we will focus on two countries and make use of the CE mark that's now starting to come into play. We will build our infrastructure in those two countries, and then expand through Europe to gain market share.
Larkin: The international marketplace is absolutely a necessity if you hope to grow your business at all. I agree that in Europe the dynamics are much the same as in the United States, but I also see the non-operating-room, non-critical-care market in Europe starting to grow very rapidly. So there are opportunities in that market as well.
A couple of points on harmonization and globalization. Tackling the global market does require an investment, and it takes some time to get a return. You've got to be patient with the investment and focus instead on helping the business grow.
Harmonization is interesting. The Europeans have a fairly sophisticated customer base centered essentially in the hospital. With the exception of the electrical differences, they are more than willing to take the same kinds of products as we market in the United States, with essentially the same features and benefits. But in the Asian Pacific and India, customers are not very concerned about obtaining sophisticated technologies. They're much more interested in durability and cost. So if you're going to go global you've got to be ready for different marketplaces that demand different things. All of them will demand patience and a fair amount of stick-to-itiveness.
Borgos: I agree with that, especially as it applies to our products. The Asians want something quite a bit simpler than we're able to sell here in the United States or in Europe. We find the European market pretty flat. For our products, in fact, it has actually decreased over the past three or four years.
As a small company, we are also concerned about the impact of ISO 9000. For a company as small as ours, the expenditure of tens of thousands of dollars to have somebody audit our quality system is overkill. There are obviously benefits, but they are more evident in larger companies with more-complex quality systems. In effect, Europe's heavy reliance on ISO 9000 certification acts as a trade barrier against companies our size.
So we're focusing more of our energies in Asia, where some of our products fit better. Neurological monitoring, for instance, seems to be very interesting to the Japanese and the Chinese. But these are very much emerging markets. To meet their needs, we have to modify our products, educate our customers, and do more to educate ourselves about their economies, their cultures, and what drives their markets.
Ralston: We see the general market in Europe growing at about the same rate as in the United States and, as Roger suggested, where we see some real opportunity is in developing areas such as South Africa, India, and the Far East. Although those markets are relatively small, they're expanding very rapidly. In order to market our products to these and other overseas markets, we've found ISO 9000 to be a necessity.
Right now, the medical device industry is one of the strongest industries in the United States. But what do you think it will look like in the year 2001?
Larkin: Despite the challenges that we've all been talking about, some of which are really daunting, I still believe that the medical device industry will continue to be an extremely important part of the U.S. economy, and that it will continue to provide real help to our clinicians.
However, we will certainly see fewer companies five years from now. In its first year as an integrated system, for instance, Barnes Jewish Christian reduced the number of its vendors from 6500 to 3600. That sends a very loud signal. Also, because there will be fewer companies, innovation will take longer.
I think we will remain net exporters, but we may be looking overseas for the innovative $10-million technologies that grow up to be $300-million markets. That frightens me, because I wonder how far beyond that we'll be able to maintain our leadership position. Once you lose the ability to innovate, it takes a long time to get it back.
Industry will contribute to driving down the overall cost of medicine by enabling health-care providers to move patients out of the hospital. Consolidation will continue, but it's going to be a drag on innovation.
Stoll: I agree that consolidation of both customers and suppliers is going to continue over the next 5 to 10 years, so there will be fewer companies. And unfortunately, start-ups are going to be harder to start. That's a real di-lemma for the United States and one that I am not very happy about, because the technology that is slowly slipping overseas is the basis for the innovation that drives the whole industry.
Obviously, international sales will increase, and there are some huge opportunities. Some markets are bimodal or trimodal, with different levels of sophistication demanding different types of products. In India, for example, about 150 million people have access to hospital systems that are quite sophisticated by Western standards, but the remainder receive care in less-sophisticated settings. Companies may have to spend a lot of money to make their products meet the multiple needs of markets like that.