Medical device companies have a lot to learn from the fiercely competitive consumer electronics and semiconductor industries. As advanced electronics increasingly make their way into consumer medical products, these firms will face a more sophisticated intellectual property (IP) environment and growing competition from Chinese companies. The strategic use of IP assets combined with forensic technical analysis to support competitive intelligence and IP programs are well-proven practices that can help medical devices companies meet the challenges of the evolving market place.

Gary Johnson

December 16, 2010

12 Min Read
MX: Prepare for IP Battles in the Medical Devices Sector

Healthcare spending in the developed world is skyrocketing. According to the National Center for Health Statistics, U.S. health care expenditures in 2008 exceeded $2.3 trillion. They are forecast to be over $4 trillion by 2020. As in other rich countries, these costs are largely driven by the management of chronic conditions; conditions that can often be attributed to behaviours in our everyday lives. In 2007, with U.S. per capital healthcare spending reaching almost $7,000, 75% of healthcare dollars were spent on patients with chronic conditions, 40% of which could be attributed to behaviours like diet, exercise, smoking, and substance abuse.

Technologies like ubiquitous sensing, social networks, and wireless connectivity offer the opportunity to create healthcare models and new products that lower costs and improve outcomes while engaging patients in managing their own wellness. This is driving growth in a multi-billion dollar segment of the consumer electronics market: consumer-grade medical devices that enable the average person to monitor his own health and manage conditions such as diabetes and hypertension.

Frost & Sullivan forecasts the global market for medical devices to grow at a rate of 5.8% annually from 2009, to reach over $240 billion by 2012. The Asia-Pacific medical devices market is expected to grow by a staggering 10.2% a year from 2009 to 2012, when it will account for over 25% of the global market. Companies with experience in healthcare technology and consumer electronics are converging on this irresistible opportunity. Many traditional medical technology companies, including pharmaceutical firms, are making big investments in the sector in the hope of capitalizing on the trend towards personal wellness and home-based self-care.

Leverage the right technology
Semiconductor companies and consumer electronics giants have also levered their technology to penetrate these markets. For example, wireless technologies first developed for WAN (cellular), LAN (WiFi), and PAN (Bluetooth) purposes are rapidly appearing in personal fitness and medical devices, ranging from heart-rate and vital-signs monitors, to blood-glucose meters, and wireless stethoscopes. According to figures from the Kaiser Family Foundation, 285 million patients suffer from conditions, including diabetes, obesity, hypertension and sleep disorders, whose treatment can be assisted by a wireless solution. Qualcomm, a wireless telecommunications R&D company and the largest fabless chip supplier in the world, predicts that the market for wearable wireless sensors will grow to more than 400 million devices by 2014—and this is just one sector of the medical devices market.

Underpinning this kind of market growth is intense innovation and a growing volume of patents. Based on figures from the World Intellectual Property Organization (WIPO), the U.S. leads in innovation with approximately 45,000 medical technology patent applications, followed by 24,000 in Japan, and roughly 10,000 each in Germany and China. Industry players are rapidly establishing these patent portfolios to protect their intellectual property, defend their markets, and generate ongoing revenue streams from licensing.

Medical, consumer, and semiconductor vendors converge
As medical technology companies, consumer product giants, and semiconductor firms converge on this market opportunity, there will be a “clash of cultures” when it comes to managing IP. The consumer medical devices sector is fast becoming a high-volume consumer electronics market for which technical innovation, cost control, and IP management are competitive imperatives. Companies failing to employ a rigorous program to protect, manage, and assert their IP rights risk costly litigation, lost revenue, and weakened market share. When operating in the medical devices sector, they must be aware of the well-honed IP practices from the semiconductor and consumer electronics domains, and prepare for the aggressive use of IP for business purposes.

Medical device companies targeting the lucrative U.S. market, particularly those who may be manufacturing offshore or in partnership with Chinese companies, must be alert to the risk of IP litigation at the U.S. International Trade Commission (ITC). The ITC, an independent quasi-judicial federal agency with broad investigative responsibilities regarding international trade, is a favoured forum for IP litigation because it can issue injunctions to exclude products from entry into the U.S. Medical device companies, both foreign and domestic, that hold significant portfolios of U.S. IP rights and have the financial capability to assert those rights, can use IP litigation at the ITC as a powerful competitive weapon with which to defend their U.S. market presence.

Even companies well versed in intellectual property rights and patent protection, such as drug developers and professional-grade medical instrument makers, may not be ready for the complexities of the consumer medical electronics market. The typical drug-coated stent, for example, may have dozens of patents attached to it. A sophisticated blood glucose monitor, on the other hand, can have thousands, related to its user interface, software, battery, memory, power-management system, integrated circuits (ICs), and wireless connectivity.

An analysis performed by UBM TechInsights of approximately 1000 patent families in each industry, all with priorities earlier than 2008, shows that pharmaceutical and semiconductor firms have historically taken dramatically different approaches to protecting IP. Pharmaceutical companies have focused on depth of coverage for each invention (median number of global patents per family of eight) and have filed in a median of seven jurisdictions to protect the variations of their innovations in many countries. They have attempted to tightly lock up their market positions and maximize product sales opportunities in an industry where R&D investment is enormous and the pace of new product introduction is slowed by safety and regulatory concerns.

In contrast, companies in the semiconductor industry, with its frenetic pace of innovation and new product introduction, have spread IP protection across a broader range of inventions (median number of global patents per family of just three), but have been more selective about the countries in which they file (median of two jurisdictions). Their strategy has been to create patent “thickets” to hamper competitors. With a less stringent regulatory and safety approval regimen than the pharmaceutical industry, and widespread use of semiconductor technology, the patent environment of the consumer medical devices sector will likely bear stronger resemblance to the semiconductor sector.

Beware the patent trolls
Non-Practicing Entities (NPEs), often disparaged as patent “trolls,” are also becoming more active in the medical devices sector, with the number of infringement settlements, as well as their value, growing. PatentFreedom, a firm that helps operating companies more effectively manage the threats posed by NPEs, identifies that as of January 1, 2010, 18 NPEs with medical devices, pharma, and biotech IP rights portfolios, which have engaged in 14 litigations. This compares to 194 NPE litigations tracked in the wireless category and 841 in the semiconductor space where NPEs have a well-established business model of levering their patent portfolios for profit. These figures do not necessarily paint the full picture; however they do foreshadow the potentially litigious future for medical devices as semiconductors and wireless become more important underlying technologies.

Clearly the aggressive IP culture of both operating companies and NPEs in the consumer electronics and semiconductor industries will increasingly impact the medical device sector. So, medical device companies must prepare to use their IP assets more strategically by taking a “lifecycle” approach to IP management - a process that is followed to establish, grow, manage, and protect IP to optimize its economic potential.

A first step is to perform a competitive and technology landscape that assesses strength, weaknesses, opportunities, and threats (sometimes known as SWOT). Then, an IP strategy should be developed that is consistent with corporate business goals. Once the strategy is in place, the right patent portfolio can be built through innovation and acquisition, evaluating factors like technical merit, market impact, evidence of use supportability, and claim language.

Put your IP to work
The final critical stage of the IP lifecycle is to put the patent portfolio to work through well-planned and well-executed IP programs. This is where many semiconductor and consumer electronics firms have historically excelled. An effective program includes selecting the appropriate patents and the right products to target, while considering business goals and strategy. Performing upfront research and analysis on target products based on comprehensive knowledge of the industry, its products and technologies, pays off in results.

An effective IP program, supported by a combination of technical and patent analysis, can help a company achieve strategic goals in a highly competitive market, like the medical devices sector. It can serve as the basis for forging favourable business deals and establishing advantageous competitive positions. It can diminish a competitor’s business momentum or undermine the confidence of its business partners. It can block a competing product’s market entry or delay introduction by forcing product redesign. It can also impose significant cost disadvantages on the competing product by levying royalties.

Semiconductor and consumer electronics companies are particularly adept at employing IP programs for these purposes. In wireless technologies, an area quite relevant to the medical devices market, heated battles have occurred between major players. RIM settled two patent suits with close to a billion-dollar U.S. settlement, then spent hundreds of millions to acquire patents to avoid further litigation. Qualcomm and Nokia recently settled a multi-year litigation case with patent licensing and business deals. And Qualcomm and Broadcom previously settled a dispute through business agreements and an $890 million payment by Qualcomm. Even Apple, the darling of consumer electronics, isn’t immune to the high costs of IP litigation. Nokia is suing Apple for patent infringement on 3G technologies, while Apple is suing HTC, claiming infringement of more than 20 patents. In all cases, both financial and strategic goals are sought upon settlement.

The rise of China
Another similarity in the evolution of the medical devices market and the consumer electronics and semiconductor markets is the rise of China as a center of innovation. As cost pressures shift medical device production to China, local expertise has developed to serve both the domestic and global markets. While China files less than 25% of the medical technology patent applications that the U.S. does, there are now as many medical researchers in China (1.4 million) as there are in U.S. So we can expect the volume of innovation originating in China to take off in the near future. In fact, in the auscultation category (devices for listening to internal body sounds), there have been over 120 patents issued in China in 2010 compared to just 30 applications and grants in the U.S. Just as in the consumer electronics and semiconductor industries, Chinese medical devices companies will build on their success in local markets to rapidly conquer the global stage, accelerating the pace of innovation and eroding price levels.

So how does a medical device-maker effectively manage innovation to protect its IP, defend its markets and refute allegations of patent infringement from competitors? Using forensic technical analysis techniques such as product tear downs and semiconductor reverse engineering to inform strategy and decision making throughout the IP lifecycle is an important part of the answer.

Professional product tear downs are detailed, step-by-step, disassembly and analysis of electronics products like medical devices that reveal:

  • IC content

  • System architecture

  • System metrics

  • Subassembly metrics

  • Bills of materials (BOM)

For medical device manufacturers, product tear downs can provide critical insights into:

  • Who the emerging electronic component suppliers for medical devices are.

  • What the best ways to reduce the BOM and manufacturing costs are.

  • How new technologies like wireless connectivity can best be integrated into new medical products.

  • What the best design, sourcing, and manufacturing strategies are to compete in the emerging low cost environment.

  • What the competitive strengths are for new domestic and foreign market entrants.

With the information derived from product tear downs, companies operating in the medical devices market can make better business decisions about competitive positioning, technology options, R&D strategies, IP positions, and marketplace opportunities.

When a deeper understanding of how a particular component works and what IP went into its creation is needed, semiconductor reverse engineering is performed. This is a legal and proven method to:

  • Benchmark a semiconductor device against others in the market

  • Identify technology trends and key innovations at the chip level that could impact market dynamics

  • Determine if a competitor’s semiconductor is implementing patented inventions  

Semiconductor reverse-engineering techniques include semiconductor structural analysis, which reveals construction and fabrication details. It also uncovers the elemental composition of various materials, and circuit extraction, which involves taking apart a chip, layer by layer, to study its design and functionality. A complete circuit extraction yields enough information to virtually create a blueprint of chip functionality.

This advanced technical analysis is particularly useful for gathering evidence of prior art to invalidate assertions of infringement, as well as for supporting assertions against a competitor that is posing a threat to market share. Using reverse engineering to generate evidence of use of patented technology is a key to successful assertion of patents and therefore, to maximizing the return from innovation.

Many of the trends we’ve seen in the consumer electronics space, including rapid rates of product innovation, aggressive competition from Asian operating companies, and the strategic use of IP to achieve business objectives are already appearing in the medical devices sector. Due to the high cost of institutional healthcare, and the increasing demands for personal wellness solutions using advances in sensor, wireless, and other semiconductor technologies, the consumer medical devices space is becoming a consumer electronics market with many of the associated business implications.

It should be expected that the competitive IP “culture” and management practices honed by semiconductor firms, electronics companies, and NPEs over the past 20 years will be aggressively applied in the medical devices space. Forensic technical analysis, like product tear downs and advanced semiconductor reverse-engineering techniques, are among the tools employed to underpin competitive intelligence and IP rights initiatives. Competitors in the medical devices sector, especially those whose previous experience is derived from the pharmaceutical industry, need to prepare by adopting similarly rigorous technical intelligence methods and proactive IP management policies, as part of a structured, IP life cycle approach that supports corporate goals.

Gary Johnson is the vice president of business development for UBM TechInsights, where he focuses on medical devices market development. Gary advises clients on a range of technology and intellectual property issues to support their technical innovation, cost control, and IP management efforts. Gary holds a BSEE degree from the University of Minneapolis, Minnesota and has over 20 years experience in the medical devices market. He can be reached at [email protected].

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