Originally Published MDDI March 2001

Confident executives delineate the state of the industry in MD&DI's exclusive survey.

Jon Katz

A year ago, MD&DI characterized the 12 months that had just concluded as "one of the most remarkable—some might say bizarre—years in the economic history of the country." At the risk of repeating ourselves, what can one say about 2000? In the general business press, the dominant story has been the extraordinarily swift and thorough collapse of the Internet speculative frenzy. Whatever your choice of cliché—the other shoe dropping, the bubble bursting, the chickens coming home to roost—the era of "new-paradigm" portals and juvenile CEOs declaring the "irresponsibility" of generating profits already seems a distant aberration.

And yet, although the Nasdaq may have plummeted nearly 60% from its peak last March, and a more-general slowdown became evident toward the end of the year, overall the U.S. economy still grew by 5% in 2000—the strongest showing since a 7.3% rise in 1984. Reflecting this underlying solidity and the bedrock importance of the medical device and diagnostics industry, the results of MD&DI's ninth annual business outlook survey of top device company executives reveal an extremely positive attitude regarding the industry's current state and its prospects in the near future. With executives reporting that growth and R&D efforts are holding steady, regulatory burdens lightening, and global market reach expanding, the survey clearly indicates that—amid the high-tech carnage—device manufacturers managed to keep their heads while many around them in other sectors were losing theirs.

MD&DI's exclusive survey was conducted by the independent research firm Readex Inc. (Stillwater, MN), with data collected through the mail from November 1 to December 18, 2000. (Although these dates correspond with the period of turmoil surrounding the 2000 general election, there is little evidence in write-in responses that executives were influenced by the unprecedented political uncertainty.) Results are based on the responses of 237 executives who indicated on the survey that their companies manufactured medical devices or in vitro diagnostics. The sidebar on page 82 provides additional details on the survey's methodology as well as a profile of respondents.

LOOKING UP

When asked to describe business conditions as a whole, executives expressed a level of confidence similar to that of last year. As shown in Figures 1 and 2, 60% of corporate managers rated current business conditions as good or excellent, just slightly off last year's 64%, which was the highest figure since the survey began in 1993. And this year, only 3% of total respondents reported that conditions were poor—the lowest such rating in the survey's history.

There was also a remarkable evenness of response regardless of the size of a company, where it was located, or the types of products it manufactured. For example, 59% of small-company (sales <$1 million) executives declared the business climate good or excellent, compared with 63% of their large-company (sales >$50 million) counterparts. Good or excellent ratings were accorded by 61% of companies in the Northeast, 59% in the Midwest, 67% in the South, and 58% in the West—and in similar proportions whether the firm supplied disposables (61%), medical electronics (58%), surgical instruments (69%), implantables (68%), or home/durable equipment (58%).

The executives polled remained confident when asked how they expected business conditions to change over the next 12 months (Figure 3). While the 36% who think conditions will improve represents a 3% decline from last year, those who fear conditions will worsen remains at last year's all-time low of 8%. In particular, executives with large companies were considerably more upbeat this year, with one-third predicting more favorable conditions for 2001 compared with only 14% predicting improvement a year ago.

INTERNAL REVENUE

Meeting sales objectives and managing corporate growth present perennial challenges to large and small companies alike. The optimism expressed by survey respondents this year was borne out by sales growth figures for 2000 versus 1999, with 60% of device executives overall reporting an increase and only 3% noting a decline. The number of companies enjoying a boost in sales showed a positive correlation to the size of the firm: an increase was claimed by 51% of companies with revenues less than $1 million, 70% of those earning between $1 and $4 million, 72% of companies earning between $5 and 49 million, and 81% of firms selling more than $50 million. A total of 16% of all companies grew their sales by 40% or more, approaching the 20% who predicted last year they would attain this considerable jump.

The actual median increase in company revenues for 2000 was 10%—the same as for 1999—against a prediction by executives of a 15% gain. (Coincidentally, share-price performance of public medical device companies also rose by about 10% in 2000, according to Healthcare Markets Group (Hilton Head, SC).) Companies in the West (18%) and South (15%) led those in the Midwest (10%) and Northeast (8%), who perhaps bore a disproportionate burden of what one respondent noted as "the impact of rising oil prices on raw materials and transportation." The strongest performance was turned in by manufacturers of implantables (15% median increase), followed by companies producing disposables, surgical instruments, and home/durable equipment (all at 10%), and finally, medical electronics (8%).

In offering prognostications for 2001, 73% of executives anticipated that their companies will sell even more products in the coming year, and 20% of respondents again expected business volume to improve by 40% or more. Those concluding that sales will remain about the same made up 14% of respondents, with 1% predicting a decrease.

PRIMING THE PIPELINE

The results of last year's survey accentuated the difference between small and large companies regarding the level of resources devoted to research and development, showing the percentage of R&D spending to be inversely proportional to the size of the company. This year, the divergence is even more pronounced. For example, executives from companies with less than $1 million in sales reported their median R&D expenditures to be an amount equal to 18% of total annual medical product sales. (The mean or average expenditure level for small companies—a less reliable statistic, as it can be skewed by extravagant highs or lows—was a whopping 40% of annual sales.) Large companies, on the other hand, consigned only 7% (8.4% average) of sales revenues to R&D. Moreover, whereas 15% of small companies spent 30% or more on R&D, not a single large-company executive cited a comparable spending level. For all firms surveyed, the median 2000 R&D expenditure level was 10%, up from 8% in 1999.

THE SELLING FIELDS

One reason we tend to analyze the results of MD&DI's business surveys in terms of large versus small companies is because of the unique makeup of the medical device industry. According to the industry trade association AdvaMed, 80% of the 10,000 or so FDA-registered medical manufacturers are development-driven firms with fewer than 50 employees and little or no sales revenue. Conversely, the largest 2% of companies are responsible for almost half of all sales. Given this state of affairs, it can be problematic for smaller companies to connect directly with buyers or break into established distribution channels and effectively market and sell their products. One executive lamented the difficulties in "overcoming barriers to small businesses created by GPOs and large distributors and manufacturers." Another noted ongoing efforts "to combat price and discounting pressures from big distributor consolidation groups."

Evidence of this contentious dynamic can be observed in Table I, which tabulates responses from executives asked to identify the direct purchasers of their products. The most obvious gap this year is seen for group purchasing organizations (GPOs), used by 46% of large companies but only 8% of small ones. The claims that GPOs increasingly restrict small manufacturers seem to be borne out by survey respondents over the previous several years, as 24% of small companies sold products to GPOs in 1997, 18% in 1998, and 8 % in 1999. Large companies (88%) were also twice as likely as small ones (44%) to do business directly with hospitals; the 44% of small companies that did manage to sell to hospitals reflects a drop from 60% in last year's survey and 69% in 1995. Compared with last year, freestanding outpatient centers moved up four spots on the rankings of purchasers, from 17 to 25%, and appear to be somewhat more open to small companies.

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

FAR AND AWAY

Another domain in which established companies have tended to have an advantage is in their ability to operate on an international or global scale. Figure 4 ranks the geographic markets in which respondents' companies are currently selling products. The percentages are extremely similar to those of the preceding survey, with no region varying by more than 5% from last year. Overall, 85% of companies did business in the United States, and 76% of all companies—including nearly 60% of small companies—did business somewhere outside the United States. Curiously enough, firms located in the West participated no more frequently in the Japanese, Chinese, or other Pacific Rim markets than did other U.S. companies.

When asked which markets represented the best opportunities for increased sales in 2001, 74% of executives tabbed the United States, followed by Europe (53%), Japan (25%), Canada (19%), Latin America other than Mexico (18%), and China (17%) (Figure 5). Last year, executives with large companies were especially bullish on potential gains in Europe, with 88% of respondents enamored of European prospects compared with 59% who selected the United States. For large-company respondents in the current survey—observers of the torpid performance of the Euro and of disturbing trans-European fiascos such as the proliferation of mad-cow disease—passions have definitely moderated. Opportunities in Europe for the coming year were cited by 69% of large-company executives, versus 65% who named the United States. Besides Europe, bigger companies envisioned more promise in untapped markets and those with complex barriers to entry, such as China or Japan, as opposed to less logistically challenging markets such as Canada. The potential of Mexico has also fallen out of favor with big companies, declining from 30% two years ago to a mere 3% this year.

As recently as 1999, only 40% of executives surveyed indicated that their firms conducted distribution or sales outside the United States—a figure that has now risen to an impressive 79%. Other business activities conducted with comparatively less frequency abroad include manufacturing (24%), clinical trials (19%), assembly (19%), product R&D (15%), packaging or labeling (15%), initial regulatory approval (14%), and product design (12%). For certain types of devices, these figures can rise dramatically. Nearly half (47%) of implantables manufacturers presumably took advantage of more liberal foreign regulatory environments to carry out clinical trials, as did 38% to secure a product's initial regulatory approval.

RULES OF THE GAME

Although the workings of overseas regulatory bodies are certainly important to many U.S. companies, the corporate managers who received MD&DI's survey are primarily concerned with the policies and actions of FDA. The responses of these executives to the survey question regarding FDA-related problems, compiled in Table II, confirms that the domestic regulatory climate continues to improve gradually in the wake of the FDA Modernization Act of 1997 (FDAMA) and the agency's reengineering efforts. Compared with last year, for example, the number of companies reporting one or more problems declined from 38 to 35%; firms citing 510(k) clearance delays also decreased, from 25 to 22%, and especially among large companies, where the figure dropped from 61 to 39%. Companies located in the Northeast cited the highest percentage of both 510(k) and PMA clearance delays.

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

Writing in this year's CDRH annual report, Center director David Feigal, MD, states that the "average review time for 510(k)s was the shortest in over a decade. For PMAs, our average review time was even better than last year's, and represented a 54% reduction from the 'peak' time registered in 1996. With IDEs, we approved a greater percentage of devices for use in clinical trials during the first 30-day cycle than in any prior year. And, of course, long 'backlogs' remain a thing of the past throughout our premarket program." Jeffrey Shapiro, a partner in the Washington, DC law firm of Hogan & Hartson, agrees that the overall climate for product approvals is significantly less onerous than in the past: "What we're seeing is that the frustration of the early 1990s has largely dissipated. We're not getting as many complaints from clients, nor are we spending so much time continually inquiring about the status of an application. The agency is much more forthcoming about information and about where it stands in its processes, which is extremely helpful."

Feigal's report also refers to other agency accomplishments over the past year, among them improvements in FDA-industry communication and continued implementation of FDAMA mandates such as expanded third-party review and the "least burdensome" provision. (This year, the number of survey respondents who maintained that FDAMA helped improve their business continued to edge upward—from 13% two years ago to 16% last year to the current 19%.) According to Shapiro, "The agency is generally more receptive to meeting with industry, but I wouldn't attribute this necessarily to the specific meetings instituted under FDAMA. The real bread-and-butter sessions are still the pre-IDE, pre-510(k), and pre-PMA meetings. But FDA is certainly making better use of meetings to convey to industry what a submission will look like and what the requirements will be." As regards FDA's effectiveness in enacting "least burdensome" principles, "I think that's one area where there is definitely room for improvement," Shapiro says. "Although the agency is more open to negotiating data requirements, its bottom line doesn't seem to have moved very far."

PAYBACK AND PEOPLE

The life of a device company executive would be pleasant enough if problems with FDA were the only cause of potential trouble. However, as seen in Figure 6, survey respondents cited a host of factors expected to pose significant difficulties for product sales. As it did last year, price competition again topped the list at 54%, ahead of the proliferation of competing products (41%) and the expense of procuring clinical or cost-effectiveness data (28%). On the latter point, one executive noted the arduous challenge of "completing clinical trials for products in a reasonable time and at a reasonable cost."

Although the word circulating at industry gatherings is that reimbursement policy represents the next great battlefield, concerns about inadequate HCFA reimbursement and delays in HCFA payment for covered products in fact declined slightly from last year. By comparison, distress over foreign-market reimbursement nearly doubled, from 7 to 13%.

Commenting on the state of HCFA reimbursement decisions and perceived delays in actions, Robin Bostic, director of reimbursement affairs for the orthopedic division of Smith & Nephew (Memphis, TN), says that "my perspective is that things are changing for the better. I'm actually seeing a more prompt response with regard to decisions on medical policy, specifically from HCFA and, secondarily, from private payers. There are still some payers that are notoriously slow, because of the mechanism by which they operate. The key is for firms to get into a mentality of working with HCFA—of making sure that HCFA has the information it needs to make good decisions."

In assessing the likely effects of general business and financial factors, executives this year appeared somewhat less apprehensive about mergers and acquisitions, global economic instability, competition from Europe, credit restrictions, and the cost of product-liability litigation (Figure 7). Respondents were asked to rate three new factors: the tightening of the labor market, Internet-based marketing and distribution, and increased nonEuropean foreign competition. Surprisingly—or perhaps not, given the recent tech-sector shakeout—only 15% expected a significant impact from Internet marketing and supply-chain technologies. The issue of foreign competition, singled out by 11% of respondents, was addressed by one executive who lamented the difficulty of "fighting imports because of free trade and of protecting new products overseas from 'knock-off' companies that are not under FDA regulations." Another commented on the plethora of "federal, state, and local government rules and regulations—constant new ones and changing old ones—which put us at a disadvantage against non-U.S. competitors."

To end on a human note, the new item that elicited the most response was the tightening labor market (at 28%, it ranked second among all factors). Beating the same drum, diverse executives declared just how hard it is to find "enough good salespeople," "qualified staff," "skilled, mature workers," or "capable and experienced personnel," and how "high personnel turnover and retirements are threatening established loyalties." For the device industry looking ahead to the technological marvels of 2001 and beyond, it appears that the most-pressing human factor has nothing to do with ergonomics.

Jon Katz is editor of MD&DI.

Copyright ©2001 Medical Device & Diagnostic Industry