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Medtech Market Challenges

Industry experts explore sector-specific and industrywide concerns facing medical device manufacturers in 2007 and beyond.

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Going into 2007, growth and advances in the medical device industry show no signs of slowing. Likewise, the myriad pressures weighing on company executives show no signs of abating.

Whether an emerging medtech start-up or an established industry leader, manufacturers in all sectors of the medical device industry must cope with challenges related to pricing, expanding global markets, industry consolidation, and evolving regulatory requirements. At the same time, company executives must also manage a variety of pressures specific to their individual sectors.

To find out more about market challenges facing medical device manufacturers in the coming year, MX recently spoke with five experts in the field (see sidebar). In this excerpted roundtable discussion moderated by MX editor-in-chief Steve Halasey, these industry experts discuss issues surrounding global competition, sector-specific developments and their broader implications, and current market dynamics for both small and large manufacturers.

MX: More than one analyst has made note of the relentless pricing pressures that are stressing profit margins in the medical device industry. Is the situation as bad as they make it sound?

John J. Viscogliosi: Raymedica Inc. (Minneapolis) does not currently sell products to the U.S. market, but several of the portfolio companies of Viscogliosi Bros. LLC (New York City), such as Small Bone Innovations Inc. (SBI; New York City), do have products available in the United States. Based on that experience, we haven't seen pricing pressure to the extent that you've heard being discussed by some analysts.

The parties experiencing far greater pricing pressures than medtech manufacturers are the hospitals and the surgeons performing the procedures. Surgery centers that are physician-owned and more profit-oriented than normal hospitals have passed some of this pricing pressure along to SBI, and I do expect to see this trend grow in 2007 and 2008. In order to better their bottom lines, hospitals and doctors will start putting more pressure on device manufacturers to reduce their prices.

Thomas J. Gunderson: I'm not witnessing any new pricing pressure in the cardiac sector or, for that matter, from a global perspective. We're not seeing anything particularly new. But it's a big world out there. In parts of Europe, we are seeing increasing pricing pressures due to socialized medicine and the winner-take-all reality for companies that come in with the lowest bids. On the other hand, the market in Japan is very price-inelastic. The country has some of the highest prices worldwide. Also, I recently visited some cath labs in China and was surprised to discover that Johnson & Johnson (J&J; New Brunswick, NJ) is the number one supplier of drug-eluting stents in the country. While the pricing is lower than it is in the United States, it is higher than it is in Europe.

In general, medtech companies have become more aware of the importance of reimbursement and reimbursement planning. Is that how manufacturers are addressing the pricing pressures that exist in the United States and internationally?

Alexander K. Arrow, MD: Pricing pressure has been a constant feature of medical device markets. It is a reality in the European market for medical devices, and it is a threat that hasn't actually affected manufacturers as much as expected in the United States. In our opinion, the idea that there's been more pressure recently has been overplayed, especially in the United States. Manufacturers can avoid this pressure because they tend to launch new models of existing devices at higher price points. Therefore, they can concede to lowering the price on their existing models to gain favor with hospitals. They thereby can keep the average selling price constant by continuing to launch newer versions at the higher price points.

Manfred Scholz, PhD: I speak primarily from the perspective of the in vitro diagnostics sector, in which there has been a lot of rationalization and competitive shakeouts over the last several years. Pricing pressure isn't as prevalent as it once was in areas such as immunoassay testing and clinical chemistry. Pricing in these areas has settled down. However, we see a lot of price pressure in serology and nucleic acid testing for infectious diseases. These segments include international markets in which there is no patent protection for certain blood viruses. Entrants come into these markets with new and old technologies that compete on price. We often see that in China. However, China doesn't have a lot of molecular testing yet. But the tests that have become available have started at a much lower price point than in Japan, the United States, and Europe.


Sector-Specific Pressures

The cardiac sector has had a difficult year. Implantable cardioverter-defibrillators (ICDs) are having problems. Stents are having problems. All of the companies in the sector have seen a falloff. Medtronic has announced a campaign to try to rebuild the ICD business. What do you see coming for the sector over the next year?

Gunderson: It's a quandary in the cardiac sector. Cardiac may be at the end of its run for now, at least in terms of big, new technologies. Drug-coated stents and resynchronization defibrillators have been the key innovations as well as the key controversies on Wall Street over the last 10 years. I don't see any innovation of that magnitude on the horizon in the cardiac sector. Those types of breakthroughs are going to have to come from somewhere else. The cardiac sector is certainly going to have smaller innovations that will reduce pain and increase longevity. But I just don't see any of those big, easy-to-bite apples of innovation in cardiac over the next two to three years.

Arrow: The cardiac and orthopedics sectors are the fields that have made the biggest strides in the past 15 years and now are left with room for incremental improvements. We believe other medtech sectors, such as neuro and gastrointestinal devices, still have their biggest strides ahead of them.

The turf wars among physician specialty groups seem to be affecting several sectors now, including imaging, orthopedics, and oncology. Are such struggles inevitable when technology starts to change practice?

Arrow: Turf wars allow investors to identify devices that have the most disruptive potential. In the imaging sector, the graphic capabilities of today's magnetic resonance imaging systems and computed tomography scanners that allow for imaging of the coronary arteries on a beating heart have very much changed the diagnosis of cardiovascular disease. Diagnosis can be achieved without an angiogram now. This could represent another turf war, and as a result, patient treatment will likely shift.

From a manufacturer's point of view, does a turf war make your job harder when addressing all your potential target customers?

Viscogliosi: Sure it does. Raymedica and some of the other portfolio companies of Viscogliosi Bros. target innovating surgeons—those who want to be on the forefront of a new technology. We are fortunate in the fact that we still go to surgeons. But we are faced with the challenge of determining which groups of surgeons to target due to the ongoing turf wars. We try to be friends with and accommodate as many groups as possible.

The U.S. Department of Justice investigations into antikickback violations in the orthopedic and cardiac sectors seem as though they will likely come to fruition in the next six months or so. What is your sense of what the Department of Justice is looking for and what it's likely to find?

Richard S. Cohen: The department is likely to find some unfair trade practices between device companies and surgeons or other providers. Some of the relationships may be holdovers from the not-so-recent past when gift giving, favors, and trips were the norm. But now such relationships have been pulled into the spotlight by New York Times investigative reporters and other newspapers, Congress, the Federal Trade Commission, and the Department of Justice.

It's a function of the pendulum swinging. The need for orthopedic and cardiac devices is significant, and the population bulge is just beginning to hit. Overall, the Department of Justice investigations will have some effect but will not create major impediments to selling these devices.

Gunderson: The marketing practices of five, six, seven years ago—and certainly 10 years ago—aren't the same as the marketing practices of today. Companies can't take providers on big ski trips or cruises that involve 15 minutes of work within four or five days of play. I don't know any major companies that do that anymore. The investigations will take a historical look at what practices were, and companies will respond by pointing out that those aren't the practices they currently use. Everyone will move forward from there.


Emerging Information Technologies

The federal government has been demonstrating support for the growth of information technologies (IT), but the government programs seem to be limited to those promoting electronic health records. Little thought is being given to how information technologies are used in medical products or how those medical products connect with other systems. How do you see this issue developing in the coming years?

Arrow: There are some promising start-ups in healthcare IT. One that comes to mind is Visicu Inc. (Baltimore), which recently went public. The company produces remote monitoring devices for intensive care units. In addition, GE Healthcare (Chalfont St. Giles, UK) has been integrating its electronic health records into a lot of operating room equipment and other devices. The Socrates system by Intuitive Surgical (Sunnyvale, CA) enables a surgeon to remotely communicate with another surgeon located in an operating room anywhere in the world.

These products represent only a small fraction of what could be done in healthcare IT, and it's puzzling to me why this trend hasn't spread. I wish I knew why we aren't putting the same kind of resources and infrastructure behind IT that we do behind other aspects of innovation.

When will that logjam break? Do you have any thoughts on when we will see a major push for truly smart products?

Cohen: A major driver is the push to shorten hospital stays by moving patients into home healthcare and other ambulatory settings. With devices such as vital-signs monitors, ambulatory infusion pumps, and implanted insulin pumps, there's a need to communicate device data to the patient as well as to a provider or other monitoring service. The aging population, enhancing home healthcare, and catering to patients' desires to control more of their healthcare will propel new information technologies to report data to patients and providers, as well as information technologies to interpret those data.


Reshaping IVDs

The in vitro diagnostics (IVD) sector has been pretty much moribund for the last decade. But recently, there has been tremendous movement in the sector in terms of mergers and new entrants. How do you see these shifts changing that market?

Scholz: Many of the changes are being driven by the integration of financial and clinical data. Siemens, Philips, and GE are trying to move toward integration in their business models. They have patient information. They have payer information. Integrating those two components might be the first step toward the merger of healthcare services and healthcare technology. Integration is a big motivator for the big-three healthcare companies to add IVD technology to their business. It brings an important information component to the larger therapeutic picture.

There's been a lot of talk about the goal of personalized medicine, and diagnostics—both imaging and IVDs—play a key role in that. Does the joining of IVDs with imaging and information make this goal more attainable?

Scholz: The transition will happen at a steady but slow pace, and it will start in a few critical care areas. It has already happened in cardiovascular diseases, where diagnoses today are made very quickly. It is also happening in infectious diseases, and I think it will happen in the field of neuropsychiatry within the next five years.

Arrow: Combining in vitro diagnostics with imaging will allow some personalized medical therapies and will certainly help with medical and surgical decision making. However, the most important progress in personalized medicine rests with the use of genetic testing, a subset of IVD that holds both therapeutic advantages and ethical dilemmas. The other meaning of IVD, in vivo diagnostics, is also being applied now. An example is in vivo ultrasound in the coronary arteries. If in vivo ultrasound were going to reshape therapeutic protocols in the United States, it probably would have done so to a greater extent by now, particularly given that it is so well penetrated in Japan. In the United States and in other geographies, only about 5% of angioplasties are accompanied by this technology. In the United States, it's not seen as a necessary diagnostic modality.


New Markets

As major markets like joint replacement and stenting mature, more emphasis will be placed on more- specialized markets, like small bone and joint, and peripheral vascular disease. Carotid artery disease and lower-limb peripheral occlusions are quickly becoming new stenting frontiers. There is also a lot of talk about neurostimulation as a field with a lot of potential. Which of these markets are going to see some big achievements in 2007 and 2008?

Gunderson: I think you're right on peripheral arterial disease (PAD). As mentioned earlier, cardio companies have had a tough year. It's hard to have a good year in interventional coronary procedures simply because it's a well-penetrated, fairly mature market. Price reductions and unit growth seem to balance out. However, peripheral is growing 10–15% annually. Some argue that pain in the legs is as serious as pain in the heart and deserves to be treated equally.

Some of the same technologies used in coronary procedures can be used quite successfully in treating peripheral arterial disease. In addition, companies are now tailoring the technologies specifically for PAD. Fox Hollow Technologies (Redwood City, CA) has essentially reinvented atherectomy. In addition, ev3 LLC (Plymouth, MN) has put together a considerable number of peripheral products and has made the area its main focus.

On the neurostimulation side, it seems as though stimulating various nerves in the brain or the body can cure almost anything—at least theoretically. Companies are looking at neurostimulation as a treatment for everything from migraine headaches to obesity to other mental illnesses. However, beyond pain management and other areas with existing treatments, I don't think neurostimulation is really going to take off in 2007. But it's certainly a sector to watch over the next three to four years.

Arrow: The neuro sector is in a state of immaturity similar to that of the cardio sector 15 years ago. We believe neuro is "the next cardio"—a phrase we agree with but did not coin--in terms of commercial potential for emerging devices.

Viscogliosi: Since we launched Small Bone Innovations in early 2005, about 25 to 30 new companies have been formed that focus on this area, which was formerly referred to as extremities. The main reason we launched the company is because we saw the opportunity to reach an underserved surgeon segment.

In 2007, I think there will continue to be more focus on specialty surgeons, such as hand surgeons. In the past, these groups have not been targeted as aggressively as total joint surgeons and sports medicine surgeons. In July, for example, Warburg Pincus acquired a majority interest in Tornier (Grenoble, France), a firm with a focus in extremity prostheses. So just as Warburg has followed Viscogliosi Bros. investments in total disk replacement and other areas of orthopedics, now they're following us into this new space.

Is there enough funding in the investment community to support the development of emerging companies in these new areas?

Cohen: Yes. There's an overabundance of funding when compared with meritorious opportunities. As the larger-joint replacement and cardiac markets matured, both established and developing companies looked for specialized niches. Whenever that happens, it attracts newcomers to the market, along with significant Wall Street investment activity.


Industry Consolidation

Will these emerging sectors consolidate fairly quickly as the big players identify new companies as acquisition targets?

Gunderson: The big companies are already playing in some of the emerging areas. Medtronic and Boston Scientific are both in the neurostimulation area, as is St. Jude Medical with its acquisition of Advanced Neuromodulation Systems Inc. So consolidation is already starting to happen.

Recently, though, the industry has seen the creation of a little bit of a middle ground. This counters the usual routine in which small companies rise up and are taken over by the Medtronics, Boston Scientifics, and J&Js of the world. An example of this middle ground is Edwards LifeSciences, which was spun out from Baxter.

There's very little new technology that the big guys aren't watching, and many of these companies are starved for growth. They are watching entrepreneurs, who can move faster and get to markets more quickly. Then the big guys can come in and leverage their worldwide distribution.

There's a lot of money being tossed around in the IVD sector, in which a lot of mergers are happening. Will this affect the prices that small companies can hope to garner when they are purchased?

Scholz: I don't think there is much bargain pricing going on in the sector. There has been a long depression on valuations in diagnostics, and that depression is coming to an end. The IVD sector is a recovering market. In the past 15 months, valuations have improved.

What trends should manufacturers be watching over the next year to 18 months?

Cohen: Competition is growing, and, due to group purchasing organizations, it's increasingly difficult to reach operating room and hospital call points. Over the past couple of years, the market loosened up. But now it is beginning to close again.

John, what are your thoughts for the industry in the next 12 to 18 months?

Viscogliosi: The medtech industry will continue to see the larger companies look to acquisitions to fill out their product portfolios. When you have a good technology and a good company, you're always an acquisition candidate.

New small companies will continue to be formed, and surgeons and the overall medical community will continue to be disenchanted with some of the larger companies.

Doctors want to help people, and they'll continue to work with smaller manufacturers to turn their thoughts and concepts into products and procedures. It's difficult for large companies to spend appropriately to satisfy surgeons who have good ideas for revolutionary technologies.

Scholz: In 2007, the medical device industry will see a trend toward more global pricing. There will be IT integration within the healthcare service industry rather than technology companies. There will be more consolidation within the industry, and competitors that have subpar technologies will disappear. In addition, the industry will see more novel, personalized content in the diagnostics field, especially in areas like neuropsychiatry that have not been adequately served and will greatly benefit from improved diagnostic technologies.

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