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Top Medical Device Clusters

In the United States, regional clusters with medtech expertise are driving corporate and employment gains.

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

In the medical device industry, there are many ways of measuring success. To be sure, most company leaders take greatest pride in the number of patients whose health has been improved through the use of their products. But other company stakeholders may apply different yardsticks for assessing a company's success.

The same is true when it comes to determining the relative strength and success of regions that have traditionally been considered strongholds of the U.S. medical device industry. On a state-by-state level, many regions offer extraordinary capabilities that make them desirable locations for specific medtech operations ranging from research and development (R&D) to logistics and aftermarket service. But medtech's top tier is occupied by states that can support every phase of company growth, helping to create successful new ventures and to advance the continued success of established companies.

This article looks at some of the key metrics used to measure the success of medical device clusters in the United States, with an eye toward describing the kinds of activities that are currently going on in some of the leading clusters.

By the Numbers

Figure 1. Share of the 169 FDA premarket approvals (PMAs) issued from 2001 through 2005, by U.S. state. Source: FDA.
(click to enlarge)

California rises to the top of medtech's list by just about every measure. In 2005, California accounted for 52,000 medical device workers, about one-sixth of the industry's 304,000 U.S. employees.1 According to a report released this October by the California Healthcare Institute (CHI; La Jolla, CA) and Pricewater- houseCoopers, California's biomedical industry is one of the biggest drivers of employment in the state and the second-largest contributor to its high-technology economy, second only to computer consulting and programming.2

Figure 2. State shares of $2.8 billion in proceeds from medical device initial public offerings for the period 2001 through 2005. Source: Bloomberg; Navigant Consulting analysis.
(click to enlarge)

Over the past five years, California accounted for 33% of FDA premarket approvals and 46% of funds raised through medtech initial public offerings (IPOs; see Figures 1, 2).3,4 But California is not the only successful medical device state. In fact, many locales across the country are capitalizing on a strong medical device industry.

Figure 3. Top-10 medical device states by employment, 2004. Source: U.S. Bureau of Labor Statistics.
(click to enlarge)

Workforce. According to the U.S. Bureau of Labor Statistics, in 2005 California led all states in medical device industry employment.1 The most significant regional medical device industry clusters in California included San Francisco, Los Angeles, and San Diego (which shares a border with the large and growing cluster in Tijuana, Mexico). Following California and rounding out the top five states were Minnesota, Florida, Pennsylvania, and New York. Prominent metropolitan clusters outside of California included Minneapolis–St. Paul; Boston; Warsaw, IN; and Miami. Notably, the Commonwealth of Puerto Rico ranked eighth on the 2004 medtech employment list, ahead of both New Jersey and Texas (see Figure 3).

From 2001 to 2005, medtech workforces in Minnesota and Indiana grew the most on an absolute basis, from 21,000 to 24,600 (an increase of 3600) and from 12,200 to 15,200 (an increase of 3000), respectively. Average salaries surged from $57,000 to $75,000 in Minnesota and from $49,900 to $61,300 in Indiana, following the strong performance of the cardiovascular and orthopedic market sectors.

But two smaller states grew the fastest on a percentage basis. North Carolina's medtech workforce grew 31% from 4800 to 6300, primarily in the Research Triangle Park area, while Tennessee's workforce grew 11% from 6400 to 7100, primarily in the Memphis area. North Carolina is home to a diverse group of primarily emerging medtech companies, while Tennessee's workforce has grown due to an expanding concentration of orthopedic companies, including Medtronic Sofamor Danek, Smith & Nephew, and Wright Medical.

Figure 4. State-by-state contributions to market cap growth by 180 medical device companies from January 2001 through February 2006. Source: FactSet; Navigant Consulting analysis.
(click to enlarge)

Market-Cap Growth. To understand where corporate value is being created, 180 publicly traded medical device companies were analyzed. The market capitalization increases during the five-year period from January 1, 2001, to February 1, 2006, were calculated and aggregated according to the state in which the corporation was headquartered (see Figure 4). While this is not a statistically comprehensive assessment, it provides a glimpse into the success of medical device states from the perspective of corporate profits and value created.

Once again, California led all states in market value creation during the period from early 2001 to early 2006. The 49 California companies included in this assessment created $23.9 billion of increased value. But California was closely followed by Indiana at $22.9 billion, and Massachusetts at $20.7 billion. In all, the 180 medical device companies increased their market value by some $113.9 billion between January 2001 and February 2006—a 56% increase.5

Over the past five years, the U.S. medical device industry has enjoyed a highly prosperous period from the standpoint of both employees and investors. Several medical device clusters have helped shape the industry's growth and success—the San Francisco Bay Area, Boston, Minneapolis, and Warsaw chief among them. Below, this article looks at some of the factors that characterize these successful clusters today.

Riding the Bay Area's Start-Up Wave

California's Silicon Valley is a rapidly developing region centered on San Jose, at the southernmost extent of San Francisco Bay. The area was a leader in the high-tech run-up that came to be known as the dot-com bubble, and it also took a significant hit when the dot-com bubble burst at the beginning of 2001.

At first, taking up opportunities in the life sciences, including the medical device industry, was a way for many Silicon Valley companies and individuals to reduce the impact of the dot-com bust. But since then, many have embraced the Bay Area's medical device industry as a new path toward a rebounding economy.

Overall, the greater Bay Area has a lot to offer medtech companies. The region is well-known for educational institutions such as Stanford and the University of California, San Francisco—both with prominent medical schools—as well as the University of California, Berkeley. Silicon Valley adds to the area's strengths with the largest concentration of venture capital in the world. It has industry-leading companies in such technology sectors as semiconductors and networking, making it fertile ground for medical device start-ups—especially as semiconductors, wireless communications, and related technologies increasingly find their way into medical devices.

During the past five years, 11 Bay Area medical device companies conducted IPOs that raised a total of $775 million, representing 29% of all medical device IPO money raised in the United States in that period. At the same time, the area accounted for 19 premarket approvals, representing 11% of the 169 such approvals issued by FDA.

Intuitive Surgical (Sunnyvale, CA) offers an example of medtech success that reflects the potential of Bay Area start-ups. Intuitive develops and markets the da Vinci computer-aided surgical system, which enables surgeons to perform minimally invasive surgery more easily. In 1996, the firm raised $5 million from Mayfield Fund and Sierra Ventures, both of Menlo Park. Mayfield helped recruit key local management talent and within four months of the funding, the fledgling company had a dozen fully trained engineers making headway on the first prototype.

Some 10 years later, Intuitive has reached 450 employees worldwide, 270 of whom work in Sunnyvale. The company employs 14 PhDs, most of whom come from Stanford, MIT, or Johns Hopkins. The firm reported revenue of $227 million in 2005, and recently had a market capitalization of about $4 billion.

Although the Bay Area is one of the foremost U.S. medical device clusters, the region also suffers for its success. Most companies have historically located their manufacturing facilities right next door to their R&D operations—and would prefer to continue doing so. But increasing labor costs have forced many companies to outsource their manufacturing to lower-cost locations. Manufacturing wages in Mexico, for example, are typically 70% less than those in the Bay Area.

In recent years, Bay Area medtech firms have outsourced manufacturing to locations in Ireland and Mexico, as well as newer destinations such as China, Costa Rica, and Singapore. In 2002, Guidant laid off half of the employees in its Menlo Park facility and moved the plant's manufacturing operations to Puerto Rico.

As that Guidant event suggests, companies in the Bay Area don't always have control over their own destinies. Although they may begin life as independent start-ups, many wind up as subsidiaries of companies based in the Midwest or on the East Coast. For example, Abbott Vascular Devices (Redwood City, CA) fortified its role in the interventional cardiology market following closure of the Boston Scientific–Guidant merger, yet it remains a subsidiary of Chicago-based Abbott Laboratories. Many other small to midsized Bay Area companies have also sold themselves to industry heavyweights such as Medtronic and Boston Scientific. Consequently, it is difficult to predict whether they will be staying put in the Bay Area or will be consolidated into facilities elsewhere.

Massachusetts: Homegrown Start-Ups Meet the Multinationals

In many respects, the thriving medical device industry in Massachusetts is the East Coast equivalent of the San Francisco Bay Area. It, too, has a large venture capital community as well as a renowned hospital and university network. The 14,400 medical device workers in Massachusetts (most of whom are located in or around Boston), represent 4.7% of all U.S. medical device employees.

Massachusetts boasts plenty of start-ups and midsized companies, but there are also larger companies such as Boston Scientific (Natick, MA); Tyco Healthcare (Mansfield, MA); Haemonetics (Braintree, MA); Philips Medical Systems, (Andover, MA); Smith & Nephew Endoscopy (Andover, MA); and DePuy Spine (Raynham, MA), a division of DePuy Inc., which is a Johnson & Johnson company. Collectively, these top six employers account for about two-thirds of the state's medtech employment.

While Asian-based companies are geographically predisposed to set up North American headquarters in San Francisco, the Boston area offers ease of access that makes the region a favorite location for some prominent European-based companies. The small town of Andover (population: 31,000), 20 miles north of Boston, is home to the U.S. headquarters for three such European companies: Smith & Nephew Endoscopy (London), Philips Medical Systems (Best, The Netherlands), and the most recent arrival, Straumann AG (Basel, Switzerland). All three companies are clustered in Minuteman Park, a former dairy farm that is now home to a growing set of medical device and life sciences companies.

Smith & Nephew Endoscopy is a subsidiary of the British medical device company Smith & Nephew plc. The company has long been the acknowledged world leader in arthroscopy—minimally invasive surgery for articulating joints—but in recent years it has broadened its scope beyond arthroscopy to include all areas of endoscopy.

The company is now also considered a world leader in product development and commercialization for all areas of endoscopy. The company's state-of-the-art BioSkills Lab in Andover enables surgeons to work directly with Smith & Nephew engineers to develop their concepts and explore the commercialization of both endoscopic techniques and related instrumentation.

More than 10 years ago, Smith & Nephew was considering moving its U.S. endoscopy operations to North Carolina. But Massachusetts state, university, and local officials worked diligently to keep Smith & Nephew in Andover. After much consideration and discussion, the company decided to remain in Andover—a decision that some consider the defining moment in the rise of Andover's cluster of medical device and life sciences companies. The company's decision to stay sent a strong message to other medical companies that Andover was a good town in which to set down business roots.

Despite the obvious strengths of Massachusetts for medical device companies, medtech employment in the state remains tenuous. A considerable amount of medtech manufacturing has already moved out of the state, or is planning to do so. On the other hand, the state continues to attract companies and funding. Over the past five years, Massachusetts medical device companies accounted for 7.3% of all U.S. medtech IPO proceeds and 7.1% of all premarket approvals, making it the fourth-leading state in both cases.

Minnesota: From Medical Alley to Medtech Superhighway

Minnesota is a major player in the medical device industry. In 2005, the state had 24,600 medical device employees, second only to California. Moreover, during the past five years Minnesota had the second-highest percentage of premarket approvals, at 13.6%; and accounted for 10.8% of IPO funds raised. On a per-capita basis, Minnesota would lead all states for all of these metrics.

Minnesota has long been home to innovative businesses, hospitals, and universities that have shaped the medical community—not only within Minnesota, but also with an extended global outreach. A case in point is the Mayo Clinic (Rochester), the first and largest integrated group practice in the world, joined by "common systems and a philosophy of the needs of the patient come first."

The Mayo Clinic has traditionally been considered the northern anchor of Minnesota's 'medical alley.' In 2004, the number of physicians and scientists trained at the Mayo Clinic surpassed 18,000. Employees of the clinic include more than 2500 scientists and physicians from every medical specialty, and 42,000 allied health staff. The clinic now has additional sites in Jacksonville, FL, and Scottsdale-Phoenix, AZ. All together, the medical staff at the three locations treat more than half a million people each year.

A major contributor to the medtech strength of Minnesota is cardiology giant Medtronic (Minneapolis). Medtronic currently operates 14 facilities in Minnesota with more than 7000 full-time employees, and more than half of those work for Medtronic Cardiac Rhythm Management (CRM), which is the company's largest business.

In the past five years, the company has hired more than 2000 employees—double its 1999 estimates—and through the seven years ending in 2012, it expects to add another 285 new employees each year. Medtronic ranks as Minnesota's eighth-largest employer among publicly traded companies.

In addition to Medtronic, other major players in Minnesota include Boston Scientific (including its newly acquired partner, Guidant), and St. Jude Medical.

Orthopedic Opportunity in Warsaw

When you think of orthopedic devices, think Warsaw, IN. This town of 13,000 people is home to three of the five largest orthopedic manufacturers in the world: DePuy, Zimmer, and Biomet, which together employ more than 3500 workers in Warsaw. Also headquartered in Warsaw, Symmetry Medical is the largest independent outsourcing partner for implants and instruments related to orthopedic device manufacturers. According to the Warsaw-Kosciusko County Chamber of Commerce, the orthopedic community employs more than 8000 people in Kosciusko County.

During the past five years, Indiana medical device companies have been responsible for adding $22.9 billion to the market value of the medical device industry. The development and manufacturing of orthopedic devices—including artificial joint replacements--now represents one of the leading industries in Indiana. And Warsaw is considered by most to be the world headquarters for this industry.

Warsaw has a greater than 100-year lineage in orthopedic devices. The roots of the town's orthopedic manufacturing cluster go back to 1895, when Revra DePuy started his prosthetics company. Today, DePuy Inc. designs and manufactures orthopedic devices and supplies for the hip, knee, extremity, trauma, and orthobiologics segments. Its 2005 revenue of $3.8 billion ranks it first among all competitors in the orthopedics market.

In 1927, DePuy employee Justin Zimmer left to start his own orthopedics company. Today, Zimmer Inc. has the largest worldwide market position in both knee and hip replacements, as well as strong reconstructive market shares in the United States, Europe, and Japan.

Then in 1977, engineer Dane Miller left Zimmer to help form Biomet, which today designs and manufactures products for hip, knee, shoulder, elbow, and other small-joint replacement. Miller went on to lead Biomet as CEO until March 2006, and he remains on the company's board of directors.

Symmetry Medical is capitalizing on the trend of finished-device manufacturers outsourcing an increasing share of their manufacturing operations. With revenue growth of 28% in 2005, Symmetry actually grew faster than its customers. In November 2005, Symmetry Medical began developing a new 25,000-sq-ft design and development center in Warsaw, while also relocating Symmetry Medical Cheltenham to a larger 25,000-sq-ft facility.

For an otherwise sleepy town far removed from the big city, Warsaw plays an energetic and leading role in the highly lucrative orthopedics industry.

Conclusion

For all the prosperity experienced by U.S. medical device companies over the past five years, the U.S. market is actually growing at a slower rate than some markets outside the country. While company R&D and headquarters locations typically remains within the United States, companies continue to move their manufacturing out of the country to lower-cost locations. Over the past five years, for instance, shipments of medical device products in the United States have grown at a compound annual growth rate of 6%, while shipments from Mexico have grown 16%.6, 7 It remains to be seen how this trend will play out over time.

In the meantime, many U.S. states and smaller regions still exert a strong influence over the shape of the medical device industry, both at home and abroad. With strengths that include such varied characteristics as access to university researchers, strong venture capital communities, and regional expertise in medical technologies, the top medtech clusters in the United States still show ample potential for growth.


References

1. State employment for North American Industry Classification System (NAICS) categories 334510,     339112, 339113, 339114, 339115 [online database] (Washington, DC: U.S. Department of Labor, Bureau     of Labor Statistics, 2006 [cited 25 October 2006]); available from Internet: www.bls.gov.
2. California's Biomedical Industry, 2006 Report (La Jolla, CA: California Healthcare Institute, 2006).
3. "Information on Premarket Approval Applications," [online] (Rockville, MD: FDA, Center for Devices and     Radiological Health, 2006 [cited 25 October 2006); available from Internet:     www.fda.gov/cdrh/pmapage.html.
4. Medical Device Industry Initial Public Offerings, [sourced from online database] (New York, NY: Bloomberg,     2006 [cited 25 October 2006]); available from Internet: www.bloomberg.com.
5. Medical Device Industry Market Capitalization, 2001-2006, [sourced from online database] (Norwalk, CT:     FactSet Research Systems Inc., 2006 [cited 25 October 2006]); available from Internet: www.factset.com.
6. Annual Survey of Manufactures, Value of Product Shipments, 2004 [online] (Washington, DC: U.S. Census     Bureau, Manufacturing and Construction Division, 2005 [cited 26 October 2006]); available from Internet:     www.census.gov/mcd/asm-as2.html.
7. "Health Industries: Industry Trade Statistics," [online] (Washington, DC: U.S. International Trade     Commission, Office of Health and Consumer Goods, 2005 [cited 26 October 2006]); available from     Internet: www.ita.doc.gov/td/health/statistics.html.

Andrew Kinross is an associate director with Navigant Consulting (Burlington, MA).
Copyright ©2006 MX
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