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.|
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To those outside the state, California may be best known for its prominent industries in tourism, wine, and entertainment. The secret of its success may be elusive, but California rises to the top of medtech's list by just about every measure. In 2005, California accounted for 51,600 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 PricewaterhouseCoopers, 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.|
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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.|
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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 MinneapolisSt. Paul; Boston; Warsaw, IN; and Miami. Notably, the Commonwealth of Puerto Rico ranked eighth on the 2005 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.|
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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 2006a 56% increase.5
Medtech Building Blocks
The fundamental building blocks needed to create a successful medical device cluster encompass a wide variety of factors, some of which differ according to the industry sector involved. For such technology-intensive medical device sectors as cardiovascular, orthopedics, and medical imaging, for instance, access to talent is arguably the single most important requirement. In turn, satisfying this need requires ready access to engineering, science, and medical schools. Other factors that can contribute heavily to the success of a medtech cluster include the following.
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 successthe 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.
Considering the science and technology talent and entrepreneurial focus of the region, it's not surprising that many of Silicon Valley's entrepreneurs and employees gradually found their way into the medical device sector, which has long had a strong presence throughout the Bay Area. 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 Franciscoboth with prominent medical schoolsas 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-upsespecially 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. Intuitive was founded when SRI International (Menlo Park, CA) approached surgeon Fred Moll to explore how it might create remote control equipment to treat wounded soldiers in the battlefield. Although the battlefield idea was eventually abandoned, Moll believed that the concept might be a candidate for laparoscopic surgery and pitched the idea to several Silicon Valleybased VCs. 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.
The company houses its corporate and R&D staff and manufacturing in a 105,000-sq-ft facility in Sunnyvale. In order to allow for future-scale up, in December 2005 Intuitive purchased a 210,000-sq-ft facility just over a mile down the road.
Since Intuitive's products encompass both hardware and software, the company makes extensive use of the talent resident in the Bay Area, including firms with medical device background as well as those with experience in other industries. The company sources most of its components and subassemblies from local suppliers and conducts final assembly at its Sunnyvale location. For most of its hardware, Intuitive has a strategic partnership with Hewlett-Packard, which is based in nearby Palo Alto. Intuitive also contracts work to local engineering firms, which enables company staff to examine engineering and manufacturing issues in person.
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 operationsand 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 ScientificGuidant 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 arthroscopyminimally invasive surgery for articulating jointsbut 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, offering a wide range of technologies and instruments for minimally invasive surgery. Smith & Nephew backs its endoscopy products with an education and support program for surgeons, an offering that is frequently an important competitive factor among medical device companies. 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 Andovera 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.
Straumann is a global leader in developing and producing dental implants, instruments, and oral tissue regeneration products. In the United States, Straumann at first had a location in Waltham, MA, not far from Andover. But in 2004, Straumann seriously considered relocating its U.S. headquarters to another state. Pointing out the mutual benefits of keeping Straumann in the state, Massachusetts state and local officials, together with university and business leaders, worked with Straumann management to move the company to Andover. Governor Mitt Romney stressed the state's desire to attract leading technology companies like Straumann, and committed the state to supporting Straumann and other technology companies by maintaining a competitive tax structure and continuing to foster an educated workforce.
Straumann's decision to stay in Massachusettsand move to Andovergave further impetus to the expansion of Andover's medical device manufacturing cluster. Explaining the range of factors that influenced the company's decision, Straumann management pointed to access to a skilled science- and technology-based labor pool, the leading medical device companies already established in Minuteman Park, access to airports (and ease of getting back and forth to Switzerland), the opportunity for knowledge transfer and partnering, and the modern architecture of the park facilities.
Straumann opened its new North American headquarters in Minuteman Park in June 2005. The 161,000-sq-ft facility includes the company's first manufacturing plant outside Switzerland, and was built on time in less than a year. In keeping with the important role of education and training in medical device company success, Straumann's new facility includes a 35,000-sq-ft training center that has a simulation library, dental lab facilities, operating suites, and a lecture auditorium.
Over the next three years, Straumann plans to hire 500 new U.S. employees, 300 of whom will be based at the new Andover facility.
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 24,700 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 medtech 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 communitynot 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.' As early as 1890, physicians from throughout the world traveled to Rochester to learn the innovative approaches to medical practice and surgery developed by Drs. William and Charles Mayo. The first Mayo Clinic building was dedicated in 1914.
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), which was founded in 1949 as a medical equipment repair company by Earl E. Bakken and Palmer J. Hermundslie. In the years that followed, the two partners moved on to develop medical devices, including the first wearable external cardiac pacemaker in 1957 and the first reliable long-term implantable device in 1960.
Jumping ahead 45 years, Medtronic now employs approximately 32,000 people worldwide, does business in more than 120 countries, and had global revenues of $10.1 billion in 2005. Still headquartered in Minneapolis, Medtronic operations have expanded to focus on providing diagnostic, therapeutic, and monitoring systems for the cardiovascular; neurological; diabetes; spinal; and ear, nose, and throat markets. 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. CRM develops implantable pacemakers and defibrillators, monitoring and diagnostic devices, and cardiac and resynchronization devices, as well as automated external defibrillators.
In the past five years, the company has hired more than 2000 employeesdouble its 1999 estimatesand 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 December 2005, Medtronic broke ground for a new 1.5-million-sq-ft headquarters for its CRM business in Mounds View, MN. It will be the largest Medtronic facility in the world, and the company estimates that it will anchor $1.9 billion in new direct and indirect economic activity in Minnesota over the next seven years. The 820,000-sq-ft first phase alone will house up to 3200 employees, and the entire facility could eventually house up to 6000.
"We're growing jobs in Minnesota faster than we can house the employees filling them," said Steve Mahle, president of Medtronic's CRM business, at the time of the groundbreaking. "The new CRM headquarters not only addresses our current and future growth, but anchors our presence in these great northern suburbs. Our new home will allow us to continue more than 50 years of work to alleviate pain, restore health, and extend life."
The Mounds View facility marks the second major expansion project in the past six years for Medtronic. The 460,000-sq-ft corporate world headquarters opened in Fridley, in 2001.
In addition to Medtronic, other major players in Minnesota include Boston Scientific (including its newly acquired partner, Guidant), and St. Jude Medical.
In October 2005, Boston Scientific opened its new state-of-the-art 152,000-sq-ft R&D facility in Maple Grove, MN. The facility, which will support more than 500 employees, includes several R&D labs, the core cardiovascular new technology and product development organization, and other supporting functions, such as an 11,000-sq-ft conference center.
At the opening of the new facility, Minnesota Lt. Governor Carol Molnau said, "We are proud that Minnesota is home to Boston Scientific and other companies that are at the forefront of their industries and are significant drivers of economic growth." Their innovations, she said, "have improved the lives of countless patients worldwide while further establishing Minnesota as a global hub for the manufacture of medical devices." The facility is one of four buildings on the company's Maple Grove campus, which employs approximately 3000 people, 800 of whom support R&D activities.
In 2004, Guidant announced plans for major plant and employment expansion at its Maple Grove facility: a new 120,000-sq-ft building providing space for up to approximately 600 new employees to be hired between 2004 and 2008. The new building houses primarily R&D laboratories and offices.
Over the past five years, St. Paulbased St. Jude Medical has been one of Minnesota's most successful companies. During that period, the company increased its market capitalization from $5.1 billion to $17.8 billion.
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 devicesincluding artificial joint replacementsnow 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.
Following in the footsteps of their founders, these three companies continue to reinvent success through their product innovation and engineering excellence. DePuy researchers were at the leading edge of total hip replacement when it was started in the 1960s, and they continue today as product development innovators under the DePuy Orthopaedics, DePuy Spine, Codman & Shurtleff, and DePuy Mitek brand names. Biomet was the first company to introduce a minimally invasive technique (the Repicci knee, in 1992), and is a market leader in minimally invasive joint replacement.
While all of these companies continue to thrive in Warsaw, they are also expanding their operations and reach throughout the world. For example, DePuy now has 6000 employees worldwide, including 1200 employees in Warsaw. Zimmer has more than 6700 employees worldwide, and 44% of the company's sales are outside the United States.
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.
As in the case of many medical device manufacturers, a critical success factor for these three companies is the ability to continually educate surgeons and other healthcare providers about the benefits, success, and use of their products, while also creating opportunities for collaboration in product development and learning. Each of these three companies offers outreach and education programs, typically based in Warsaw. The programs are also increasingly offered throughout the United States and around the world, enabling the companies to provide greater access to their products and knowledge for surgeons, residents, clinical researchers, and other institutions and partners.
For an otherwise sleepy town far removed from the big city, Warsaw plays an energetic and leading role in the highly lucrative orthopedics industry.
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 remain 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.
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.