How Biomedical Companies Navigated Turbulent Economic Times

How Biomedical Companies Navigated Turbulent Economic Times


While most giant corporations crashed during the worst economic climate since the Great Depression, the biomedical devices industry grew, invested, and prospered. The Great Recession (from 2007 to 2009) represents the worst downturn the western world has seen since the 1930s, a time when most companies saw revenue recede and profits disappear, and they resorted to widespread layoffs, investment freezes, and research cuts. In the midst of this storm, the worldwide biomedical devices industry went against the current. These companies grew their revenues and increased profits by investing in research and product development, increasing their marketing spend, and hiring new staff. They did this in all of their markets—North America, Europe, and Asia—and grew their profits without massive outsourcing, inventory liquidations, mass layoffs, or fire sale liquidations. This sector is not completely recession proof, as some firms did hit the bumps when consumers delayed expensive, elective medical procedures such as knee and hip replacements. But taken as a whole, the businesses that comprise this industry sector sailed through the Great Recession as if it never happened.

This industry review looks at 25 of the top independent biomedical device makers for an in-depth study that analyzes their business strategies, financial results, marketing investment, product portfolios, and research and development to better understand what drove growth and profitability in a time of worldwide downturn. The analysis sets out to discover why this particular sector thrived where others failed, analyze whether this success is sustainable over the long-term, and identify areas for improvement.
 
Summary and Key Findings
Why did so many companies in this industry sustain such growth, how have they achieved this success, and can they keep it up? We found three common characteristics shared by the most successful of the 25 biomedical technology firms that appeared to contribute to their growth during the recession and are still a factor today (see Table I):
  • High Value-Added Manufacturing. Building advanced technology products in developed markets while adding a high level of value to base costs has and will continue to do well for this sector. For highly differentiated products sold as customized solutions, the United States and Europe have been great places to establish and grow businesses.
  • Increased Marketing Efforts. These companies continued to increase spend on marketing efforts during the Great Recession.
  • Investment in R&D and New Products. The most successful biomedical device companies developed a robust pipeline of new products and R&D capabilities, which allowed them to navigate challenging times successfully. Even during the Great Recession they were increasing their R&D spend.
In short, the best of biomedical device makers succeed by making very little very well, for sale at very high prices.
Despite the unparalleled success of the biomedical device industry from a 10,000 foot view, our close study reveals operational fissures that, if left unchecked, could threaten future growth. For instance, some firms, having grown through acquisition of start-ups and by purchasing parts of organizations, now have too many plants and labs to be efficient. Based on our analysis of the firms and the industry, these companies could consolidate and restructure in order to achieve maximum efficiency by sweeping up the collections of purchased parts and turning these businesses into coherent and focused companies. The challenge is to rationalize and consolidate in a fashion that does not disrupt sales operations, disturb regulatory licensed manufacturing processes, or lose intellectual capital, while moving to a product portfolio mix that offers strategic diversification, builds on related technologies, and simultaneously adds complementary applications. Consolidation will be a key driver facilitating growth over the coming years. History shows that if the current management will not do it, then someone else will. Recall that Alfred Sloan was brought in 1920 to clean up the loose collection of parts that Billy Durant had assembled under the name General Motors, a firm that had a very meaningful and industry-defining run for 80 years after that.
 
The big opportunity for the biomedical device business is to move beyond the sometimes bumpy revenue stream from selling things, and migrate to a business model focused on selling systems that provide a point of control and differentiation (usually from software) or that yield sustained revenues from related consumable products used in caring for patients. It is the kind of strategy that worked for King Gillette when his business first adopted the razor and blades model; it is a strategy that has also worked for IBM as it has moved from a hardware business to one driven by sustained revenue streams from software and services.
 

High Value-Added Manufacturing

The biomedical devices sector is characterized by highly specialized manufacturing efforts that generally add a high level of value to complex products in processes subject to sophisticated quality control processes, subject to close regulatory review. High-value add is used here to mean the process of taking fairly inexpensive inputs such as metal, electronics, or materials, manufacturing them to build customized products that constantly evolve with advancing technology and practice, and then marketing them with sophisticated sales and distribution organizations to yield revenue that is a large multiple of the original input costs. Most biomed devices have been evolving at a fairly fast rate in the past decade, resulting in a fairly close pairing between the R&D function and the manufacturing operation; often the two functions are co-located.
Generally, there are three categories of products manufactured:
 
  • Internal or External Use. Devices or materials that are used directly on or in the human body. Unsurprisingly, these products are subject to the highest level of quality control and regulatory scrutiny of manufacturing processes. Because of frequent product evolution and advancement, R&D is co-located with the production process. The designs are often highly customized to individuals, or adapted to local markets of patient populations and local medical usage. As a result, manufacturing normally occurs in individual or small quantity batches at plants located in or near the target national market, with limited scope for economies of scale.
  • Treatment Devices and Controls and Electronic Diagnostic Units. These devices are used to diagnose or treat the patient, sometimes in direct contact and sometimes removed from the patient in a remote laboratory setting. Most devices can be compared to computers with materials handling capabilities. They are built in small batches on short runs, and customization is common. Quality controls on device performance are rigorous, while licensing authority is not as closely monitored. Because of generally rapid advances in product design, production runs tend to be in short batches and highly integrated interaction with R&D staff is required.
  • Consumables Used by Treatment Devices. This category includes fluids or materials used in a treatment process, usually in a treatment device built by the same company. Because these items are used in direct patient contact, quality controls are often as rigorous as those applied to advanced pharmaceuticals, and regulatory scrutiny and review are also at the same level. The design and content of these offerings coevolves with the matching treatment devices, although they may be built or processed at different plant sites. There is often a strong requirement for time-sensitive freshness that, coupled with varying local regulatory approvals on fluids and materials, leads to market-localized manufacturing.

The high level of value comes from the advanced quality controls and high degree of customization that are required across most of the sector. The requirement for regulator licensing of manufacturing processes can also form a protective barrier to the entry of new competitors.

There are several results of this combination of customization, R&D and manufacturing pairing, and regulatory control. Most manufacturing plants in this sector are specifically licensed by the local regulator to produce only a specific product or set of products at a particular site; moving that license, and the intellectual property about the conduct and control of the manufacturing process to another site can incur long lead times for planning and expense for the transfer. Often multiple key people with skills and knowledge must move with the process. Closings, moves, and consolidations can take considerable time and incur considerable expense. Geographic areas served tend to be limited to a country or continent rather than the worldwide scale of production from a single plant than can be found in other high-tech sectors. Because many firms in the industry have grown by acquisition of smaller firms, it is common to find a legacy of multiple small- to mid-sized manufacturing facilities scattered across the landscape, each plant with its own process, products, paired R&D function, and manufacturing quality and control staff. Because many of the BioMed 25 originated in the United States, most have a manufacturing footprint that is dominated by U.S.-based plants. Those that originated in Europe have their primary plants there, in the UK, Germany, or in what is arguably the highest cost manufacturing location in the world, Switzerland.
 
It is interesting to note what the BioMed firms are not doing with respect to manufacturing. With only a few exceptions, they are not moving to lowest possible cost labor markets and building large single plants to supply the world. They are not designing products and processes in one central high-cost, high-knowledge market, and then moving the actual production to a distant, low-labor cost manufacturing site. Where product standards differ across markets they are having limited success in getting regulators to agree to common product standards that allow common products and shared economies of scale. As a general observation, this is not (yet) an industry where everything you see or touch says “made in China”. However, many of the firms are opening or acquiring plants in China or India with the intent to supply those markets.
 
Yet this industry is not static; companies are attempting to control costs, consolidate processes, and increase efficiency. While few firms have what might be described as a grand manufacturing strategy that is worldwide in scope, most are trying to trim back around the edges and step toward a bigger strategy. Many are making the necessary and often expensive moves to consolidate many little plants in a smaller number of larger R&D and manufacturing centers. But these moves notably can take two to four years to plan and execute, and generate substantial expenses and write-offs for the cost of transition. Obtaining new manufacturing licenses can have long lead times. Several firms are working to develop common shared upstream product components that can be built at a single or at a few locations and shipped into local markets for advanced processing and local customization. It is the classic operations management manufacturing idea of delayed differentiation. Companies are working to rationalize their supply chains and often build merged, common distribution functions. And they are building new plants in new markets, which are then paired with or linked to original, developed market sites for R&D support.
 
Substantial further consolidation is possible and may become a necessity if the device sector starts to come under cost pressures from a changing healthcare marketplace. For instance, the electronic elements of medical devices and diagnostics could be fully outsourced to third-party manufacturers that could use the electronic assembly supply chain in Taiwan and China to lower costs and gain efficiency from consolidated volumes. Consumable fluids and materials could develop partially processed material components in concentrated form that could then be bulked up and adapted to local market needs. Internal usage medical components could be standardized for use across more markets, common manufacturing processes could be developed, or production for one product line could be concentrated in a single plant supplying the world while other products are produced in other markets and shared across a worldwide supply chain. There is considerable scope for an industry with such a plethora of small plants in high-cost manufacturing locations to begin to reduce costs.
 

Next: Investment in R&D and New Products

Yair Holtzman is director and global life sciences leader at WTP Advisors (White Plains, NY). He leads the firm's Business Advisory Services Group and co-leads the Research & Development Tax Services Group. He has twenty years of experience as a management and tax consultant focusing on Research and Development in the Chemicals and Life Sciences Industries. Holtman is a Certified Public Accountant in NY, NJ, IL and NH and holds an MBA degree from Cornell University’s Johnson Graduate School of Management, with a concentration in Operations Management and Manufacturing. He can be reached at yair.holtzman@wtpadvisors.com

At the time this paper was published, Tom Figgatt, Sr., was an associate with WTP Advisors, working in Business Advisory
Services and Tax Advisory practices. He spent more than 30 years working for IBM in leaderships roles involving
business and financial planning, strategic analysis, information systems, product planning, marketing
and sales, in business units involved information technology hardware, software, services and
consulting. He holds an MBA from the Harvard Business School, graduating with High Distinction,
as a George F. Baker Scholar, with concentrations in Finance and Marketing. He holds certificates
in accounting and taxation from Sacred Heart University, and a BA in Economics from Vassar
College.

Approach and Methodology: How Biomedical Companies Successfully Navigated Turbulent Economic Times

Background of the Medical Device Industry
The U.S. medical device manufacturing sector is a highly diversified industry that produces a range of products designed to diagnose and treat patients in healthcare systems worldwide. Medical devices range in nature and complexity from simple tongue depressors and bandages to complex programmable pacemakers and sophisticated imaging systems. The key products that comprise this industry include surgical appliances and supplies, surgical and medical instruments, electromedical equipment, in vitro diagnostic substances, irradiation apparatus, dental, and ophthalmic goods. The following North American Industry Classification System (NAICS) codes comprise the medical devices industry that is covered by the Office of Health and Consumer Goods (OHCG):
  • 325413 In-Vitro Diagnostic Substances Manufacturing
  • 334510 Electro-medical and Electrotherapeutic Apparatus Manufacturing
  • 334517 Irradiation Apparatus Manufacturing
  • 339112 Surgical and Medical Instrument Manufacturing
  • 339113 Surgical Appliances and Supplies Manufacturing
  • 339114 Dental Equipment and Supplies Manufacturing
  • 339115 Ophthalmic Goods Manufacturing
 
Further detail on the specific product categories that fall in this industry sector, including the North American Industrial Classification System (NAICS) codes, can be found in the sidebar “Medical Device Industry Definitions and NAICS Codes”.

selected). To ensure full visibility, we chose only firms that publish annual financial reports of financial results that are publicly available. Of the 25 firms selected, 20 are based in the United States, while four have headquarters in northern Europe (Germany, Netherlands, Sweden), and one is based in Japan (Terumo).
 
Firms for which sufficient, detailed data on revenues and expense was not available were deselected, usually because medical devices and technology comprised a smaller part of a much larger firm. Thus we have not included GE, Siemens, Philips, Johnson & Johnson, and Toshiba because, while they break out top line revenue for their medical lines, they do not break out in sufficient detail the expenses and revenues associated with the segment to allow comparison and compilation with other firms more solely dedicated to the medical device sector.
 

Return to How Biomedical Companies Successfully Navigated Turbulent Economic Times

 
 
One exception to the rule of dedication to medical devices was made to include Danaher Corp., because it is a growing player in the medical device business based on a steady stream of strategic acquisitions and organic growth, and its reporting allowed us to sufficiently sort out the medical device sector and the associated expenses and investments from its unrelated involvements as a provider of Craftsman Tools to Sears and gasoline pumps to retail gas stations. And with the plans announced in February 2011 to acquire Beckman Coulter, the company will substantially increase its presence in medical device and technology business.
 
To be selected, the firms had to publish financial reports that prepared and presented in adherence with accepted and respected financial accounting standards, such as the U.S. Generally Accepted Accounting Principles (GAAP), international standards, International Financial Reporting Standards (IFRS), or the Japanese GAAP. Reports had to include a full scale management discussion and analysis of results, fully detailed financial statements including an income statement, balance sheet, statement of cash flows from operations, supported by accompanying and detailed footnotes, and with breakouts of results by major product line (if applicable) and by geographic region. We relied upon either U.S.-style reporting in 10-K reports filled with the SEC, or with European format reports issued under the IFRS standards. To add a sample on the leading edge of growth, we included one smaller new firm, Tornier, based in the Netherlands but issued U.S.-format reporting in a prospectus that that supported a public issuance of stock to U.S. markets in February 2011.
 
Our analysis consisted of summaries of revenues, profits, and earnings per share from the Top 25 firms medical devices business, as well as in depth examinations of the expenditures for sales and marketing (S&M), or their total expense for selling, general and administrative expense (SG&A) if S&M were not broken out separately. We also examined the level and growth of their organic investments in research and development; R&D investments in acquired firms, which can be booked as investment and or treated as expense, were treated as current period expenses. We have focused on the years that span the Great Recession, 2006 to 2010, with updates added for fiscal year (FY) 2010 results as they have become available. Companies with FYs ending through April are grouped back with results for FYs ending the prior December, while FYs ending from May onward are grouped forward to the December ending that year.
 
Yair Holtzman is director and global life sciences leader at WTP Advisors (White Plains, NY). Tom Figgatt, Sr., is an associate at the firm.

Infographic—Hospital Spending on Medical Devices, Plus the Cost of Implant Procedures

Hospitals spend around $17 billion annuallly on physican preference items such as pacemakers, artificial knees, and spinal discs.

Numbers, Infographic, Cardiac Valve Replacement, Spinal Fusion, Hip Replacement, Knee Replacement, Implants, Pacemakers, Stents, Hospitals, Physicians

Teleflex Medical OEM’s Rod Cutter Can Reduce Operating Effort by More Than 50%

Teleflex Medical OEM recently launched a high-performance rod cutter specifically designed to handle extremely strong cobalt chromium (CoCr) and titanium rods. With proprietary shearing technology, the cutter provides consistent, clean cuts with less effort, a reduction of more than 50% in some cases. Performance tests indicate the durable rod cutter can cut cobalt chromium rods more than 500 times with minimal raised burrs or edges.

The stainless steel rod cutter features a guide for easy insertion and proper positioning of a rod in the cutting hole, and extendable arms that lock in place for increased leverage and reduced operation efforts. It can be custom configured with up to four different holes on the cutting head: 3.0 6.0 mm (in 0.5-mm increments), plus 6.35 mm. A sturdy base is available for table top use of the rod cutter.

Richard Nass

Weekly Vitals: Obama Champions U.S. Manufacturing, Breast Implant Honcho Gets Busted, and More

In his State of the Union Address this past week, President Obama focused on the importance of reinvigorating American manufacturing and the need to better incentivize companies to stay or set up operations in the U.S. rather than shipping jobs and business overseas. And while the medical device industry applauded this general mentality, many were quick to point out that the impending medical device tax was among the key drivers of medtech operations moving abroad. In other news, the former head of the disgraced French breast implant company that endangered patients with industrial silicone was busted by police in a dawn raid. Read about these issues and other interesting stories form the past week in the below roundup.

Buckling Carbon Nanotubes Show Promise for Stretchable Electronics

Led by the Rogers Research Group at the University of Illinois at Urbana-Champaign, a number of university research groups are pursuing the development of stretchable electronics for novel implantable medical devices and other applications. Adding to the exciting field is a team of researchers at North Carolina State University (NC State; Raleigh) that has exploited the sturdy, stable, and conductive properties of carbon nanotubes to create novel elastic conductors.

NC State Stretchable Electronics
Buckling carbon nanotubes could expedite development of stretchable electronics for medical implants. Image: NC State.

The key to stretchable electronics is developing elastic conductors that can reliably transmit electrical signals despite being stretched or elongated. To achieve these stretchy, effective conductors, the NC State team has discovered a method of "buckling" carbon nanotubes on the plane of a substrate.

Employing a transfer printing process, the researchers place aligned carbon nanotubes onto an elastic substrate. Next, the substrate is elongated. In turn, the carbon nanotubes are separated; however, they maintain their parallel alignment. When the substrate is released, the nanotubes buckle and create a pattern of parallel squiggly lines on a flat surface, according to the researchers. As a result of this process, the carbon nanotubes can be stretched and bent without compromising their electrical properties.

This nanotube-buckling process could allow for efficient, large-scale production of stretchable conductors, the researchers note. In addition, it is compatible with existing manufacturing operations. "For example, roll-to-roll printing techniques could be adapted to take advantage of our new method," says Yong Zhu, assistant professor of mechanical and aerospace engineering and lead author of a paper describing the buckling method.

Transparent Masterbatch Colorants Meet or Exceeds ISO 10993 and USP Class VI Requirements

Transparent color concentrates for medical-grade copolyesters are certified to meet the USP Class VI testing protocol. These OnColor HC Plus masterbatch colorants complement existing certified colors for opaque resins used in medical device manufacture. Because the complete palette of standard and custom colors from the supplier meets or exceeds ISO 10993 and USP Class VI requirements and is globally available, users can design products, maintain regulatory compliance, and protect brand integrity worldwide.

PolyOne Corp.
Cleveland

 

Product Life Cycle Management Service Meets 21 CFR Part 11 Requirements

A consulting firm has developed a preconfigured product life cycle management (PLM) service that medical device companies can rapidly implement. PLM Vivo for Medical Devices features a short set-up time, a structured design control process, and a validated, production-ready software system, enabling it to be implemented by manufacturers in as few as 16 weeks. The service is based on the consulting firm’s data templates, workflows, document templates, computer system validation templates, reports for internal and external audits, and a security model that meets the requirements specified by 21 CFR Part 11. The firm is a member of Oracle’s partner network, and the service is built on Oracle’s Agile PLM application.

Kalypso
Beachwood, OH, 216/378-4290


 

Medical Plastics Molding Company Offers Rapid Prototyping

A manufacturer of plastic molded medical device components provides concept review, rapid prototype design, material selection, component assembly and packaging, and sterilization-management services. Supported by process validation and reporting, the firm supplies OEMs with thermoplastic and thermoset components. The ISO 13485:2003– and ISO 9001:2008–certified company can perform molding operations in a Class 10,000 cleanroom. Its advanced molding machines are equipped with precision robots and a variety of sensors that can detect production irregularities before the injection molding process is complete. For validation purposes, the company’s scientific molding system creates a digital record of every component created.
 

DG Medical Molding
Centerville, OH, 937/433-7600


 

Company Offers Nitinol and Medical Alloys, Assistance with Product Customization

A nitinol melting facility is dedicated to producing materials for the medical device industry, including custom titanium and other high-performance alloys as well as the shape-memory material. Employing a special custom melt process, the production plant enables the metals supplier to provide more nitinol directly rather than depending on outside sources and thus represents a stabilization of the supply chain. The company supports its line of commodity metals with high levels of service and the application of accumulated expertise in product customization. It supplies wire-based products in addition to advanced alloys.

Fort Wayne Metals Research Products Corp.
Fort Wayne, IN