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Roche Asserts Patents against Entire Industry to Enjoin Sales of Diabetes Test Strips

 
Limbach
 
Limbach: High-stakes lawsuit raises key questions.

At the end of November, Roche Diagnostics Operations Inc. (Indianapolis) took on every major player in the blood glucose test strip industry by filing a lawsuit in U.S. District Court for the District of Delaware.1 The Roche suit seeks to enjoin meter and test strip sales by the defendants, which include Abbott Diabetes Care (Alameda, CA), Bayer Healthcare (Tarrytown, NY), and LifeScan (Milpitas, CA), a Johnson & Johnson company. The parties to the lawsuit make up all but a small percentage of the blood glucose test strip market, which has estimated annual sales of about $8 billion.

Roche accuses the defendants of infringing two recently issued U.S. Patents (nos. 7,276,146 and 7,276,147), both of which cover methods of determining blood glucose concentrations with a disposable test strip. The methods covered by the two Roche patents include two key features in combination. The first is a small sample size used by the test strips. The patents claim methods of using a blood sample size of less than 1μl, a drop almost as small as the head of a pin. The second key patented feature is a fast testing time. The claims cover methods that display a result within 10 seconds of detecting a blood sample in the test strip capillary chamber.

Meters and test strips are used by diabetic patients and their healthcare providers to periodically test blood glucose levels. According to the American Diabetes Association, there are 20.8 million adults and children in the United States—or 7% of the population—who have diabetes. Unfortunately, 6.2 million people (nearly one-third of the total) are unaware that they have the disease.

Frequent glucose testing is key to controlling the impact of the disease. People with diabetes typically test themselves at least several times a day using a handheld meter with disposable test strips. Testing typically involves pricking a fingertip or forearm to draw a drop of blood, which is then applied to a single-use test strip and inserted in the meter. With regular testing, a diabetic person is better able to adjust diet, exercise, insulin intake, and other factors that affect blood glucose levels. Keeping glucose levels under tight control has been shown to dramatically improve the health and longevity of people with diabetes.

For many years, companies have been working hard to improve testing systems by enabling the use of smaller blood samples, and delivering glucose level results more quickly. A smaller sample size provides the benefits of less pain, less mess, quicker healing time, and the ability to draw the sample from an ‘alternate test site,' such as the forearm, rather than sensitive fingertips. Shorter test times are clearly more convenient for the user.

The Roche patents in suit claim the benefit of a provisional patent application that was filed in November 2001. By that time, many manufacturers of blood glucose test strips and meters had already provided testing systems that delivered results in times approaching 10 seconds or less. Many of the systems also used a sample size of around 1μl or less . However, Roche was able to obtain its patent claims by demonstrating that its invention was complete by March 1998. The company presented the proof in a declaration to the U.S. Patent and Trademark Office (PTO). This maneuver, known as swearing behind a prior art reference date, is a tool useful in jurisdictions that award patents to those who invent first, rather than those who file a patent application first. The United States is now the only country that awards a patent to the person or company that is the first to invent a technology. In all other countries, the patent goes to the applicant who is first to file a patent application (provided the applicant actually invented the technology, rather than merely filing on an idea invented by another).

The Roche suit highlights the need for medical device companies to conduct timely and appropriate tests demonstrating their technology developments, and to document the results properly. Several factors may work against Roche in its suit. For example, this case may well turn on whether Roche conducted the proper tests, documented them sufficiently, and worked diligently to reduce its invention to practice under the patent laws. Further, the long delay between the development of the test strip technology and Roche's filing of a patent application may also raise the issue of whether the company abandoned its patent rights in this technology.

The case also raises issues of obviousness. To be patentable, a technology must be new, useful, and nonobvious. In a recent decision, KSR v. Teleflex, the U.S. Supreme Court clarified the standard for determining what constitutes an obvious combination of prior art technologies.2 This landmark case generally makes it easier to show that a particular invention was obvious at the time it was created, therefore making it easier to invalidate an existing patent. Since the inventiveness of the two Roche patents involves making test strips faster and able to use smaller sample sizes, the patents may be vulnerable to the argument that these goals were obvious to anyone working in the test strip field in the late 1990s.

A similar argument that may weaken Roche's position involves the fact that the Roche patents appear to claim the desired results—a faster testing method using smaller sample size—rather than claiming how the results are achieved. The U.S. Supreme Court has long held that a patent claim must include novel method steps or structural limitations, rather than merely claiming the functional result that is obtained.

Many interesting issues are presented by the Roche case. The defendants may present prior art that was not previously considered by the patent office, and will likely argue that the patents are invalid, unenforceable, and not infringed, and that injunctions are not warranted. The defendants may also ask PTO to reconsider the validity of the patents in formal reexamination proceedings. Such a move could stay the proceedings in U.S. district court, or the court and PTO proceedings could be conducted concurrently.

At this early stage, of course, the outcomes of the case and of the counter actions that the defendants may take are all unclear. Abbott, Bayer, and LifeScan each have sizable test strip patent portfolios covering other aspects of glucose meters and test strips. Now that Roche has sued these companies, they may very well decide that this is the best time to assert their patents against Roche, either in this case or in separate law suits. As is the case in most lawsuits, the parties may decide to settle the case at some point before trial.

The financial stakes of the case are enormous, and the way in which the patent law issues play out will be well worth watching for the general lessons they may offer.


References

1. Roche Diagnostics Operations Inc. et al. v. Abbott Diabetes Care Inc. et al., Case no. 1:07-cv-00753-JJF, U.S. District Court for the District of Delaware (November 21, 2007).

2. KSR International Co. v. Teleflex Inc., 550 U.S., 82 USPQ2d 1385 (2007).

Douglas C. Limbach is an attorney with Shay Glenn LLP ( San Mateo, CA).

© 2007 Canon Communications LLC

Return to MX: Issues Update.

Manufacturing: Significant Industry Growth Driven by VC Dollars

2007 MEDTECH SNAPSHOT

Several states saw either an increase or the same number of registered manufacturing facilities in 2007. Overall, the number of medical device establishments increased from 12,679 (2006) to 16,095 (2007). To submit registration and listing submissions, contact FDA at 240/276-0111 or via e-mail at reglist@cdrh.fda.gov. For policy questions, contact CDRH at 240/276-0110; fax 240/276-0140; or e-mail rlprogram@cdrh.fda.gov.

Click images and tables to enlarge:

FDA-registered medical device establishments, with the number of firms and percentage of U.S. total for each state. Establishments include manufacturers, contract manufacturers, repackagers/relabelers, and rebuilders/refurbishers. Percentages for each state are rounded to the nearest whole number. Source: CDRH establishment registration database.

 
Venture-financed companies supported 493,800 jobs in life science sectors in 2006.
—National Venture Capital Association

Ten states with the highest employment levels of medical appliance technicians (who construct surgical and medical appliances), 2006. Source: U.S. Department of Labor, Bureau of Labor Statistics.
 
Employment at venture capital–backed life sciences companies comprised 54% of the total life sciences employment and 60% of total life sciences revenue
in 2006.
—National Venture Capital Association

The number of FDA-registered medical device establishments in the United States in 2006 compared with 2007. Source: CDRH establishment registration database.
Medical device manufacturing, repackaging, and rebuilding operations by state (includes U.S. territories). Source: CDRH
establishment registration database.
Copyright ©2007 Medical Device & Diagnostic Industry

008 MDEA Jurors Announced

Organizers of the Medical Design Excellence Awards program have announced the members of the jury panel who will be charged with evaluating entries in the 2008 competition.

 
MDEA

Members of the MDEA jury are selected each year by a panel of editors from Canon Communications (Los Angeles), presenter of the awards program. The jury panel typically encompasses experts from a wide range of healthcare- and design-related fields, including clinical practice, biomedical engineering, human factors, industrial design, manufacturing, and other areas. Jurors named to the panel for 2008 are as follows.

Kouros Azar, MD (Thousand Oaks, CA), a biomedical engineer and a practicing plastic surgeon with a specialization in complex reconstructive and aesthetic surgical techniques.

Warren S. Grundfest, MD, professor of bioengineering and electrical engineering in the School of Engineering, and professor of surgery in the School of Medicine, at the University of California at Los Angeles.

Ogan Gurel, MD, chairman of the Aesis Research Group LLC (Chicago) and an adjunct associate professor of bioengineering at the University of Illinois–Chicago.

Balakrishna Haridas, PhD, director of the National Science Foundation Minimally Invasive Medical Technologies Center (MIMTeC) and an associate professor in the department of biomedical engineering at the University of Cincinnati.

Edmond W. Israelski, PhD, human factors program manager for Abbott Laboratories (Abbott Park, IL).

Pascal Malassigné, MID, professor of industrial design at the Milwaukee Institute of Art and Design, research industrial designer at the Milwaukee Veterans Affairs Medical Center, and adjunct assistant professor of rehabilitation at the Medical College of Wisconsin in Milwaukee.

Jerry K. McVicker, PhD, scientific director of Midland Bioproducts Corp. (Boone, IA), a company that develops human and veterinary diagnostic assays.

Sandra J. Miller, managing director of the Stanford Biodesign Program at Stanford University ( Palo Alto, CA).

E. William Schneeberger, MD, cardiothoracic surgeon at the University of Cincinnati Medical Center's department of surgery, division of cardiac surgery.

Robert Virag, founder and principal of Trifid Medical Group LLC and Alveoli Medical LLC (Chesterfield, MO).

Herbert F. Voigt, PhD, professor of biomedical engineering and research professor of otolaryngology at Boston University . Voigt is president and a fellow of the American Institute for Medical and Biological Engineering (Washington, DC).

Michael E. Wiklund, president of Wiklund Research & Design Inc. (Concord, MA).

The MDEA competition is the premier awards program for the medical technology community, offering recognition to manufacturers, suppliers, and the many people behind the scenes—engineers, scientists, designers, and clinicians—who are responsible for the groundbreaking innovations that are changing the face of healthcare. Now entering its 11th year, the program has previously presented awards to more than 250 groundbreaking healthcare products.

When considering juror nominees, Canon's editors pay particular attention to the need for a balanced, multidisciplinary, and impartial jury. For this reason, jurors cannot be affiliated with a company that is submitting a product for consideration.

In addition to the 12 full jurors, the organizers have appointed five alternate jurors who may be asked to serve if the need arises. Alternate jurors are as follows.

Laura Bix, PhD, assistant professor at the School of Packaging at Michigan State University (East Lansing, MI).

William A. Hyman, PhD, professor of biomedical engineering at Texas A&M University (TAMU; College Station, TX).

Craig M. Jackson, PhD, president of Hemosaga Diagnostics Corp. (San Diego).

Eliot Lazar, MD, principal of elCON Medical ( Buffalo, NY).

Mark S. Vreeke, PhD, senior partner at Rational Systems LLC (Houston).

To be eligible for the 2008 competition, products must be commercially available—able to be ordered or purchased—by December 31, 2007. The final deadline for entries (with payment of a late fee) is January 18, 2008.

Winning products will be announced in April 2008, and honored with gold and silver awards in a ceremony during the Medical Design & Manufacturing (MD&M) East Conference and Exposition, June 3–5, 2008, at New York City's Jacob K. Javits Convention Center.

The MDEA competition accepts the endorsement of professional and industry organizations whose members are involved in the design and development of medical technologies. Endorsing organizations supply expertise that assists in the development of the competition. Endorsing organizations of the MDEA program currently include the following.

  • ACCE Healthcare Technology Foundation (Plymouth Meeting, PA).
  • AdvaMed (Washington, DC).
  • American Institute for Medical and Biological Engineering (Washington, DC).
  • Human Factors and Ergonomics Society (Santa Monica, CA).
  • Medical Device Manufacturers Association (Washington, DC).
  • National Collegiate Inventors and Innovators Alliance (Hadley, MA).
For additional details, including a downloadable entry form, entrants should visit the MDEA Web site at www.MDEAwards.com.

© 2007 Canon Communications LLC

Return to MX: Issues Update.

Corporate Finance: Device Sector Sees Off-the-Charts Venture Capital Investment

PriceWaterhouseCoopers has said that medical device investing is at an all-time high. It estimates that $1.08 billion went into 96 deals during the first quarter of 2007. The sector also attracted 27 first-time deals during the same period.

Top companies backed by venture capital include Boston Scientific Corp.; Kyphon Inc., which is now being acquired by Medtronic; and Intuitive Surgical Inc. As a whole, device companies have better performance numbers than most companies on the S&P 500 index.

Click images and tables to enlarge:

 
Medical device companies require capital to get through the regulatory process, and the VC industry is responding. Venture capitalists are now willing to invest in later stages with the hopes that an IPO or robust acquisition is around the corner.
—Mark Heesen, president, National Venture Capital Association

 
 
The medical device industry continues to outperform the S&P 500 index in many categories. Source: Baseline.

The top 40 public medical manufacturers worldwide, ranked by trailing 12 months (TTM) revenues. Source: Baseline.

Copyright ©2007 Medical Device & Diagnostic Industry

Sleep and Respiratory Device Markets Poised for Growth

 
Zable
 
Analyst Zable: Sleep device market awakened.

The fundamentals of the respiratory device market, including the sleep disorders market, remain strong, with both U.S. and international markets poised for growth into the foreseeable future. That's the view of Joshua Zable, a medical devices analyst at Natixis Bleichroeder (New York City), after attending the International Respiratory Congress, held earlier this month in Orlando.

According to Zable, the present strong state of the industry is the result of many years of “increased development of evidence-based care; continued prevalence of respiratory and sleep disorders; internationalization of respiratory care paradigms, as developed in the United States; increasing industry participation; and breakthroughs in information technology.”

The annual International Respiratory Congress, organized by the American Association for Respiratory Care (AARC; Irving, TX), provides a look at the latest products and trends in advanced respiratory technology.

“After discussions with attendees, we continue to believe that the sleep and respiratory markets for devices continue to be healthy and growing,” Zable says. “Further of interest is that the sleep and respiratory space appears to be getting more visibility outside the United States, which should support continued growth in the industry.”

The Importance of Reimbursement

Zable says the possibility of home diagnostic testing reimbursement is arguably the most important issue on the minds of players in the sleep device market. To date, the Centers for Medicare and Medicaid Services (CMS; Baltimore) has provided reimbursement only for facilities-based polysomnography for the diagnosis of obstructive sleep apnea. But on December 14, 2007, CMS issued a memo containing a proposal to provide reimbursement for home diagnostic testing for obstructive sleep apnea.

“Nearly all home testing devices fell under the proposal—classes II, III, and IV—and this potential change in diagnosis can spur growth in what we already view as one of the most attractive markets in medtech,” Zable says. “With the final ruling expected to be posted no later than March 14, we do not expect an immediate impact from this ruling, but it should allow the proper channels time to prepare for this change.”

Additionally, the American Academy of Sleep Medicine (AASM; Westchester, IL) recently published its recommendations for the use of portable monitoring as an alternative to the established practice of using in-laboratory polysomnography for the diagnosis of obstructive sleep apnea. “The AASM recommended portable monitoring's use, in conjunction with comprehensive sleep evaluation, for obstructive sleep apnea patients for whom polysomnography is not possible due to mobility, safety, or critical illness issues,” Zable says. “While the AASM continues to assert that portable monitoring should not completely replace polysomnography, we view this compromise as an indication of recognition that reimbursement for home diagnostic testing is on its way—in some shape or form.”

Players in Motion

In addition to forecasting continued growth in the sleep and respiratory markets for devices, Zable provides the following insights into some of the major and emerging sleep and respiratory device players that were on hand at the AARC meeting.

Respironics. Zable says that Respironics Inc. (Murrysville, PA) seems well positioned to benefit from an estimated 15% market growth rate in the obstructive sleep apnea therapy market. “Respironics is a diversified respiratory company, with leadership in multiple respiratory areas,” Zable says. “Despite being known as the leader in sleep devices, Respironics is also the leader in noninvasive hospital ventilation, an area that is receiving more attention.

“Children's Medical Ventures and Respiratory Drug Delivery [both units of Respironics] are smaller businesses, but could be future growth drivers for the company,” Zable adds.

Only a few weeks after the AARC meeting, Respironics announced that it had entered into a merger agreement under which Royal Philips Electronics will purchase the company for approximately $5.1 billion.

ResMed. A pure-play respiratory device manufacturer, ResMed Inc. (Poway, CA) is one of the largest players in the obstructive sleep apnea market. “Despite recent challenges associated with a product recall, we still believe the company is a leader in the space,” Zable says. “New product launches should drive growth.

“A few years ago, ResMed acquired Saime SA for noninvasive ventilation,” Zable adds. “While the company has deliberately and slowly developed new products, the company does intend to distribute Saime's products in the United State when it is ready. This should boost growth and diversify the company.”

Vital Signs. Vital Signs Inc. (Totowa, NJ) , along with its subsidiary Sleep Services of America, had a significant presence at the AARC meeting, during which the company displayed three new products: its new fluid warming system called enFlow, a single-patient use laryngoscope blade called SteeLite, and an endotracheal tubes line of products called Redi-Tube. “While most investors continue to hone in on Vital Signs' acquisition strategy as related to its sleep business, we believe Vital Signs appears ready to look to acquisitions or partnerships to help it expand geographically, specifically outside of United States,” Zable says. “As a reminder, 70% or more of its revenues are derived from United States, so international expansion could be a real driver of growth.”

Xltek and Natus Medical. Exhibitors at the AARC meeting also included Excel-Tech Ltd. (Xltek; Oakville, ON, Canada), now part of Natus Medical Inc. (San Carlos, CA). “The integration appears to be going well, with products launching on schedule,” Zable said. “Despite going head to head with significantly larger companies in the space, the combined Natus-Xltek entity should have the largest market share in its business lines.” Xltek develops and markets computer-based electrodiagnostic systems and disposable supplies used by medical practitioners to aid in the detection, diagnosis, and monitoring of neurologic and sleep disorders. “Xltek used to compete with Natus, among others, in the neurology space, so Natus will now use its products, intellectual property, and distribution to leverage its neurology business,” Zable adds.

Invacare. Zable says Invacare Corp. (Elyria, OH) is also making a bid to become a larger player in the sleep market. At the AARC meeting, the company displayed a new, low-cost continuous positive airway pressure (CPAP) device. “Despite Invacare's reach and reputation, previous efforts in sleep have fallen short of expectations,” Zable says. “While the new device is an improvement to previously launched devices, we continue to believe that Respironics' and ResMed's leadership will be difficult to challenge.”

© 2007 Canon Communications LLC

Return to MX: Issues Update.

International: Manufacturing and Technology Innovation is Critical for Europe

2007 MEDTECH SNAPSHOT

Medical technology is one of the most dynamic sectors in Europe, contributing to a significant increase in life expectancy and improvements in quality of life. Eucomed, a European association representing 4500 companies, estimates that total medical technology sales in Europe reached €63.6 billion ($78.8 billion) in 2005, roughly one-third of the global industry market.

However, experts from the market have concerns about Europe's ability to sustain medical device innovation. EU members spend between 3% and 6% (roughly €3.8 billion ($5.5 billion)) annually of its sales on R&D, compared with the United States, which spends about 13% on R&D.

In August 2007, the association recommended a ramp-up of funding for the establishment and management of coordinated National Medical Technology Innovation Centers across Europe. These centers would provide funding, expertise, and development support to innovators within the sector, similar to incubator sites. Technology will primarily focus on biotech and genetics, but also on miniaturization of medical devices and on transmission of health data.

Click images and tables to enlarge

Europe's medtech market split (by percentage). Source: Eucomed, 2006.
 
Innovation in our health sectors is of tremendous importance to the
competitiveness of our economies and the well-being of our citizens.
—Gunter Verheugen, vice president of the European Commission

Eucomed estimates that the national association members
employ about 435,000 medtech workers.
Copyright ©2007 Medical Device & Diagnostic Industry

Survey: Medtech Firms Challenged by Contract Complexity and Pricing

 
Rao
 
Model N's Rao: Driving the revenue cycle.

The challenges of driving net revenue and profit targets while complying with evolving government legislation place medical technology manufacturers in a highly complex demand-chain landscape. Results from a recent best practices survey of 20 major medical technology companies show that organizations have begun to pay greater attention to the processes that drive the revenue life cycle—pricing, contract development, contract performance monitoring, settlement management, and regulatory compliance management—in order to better control issues of revenue leakage and regulatory compliance risk.

This article presents findings revealed in the 2007 Revenue Management Excellence Survey, an industry survey designed to help medtech companies benchmark their performance and identify best practices for pricing and contracting. The survey identifies and examines medtech manufacturer trends and initiatives related to revenue management.

An analysis of three important areas from this year's medical technology survey identifies significant opportunities for improving the impact and effectiveness of revenue management. Key findings of the survey include the following.

  • More than a quarter of survey participants (27%) have poor or very poor confidence in their current system's ability to manage the linkage between commercial and government pricing.
  • The vast majority of respondents (85%) reported that their companies currently use a manual system (spreadsheet) or an enterprise resource planning (ERP) system to manage pricing and contracts.
  • Nearly two-thirds of survey participants (64%) reported that their sales teams do not have the tools to analyze margin and profitability for a proposal.

Within medical technology companies, sales and marketing, finance, and support functions face revenue-related challenges in their daily interactions with distribution partners, group purchasing organizations (GPOs), integrated delivery networks (IDNs), and emerging affiliations of providers and physicians. To retain margins in their competitive environment, medical technology manufacturers must incentivize each contracting partner with creative pricing structures and contract terms, leading to ‘mass customization' in contracting. This dynamic poses significant challenges for medical technology companies' sales, finance, and contracts organizations, often creating a significant spread in the growth-to-net-revenue equation.

In addition, regulatory compliance issues related to government contracts, as well as the accountability requirements imposed by the Sarbanes-Oxley Act of 2002, increase both the complexity and administrative burden on pl anning and operations.1

Prior surveys from 2003 through 2006 revealed that a combination of revenue leakage sources could cost medical technology companies as much as $40 million in lost revenue on every $1 billion in sales.2–4 In this year's survey, respondents estimated the further effects of revenue leakage on certain aspects of the revenue life cycle, including the following:

  • Estimated revenue loss from contract noncompliance or nonperformance averaged 8% of contract value.
  • The median estimated overpayment on incentive rebates was 5% of rebates paid annually.
  • Estimates of overpayment on administrative fees reached 5% of the administrative fees paid.

These results confirm the importance of managing the revenue life cycle in a holistic manner and suggest there is ample opportunity to improve existing practices.

Aligning Pricing with Profitability Goals

In considering the various stages of the revenue life cycle, the pricing and offer-development stages are seen as areas in which medtech companies have made process improvements. Nevertheless, companies still encounter challenges when seeking to align their pricing plans with revenue goals and implementation in the field. Most survey respondents feel that they have done a good job of establishing and publishing clear processes for pricing and contracting. However, respondents indicate less satisfaction in the following areas.

  • Optimizing pricing based on specific customer contributions.
  • Pricing and contract-optimization systems.
  • Ability to accurately align account manager incentives with contract profitability.

It appears that manufacturers are making little progress in aligning these metrics, as previous benchmark studies also identified these issues as areas of concern.

The survey results suggest that automated systems for pricing and contracting, and online pricing access for field sales reps, are two measures that can elevate satisfaction levels in key areas surveyed. Having automated systems and online pricing access also results in a consistent reduction in the time spent by contract organizations supporting administrative functions related to pricing and contracting.

Contract Compliance: A Consistent Revenue Risk

The management and use of information about performance and compliance to contracts emerged as consistent risk areas for revenue exposure, especially for companies with manual processes. Of the companies responding to the survey, nearly two-thirds (63%) indicated that failure to comply with contract terms contributed to lost revenue in their organizations.

Overall, respondents estimated that the average loss of revenue from contract noncompliance is 8%. However, that figure drops to 1% for companies with automated systems for monitoring contract compliance, and increases to 9% when companies use manual or other methods for monitoring compliance.

Automated Systems Are Key

The processes involved in validating and paying settlements were also considered potential risk areas for revenue exposure. According to the survey results, nearly half of medical technology manufacturers believe that their settlement processes need improvement, and 45% believe these processes lead to lost revenue.

More than two-thirds of respondents (70%) indicated that their companies sell through distribution channels. The survey base further reported that, on average, 29% of all sales are made through distributors. The survey also shows that rebates are used in 14% of contracts.

Among the surveyed companies, strong differences emerged in the use of automated and manual systems for managing administrative fees, and membership and distributor rebates. The survey results suggest a strong correlation between greater contract volume, increased use of automated systems, and greater ability to foresee overpayment risks. Conversely, the majority of companies that do not know whether settlements are being overpaid are those using manual or other patchwork processes.

Postpayment adjustments consume additional time and resources in an already constricted environment. Surveyed companies reported that a substantial number of distributor rebates require postpayment adjustment. In a third of these cases (33%), the need for adjustments is due to product, pricing, and contract errors, while 14% are due to customer and membership errors (see Figure 1).

Figure 1: Estimates of postpayment adjustment based on error types. Source: Model N (Redwood Shores, CA).

Regulatory Compliance Less of a Concern

When compared with data from a parallel survey of the pharmaceutical industry, results of the medtech survey suggest that medical technology companies are much more confident in their ability to manage government regulatory compliance. However, addressing increasing levels of regulatory control will continue to be an issue.

Companies' recent focus has been on compliance with Sarbanes-Oxley and Federal Supply Service requirements.5 But the complexity of compliance requirements is likely to increase as devices converge with pharmaceuticals and new government programs, such as Medicare Part D, begin to extend coverage into the medical technology world. One example of such increasing requirements that is creating some noise is a bill recently introduced in the U.S. Senate by Senators Charles Grassley (R–IA) and Arlen Spector (R–PA). Called The Transparency of Medical Device Pricing Act of 2007, the proposed legislation would require manufacturers to submit quarterly reports of their sales price data for implantable medical devices, including both average sales price and median price.6

Respondents were asked to rate the ability of their government pricing and reporting systems to keep up with changing federal and state regulatory policies ( see Table I). Just over a quarter of respondents (27%) felt their government reporting systems can keep pace with the changing regulatory environment. The rest were neutral or had some level of concern, which increased as company size increased. The highest level of faith in current systems was found in government pricing, where 36% of respondents expressed confidence in their system's ability to remain compliant with government pricing regulations and none expressed a lack of confidence.

Compliance Issue
Little Confidence (%)
Neutral (%)
Confidence (%)
Average Rating (%)
System's capability in meeting the requirements of a government audit.
18
54
27
3.9
Company's compliance with government pricing regulations.
0
63
36
4.4
Company's ability to manage the linkage between commercial and government pricing.
27
45
27
3.5
Ability of current processes and systems to satisfy Sarbanes-Oxley requirements.
18
45
36
4.0
Company's ability to effectively and efficiently access historical data related to government pricing.
36
27
36
3.5
Table I. Benchmark ratings for confidence in meeting government regulatory requirements (1= no confidence; 6= high confidence). Source: Model N (Redwood Shores, CA).

The ability of systems to access historical data and to manage the linkage between commercial and government pricing drew the lowest overall levels of confidence (36% and 27% had little confidence, respectively). Preparation for Sarbanes-Oxley compliance received higher marks, with only 18% expressing little confidence. When comparing the overall survey base to companies with higher percentages of government business, the medtech results are consistent with general industry patterns.

Conclusion

When compared with data from previous years, results from the 2007 survey reveal that the issues involved in the medical technology industry value chain are not getting simpler. Distributor and provider networks continue to require more competitive pricing and contracting terms, while government regulations continue to get stricter and more costly to satisfy. To stay competitive in this dynamic environment, medical technology companies should carefully examine their revenue management practices and take advantage of opportunities to make improvements.

Companies that invest in improving their pricing, contract, compliance, and settlements processes will drive higher productivity and protect more of their hard-won revenues. By improving their business practices and implementing automated revenue management systems, medtech companies can close the gaps in their revenue management practices, while also reducing their regulatory compliance risk.


References

1. Sarbanes-Oxley Act of 2002, P.L. 107-204 (July 30, 2002).

2. Z Rinat and J Schein, “ Customer Contract Compliance,” MX 3, no. 6 (2003): 54–61.

3. Van Diamandakis, “Making the Most of Company Revenues,” MX 5, no. 2 (2005): 22–29.

4. GV Rao and RS Matsuk, “Medtech Revenue Management Practices,” MX 7, no. 1 (2007): 24–31.

5. Federal Supply Schedule Service; Dental and Other Medical Products [online] ( Hines, IL: Department of Veterans Affairs, Office of Acquisition and Logistics, National Acquisition Center), available from Internet: www1.va.gov/oamm/oa/nac/fsss/dentothmedfss.cfm.

6. Transparency in Medical Device Pricing Act of 2007 (S 2221); available from Internet: www.govtrack.us/congress/bill.xpd?bill=s110-2221.

Gopkiran Rao is senior director of industry marketing at Model N Inc. ( Redwood Shores, CA), a provider of integrated revenue management solutions for the life sciences and high-tech industries. The 2007 Revenue Management Excellence Survey was conducted by Computer Sciences Corp.–Global Health Solutions ( El Segundo, CA) and Model N.

© 2007 Canon Communications LLC

Return to MX: Issues Update.

Growing Companies Fuel Device Industry M&A Activity

M&A ANALYSIS

Illustration by GLENN GUSTAFSON/G2 Illustrations Inc.
In 2007, mergers and acquisitions (M&As) continued to shape the landscape and change the dynamics of all segments of the medical device industry. For the third straight year, strategic buyers and private equity financial buyers have had an insatiable appetite for acquisitions to enhance their growth prospects. They've filled out their product and technology offerings and their base of customers. HT Capital Advisors tracked more than 350 M&A transactions in the first nine months of 2007, including more than 100 transactions with European and nearly 25 with Asian participation. In total, these included 290 closed transactions as well as 67 announced and pending transactions. Seventeen deals exceeded $1 billion in transaction value, 30 had transaction values between $100 million and $1 billion, and 119 were less than $100 million in value. The remaining 191 transactions were of undisclosed value.

Valuations peaked in the first half of 2007, as private equity buyers led the market to new highs with their ability to finance their offers with unprecedented leverage. Corporate acquirers tried to keep up in many cases, thereby initiating bidding wars, or perhaps more importantly, the impression of bidding wars. Many transactions required bids of several times revenue and more than 20 times earnings before interest, tax, depreciation, and amortization (EBITDA) just to compete. The result was that revenue and earnings multiples in general were at all-time highs. Of those transactions for which financial terms were disclosed, the purchase-price-to-revenue multiples ranged from 0.26 times to 29.9 times, and the average was nearly 4.2 times. The price-to-EBITDA multiples ranged from 4.0 to 58.5 times, with an average of nearly 24 times. For publicly traded targets, the average one-day price premium was 20%, and the average one-month price premium was 28%.

Merger Mania

July was the medical device industry's merger mania month. Several major acquisitions were proposed or concluded: Siemens's acquisition of Dade Behring, Medtronic's acquisition of Kyphon, ev3's acquisition of FoxHollow, Teleflex's acquisition of Arrow, and ReAble Therapeutics's acquisition of DJO Inc. Among other major transactions in 2007 were Molnlycke Health Care Group's acquisition by two private equity firms, Investor AB and Morgan Stanley Private Equity; Hologic's acquisition of Cytyc Corp.; and Flextronics's acquisition of Solectron.

In terms of the number of transactions, the most active buyers were Inverness Medical Innovations, which announced or completed seven transactions during the period, and Medtronic, which announced or completed four. In terms of total transaction size in dollars, Siemens held the top spot with more than $7.2 billion in transaction value, followed by Hologic ($6.0 billion), Warburg Pincus ($4.5 billion), Flextronics ($4.3 billion), and Medtronic ($4.0 billion).

Venture capital financing levels were also at all-time highs in the medical device and equipment sector during the first half of 2007. In the first six months of the year, a record $2.1 billion went into 204 medical device and equipment deals, an increase of more than 60% over the $1.3 billion invested during the same period in 2006. The majority of the transactions were mid-to-late stage transactions, but early-stage transaction volume also increased over prior periods. Of the $2.1 billion invested, $420 million went into first-stage investments, double the amount of the prior year. Investment in the medical device sector by venture capital firms has been driven by the successes they have experienced in the industry over the past couple of years as many of their portfolio companies have been acquired.

Based on a few very successful medical device initial public offerings (IPOs) over the past year, we believe that the public markets will be a viable alternative exit strategy for companies with promising products or technology. The October 2007 IPO of TranS1, which makes products to treat degenerative disk diseases of the lower spine, is a good example of an IPO that may spur other companies to consider an IPO rather than being acquired. TranS1's common stock surged 60% on the day of the offering. The company raised $85.5 million, and at that time had a total stock market value of $470 million, approximately 78 times revenues.

Mindray Medical International, one of China's largest device firms, completed its $13.50 IPO in September 2006, and since then its common stock has more than tripled. The company has operations in the United States, and with its war chest from the IPO, it could become an active acquirer. There were also several Chinese pharmaceutical companies in the IPO pipeline in the third quarter of 2007. We expect other Chinese medical device companies to go public to take advantage of the strong appetite that is developing worldwide for Chinese companies.

Given China's demographics, we would not be surprised to see the acquisition of Chinese medical device companies by major U.S. or foreign medical device companies to enhance their penetration of the Chinese market.

New Buyers

The dramatic change in M&A activity that began about four years ago with respect to the most active potential acquirers became even more evident in 2007. Previously, several large companies—including Boston Scientific, Medtronic, Baxter, GE, and Johnson & Johnson—were the dominant players in the acquisition marketplace. Over the past several years, the number of acquisitions completed by these large companies has declined somewhat. In their place, another group of companies—Arthrocare, Angiotech Pharmaceuticals, Integra LifeSciences, American Medical Systems, Hologic, ev3, St. Jude Medical, Inverness, and ReAble, to name a few—have completed IPOs. They have grown very successfully and profitably and now have the financial clout, reputation, desire, and need to grow through acquisitions. Some of these firms cannot continue to grow significantly with their existing product and technology platforms, so they have become aggressive acquirers of smaller companies that have developed or are developing products with promising market potential.

Table I. (click to enlarge) A sampling of key mergers and acquisitions in the medical device industry in 2007. Mergers are ranked by deal size. Source: Bloomberg and HT Capital Advisors LLC.
We also expect many foreign acquirers, which we know have been looking at potential acquisitions over the past few years, to step up their acquisition efforts over the next year given the favorable exchange rate. Smith & Nephew plc, which has acquired many companies over the years, acquired the privately held wound-treatment company BlueSky Medical Group in May for potentially as much as $110 million (see Table I). More than 85% of the purchase price was contingent and based on future milestones. In 2006, BlueSky had revenues of $11 million. The transaction gives Smith & Nephew entrance into the fastest-growing segment of the advanced wound-care market—negative- pressure wound therapy. This transaction is a good example of how many medical device transactions are structured to minimize risks to the buyers by aligning their interests with those of the sellers.

As in past years, the vast majority of large acquisitions on the domestic front in 2007 were in the cardiovascular and orthopedic space. On July 26, Medtronic announced that it would acquire spinal products developer Kyphon for $4 billion, a 32% premium over the stock market value one day prior to the announcement and more than seven times trailing revenues. Medtronic was obviously impressed by Kyphon's technology and market potential when it chose to add Kyphon's catalog to its broad portfolio of products. Analysts expect the acquisition to boost Medtronic's top-line and bottom-line growth by 2010.

Integra LifeSciences proposed an acquisition of publicly held IsoTis for $51 million in cash, approximately two times revenues. This will help Integra further its goal to become a leader in regenerative medicine—a logical adjunct to its basic orthopedic business. The transaction gives Integra one of the largest sales forces addressing the orthobiologics market, and it will benefit from cross-selling to its spine, neurosurgery, trauma, extremity, and reconstructive surgery businesses. It was interesting to note that by mid October, IsoTis had not yet accumulated the required 50% shareholder approval for the transaction, primarily because a large part of its shareholder base are individuals residing outside of the United States.

In an attempt to create a company with a bigger mass in the global endovascular market, ev3 announced in July it would buy, but in effect merge with, FoxHollow Technologies. The $780 million transaction was at a premium of more than 20% to FoxHollow's stock market value on the day before announcement of the transaction. FoxHollow's promising SilverHawk and NightHawk lines are to be sold into a fast-growing global market with the help of ev3's strong international sales force. Ev3 is partially owned by private equity firms Warburg Pincus and Vertical Group.

ReAble Therapeutics (formerly Encore Medical, a public company taken private in 2006 by The Blackstone Group, a large private equity firm) acquired DJO in July for $1.6 billion, a 20% premium over the stock market value the day before the transaction was announced. The purchase price represented a price-to-revenue multiple of 3.2 times and a price-to-EBITDA multiple of 15.9 times. DJO produces rehabilitation and regeneration devices. Interestingly, illustrating that many things often come full circle in the world of M&A, ReAble is getting back into the orthopedic soft goods business that Encore previously sold to DJO. Also in May, ReAble enhanced its pain-management offerings with the acquisition of Iomed for $22 million. With the financial backing of Blackstone, ReAble can be expected to continue making acquisitions to further enhance its strong orthopedics position.

Diagnostics: Heating Up

The acquisition climate in the diagnostics segment currently is very hot. The segment has received a great deal of attention since the announcement of Siemens's $7 billion offer for Dade Behring (four times revenue) in July. With this proposed acquisition, Siemens has pulled off a major coup to further its goal of creating a one-stop medical testing company. In effect, Siemens has upped the M&A ante for competitive in vitro diagnostic companies. Its main rival GE will have to make a significant acquisition if it wishes to maintain its leading medical testing position.

Inverness Medical Innovations has been on a buying spree in the diagnostics area in 2007 with no less than seven acquisitions announced through September, plus two more foreign acquisitions in the first week of October. Inverness's largest transaction was the June acquisition of Biosite Inc. for $1.9 billion, or $92.50 per share. Prior to being acquired by Inverness, Biosite terminated a merger agreement it had with Beckman Coulter. In September, Inverness bought HemoSense Inc. for 5.8 times trailing 12-month revenue of $28 million. HemoSense, a point-of-care diagnostics company that makes blood coagulation systems, was not profitable. In October, Inverness beefed up its distribution system with the acquisition of Bio-Stat Healthcare Group, a distributor of diagnostic products in the UK. The purchase price was $33.4 million plus an earn-out of up to $14.6 million based on future results. Bio-Stat was profitable with 2006 revenues of $29.5 million.

Women's Healthcare

In women's healthcare, Hologic's $6.2 billion acquisition of Cytyc Corp. completed in October combined two major players in the area. The resulting company has the largest sales force in the United States devoted to selling screening tools and medical devices to OB/GYNs. Cytyc's dominant business to date has been Pap-smear tests for cervical cancer, while Hologic's main source of revenue is digital mammography. The merger of Hologic and Cytyc is notable because it creates a $10 billion sales global leader in women's healthcare with a comprehensive portfolio of best-in-class products. The transaction was structured as an acquisition of Cytyc by Hologic, for total cash and stock consideration of $6.2 billion, a 33% premium over Cytyc's stock market value on the day before the transaction was announced. Of all the transactions we have reviewed over the past year, this one ranks high from the standpoint of overall fit and the ability to significantly increase revenues by leveraging the combined company's extensive channel coverage, cross-selling opportunities, and broad international presence.

Interestingly, both companies have grown significantly through several acquisitions over the past two years and continued to pursue deals while they were courting each other. In September 2007, Hologic paid about $70 million for Biolucent, the leading producer of mammogram breast cushions. In March 2007, Cytyc acquired Adiana Inc., which had a proprietary nonincisional permanent contraceptive procedure, and in February 2007 it acquired publicly held Adeza Biomedical, a producer of preterm birth testing kits. The price paid was about $420 million, a 65% premium over the stock market value of Adeza the day before the transaction was announced.

A New Era for Contract Manufacturing

A blockbuster transaction in the contract manufacturing area was Flextronics's October cash and stock acquisition of Solectron for approximately $4.3 million. The combined company has revenues of about $30 billion, operates in 35 countries, and will be, by far, the largest and most diversified global provider of advanced design and vertically integrated manufacturing services. To further expand its medical manufacturing services into the design and manufacturing of disposable medical devices, Flextronics announced in August that it would acquire private equity–backed Avail Medical Products ($250 million in sales) from UBS Capital Americas and Norwest Mezzanine Partners.

We would not be surprised if the Flextronics-Solectron transaction were a precursor to other less-flashy supply sectors of the industry, such as contract manufacturing, design and marketing, logistics, and component and subassembly suppliers.

Diversified manufacturer Teleflex made a definitive shift toward the medical products business in July by announcing it would purchase Arrow International for $2 billion in cash, a 20% premium and a price-to-EBITDA multiple of sixteen times. Teleflex believes the deal is a major milestone in its efforts to redefine its portfolio. Arrow's disposable catheter products were attractive in part because they represented recurring revenue streams. The Arrow deal came on the heels of Teleflex's acquisition of the assets of contract manufacturer HDJ Co. and its wholly owned subsidiary Specialized Medical Devices.

Other Major Deals

On July 2, Tyco International successfully completed the spin-off of its Tyco Healthcare business, which is now Covidien, a publicly traded company. With nearly $10 billion in sales, 59% of which is from medical devices, Covidien contains such leading brand businesses as Autosuture, Kendall, Mallinckrodt, Nellcor, Puritan Bennett, Syneture, U.S. Surgical, and Valleylab. With its strong market position and financial strength, we expect Covidien to pursue acquisitions of other trophy brand-name medical product companies in the years to come.

In May, Cardinal Health announced it would purchase Viasys Healthcare, a medical technology company focused on respiratory, neurology, medical disposable, and orthopedic products, for $1.5 billion. The acquisition expands Cardinal's clinical and medical product offerings for global acute-care customers.

Private equity firm Warburg Pincus agreed to buy optical products maker Bausch & Lomb in May for $3.7 billion, at which time it also agreed to a 50-day window to invite other bidders. This so-called go-shop clause gained fashion this year as a method to ensure private equity buyers were indeed paying full price. The invitation was accepted by Bausch rival Advanced Medical Optics (AMO) in July, which submitted a $5 billion bid. AMO's bid was withdrawn a month later when Bausch refused to grant the company extra time to shore up its bid.

In January, Apax Partners sold Molnlycke Health Care Group, the Swedish device company, to private equity firms Investor AB and Morgan Stanley Private Equity for $3.7 billion, a price-to-revenue multiple of 3.8 times. Molnlycke makes wound-care and surgical products. During its holding period, Apax acquired and combined the wound-care business of SSL International and surgical glove business of Regent Medical with Molnlycke. Other bidders in the sale of Molnlycke included The Blackstone Group and Clayton, Dubilier & Rice. The transaction is an example of private equity funds trading among themselves, something that was prevalent in 2007 in other industries as well.

The Long View for Components

The long-term consolidation trend of the medical device component sector continued over the past year. In addition to producing components for medical device OEMs, many targets also serve the needs of the aerospace, instrument, and security industries. There is a very large universe of attractive component companies with revenues in the range of $5 million–

$100 million. Many of them have just one proprietary product, technology, or technique, which would enhance the product offerings of many potential acquirers.

In the components area, the acquisitions made over the past year by SurModics, a leading provider of surface modification and drug-delivery technologies, were a good example. In August, SurModics solidified its position and broadened its product offerings in the diagnostics market by acquiring BioFX Laboratories, a producer of substrates used in test kits with revenues of $3.5 million. The price paid is a good illustration of the valuation that well-positioned small component companies can command: $11.3 million in cash, and up to an additional $11.4 million in cash when certain revenue targets are achieved. Also in August, SurModics acquired Brookwood Pharmaceuticals, which further strengthens its leading position in polymer-based drug-delivery systems.

Greatbatch Inc., a leading provider of critical components used in implantable medical devices, enhanced its product offerings and base of OEM customers through two acquisitions. In June, it acquired publicly held Enpath Medical, a supplier of venous vessels, for approximately $93 million, a 30% premium over the stock market value of the company the day before the transaction was announced. In April, Greatbatch acquired Biomec Inc. for approximately $11.4 million in cash. The acquisition is expected to broaden Greatbatch's device design and engineering service capabilities.

In March, Moog Inc., a manufacturer of precision control components and systems, continued its long-term strategy of growth through acquisitions with the purchase of Zevex International for $83.8 million. Zevex produces a line of pumps, sensors, and surgical tools for the medical OEM marketplace. The purchase price represented a premium of 39% over Zevex's stock market value on the day before the transaction was announced.

Conclusion

In summary, 2007 was an exciting time for M&As in the medical device industry. Private equity led the way on big deals, about which the prevailing attitude was “no one is immune to a buyout” because of size. That transaction environment changed significantly with the problems in the credit markets during July and August.

The Federal Reserve did much to calm the M&A market's nerves by initiating its first interest rate cut in many years. Since the much-analyzed subprime meltdown during the mid part of the year, common wisdom on Wall Street says that larger private equity buyouts financed by syndicated loans will diminish substantially. Thus, very large deals are likely to return to the domain of the large, corporate buyers. This does not mean, however, that we are unlikely to see smaller, strategic deals in the future.

On the contrary, tuck-ins and add-ons that plug gaps in a corporate buyer's strategy are likely to become more prevalent. What the M&A market might resemble is a sort of barbell market, where the bulk of the transaction dollar volume comes from a handful of large deals, and the bulk of the transaction volume comes from deals in the middle to lower-middle market (<$500 million).

One of the main drivers of M&A activity in general over the next two years will be the fact that many company owners will be eager to sell before any increase in the currently favorable maximum 15% federal capital gains rate. We believe this will be particularly true in the medical device component sector because there are a large number of companies with owners at or near retirement age, and a large group of large financially strong industrial component manufacturers aggressively seeking acquisitions.

Overall, we expect mergers and acquisitions in all segments of the medical device industry to continue to be strong in 2008 and beyond. Simply stated, there is a substantial number of small and medium-sized medical device and component companies that have products or technologies that make them attractive acquisition targets for a large group of very motivated potential buyers, both strategic and financial.

Clyde Burkhardt is senior managing director for HT Capital and Stephen Tardio is the managing director of HT Capital's Chicago office. They can be reached at cburkhardt@htcapital.com and stardio@htcapital.com, respectively.


Copyright ©2007 Medical Device & Diagnostic Industry

CMS Memos Explore Application of Coverage with Evidence Development

After months of inaction on its much-debated proposal to implement a new approval category for coverage with evidence development, this month the Centers for Medicare and Medicaid Services (CMS) suddenly leapt into action. Within the span of eight days, the agency issued memos explicitly citing the possibility of coverage with evidence development for three distinct technologies. But this latest flurry of CMS activity has sparked questions as to whether coverage with evidence development will be applied as narrowly as CMS has previously suggested.

 
Mannen
 
Mannen: Shifting ground.

To date, this relatively new type of national coverage decision has been the subject of more discussion than action. “If this signals greater willingness of CMS to deploy coverage with evidence development in 2008, then the reimbursement ground beneath device manufacturers may be about to shift,” says Ted R. Mannen, a member of Epstein Becker & Green PC and managing director of EBG Advisors Inc. (Washington, DC).

On December 13, CMS issued a proposed decision memo that called for applying coverage with evidence development to computed tomographic angiography for the diagnosis of coronary artery disease. The decision summary—available at www.cms.hhs.gov/mcd/viewdraftdecisionmemo.asp?id=206—states that “the evidence is inadequate to conclude that cardiac computed tomographic angiography is reasonable and necessary under section 1862(a)(1)(A) for the diagnosis of coronary artery disease; however, the agency believes the evidence is promising for two clinical indications and that coverage with evidence development would be appropriate for these indications.”

On the following day, December 14, CMS proposed changes to its national coverage decision for continuous positive airway pressure (CPAP) equipment. The proposal would extend reimbursement to home diagnostic testing for obstructive sleep apnea. However, the memo stipulated that, under the proposal, Medicare coverage for CPAP would only be expanded when provided in the context of a clinical study meeting certain coverage with evidence development requirements. Details of the proposed criteria are available at www.cms.hhs.gov/mcd/viewdraftdecisionmemo.asp?id=204.

Slurzberg
 
Slurzberg: Possible widespread application.
 

“The fact that CMS is proposing coverage with evidence development in these situations raises questions,” says Jo Ellen F. Slurzberg , vice president for reimbursement and health policy at Almyra Inc. (Boxborough, MA). “It suggests that the application of coverage with evidence development will not be rare—as CMS has indicated it would be—but instead, frequent.”

As if to underscore the shifting definition of frequency, on December 20 CMS issued another proposed decision memo on fluorodeoxyglucose positron emission tomography (FDG PET) for chronic osteomyelitis and other indications. In this most recent proposed decision, CMS requested comments on “the potential to provide limited coverage for any or all of these indications under the coverage with evidence development paradigm. We solicit public comments as to the specific types of studies that would be appropriate under coverage with evidence development.” The memo can be viewed at www.cms.hhs.gov/mcd/viewdraftdecisionmemo.asp?id=207.

Slurzberg says the recent memos raise a number of problematic issues. “The questions being raised by CMS and the trials being proposed are very extensive, and normally trials of this magnitude would be conducted in the context of FDA regulatory guidance and oversight,” she says. “Who will then oversee these trials? The trials being suggested will take years to complete, and it is unclear if they can be designed to address the questions being asked.

“For industry, coverage with evidence development is becoming a wild card in the overall product development and commercialization process for new devices, as well as for mature devices,” Slurzberg adds. “The lack of predictability is material for both start-up phase companies and mature companies. Even with trials conducted in the context of FDA clearances and approvals, there are lessons learned along the way and instances where the original questions posed shift in the course of the trials, as do endpoints and statistical requirements. CMS does not have the expertise of FDA to manage these complexities.”

Coverage with evidence development is among a wide range of topics discussed by seven national reimbursement experts in “2008 Reimbursement Update,” in the January/February issue of MX magazine. The roundtable panelists also consider pay-for-performance initiatives, the new Medicare-severity diagnosis-related grouping system, and other reimbursement-related policies and trends.

© 2007 Canon Communications LLC

Return to MX: Issues Update.

Strength Despite Setbacks

SALARY SURVEY 2007

Illustration by GLENN GUSTAFSON/G2 Illustrations Inc.
The medical device market has seen some curveballs this past year, from declining sales of some products to a higher-than-usual rate of mergers and acquisitions (M&As). Despite all that, demand for qualified professionals remains high, and in many cases, firms are struggling to find the right people to put in key positions. Thus, medical device professionals continue to enjoy strong compensation and high job satisfaction, as the results of MD&DI's annual salary survey bear out.

This is also borne out by comments from executive recruiters that specialize in the medical device industry. They are seeing starting salaries and bonuses rise despite factors that might indicate a trend the other way. The reason, they say, is that there are so few qualified professionals who are looking for a new job, especially if it requires relocation. “Demand for talent in the industry is as robust as ever,” says Richard Arons, PhD, managing director of Korn/Ferry International (Princeton, NJ). “This is a good time to be part of the medical device industry.”

“A lot of new companies are being started, and they all need people,” says Dan Murray, owner of Medical Search (Michigan City, IN). “Good people are hard to find even when the market is soft. But it's been pretty good for the last four years.”

Indeed, only 7% of respondents to MD&DI's salary survey said that they are actively looking for a new job, and only 25% said they are considering looking. That means that about two-thirds of respondents have no interest in seeking a new position. (Readex Research polled 399 medical device and in vitro diagnostics professionals for MD&DI in the summer and fall of 2007.)

Shifts

A large chunk of the device industry has been affected by M&As. A whopping 41% of respondents said that their firm has been involved in a merger or acquisition in the past 12 months. One would think that this has created some softness in the job market, but for the most part, that has not been the case.

The spate of M&As has thrown some qualified people into the market, but they are getting snapped up quickly, says James Myhre, vice president of the Cassie-Shipherd Group (Toms River, NJ). “I have not had difficulty finding qualified candidates,” he says. “Some really strong candidates who were not previously available are now available. When I have had difficulty, it has been because of where the jobs are. For example, positions requiring relocation to Memphis have been difficult to fill.”

The M&A fallout has created a glut in certain positions, such as manufacturing and sales and marketing, says Brian Walker, president of the Wise Group (Fairfield, CT). But in other areas, he says, it has had virtually no influence.

In professions such as engineering and research and development, “people are being snapped up as quickly as they are laid off,” says Roger Brooks, president of Leading Edge Medical Search (Boulder, CO), “especially if they are open to relocation.”

Shortages

Shortages are happening in some professions, because there are simply not enough qualified people to fill the positions being opened up via new companies, expansions, or retirees from the baby-boomer generation.

“There is a shortage of clinical people, there is a shortage of regulatory people, and there is a shortage of product development people with 3–8 years of experience,” says Joseph Mullings, president and CEO of the Mullings Group (Delray Beach, FL). “There are people out there, but the ­number of ‘A players' seems to have gotten smaller. The regulatory and clinical professionals want to stay where they are until the PMA [premarket approval] they are working on goes through. The product development specialists are waiting to see what the next revenue pipeline will be in the device market now that the drug-eluting stent market has declined.”

“We are seeing a lot of demand for senior leadership, including CEOs,” says Arons. “We are seeing strong demand for medical directors and quality people, which is not surprising given the flurry of FDA-483s and warning letters given out recently. And we are seeing a lot more demand for marketing people with a consumer-patient connection. Our clients are paying more attention to patient preferences and attitudes. That's a shift.”

But, Arons notes, “We haven't seen a manufacturing or operations search for a while. It's generally in a down cycle when you see a focus on manufacturing and supply-chain people. [The process is believed] to tighten up profitability when sales are constrained. When they are not constrained, you see more of a focus on the people that get products into the market. This suggests we are still in an updraft.”

One reason there is often a shortage of qualified candidates is that people with a scientific background don't usually target the medical device industry as a place for their talents, says Walker. “People don't necessarily see the value of the medical device industry, and so a lot of those interested in the life sciences gravitate toward pharmaceuticals,” he says. “When they decide on what tracks to take in school, they are not preparing themselves for the device industry at this point.”

Start-Ups

The glut of new positions and new companies means that in some cases, start-up firms aren't drawing the kind of talent that they used to.

“There has been some pushback on the start-up market,” says Mullings. “The conditions for start-ups are no longer optimal. Fewer of them are being acquired at a home-run rate. Many people [at larger companies] are no longer interested in going for a lump of gold at the end of a successful exit. They are now saying, ‘if I stay where I am for the next 5–10 years, the options, preferred stock, bonuses, and other compensation will be close to the same amount of money.' One reason is that venture capitalists are asking for more, and the original people at start-ups are getting severely diluted. You are seeing some companies go to D rounds now, whereas they used to be acquired after the ­B round. Economically, it doesn't make as much sense.”

Walker agrees. “If you are a start-up,” he says, “people are leery of coming aboard unless they get a very attractive equity position.”

But one area that is less prone to these issues is cosmetic surgery, Mullings says. “Start-ups there have few problems on the regulatory or reimbursement sides, and doctors [in that industry] are highly adoptive,” he says.

Also, for those who want such opportunities, “the amount of capital available for medical device start-ups is at an all-time high,” says Brooks. Indeed, he says, top candidates might be able to pick and choose which start-up they want to go with. In those cases, it might make sense to go with a company backed by a venture capital firm that has had experience with device start-ups, he says.

This is not to say that start-ups will hire just anyone.

“The start-up companies I work with like mechanical engineers with hands-on skills,” says Murray. “If a candidate has a machine-shop background, they especially like it. These days, you have got to have some sort of 3-D modeling skills, Solidworks being the most popular. If you don't have those skills, these companies won't hire you. That's how big of a deal it is. Luckily, most people coming out of school now have these skills.”

As far as leadership positions at start-ups go, Arons says, firms aren't looking for just anyone. “My clients say they want someone who has led an early-stage company successfully and would like to do it again. Lightning can strike twice.”

Specialists

If you are looking for a new job, you are particularly at an advantage if you are a regulatory or clinical professional.

“Regulatory, clinical, and reimbursement people are most in demand this year,” says Mullings. “They are being offered more money and relocation packages. A lot of these professionals are game-changers. If you have bad clinicals or bad regulatory strategy, that can ruin an organization.”

Complicating the demand is that firms are “looking for regulatory people with the full gamut of experience, which is rare,” says Walker. “Most people flow back and forth between regulatory and other divisions. Someone who grew up in the [regulatory] profession is a very highly coveted individual. And I see positions demanding that popping up everywhere.” He says starting salaries for top regulatory professionals have jumped 10–15% in the past year. “For the right individual, there seems to be tremendous flexibility and opportunity in terms of compensation packages. But not many fit that description.”

Accentuating the demand, Brooks says, is that “regulatory and clinical people seem least likely to relocate for career opportunities. People with positions in sales and marketing tend to have high career ambitions. They are motivated by advancement opportunities and are willing to move their families for them. Clinical professionals are less inclined to chase those opportunities. They will make a change, but they are less likely to move. That makes those searches harder to conduct.”

Myhre says that regulatory people at the vice president level can expect to start at $200,000 a year, and he has seen offers as high as $275,000. The same is true for top research and development personnel. Similarly accelerating are the salaries of CFOs, where $325,000–$375,000 is common, he says. “It used to be that only CEOs would get that kind of money,” he says. Less than a decade ago, it was rare for vice presidents in the industry to make more than $200,000 a year, he notes.

Oddly, he says, since the M&A activity has put more qualified candidates in play, one would think starting-salary offers would go down, but the opposite is happening. “You bring [a device company] five candidates, and invariably, they fall in love with one and they want that one no matter what, even if the others are just as qualified in every respect. That tends to drive the salaries up and make the negotiation process difficult.”

Security

One possible silver lining for employers looking to hire is that 13% of survey respondents feel less secure in their jobs than they did last year. That could translate into people soon looking for new opportunities.

It would not be surprising if some of those 13% were from Boston Scientific, which announced that it will eliminate about 2300 jobs by the end of the year. Yet, as with the M&A fallout, recruiters don't expect the layoffs to have a huge effect on the job market.

“Unfortunately, the effect will likely be on the hourly people, not the marketing, engineering, regulatory, and clinical people,” Mullings says. “I don't see much impact on the highly skilled and educated workforce. Those who are [skilled] will be redeployed to new technologies or offered early retirement. You won't see ‘A players' cut, though you may see some leave before Boston Scientific's changes affect them.”

That is exactly what is happening, says Myhre, who works out of his firm's Massachusetts office. “I have received a number of résumés from Boston Scientific people in the past few months, and really strong people too,” he says. “Some very highly qualified people at high levels are becoming available.”

Survey Details

A copy of the full MD&DI Salary Survey is available. It contains tabular breakdowns for the industry as a whole and previously unpublished tabular breakdowns for the seven surveyed job functions.

Copies cost $150 each. For more information or to place an order, contact the MD&DI editors at 310/445-4200, fax 310/445-4269, or by e-mail at mddi@cancom.com.

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Copyright ©2007 Medical Device & Diagnostic Industry