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Business Drivers

BUSINESS DRIVERS

Paul R. Sohmer, MD, has assumed the role of acting CEO at in vitro diagnostics manufacturer Cylex Inc. (Columbia, MD). He has also been appointed to the company's board of directors. Sohmer has served as CEO of both public and privately held medical device, biotechnology, and healthcare services companies. Most recently, he served as chairman, president, and CEO of TriPath Imaging Inc. (Burlington, NC), which was sold to Becton Dickinson (Franklin Lakes, NJ) in December 2006. In a related announcement, Judy Britz, PhD, Cylex's chairman and CEO for the past eight years, has left the company to pursue personal interests. The company plans to initiate a formal search for her permanent successor. Britz joined Cylex in May 1999. During her tenure as CEO, she raised more than $33 million in funding for the company.

Denny Sakkas, PhD, has joined Molecular Biometrics LLC (New Haven, CT), a privately held diagnostics company, as chief scientific officer. Sakkas is an associate professor at Yale University School of Medicine and director of the embryology laboratory at Yale Fertility Center. In conjunction with the new appointment, Molecular Biometrics announced that it is opening a new 2200-square-foot research facility adjacent to Yale University. Sakkas will oversee the company's research and development activities from the new facility, which will initially be dedicated to the company's lead product candidate, ViaTest-E. The product is in late-stage development for the assessment of embryo viability in the field of in vitro fertilization and assisted reproductive technology.

Biomedical device technology developer Biophan Technologies Inc. (Pittsford, NY) has named Stan Yakatan as chairman of the board of directors. Yakatan has served on Biophan's board since 2006. He is also the founder, chairman, and CEO of Katan Associates (Hermosa Beach, CA), a consulting firm and corporate finance advisory group focused on life sciences. Yakatan also currently serves as chairman of Grant Life Sciences Inc. (Los Angeles).

EyeGate Pharma (Waltham, MA), a privately held company developing iontophoresis technology to noninvasively deliver therapeutics for ocular indications, has promoted Michael A. Patane, PhD, to chief scientific officer. Patane joined EyeGate in 2007 as vice president of research and development. Prior to joining EyeGate, he was executive director of global discovery chemistry at the Novartis Institutes for BioMedical Research, where he was responsible for infectious diseases and ophthalmology drug discovery programs. EyeGate has also appointed Remis Bistras, PhD, as vice president of business development. Prior to joining EyeGate, Bistras was senior consultant at advisory firm S.M. Jagger Consulting (Litchfield, CT). Previously, Bistras was director of business development and licensing at CIBA Vision-Novartis, a $1.5 billion eye care division of Novartis.

 
Stone

Bob Pryor has decided to step down from his position as head of Agfa HealthCare Americas (Greenville, SC). Barry Stone, COO of Agfa HealthCare Americas, has taken over the position of CEO. Pryor joined Agfa with the company's Sterling Diagnostic Imaging acquisition in 1999. At Sterling Diagnostics, he was responsible for sales and service for the Americas and was a member of the global executive management committee. Before Sterling Diagnostics, Pryor held a number of cross-functional management positions at the DuPont Co. in its healthcare businesses. He retires following a 34-year career in the healthcare field. Stone served as COO for the U.S. organization for nearly two years prior to his appointment as CEO. Over the years, he has held a variety of roles at Agfa, including serving as managing director of Agfa in the United Kingdom.

Mahar

Alphatec Holdings Inc. (Carlsbad, CA), a medical technology company focused on products for the surgical treatment of spine disorders, announced that Andrew Mahar, a veteran biomechanics and clinical research practitioner, has joined the company as senior director of biomechanics and clinical research. Mahar was formerly director of the Orthopedic Biomechanics Research Center at Rady Children's Hospital (San Diego). From 1998 to 2005, Mahar served as a biomechanical engineer in the department of orthopedics at Rady Children's Hospital.

Naviscan PET Systems Inc. (San Diego), a privately held company specializing in the development of high-resolution positron emission tomography (PET) scanners, has announced four senior appointments: Skip Mendelson as vice president of sales, Ashok Kaul as vice president of marketing, Guillaume Bailliard as vice president of market development, and Christopher Matthews, PhD, as vice president of technology. Most recently, Mendelson served as vice president of sales at R2 Technology (Santa Clara, CA), a developer of computer-aided detection software, and Trex-Lorad Medical Systems, a manufacturer of mammography and breast biopsy equipment. He began his career at GE Healthcare (Chalfont St. Giles, UK), where he held positions in sales and sales management over an eight-year span. Kaul has more than 22 years of healthcare experience in marketing and product development with Abbott Laboratories, Medtronic, St. Jude Medical, GE Healthcare, and Bacchus Vascular, where, most recently, he held the position of vice president of marketing. He began his career as a product development engineer at GE Healthcare. Bailliard has 10 years of healthcare experience. Most recently, he was the Americas x-ray sales manager for GE Healthcare. He began his career as a design engineer for Genzyme Surgical (Cambridge, MA). Matthews has 12 years of diagnostic imaging experience, most recently as a project director for Siemens Medical Solutions (Malvern, PA), where he led the development of multiple generations of PET-CT systems.

Hill

St. Jude Medical Inc. (St. Paul, MN) has elected Barbara B. Hill to its board of directors. Hill is currently CEO and president of ValueOptions Inc. (Norfolk, VA), a privately owned managed behavioral health company, where she also serves as a board member. Hill has 30 years of experience within the healthcare industry, including past roles as president of Express Scripts Inc. (St. Louis), a Fortune 200 pharmacy benefits management company where she also served on the board of directors. She also previously served as CEO and chairman of Woodhaven Health Services (Baltimore), a venture capital–owned institutional pharmacy.

Copyright ©2008 MX

The State of Medtech M&A

FINANCE

Photo by ISTOCK
The year 2007 ended amid uncertain economic conditions, precipitated by the subprime and structured-loan debacles. The tightening credit situation will affect leveraged transactions such as private equity deals most immediately, as lenders and principals will require a higher burden of proof before permitting a deal to move forward. But the impact of the credit squeeze will extend well beyond private equity deals to affect the overall interconnected world economy. Although the aphorism that healthcare is recession-proof still applies, prospects for a particular sector, company, or deal must be evaluated according to their specific circumstances.

In general, 2007 mergers and acquisitions (M&A) activity in the diagnostics and medical device industries reflected complementary moves in which acquirers sought businesses that dovetail with their core product lines and infrastructure, as opposed to acquisitions driven by the need for diversification. Many acquirers looked to purchase platforms, technologies, and organizations that address markets expected to grow significantly in the future. Particularly hot sectors include diagnostics, orthopedics, spinal and cardiovascular products, and home-care devices, among others.

Despite the credit crunch, there were several notable diagnostics and medical device private equity transactions in 2007, some of which were announced in the prior year. Going forward, large deals of this nature will be harder to finance.

The Walden Group Inc. (Tarrytown, NY) takes a look at these and other top 2007 medtech deals in its Strategic Healthcare M&A Report for the fourth quarter and full year 2007 (see Tables I and II).1

Transaction
     Value
($ millions)
Acquiring Party
Transferring Party
7,000
Siemens AG
Dade Behring Holdings Inc.
6,200
Hologic Inc.
Cytyc Corp.
5,300
Siemens AG
The Bayer Diagnostic Unit of Bayer
3,700
Madison Deabrborn Partners
VWR International Inc.
3,000
Roche Holding AG
Ventana Medical Systems Inc.
2,000
Quest Diagnostics Inc.
Ameripath
1,680
Inverness Medical Innovations Inc.
Biosite Inc.
1,600
Qiagen N.V.
Digene Corp.
615
MDS Inc.
Molecular Devices Corp.
600
Illumina Inc.
Solexa Inc.
600
Roche Holding AG
BioVeris Corp.
525
Avista Capital Partners
The medical imaging unit of Bristol-
    Myers Squibb Co.
452
Cytyc Corp.
Adeza Biomedical Corp.
420
Quest Diagnostics Inc.
HemoCue
389
Bio-Rad Laboratories Inc.
DiaMed Holding AG
326
Inverness Medical Innovations Inc.
Cholestech Corp.
300
PerkinElmer Inc.
ViaCell Inc.
273
Roche Holding AG
NimbleGen Systems Inc.
250
Agilent Technologies Inc.
Stratagene Corp.
241
Bracco Diagnostics Inc.
E-Z-EM Inc.
230
Inverness Medical Innovations Inc.
ParadigmHealth Inc.
195
Clera Group
Berkeley HeartLab Inc.
170
Inverness Medical Innovations Inc.
BBI Holdings Plc
165
Inverness Medical Innovations Inc.
HemoSense Inc.
155
Roche Holding AG
454 Life Sciences
112
Ametek Inc.
Cameca SAS
110
Eppendorf Group
New Brunswick Scientific Company
    Inc.
Table I. Diagnostics M&A transactions in 2007 with values greater than $100 million. Source: Walden Group.
Transaction
     Value
($ millions)
Acquiring Party
Transferring Party
10,900
The Blackstone Group
    Goldman Sachs Capital Partners,
    Kohlberg Kravis Roberts & co., and TPG
Biomet Inc.
5,100
Royal Philips Electronics
Respironics Inc.
3,900
Medtronic Inc.
Kyphon Inc.
3,670
Warburg Pincus
Bausch & Lomb
2,350
Onex Corp.
The healthcare imaging
    group of Eastman Kodak
2,000
Teleflex Inc.
Arrow International Inc.
1,920
Olympus Corp.
Gyrus Group Plc
1,500
Cardinal Health Inc.
Viasys Healthcare Inc.
1,500
ReAble Therapeutics Inc.
    (formerly Encore Medical)
DJO Inc.
1,400
Johnson & Johnson Inc.
Conor Medsystems Inc.
889
Smith & Nephew Plc
Plus Orthopedics Holding AG
808
Advanced Medical Optics Inc.
IntraLase Corp.
780
ev3 Inc.
FoxHollow Technologies Inc.
771
Hoya Corp.
Pentax Corp.
750
Getinge AB
The cardiac surgery and vascular
    surgery divisions of Boston
    Scientific Corp.
525
Kyphon Inc.
St. Francis Medical Technologies Inc.
425
Avista Capital Partners
The fluid management and venous
    access business of Boston
    Scientific Corp.
274
Ecolab Inc.
MicroTeck Medical
    Holdings Inc.
221
Medtronic Inc.
Shandong Weigao Group.
    Medical Polymer Company Ltd.
160
Fresenius Medical Care AG & Co. KGaA
Renal Solutions Inc.
140
C. R. Bard Inc.
The LifeStent peripheral
    vascular product line
    of Edwards Lifesciences Corp.
137
China Medical Technologies
The fluorescent in situ hybridization-
    business of Supreme Well
    Investments Ltd. and Molecular
    Diagnostics Technologies Ltd.
125
Greatbatch Inc.
Precimed Inc
102
Greatbatch Inc.
Enpath Medical Inc.
Table II. Medical device M&A transactions in 2007 with values greater than $100 million.
Source: Walden Group

Diagnostics Lead the Way

Siemens AG (Munich) made two huge acquisitions in 2007: its $7 billion purchase of Dade Behring (Deerfield, IL), a maker of clinical diagnostic instruments, reagents, and consumables; and its $5.3 billion purchase of the Bayer Diagnostics unit (Tarrytown, NY) of Bayer HealthCare LLC (Leverkusen, Germany). As evidenced by these moves and its 2006 purchase of in vitro diagnostics specialist Diagnostic Products Corp. (Los Angeles) for $1.86 billion, Siemens is making a major move into the laboratory, clinical, and immunodiagnostic segments as it expands well beyond its core diagnostic imaging business.

Royal Philips Electronics (Amsterdam, The Netherlands) also demonstrated a stronger healthcare focus in 2007. It plans to spend $5.1 billion to buy Respironics (Murrysville, PA), a manufacturer of products serving the sleep and respiratory markets. Through the deal, Philips hopes to drive growth in the hospital and home-monitoring markets. Although Respironics' sales and profits have been growing significantly, Philips will need to reap major synergy benefits given the hefty price—which is more than four times Respironics' annual sales and 20 times its earnings before interest, tax, depreciation, and amortization (EBITDA).

Philips is also spending $430 million to acquire Visicu Inc. (Baltimore). That price is a tenfold increase over Visicu's annual sales. The company's technology, which is installed in about 180 hospitals, enables hospital intensive care units (ICUs) to link via telemedicine and computer monitors to an eICU facility where specially trained physicians can monitor and care for hundreds of patients at a time. The care teams are able to use software alerts to track patient vital trends and intervene earlier—before complications occur.

Philips' announcement of its intent to acquire Visicu came only two weeks after Philips announced it would acquire Emergin (Boca Raton, FL), a clinical IT company that specializes in medical alarm software. Other Philips acquisitions for 2007 include home heart-monitoring service provider Raytel Cardiac Services (Windsor, CT) for $110 million; Ximis Inc. (El Paso, TX), a provider of Web-based medical information management services for radiology departments; and diagnostic imaging company VMI-Sistemas Medicos (Lagoa Santa, Brazil).

Representing a significant consolidation within the women's health sector, Hologic Inc. (Bedford, MA) paid $6.2 billion for Cytyc Corp. (Marlborough, MA). The combined company will have operations in more than 20 countries and employ more than 3300 people, including 1200 sales and service people—the largest direct sales force in women's health. The purchase price represented 9.7 times Cytyc's annual sales and 22.5 times its EBITDA.

However, perhaps the most prolific corporate buyer during 2007 was Inverness Medical Innovations Inc. (Waltham, MA). During the year, the company made acquisitions in the areas of protein diagnostic testing (Biosite Inc.; San Diego; $1.68 billion), heart-disease monitoring (Cholestech; Hayward, CA; $326.3 million), disease management (Alere Medical Inc.; Reno, NV; $302 million; and ParadigmHealth; Upper Saddle River, NJ; $230 million), blood-coagulation monitoring (Hemosense; San Jose; $165 million), point-of-care testing (Instant Technologies; Norfolk, VA; and Quality Assured Services; Orlando), and drugs-of-abuse testing (First Check Diagnostics; Lake Forest, CA). The company also made several overseas purchases, including Bio-Stat (Hazel Grove, Stockport, UK), Promesan (Milan, Italy), and Panbio Ltd. (Brisbane, Australia).

Medical Devices

Medtronic Inc. (Minneapolis) accelerated its growth in the spine segment with its $3.9 billion purchase of Kyphon Inc. (Sunnyvale, CA), a developer of diagnostic and minimally invasive technologies for the treatment of spinal conditions. While Medtronic primarily serves orthopedic and neurological surgeons who specialize in spinal surgery, Kyphon adds new call points: interventional radiologists and interventional neuroradiologists.

Medtronic also expanded its reach in China with a $221 million joint venture deal for Shandong Weigao Group Medical Polymer Company Ltd. (Weihai, China), a supplier of medical devices and single-use consumables. It also made some smaller acquisitions, including that of Biophan Technologies Inc. (Pittsford, NY), a developer of technology to make implantable devices safe for magnetic resonance imaging. It also purchased the O-arm imaging system assets of Breakaway Imaging (Littleton, MA). The system provides orthopedic surgeons with 3-D images, as well as multiplane 2-D and fluoroscopic imaging.

Also in 2007, Teleflex Medical (Research Triangle Park, NC) made a major transformative move with its $2 billion acquisition of Arrow International (Reading, PA), a leading global provider of catheter-based access and therapeutic products for critical and cardiac care.

Other large deals in 2007 included the pending $1.92 billion purchase of Gyrus Group (Wokingham Berkshire, UK) by Olympus Corp. (Tokyo). Gyrus is a manufacturer of radio-frequency devices and energy-based technologies for minimally invasive surgery. In addition—similar to the Philips-Respironics deal--the $1.5 billion purchase of Viasys Healthcare (Conshohocken, PA) by Cardinal Health Inc. (Dublin, OH) reflected expected growth in the sleep diagnostics and therapy market. In addition, Johnson & Johnson Inc. (New Brunswick, NJ) closed its $1.4 billion acquisition of drug-eluting stent maker Conor Medsystems. And in orthopedics, Smith & Nephew (London) paid $889 million for Plus Orthopedics Holding AG (Rotkreuz, Switzerland), a supplier of cementless hip prostheses.

Private Equity Deals

The largest private equity deal in 2007 was the $11.4 billion buyout of Biomet Inc. (Warsaw, IN) by the Blackstone Group (New York City), Goldman Sachs Capital Partners (New York City), Kohlberg Kravis Roberts & Co. (New York City), and TPG (Fort Worth, TX). The deal reflected the prominence of orthopedic implants as the population continues to age and life spans lengthen. Biomet represents a major platform on which to propel expansion as a private company with prominent financial backers.

The importance of orthopedics also drove the $1.5 billion purchase of noninvasive brace manufacturer DJO Inc. (San Diego) by ReAble Therapeutics (Austin, TX). Blackstone has a majority interest in ReAble.

On the diagnostics distribution side, Madison Dearborn Partners (Chicago) spent $3.7 billion on lab products distributor VWR International (West Chester, PA). Madison Dearborn owns several distribution companies and is bullish on lab distribution. Drug and chemical group Merck KGaA (Darmstadt, Germany) sold VWR to buyout firm Clayton, Dubilier & Rice (New York City) in 2004.

Warburg Pincus (New York City) took Bausch & Lomb Inc. (Rochester, NY) private in a $3.7 billion buyout, giving the company greater flexibility to focus on long-term strategies compared with the reporting pressures of being public. In addition, Onex Corp. (Toronto) purchased the healthcare imaging group of Eastman Kodak Co. (Rochester, NY) for $2.35 billion, reflecting Kodak's desire to reduce debt and focus on its core business.

Meanwhile, Boston Scientific Corp. (Natick, MA) and private equity firm Avista Capital Partners (New York City) have signed a definitive agreement under which Avista will acquire Boston Scientific's fluid management and venous access businesses for $425 million in cash. Avista also recently signed an agreement to acquire Bristol-Myers Squibb Medical Imaging, a business unit of Bristol-Myers Squibb (New York City), for approximately $525 million.

2008 Outlook

Concerns about a recession and the upcoming election—which could have an impact on budget and FDA regulatory matters—are likely to weigh down M&A activity in 2008. The economy is slowing down, and consumer confidence is dropping. Regardless, healthcare spending is largely nondiscretionary, with the exception of cosmetic and other elective surgeries.

Economic weakness is likely to motivate companies to become more efficient, less bloated, more inclined to lower costs (via outsourcing, technology, and improved work flows), and more exacting in terms of acquisitions. Lenders will be raising the bar, and successful deals will require more compelling rationales, less risk, and built-in cushions to tolerate an economic downturn. Yet, 2008 will present buying opportunities, and companies should be positioning themselves with disciplined R&D and strategic M&A initiatives to take advantage of the inevitable economic rebound.


References

1. Strategic Healthcare M&A Report (Tarrytown, NY: Walden Group, 2008); available from Internet:
    www.waldenmed.com/newsletters.asp.

Richard S. Cohen is a principal at the Walden Group Inc. (Tarrytown, NY; www.waldenmed.com), a strategic investment-banking firm specializing in the healthcare industry.

Copyright ©2008 MX

The Eyes Have It

COVER STORY

Sidebars:
Few medical device executives know what it is like to start a new company that already has 2000 employees and half a billion dollars in revenue. Fewer still are executives like James V. Mazzo, chairman and CEO of Advanced Medical Optics (AMO; Santa Ana, CA), who has had the thrill of presiding over the gathering momentum of an industry powerhouse in the making.

Following its 2002 spin-off from Allergan Inc. (Irvine, CA), AMO hit the ground running and hasn't looked back. Over the past six years, the company has doubled in size, both in terms of revenue and employees. Doing so has required a blend of sizable strategic acquisitions, as well as the development of a robust in-house research and development (R&D) function. Noteworthy acquisitions since AMO's spin-off have included its $450 million purchase of Pfizer's ophthalmic surgical business in 2004 and its $1.3 billion purchase of Visx Inc. in 2005. And, just last year, AMO acquired WaveFront Sciences Inc. (Albuquerque) and IntraLase Corp. (Irvine, CA), further strengthening its product pipeline for years to come.

Today, AMO is a major player in multiple ophthalmic technology sectors, including cataract removal and implants, laser vision correction, and contact lens care. Establishing market leadership in multiple segments has not been without its hurdles. According to Mazzo, however, virtually every challenge AMO has faced over the years has provided an opportunity for the company's leaders to refine and strengthen their vision for the future. Despite last year's setbacks—including a massive recall of a contact lens solution and an unsuccessful bid to acquire eye care giant Bausch & Lomb Inc. (B&L; Rochester, NY)—Mazzo says AMO has never been as well positioned for sustained growth as it is today.

In this interview with MX editor-in-chief Steve Halasey, Mazzo discusses AMO's evolution since its spin-off, as well as the company's strategy for continued growth across all stages of the vision care life cycle.

MX: In 2002, AMO spun off from Allergan Inc. (Irvine, CA), where you served in several executive-level roles. What technologies did AMO bring with it in the spin-off, and how has its technology base evolved since then?

James V. Mazzo: At the time of the spin-off, I had been with Allergan for 22 years, and I'd been living overseas for about 12 years. At that time, I had dual responsibilities. I was president of Allergan's Europe–Africa–Middle East business, and I also ran the company's global marketing for its surgical and eye care divisions.

During an off-site meeting of our management team, the company's leaders discussed the fact that Allergan had both a pharmaceutical and a medical device business under one roof. And as you know, they're fundamentally two different businesses. They're run differently, their regulatory landscapes are different, and even the analysts that cover the industries are different.

We discussed various avenues for separating the two businesses—doing an initial public offering (IPO), doing a spin-off, or even just selling the medical device franchise. We had already decided that Allergan was going to stay in the pharmaceutical business, especially considering its blockbuster products, such as Botox.

We decided the best move for shareholders was to create a tax-free spin-off in which we would essentially cleave the company into two separate public entities. Most people are more familiar with an IPO than with a spin-off, in which two completely separate companies are created. When you do a tax-free spin-off, the resulting companies can't have any affiliation. So it truly creates a new entity with a new board of directors and a new management team.

How did you come to take on the leadership role at AMO?

I left that initial meeting thinking, 'Good luck to the individual that takes on that new role.' And then David Pyott (Allergan CEO) and the Allergan board of directors asked if I would be interested in becoming the CEO of the spin-off. Obviously, I was very interested. Being able to lead a company of that size—with a global presence and about $500 million in annual revenue—certainly has its merits. And I had spent 22 years in that business, so I knew everybody quite well.

At the end of January 2002, the Allergan management team announced to the rest of the company and to the external community that we were going to create two separate companies through a tax-free spin-off by the end of June that year. Obviously that was no small task.

AMO has done a lot of acquisitions over the years, and people often comment on how difficult they think that must be. I tell them that if you're able to create and populate a company in six months--everything from choosing a name to filling the board of directors and various structures across the globe--acquisitions are not that hard by comparison.

How were the initial phases of the spin-off accomplished?

Our goal was to turn on the lights in all of our facilities on July 1, 2002. For any given facility inhabited by both Allergan businesses, whichever entity had a larger presence got to stay. The other had to find a new home. Globally, in more cases than not, Allergan's pharmaceutical side was larger. But in several cases, that side had to find a new home.

About 80% of AMO's employees came over from Allergan, and we had to populate the other 20%. We had about 2000 employees at the time of the spin-off, with nearly $540 million in annual sales and a $350 million market cap.

Allergan was a great company—but I left with a gold watch and $250 million in debt.

The spin-off was an exciting time. I looked outside the company for about half of the people who would report directly to me. As I said, Allergan was a tremendous company—but you never know what you don't know. So I figured that having some people come from the outside with either medical device experience or public company experience would help us take AMO to the next step.

We also realized that one of our greatest competitive strengths would be our ability to move quickly. We have very strong competitors—some that were much larger than us at the time of our spin-off. So we knew we needed to be fast and focused. We also realized that we were going to need to do some acquisitions to help populate our R&D pipeline, as well as get us into the segments in which we needed to compete.

In which eye care markets does the company currently operate? What portion of AMO's business does each represent?

Well, today AMO has a little more than $1 billion in annual revenue and a market cap of about $1.5 billion. We're a global company.

Our cataract business, which entails the removal of aged lenses and encompasses several different products, represents about 50% of our revenue. Our refractive business—laser vision correction and refractive intraocular lenses—represents about 33%. And our eye care business, which primarily focuses on contact lens care products, represents about 17%.

The eye care product revenue is currently a little lower than what we would traditionally expect because, unfortunately, we had to recall one of our contact lens solutions last May. That tempered our 2007 revenues. However, we have come back quite well with a new product in that category.

You're not the only company that's been hit by that problem.

That's true. But it was definitely a learning experience.

I meet with the employees periodically throughout the year. Recently, during one of these meetings, a new employee asked me what I thought AMO's finest moment had been since the spin-off six years ago. And I told him that it was the day after the recall was initiated. To this day, I've never seen a team coalesce around a critical juncture the way that we did on that day. Ultimately, the recall cost us about $175 million on the bottom line. Our stock had been trading at nearly an all-time high, and obviously it took its hit. But it's moments like those—when you have to recall a major product globally—that really test an organization's fiber.

The day after the recall, AMO's management team gathered in the boardroom, and we determined that we would have a new product on the market within three months—and that it would be a better product. We decided that we were going to handle all the patients correctly, we were going to get the doctors involved, and that we would ultimately regain about three quarters of the market share by the end of 2008.

How well has AMO been able to execute that plan?

We've either achieved or are in the process of achieving each of those goals. Nobody believed we could execute our plan to regain market share—and, in fact, some still have doubts—but every day we're seeing a growing market share. We've launched a product that's better than the one that was recalled, and we got doctors involved in helping us relaunch it. And in the process of going through the recall, we discovered lot of things about our product, and that knowledge has helped reshape the industry.

I've received letters from customers who tell us that they appreciate the great job we did on the recall. But others have told us that they think we went too far. They loved our product, and they wished we hadn't taken it off the market. Part of their argument is that it was only FDA requiring a recall, yet we initiated a global recall. In fact, during the recall, I received calls from international regulatory agency officials who said, 'We have no problem with your product. Why are you recalling it on a global basis?'

However, we felt we had to alert everyone on a global basis. We operate in more than 60 countries and sell direct in more than 20 countries. So the sheer magnitude of the communication required to employees, doctors, end-users, and shareholders—over Memorial Day weekend in the United States, nonetheless—was unbelievable. Every hour, we'd encounter another issue. So it was important to stay organized. We were in complete service mode. We operated under this premise: Do it quick. Take it all back. Don't question people. If they need something, just handle it.

In which eye care markets does AMO not compete? Are there any plans to enter new areas in the near future?

The two primary segments that AMO does not compete in today are contact lenses and back-of-the-eye technologies, such as retina products. There are also adjunct areas where we could grow our presence. For example, we may currently be participating in a market, but we might identify an outside party with technology that, in our hands, could build a better mousetrap.

The great thing about the ophthalmic sector is that, just when you think the technology can't get any better, it can. So if somebody else has an attractive, available technology that we think would benefit from our large machine, our global nature, our strong R&D pipeline, and our sales force and marketing, we'll make the acquisition.

We'd much rather have new technologies coming out of our own R&D engine. But if we see somebody else that has a better technology in a market in which we're already currently working, we'll switch gears and consider acquiring that technology.

Does AMO consider the market for eye care products a unified global market, an assemblage of regional markets, or in some other fashion? How does the company structure activities to address similarities and differences in eye care markets worldwide?

You can't view the global marketplace as one market because there are very different nuances at play in different countries. However, a consistent global message is required.

First off, like many devices, ophthalmic products will enter global markets gradually. Generally, our products will first enter Europe and unregulated Asia-Pacific markets under the CE mark. Later, they will move into other markets in Asia-Pacific. Then, about 18 to 24 months later—give or take—products will get approved by FDA. And, as with many other medical devices, our products usually don't appear on the market in Japan for another three years.

So obviously we can't treat the global market as a single entity. First off, my people are going to be talking about different products in different parts of the globe. And in some cases, marketing nuances differ, with variations being seen between France and Germany and so forth. For example, you can't use certain terms simply because they don't translate well or the messaging is different. The day you neglect those differences is the day you will upset a certain geographical market.

However, the overall message for our products still needs to be consistent. Ophthalmologists, optometrists, and opticians are a very close-knit group, and they all go to various international meetings. If you have a meeting—whether it's in America, Japan, or Europe—they'll all participate. Thus, we try to have a consistent message for any product that is sold around the globe.

There may be some marketing nuances based on cultural differences, but the messaging and the packaging need to be the same. Creating a marketing discipline can help keep your costs in line. But more importantly, you don't want an ophthalmologist in Europe and an ophthalmologist in the United States saying completely different things about the same product. You want to communicate the same message and be able to promote that message to physicians.


Acquiring Minds

Since the spin-off, AMO has gone from $500 million in revenue to more than $1 billion. What percentage of AMO's growth has been achieved organically and what percentage has been a result of acquisitions?

(click to enlarge)
"Just when you think the technology can't get any better, it can."
To some extent, the question is, 'When does an acquisition become organic?' For example, we bought Pfizer's surgical ophthalmology unit, Pharmacia, in 2004. Since then, we have made many iterations based on Pharmacia's technologies. To us, that's organic growth. If we acquired the products, it's not. However, any offshoots created by our R&D team—or any entirely new technologies—are considered to be organic growth straight out of our own labs.

Currently, AMO's five-year revenue from new products is 48% of total revenue as of January 1, 2008. But our three-year revenue from new products is 62%. Our goal on a five-year basis is to have 50% of our revenue coming from new products. That number doesn't just reflect the impact of acquisitions. Today, our R&D team's goal is to put 50% of our business out to pasture. And in three years, our goal is 70%. It's a very aggressive approach.

In 2007, AMO purchased WaveFront Sciences Inc. (Albuquerque) and IntraLase Corp. (Irvine, CA). How did these acquisitions broaden AMO's reach, and how have the acquisitions performed thus far?

The IntraLase and WaveFront Sciences acquisitions did two things for AMO. They enabled us to move into an area that complements our existing refractive business. But mainly, the R&D of both of those companies was the most appealing element of the acquisitions. Those companies brought with them pipelines of technologies that we'll be launching for the next several years—and their offerings are well ahead of where the industry is today. That's what really appealed to us about the acquisitions—their people and their methodologies.

Of course, the easy part is to write the check. The tough part is to integrate. But the IntraLase and WaveFront Sciences integrations went extremely well for a couple of reasons. For one, their technologies were outstanding. Bringing them to market was a fairly straightforward process. And with our powerhouse distribution capabilities and our global nature, we were able to accelerate that process much more than either could as separate companies.

The other reason the acquisitions went well is that the mentalities of those two companies, from a cultural standpoint, were very similar to the culture of AMO. In any acquisition, the number one hindrance to integration is culture. You have to consider the mentality of the people working at the company and the culture surrounding the process for bringing products to market. IntraLase and WaveFront Sciences matched the culture of AMO quite closely, so people blended in fairly quickly.

Last year, AMO offered to purchase Bausch & Lomb Inc. (B&L; Rochester, NY) for an estimated $4.3 billion. However, Bausch & Lomb was ultimately taken private by private equity firm Warburg Pincus. What initially attracted AMO to the possibility of acquiring Bausch & Lomb? Has AMO adjusted its business strategy in light of Bausch & Lomb's decision to go private rather than be acquired?

The process surrounding the B&L deal was unique. It's the first time our company had to communicate to outside parties that we were considering buying something while we were still evaluating the merits of a purchase. Usually you wait to communicate externally until after you've made the decision to buy.

However, Warburg Pincus put B&L into what is called a 'go shop' process. We only had 50 days to publicly state whether we were interested in potentially acquiring B&L. So it's a unique process—and not one that I would highly recommend going through in a situation like that. For one, it's a very short period of time. Second, you have to sign a confidentiality agreement that prohibits you from telling people why you're interested in the company. And third, you're trying to evaluate the entity thoroughly. We were just drawn into the process.

As we went through the process, it became quite apparent why the acquisition would have made sense. Bausch & Lomb—as Warburg Pincus obviously recognized—has a very strong geographical presence. They sell direct in some markets where we do not sell direct, so the company would have provided opportunities to go direct in those markets in a quicker fashion.

Also, B&L has a tremendous consumer name. And although AMO's products are not consumer-oriented to a grand degree, the consumer is playing a much more active role in the markets we serve. And despite the problems B&L had encountered in terms of recalls, they still had a very strong name.

Acquiring B&L would have enabled AMO to move into the category of contact lenses in a very quick fashion. That was the main appeal of a potential acquisition. However, it became quite apparent through the go-shop process that B&L's true intention was to go private. Despite our best efforts—including a better share price offer, representing a $10 premium—at the end of the day, their desire was to go private with Warburg Pincus. So we decided to pull out of the process.

But you know, if you don't learn from going through a process, then it's a waste of time. In this case, we learned a lot about AMO as a company—where we were strong and where we needed to improve. In evaluating how we would integrate B&L if we were to make the acquisition, we had to look at our structure globally. It was an interesting process, and we brought in an outside consultant to help us prepare for the integration. But at the same time, in case the acquisition wasn't successful, I asked the consultant to also evaluate our strengths and weaknesses. And as a result of the observations that came out of that analysis, we're going to do business a little differently. So evaluating the B&L purchase was by no means a wasteful process.

You asked whether AMO has adjusted its business strategy in light of B&L's decision to go private. And I would answer that the adjustments we've made weren't because B&L went private. Rather, we adjusted our strategy because, in the process of pursuing B&L, we took an x-ray of AMO with the help of some external expertise.

Going forward, do you expect AMO's acquisition strategy to be as aggressive as it has been in recent years? If so, what types of technologies are of greatest interest to the company?

Today, we are in the best position organically that we've ever been in. And frankly, even if AMO doesn't do another acquisition, we still have enough in the pipeline to continue our market leadership in the categories in which we operate.

However, the day my team and I stop evaluating potential acquisitions and start thinking that we're the smartest people on the face of the earth in our markets, that is the day we'll lose. I've witnessed several examples in the medical device industry—both in ophthalmics and in outside sectors—where executives have said, 'If we don't make it, it must not be very good.' With that attitude, you'll fall flat on your face.

Is AMO funding R&D more heavily now than it has in the past?

Yes. As a percentage of revenue, our goal is always 6–6½%. But, of course, when a company grows its revenue from $500 million to $1 billion, that percentage equates to a doubling of the investment in R&D. Our R&D expenditure has gotten as high as 7%, but our goal is right around 6½% of revenue.

Our three businesses represent different investments in R&D. Our eye care franchise usually only requires somewhere between 3 and 4% of revenue, whereas our ophthalmic surgical division tends to be a little higher, around 8–9%, simply because of the way in which those products are approved. But regardless of division, we will never miss an opportunity to invest in R&D if such an investment means we can accelerate a project or add one.

One of the lessons we took away from last year's external evaluation of the company was that we've traditionally had too many projects in R&D. And when that happens, you end up spending a lot of time on a bunch of projects rather than focusing your resources on the ones that are going to make a monumental difference. So going forward, we're focusing our spending on projects that are likely to have greater returns.


Money and Markets

To what extent does the current deterioration of the U.S. economy negatively affect domestic LASIK procedure volumes? In what ways is AMO looking to offset such declines?

To a grand degree, all of our businesses are influenced by the doctor. True, LASIK is a product line that consumers decide to pay for out of their pockets. Similarly, contact lens care comes out of consumers' pockets. They're not typically insurance reimbursed. However, consumers are influenced by their doctors in these areas.

However, in the United States right now, you can't pick up a newspaper or look at the TV without seeing news about the state of the economy. It's become the number one presidential election issue—even over the war in Iraq. And those economic concerns have affected the number of people walking in and having LASIK—because LASIK is still a cosmetic procedure. It comes out of the consumers' own pockets.

On our earnings call in February, we accounted for what we believe will be a degradation in the growth of the LASIK market in the United States. We think there will be double-digit growth outside the United States, but we think economic concerns are going to degrade the U.S. market itself.

Overall, the rest of our businesses are not likely to be affected by the economic downturn—especially those businesses that are reimbursed through the government. We also don't think contact lens care will be affected because it represents a fairly small investment by the consumer.

You've mentioned AMO's global presence. Geographically speaking, where does the greatest untapped market for the company's products exist?

We have a presence in all markets, and we sell direct in most of the major markets. Currently, I see the greatest market potential for us in Eastern Europe. We're already fairly strong in Asia-Pacific; we sell direct in markets such as Korea and Thailand. But we're not direct in many parts of Eastern Europe, and I think that region presents significant growth potential.

Japan is one market where our LASIK business is doing extremely well. The cataract business, on the other hand, is being adversely affected by the Japanese government's price regulations.

We're focused on growing our global business, not so much geographically, but more in terms of expanding our presence in noncapitated environments. We're trying to focus on the places where consumers will pay for our products.

Over the long run, the economy is going to fluctuate. There will be good and bad years. But in the end, our business is about visual outcomes. LASIK is not the same as going on a vacation in the Bahamas. If the doctor can clearly show a consumer that our products will enable them to see better, they will pay for it. This is not breast augmentation. This is actual enhancement of vision.

As people get older, their eyes degrade. It's one of those organs that definitely degrades over time. But if there is one of your senses that you don't want to go away, it's definitely your eyesight. And so people will pay for improvement—even if the government is not willing to pay for it. So it's incumbent upon us as a market leader to develop technologies that are not cost-prohibitive but that are clear improvements to a person's quality of life.


Nuts and Bolts

Describe the intellectual property portfolio surrounding AMO's products and the company's strategy for protecting its technology.

Frankly, if we were to rely only on IP protection to extend the life of our products, it's inevitable that somebody would simply come along with a better mousetrap.

However, IP does play an important role in our business, and we will defend it vigorously. For example, a couple of years ago, we had a WhiteStar Signature patent on one of the fluidics of our phacoemulsification that we believed our largest competitor, Alcon Inc. (Fort Worth, TX), infringed. We enforced that patent and were awarded a handsome judgment—even though we were the smaller company. Obviously, it's very costly to go to court today—even if you're right--because these cases can take two to three years or longer. But defending our IP was more than worth it; in the end, we were awarded $121 million in the case against Alcon.

Does AMO file a lot of patents?

Yes, we do file a lot. Obviously, it's costly and time-consuming, but patents are very key in our sector. Because again, products in the ophthalmic market move quickly, so companies need to innovate quickly. And innovation should be rewarded—that's why we file a lot of patents.

What significant clinical research is the company undertaking?

We're extremely active in clinical research. And that's not peculiar to ophthalmology. Overall, medical device manufacturers spend a significant amount of resources on clinical research.

For example, we are developing an accommodating intraocular lens that we plan to launch early in the next decade. The product is state-of-the-art, so we've spent a lot of time and money working with physicians on a global basis to test iterations.

Oftentimes, a new design will go through seven to 10 iterations before coming to fruition. After all, you're working with optics. You're replacing something natural with an intraocular lens, which uses the mechanism of the eye. Supplanting that is not easy to do.

Even with contact lens care products, companies need to spend a lot of time in the clinic working with physicians and their teams. Those are products that are placed on a contact lens, and there are new materials being developed every day. So developing these products takes a lot of time and money because, whatever the initial design, I can almost guarantee that it will still pass through at least three to four iterations before the product comes out.

In terms of marketing, what are your primary channels and how do you relate with your customers? In many cases, the marketing of LASIK therapies is conducted by clinics or individual clinicians. What role does AMO play in devising or paying for such marketing activities?

Our customers—ophthalmologists, optometrists, and opticians—are the primary mechanisms through which we reach end-users. And then, of course, there are operating room nurses who influence the purchasing decision and retailers who distribute the product.

But mainly, our customers are the eye care professionals. They're the ones making the decisions on products. Even contact lens care is a very brand-loyal segment. In fact, about 75% of the time, patients stick with the product that their doctor recommended—even though, here in the United States, they go to a retailer to purchase it.

Even with LASIK, the consumer might want the procedure, but they don't really make the decision as to what type of laser is used. That's the physician's decision.

That said, we are very cognizant that consumers are playing a much more active role in identifying who they think are the best physicians. And they're investigating the technologies used by those physicians. Thus, we've created some innovative marketing programs, especially for LASIK, that we provide to physicians.

One such campaign is what we call iLASIK. It is a branded campaign for physicians who use the three mechanisms of our product line: WaveScan mapping and guidance, corneal flap creation with the IntraLase femtosecond laser, and the excimer laser vision correction procedure using VISX technology. These physicians are included on the Web site www.ilasik.com, where patients can go to see who is using the best technology. These are the same products that NASA recently approved for astronauts and that the U.S. military uses for fighter pilots. So there's a consumer mentality that if NASA uses it, it's got to be good. But in order to be included on this Web site, physicians have to use our technology.


Eyes on the Future

Looking at the big picture, what do coming decades hold in terms of technological advances?

First off, our technology addresses a wide range of demographics. There's the Gen-Y and Gen-X groups—that 18- to 34-year-old range. Then there is the 35- to 60-year-old crowd, which includes the baby boomers. And then there is the 60-plus club. All three of those groups are heavily influenced by their visual outcomes.

Obviously, the elderly group is facing cataracts, which is the aging of their lenses. They can't see. It's not graying of the hair—it's graying of the lens. More often than not, when you talk to somebody after cataract surgery, they'll tell you that they didn't remember how blue blue was and how green green was.

Then, you have the baby boomers, who are finding it a challenge to read their shampoo and medicine bottles. Their arms just aren't long enough—that's presbyopia.

And finally, you have the young population, which is very athletic. But they don't want to wear glasses while they play, so they're getting contact lenses. So, regardless of age, people are focused on their visual outcomes.

Beyond that, there's the question of how crisp of vision can be achieved with an intraocular lens. Two or three years ago, we introduced a lens called Tecnis. The government decided to give practitioners a $50 premium on reimbursement when they chose the Tecnis lens because AMO was able to demonstrate its safety profile in relation to driving. We showed that, due to their clarity of vision, people with Tecnis lenses were able to brake quicker than those who had other lenses. So even though the government has been looking to cut back prices, they've actually increased payment for what's being called 'a new-technology IOL.' It's a safer, more technologically advanced lens. And so, that example just goes to show that there is no limit to where technology can go.

Five to 10 years ago, if a patient had a lens put in, it required a two- to three-day hospital stay. Patients would have sutures on their eye, and they'd have to wear glasses. Today, a patient can have surgery at 8 o'clock in the morning and be driving or reading with their grandkids at noon. No hospital stay, no sutures. The lens goes through a 2.8-mm incision—and we're looking to get that below 2 mm—meaning even less trauma to the eye.

Across all ophthalmic sectors, we continue to see advances. Contact lenses today are very comfortable to the eye. They're thin and have a high water content. With LASIK, one of the greatest advances has been lasers—they're less intrusive and provide better outcomes. AMO is the leader in this area. We have both an excimer and a femtosecond laser. Going forward, lasers will be used more to treat ocular conditions—even ones that our company isn't focused on today, such as back-of-the-eye conditions.

In short, we're in an evolving marketplace. All three demographics are heavily influencing our business, and technology plays a very important role in how we go forward.

Copyright ©2008 MX

U.S. Justice Department Scrutinizes Orthopedic Firms

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

For more than two years, leading orthopedic manufacturers have lived under a cloud of intense scrutiny by the U.S. Department of Justice (DOJ), which focused its attention on sales and promotional practices in the orthopedics sector. At the end of September 2007, DOJ announced that it had induced the five companies under investigation to enter into a settlement agreement. In return for shelving the government's probe of alleged industry violations of the Federal Healthcare Antikickback Act and the False Claims Act, the companies accepted the imposition of corporate integrity agreements, deferred prosecution agreements, and fines totaling $311 million.

Stryker Corp. (Kalamazoo, MI), which was the first company to voluntarily cooperate with the DOJ inquiry, was not required to pay a fine. The company signed a nonprosecution agreement and promised to adhere to the same reforms as those imposed on the other companies during an 18-month monitoring period.

Each of the other firms—Biomet Corp. (Warsaw, IN); DePuy Orthopaedics Inc. (Warsaw, IN), a Johnson & Johnson company; Smith & Nephew plc (London); and Zimmer Holdings Inc. (Warsaw, IN)—was required to pay a fine. The amounts of the respective fines were: Biomet, $26.9 million; DePuy, $84.7 million; Smith & Nephew, $28.9 million; and Zimmer, $169.5 million.

According to U.S. attorney Christopher Christie, lead prosecutor on the case, the amount of each company's fine was determined on the basis of its market share, not the degree of its alleged wrong-doing. In a strongly worded statement about the settlement, Christie referred to the alleged violations as a "common practice" among orthopedics firms. "This industry routinely violated the antikickback statute by paying physicians for the purpose of exclusively using their products," said Christie.

Kevin McAnaney, a Washington, DC-based attorney who specializes in healthcare fraud and abuse issues, says the settlements are likely to establish new benchmarks for managing physician consulting arrangements. "As part of the settlements, each of the companies agreed to develop an annual comprehensive needs-assessment document that sets out and provides written support for the specific consulting services needed in the coming year, the quantity of services, and their fair market value, by discrete category," he says.

"In addition, as part of the settlements, the companies have adopted specific policies on payments for product development services, including royalties; payments for clinical data, research activities, and fellowships; contributions to private foundations associated with physician consultants; and distributorships with which physicians have a relationship," he adds. "Proactive companies will be reviewing their compliance policies to address these areas of concern."

Despite the settlement, companies in the orthopedics sector may have little time to catch their breath, as yet another investigation of the industry is already under way. This time, Medtronic Inc. (Minneapolis) joins Biomet, Smith & Nephew, Stryker, and Zimmer in an apparent probe of potential violations of the Foreign Corrupt Practices Act.

Just days after the DOJ settlement was announced, the five orthopedic firms reported that they had received formal notice of an investigation by the U.S. Securities and Exchange Commission (SEC; Washington, DC). DePuy was not included. Earlier this year, the company notified both DOJ and the SEC that one of its senior international executives was resigning over alleged improper overseas payments.

Although the SEC has declined to comment on the matter, industry analysts generally see the commission's inquiry as a continuation or extension of the original DOJ investigation. And, they say, it will likely take just as long to come to a resolution.

Copyright ©2008 MX

Corporate Conduct amid Recalls

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

In recent years, both the pharmaceutical and medical device industries have been hit by many high-profile product recalls, the effect of which has been to undermine the nation's confidence in nearly every segment of the healthcare sector.

In particular, product recalls by cardiovascular product manufacturer Guidant Corp., now part of Boston Scientific Corp. (Natick, MA), have garnered significant attention both in the media and in courtrooms. During 2005 and 2006, the company recalled hundreds of thousands of its implantable cardioverter-defibrillators (ICDs) and pacemakers due to the possibility for malfunction.

Although recalls are not unusual among medtech manufacturers, the debate surrounding Guidant intensified after The New York Times reported that the company failed to properly inform physicians and patients about a potentially fatal flaw in its devices. Company executives defended the decision to limit notification by asserting that the devices met engineering standards and that the risk involved in surgery to remove the devices was greater than the risk associated with leaving the device implanted.

As Guidant's acquirer, Boston Scientific currently faces numerous class-action and individual lawsuits nationwide. The claims and damages sought vary among the lawsuits, but most hinge on issues of negligence related to the company's failure to properly warn physicians and patients of the dangers associated with the devices.

"Guidant's alleged failure to adequately disclose the risks associated with its ICDs and pacemakers also highlights the reach of the Sarbanes-Oxley Act of 2002 (SOX)," says J. Mark Ray, a partner with Alston & Bird LLP (Atlanta). "SOX mandates so-called 'disclosure controls' and sets strict standards for corporate governance and financial reporting. So, Guidant's failure to disclose could have also violated SOX and exposed it to enforcement action from the Securities and Exchange Commission. Perhaps most important to the former executives and directors of Guidant, some theories of corporate liability under SOX and state corporate laws could give raise to personal liability."

Of greater importance to medical device manufacturers outside of Boston Scientific-Guidant is the attention and reaction that company's woes have drawn, not only from the public and media outlets, but also from industry leaders and regulatory agencies. The pending lawsuits against Guidant raise serious legal, regulatory, ethical, and financial questions, and how each element plays out for the company could have implications for all medical device manufacturers.

Copyright ©2008 MX

Battle Heats Up over Proposed FDA Budget

BUSINESS NEWS

In February, the Bush ad-ministration announced a proposed FDA budget of $2.4 billion for the 2009 fiscal year. Under the president's proposal, FDA's Center for Devices and Radiological Health (CDRH) would receive $290.9 million—an increase of 2.5% over FY08.

Commenting on the proposed funding for FDA's medtech-related activities, Steven Grossman, deputy executive director of the Alliance for a Stronger FDA, says, "CDRH doesn't do so well in this budget. Nobody does, but CDRH does particularly poorly."

Although many advocacy groups joined the alliance in taking a hard-line position on the proposal, the leading medtech industry associations—which are both alliance members—offered more-measured responses. Stephen J. Ubl, president and CEO of AdvaMed (Washington, DC), said, "While this additional funding is a good start, the FDA could benefit from additional increases in appropriations to better prepare for the future and to perform its core functions."

Mark Leahey, executive director of the Medical Device Manufacturers Association (Washington, DC), said, "While we believe that CDRH could definitely use more evaluators to review submissions, we do not especially see FDA's device-sector needs as perhaps as pressing as what appear to be legitimate concerns regarding FDA's oversight activities involving food, drugs, and other areas."

Many agency observers agree that FDA's mission and scope have significantly expanded over the past 25 years. Thus, some argue that the agency should receive increased funding from Congress rather than increased user fees. Failing additional appropriations, some contend that the agency's mission should be modified or scaled back.

Freiberg

Glen Paul Freiberg, president of RCQ Consulting (Rancho Santa Fe, CA) contends that the agency needs to set limits on its demands for new resources. "FDA needs to adopt more business-oriented analysis methods, particularly with regard to the application of resources to perform its primary mission--that is, determining, prioritizing, and differentiating what it needs to do rather than what would be nice to do," he says.

Copyright ©2008 MX

Money Matters

BUSINESS NEWS

In 2007, medical device companies were involved in 385 venture capital deals with an investment total of $3.9 billion, reports the PricewaterhouseCoopers-National Venture Capital Association MoneyTree Report. Notably, 114 device companies received first-time financing, representing a slight decrease compared with the 118 medtech companies receiving first-time financing in 2006. However, the aggregate amount invested in first-time medtech financings in 2007 was $838 million, a 43% increase over the $587 million invested in first-time medtech financings in 2006.

A recent study released by industry association AdvaMed (Washington, DC) reports that the highly competitive nature of the medical device industry has limited the rate at which medical device prices are increasing. Between 1989 and 2004, spending on medical devices and in vitro diagnostics remained relatively constant as a proportion of total national health expenditures. Meanwhile, medical device price increases have been modest at an average annual rate of 1.2%. During the same period, the medical consumer price index grew at an annual rate of 5%, and the overall consumer price index grew at a rate of 2.8%.

Roundtable: Sales Force Management

ADVERTISING, DISTRIBUTION, & SALES

Sidebar:

Matters aren't getting any easier for medtech sales reps. Already challenged by a fickle third-party payer system and intense competition in nearly every sector, today's reps are also facing an increasing array of vendor credentialing requirements and tougher legal scrutiny than ever before. For this issue's roundtable discussion, MX called upon a panel of experts to provide their views about the current state of medtech company sales efforts, and the implications of current trends for sales management in medical device companies (see sidebar).

MX: Gaining access to hospital purchasing decision makers is becoming increasingly difficult for medical device manufacturers. In recent years, medical device sales reps have seen a proliferation of requirements that providers are demanding vendors meet in order to call on them. How prevalent are vendor credentialing programs among hospitals, and what types of requirements are most common?

Mark Adams: On the East Coast, Philadelphia and Boston seem to be the cities that are jumping on vendor credentialing requirements faster than anywhere else. Hospitals are telling reps that after a certain time they will not be allowed in the hospital unless they have paid a fee. But the fee is expensive, and it's becoming restrictive.

One hospital system in Philadelphia also wants vendor reps to take a proficiency test to ensure that they know their products. I'm not exactly sure how they are going to be able to quantify that.

For the Philadelphia area, a company called Status Blue (Marietta, GA) has begun to tout itself as a healthcare vendor certification service. According to this firm, the company pays $180 for each rep, and then the rep is certified for several different hospitals in the area. The materials I saw didn't say which hospitals had signed onto the program, only that Hahnemann University Hospital was going to begin using the program.

Mark Miller: The way that these requirements are being imposed by certain hospitals or groups of hospitals does seem to be a little bit dependent on region. For instance, the University of Wisconsin charges $250 to register a rep. The rep may also be required to take some kind of test. That registration allows the rep to call on people throughout the university, and to bring in their managers.

Other places are requiring reps to come in on a Saturday and complete 4–8 hours of training before they will be permitted to come into that single institution. Obviously, for smaller companies such as Zonare, that represents a significant barrier that could prevent our reps from selling successfully.

Another vendor credentialing company is called RepTrax (Lewis­ville, TX). I guess it costs $175 a year for a rep to join that service. In addition, the reps have to go online and enter a lot of information, and then prove through some kind of certification that they have the proper vaccinations and immunizations and so on. Hospitals also have to pay a fee in order to join this service.

How are medtech sales forces adapting to vendor credentialing programs? How does the effect on small manufacturers differ from the effect on larger companies with more reps?

Miller: There's no question that larger companies are at an advantage because they can negotiate for their entire company across a large number of hospitals. And since those hospitals would have more than a single rep calling on them from that company, it makes sense for them to set up an agreement on a companywide basis.

Adams: It's also not good for the hospital. Because smaller companies that are just ramping up may very well have a better mousetrap.

Vendor credentialing amounts to a revenue center for hospitals, which means it's an expense line for sales managers. Overall, what are you having to put in your budgets to accommodate the fees that hospitals are charging?

Adams: That's the problem; we honestly don't know. I can't budget for something that I have absolutely no information about. And that's really what it boils down to at this point. We don't have any kind of information from these people at all.


Shifting Audiences

Even before pay-to-play arrangements began gaining traction and making it difficult for reps to get into hospitals, many institutions had already begun to change their ways of dealing with medtech sales reps. How has the purchasing power in the medical device marketplace changed in recent years?

Marshall C. Solem: We've definitely seen a continued increase in the involvement of other stakeholders—beyond the physician, surgeon, and clinical staff—in the decision process. Now, specialists in areas such as infection control, quality, materials management, purchasing, and so on, are playing a much larger role. And increasingly, depending upon the product, IT specialists are also getting involved.

These changes are really shifting the dialogue from a sale based on clinical effectiveness to a sale that relies on economic factors and a much more overarching value proposition.

How does that trend change the relationship that your sales reps have with physicians? And how does it affect your company's sales strategies?

Adams: It's clear that physicians have lost a lot of power and clout. Our company sells into the electrophysiology lab, and the connection has always been to their interventional partners. But now those partners—because of the diminished status of the stent market—don't have the same financial clout in the hospital that they had in the past.

If your reps are selling less to physicians than in the past, does this also reduce the feedback and input that they get from physicians?

Adams: It's very clear to us that physicians don't know what they can purchase. When asked, they all say they want to buy those disposables and that console. But then they will also admit that they don't know if they have any money.

So then the sales rep has to go from the physician who is specifying the product to other hospital employees. And at this point, the whole game changes.

The lab director says, 'I don't have any money for that. I can't buy a piece of capital equipment. I can't even rent one.' And then the rep has to climb the ladder from there to the hospital administration, while at the same time coordinating every step with the purchasing department.

And at every rung of the ladder, the rep has to have a really, really good story to tell about why this product is going to be not only beneficial for patients, but also an enhancement to the hospital's profit centers. Without that, even a product that already has FDA approval and third-party reimbursement coverage is not going anyplace.

Dale Hagemeyer: One way to combat possible decreases in feedback is to look to syndicated data sources such as Health Market Science (www.healthmarketscience.com), for data about which devices physicians are prescribing for their patients. These data are gleaned from actual insurance claims.

It is becoming critical that companies understand how effective their sales efforts are at influencing physicians. It is one thing for a physician to say that he or she favors a company's product. It is quite another for a company to be able to monitor physician behavior and have data to describe it.

In order to better differentiate themselves, some companies have begun to perform economic outcomes research so that they can provide that information to their sales reps. In your experience, what are companies doing beyond their clinical studies to support the economic case in favor of their products?

Solem: In our clients, we're seeing a lot of growth in health outcomes departments and reimbursement departments, so that companies can start tailoring their message and their value proposition to all these other stakeholders—particularly the economic stakeholders.

Some companies are putting in place special business-oriented reps—separate from their clinically oriented reps—to try to better understand and build a relationship with these other stakeholders in the institution. Sometimes a company can get its clinical reps to perform that role, so that there is only one person involved. In other cases, companies are splitting the business role and the clinical role into two different positions.

But they are clearly doing postapproval studies and tracking. And they are conducting lots of outcome studies in partnership with some of their best customers, so that they have a real story that they can tell to the economic stakeholders in order to be successful in this realm. Because it's clear that the clinical story alone doesn't cut it anymore.

Miller: When we teach and train our sales reps, we like to have them talk about the return on investment. We prepare them to perform a complete analysis of the economics of the decision to purchase or acquire a piece of capital equipment like ours, including the return on investment, how long it will take to pay it back, and what kind of revenues can be expected.


Sales and Ethics

The marketing and sales practices of medtech companies are coming under increasing scrutiny. How is this scrutiny affecting how medical device manufacturers (across all sectors) manage their sales functions?

Solem: We're hearing much more discussion from our clients about the need to keep sales and marketing practices within guidelines. Compliance is starting to become part of performance evaluations for regional vice presidents and managers, and obviously an expectation for individual sales reps.

Many companies are relieved that medtech sales practices are returning to an emphasis on which company can deliver the products with the best clinical and economic outcomes for their customers, rather than which company has the biggest or best entertainment budget.

However, in some of these discussions we still hear the lament that not everybody is playing by the same rules, and that competitors are playing outside the guidelines.

Adams: From my perspective, the ethics, morals, and principles of my company all trickle down from my chair to my sales force. And actually, each of us, as a sales manager, knows exactly what our people are doing—or pretty close—because the money that they spend has to come from someplace. And I'm the guy who has to sign off on expenses.

So I encourage our reps to do the right thing. And I explain to them on a regular basis that this is the way we're going to do business.

When I'm expounding to my reps and asking for more sales interactions with key positions and key opinion leaders, for instance, I make it very clear that those peoples' opinions should not be considered for sale. Because if they are, they are also for sale to somebody else with much deeper pockets that we couldn't compete with.

Miller: Our company is subject to two significant types of reporting requirements that limit the potential for abuses. First, because we have a contract to supply the Veterans Administration (VA), we have to report all of our deals to the government. And second, because we are a publicly traded company, the Sarbanes-Oxley Act requires that we follow the rules for revenue recognition, making sure that we have delivered on every verbal or written promise to every customer we've sold to. It costs companies a lot of money to track this kind of stuff, and those costs are especially stiff for small companies.

So ethics guidelines are only one means that companies can use to control sales practices. From a practical standpoint, reporting requirements such as those imposed by a VA contract or by the Securities and Exchange Commission's revenue recognition laws can be just as important.

Hagemeyer: I think that business strategist and author Don Tapscott has the right approach: transparency is a critical empowerer. Last fall I spoke at a conference with Senator Paul Sarbanes (D—MD). We had a chance to talk a bit about transparency as a philosophy as opposed to a requirement. It is quite liberating once you 'get it' and have the ability to 'do it.'

Many companies have adopted the AdvaMed Code of Ethics as a guide for sales interactions with healthcare professionals. How do companies ensure sales force compliance with these policies (or others)? Are these policies adequate guides for keeping companies out of trouble? What kinds of activities do you undertake to make sure that all of your sales reps are trained in these policies?

Miller: We have not adopted the AdvaMed Code of Ethics. However, we have our own policies and processes in place to govern how our sales and applications people go out and make sales calls.

Solem: Particularly the larger clients that we work with have all pretty much adopted the AdvaMed code. But merely agreeing to such a code is never enough. To make sure that there is compliance throughout the company, the code really has to receive top-to-bottom commitment and buy-in, and programs have to be created to train employees about the code and promote its use.

Out of concern over the behavior of pharma sales reps, the District of Columbia recently voted to require the registration of pharmaceutical company sales reps. Do you think city, state, and regional authorities will begin to adopt this strategy for medical device reps as well?

Solem: We're seeing a lot of moves directed at the pharmaceutical industry. People are trying to limit the access that pharma reps have to healthcare providers, and limit their ability to use information on physician prescribing behaviors and things like that. But a lot of these moves—particularly in New Hampshire and the northeast—have been thrown out of court as not legitimate.

The effort in Washington, DC, has something of a different twist to it. It is motivated by a combination of ethics concerns as well as a desire to restrict promotional efforts that lack content. Those promotional efforts might not be unethical, but they are often more hype than substance, so there is still an interest in controlling them. Whether these restrictions will survive future court challenges remains to be seen. But in the future, it seems likely we'll see more such efforts. How they will ultimately settle out is anybody's guess right now.

Hagemeyer: I work closely with pharma as well as medical device companies. I don't think this type of reaction will spread widely. The state gift laws have already restricted what reps can do in terms of influencing with things of value. It would take a lot of wrangling to get the states to agree on a federal version of this type of legislation. Watch for pharma to be the pattern, but don't expect much in the near future. The worst is over.

This summer, the French government is implementing a sweeping registration and certification program for sales personnel. It is a real nightmare for the companies behind those reps. Among all the EU nations, only the French are doing this, because it is so restrictive and labor intensive.

Fortunately, we're a long way from where the French are.


Structuring Sales Forces and Compensation Models

Medical device manufacturers have multiple options when it comes to structuring their sales forces. How are medtech companies determining whether to build direct sales forces, rely on independent sales reps, or formulate some sort of hybrid approach? What types of factors need to be considered?

Solem: A lot of things need to be factored in. One of the biggest considerations—particularly for small manufacturers with a niche product, or even companies seeking to market a broadly appealing platform technology to medical specialists for a specific niche procedure—is whether the company can afford to build the critical mass of a sales force by itself.

If the company can't afford to build that core group by itself, hiring independent reps, or going through a distributor or partner with a broader portfolio, can be the way to go. In fact, being part of a larger sector-specific portfolio is often a good way for a start-up company to gain access to the market for its product.

On the flip side are companies that choose to build their own direct sales forces. Doing so is quite expensive, but also gives companies a lot of advantages. Not the least of these is control over the way the company approaches its customers. Companies lose a lot of that control when they go through independent reps, which makes that a somewhat risky choice.

How strong is the competition to recruit medtech salespeople? How does that competition affect your strategic thinking with regard to elements such as Marshall just described?

Adams: CryoCor's area of specialization is electrophysiology treatment of atrial fibrillation. And in this realm, it takes a specific knowledge set for sales reps to be successful. I don't have any bias against distributors, but I don't typically find the knowledge set that we need in distributor reps. Moreover, I agree that overall, a company gets better coverage from a direct rep.

Nowadays, however, one important criterion is how fast the candidate can hit the ground running. Smaller medtech companies, especially, just can't give a candidate 90–180 days to get up and rolling. We need somebody who is going to get in front of customers and begin making an impact in a very short period of time. Consequently, the candidate's history and what their experience enables them to bring to the table can be very important.

Merger and acquisition activity in the medical device industry continues to accelerate. Following a merger, overlap in account coverage and roles, downsizing, or even a need for relocation can lead to huge stress and unrest among salespersons. What are the most crucial considerations for medtech sales executives looking to effectively manage small- and large-scale sales force integrations?

Solem: One of the biggest issues that we see during integration is that the salespeople lose sight of the fact that their primary job is to sell to and support the customer. They wind up spending too much time on tasks related to integration, and the customer gets lost in the process. So one thing that absolutely has to stay in the forefront during integration is that the main job of the company and all of its employees is to take care of the customers.

A second big issue is for the newly merged company to focus on retaining its best people from both the buying and selling companies. Again, competitors are wise to the mayhem associated with mergers. Uncertainty within either of the merging organizations can make employees begin to look around for their best opportunities. And this impulse doesn't just come over recently hired or mediocre reps; even good, long-time employees will use company uncertainty to explore their options.

Adams: What's really challenging right now is the environment that's been created by all of the mergers in the cardiology space, by the problems that Guidant-Boston Scientific is having, and by Johnson & Johnson cutting back after its ill-fated purchase of Conor Medsystems. A lot of reps are on the street because of these issues.

So now, when reps—and even sales managers—hear about a potential suitor, they are already heading for the door. This environment makes retention extremely difficult. Salespeople have to trust their company and its managers implicitly. But now, salespeople don't really trust anybody on a regular basis. That's why they are so independent and why they are doing what they are doing. But it's a real challenge for management.

Miller: I have been involved in a few mergers and acquisitions, and I believe that I've seen the good, the bad, and the ugly among them. But I do believe that the most important thing a merging company can do is to retain as many of its employees as it possibly can, focusing on the retention of salespeople in particular.

Very early on, companies must focus on what the sales management structure is going to be, so that they can quickly give their salespeople a sense of security. Companies need to get those teams focused, motivated, and going in the same direction, so that they can begin to make everyone feel comfortable working with one another.

Copyright ©2008 MX

Roundtable: Sales Force Management

ADVERTISING, DISTRIBUTION, & SALES

Sidebar:

Matters aren't getting any easier for medtech sales reps. Already challenged by a fickle third-party payer system and intense competition in nearly every sector, today's reps are also facing an increasing array of vendor credentialing requirements and tougher legal scrutiny than ever before. For this issue's roundtable discussion, MX called upon a panel of experts to provide their views about the current state of medtech company sales efforts, and the implications of current trends for sales management in medical device companies (see sidebar).

MX: Gaining access to hospital purchasing decision makers is becoming increasingly difficult for medical device manufacturers. In recent years, medical device sales reps have seen a proliferation of requirements that providers are demanding vendors meet in order to call on them. How prevalent are vendor credentialing programs among hospitals, and what types of requirements are most common?

Mark Adams: On the East Coast, Philadelphia and Boston seem to be the cities that are jumping on vendor credentialing requirements faster than anywhere else. Hospitals are telling vendor reps that after a certain time they will not be allowed in the hospital unless they have paid a fee. But the fee is expensive, and it's becoming restrictive.

One hospital system in Philadelphia also wants vendor reps to take a proficiency test to ensure that they know their products. I'm not exactly sure how they are going to be able to quantify that.

For the Philadelphia area, a company called Status Blue (Marietta, GA) has begun to tout itself as a healthcare vendor certification service. According to this firm, the company pays $180 for each rep, and then the rep is certified for several different hospitals in the area. The materials I saw didn't say which hospitals had signed onto the program, only that Hahnemann University Hospital was going to begin using the program.

Mark Miller: The way that these requirements are being imposed by certain hospitals or groups of hospitals does seem to be a little bit dependent on region.

For instance, the University of Wisconsin charges $250 to register a rep. The rep may also be required to take some kind of test. That registration allows the rep to call on people throughout the university, and to bring in their managers.

Other places are requiring reps to come in on a Saturday and complete 4–8 hours of training before they will be permitted to come into that single institution. Obviously, for smaller companies such as Zonare, that represents a significant barrier that could prevent our reps from selling successfully.

Another vendor credentialing company is called RepTrax (Lewis­ville, TX). I guess it costs $175 a year for a rep to join that service. In addition, the reps have to go online and enter a lot of information, and then prove through some kind of certification that they have the proper vaccinations and immunizations and so on. Hospitals also have to pay a fee in order to join this service.

Are these practices mostly being adopted in academic healthcare centers, for-profit hospitals outside of university centers, or both?

Miller: I think it's in both. We've seen it in community hospitals as well as teaching institutions.

Adams: It's almost comical when you're standing in an inner-city hospital with a gigantic trauma department, and the hospital staff are asking guys in suits and ties for credentials, while everyone else can just saunter around the hospital. It's absolutely amazing.

How are medtech sales forces adapting to vendor credentialing programs? How does the effect on small manufacturers differ from the effect on larger companies with more reps?

Miller: Zonare is a small start-up company based on the West Coast. But we're trying to offer training at some of our sales meetings, and we're trying to prepare our representatives and encourage them to share best practices. We've even offered to provide immunizations when our representatives come out to the home office.

There's no question that larger companies are at an advantage, because they can negotiate for their entire company across a large number of hospitals. And since those hospitals would obviously have more than a single rep calling on them from that company, it makes sense for them to set up an agreement on a companywide basis.

Smaller companies often find themselves in more of a hit-or-miss situation. Each time we go into an institution, we don't know what's going to happen. Sometimes we get tripped up by unexpected requirements, and our rep has to retreat. And a lot of times the reps don't even go into the hospital, they just go somewhere else. And that's not good for us.

Adams: It's also not good for the hospital. Because smaller companies that are just ramping-up may very well have a better mousetrap.

These fees pretty much amount to extortion. And I'm not sure I'm willing to pay fees like that just so my people can go in to offer a hospital significant pricing underneath my competitor, and all the other things that we've got to offer.

We sell a very large piece of capital equipment that drives catheters. It costs a fortune to ship this equipment into a hospital to demonstrate it, or to loan it to a facility for 90 days so that it can perform more procedures. To be required to pay a fee on top of that just doesn't seem right.

It seems that some commercial firms are heading in the direction of providing standardized vendor credentialing. How far along is that trend, and how acceptable do hospitals consider such credentials?

Adams: It seems to be hit and miss. If I had more information about some sort of standardized program, I would feel a bit more comfortable. But right now, I don't know from hospital to hospital or region to region who I'm going to be dealing with or what the institution might require.

We've not gotten the standard vendor letters that most purchasing departments send out, saying that we should be prepared for particular requirements. Or, for instance, warning us that reps are not going to be able to buy lunches at holidays. We're not getting any of that communication; we're basically just walking into the hospitals and getting blindsided.

Miller: It would certainly be nice if there were some standardization. But one doesn't get the impression that the firms that are currently providing credentialing services are in any hurry to head that direction. Instead, it seems like they are just trying to plug themselves into a situation that is very frustrating for companies, in order to make some money out of the deal.

It would be nice if the American Hospital Association or another appropriate body would issue a position statement on these practices, indicating the expectations for both hospitals and vendors. That way, companies would know from the beginning how to train their sales team, and individual reps, and applications folks. They would know what to expect, and they would expect the same thing everywhere they went.

Vendor credentialing amounts to a revenue center for hospitals, which means it's an expense line for sales managers. Overall, what are you having to put in your budgets to accommodate the fees that hospitals are charging?

Adams: That's the problem; we honestly don't know. If I could standardize at $185 per rep and try to calculate a total based on their number of accounts, the situation would be a lot more comfortable. But I have no idea what each of these services is going to charge, or how many hospitals are going to be involved.

I can't budget for something that I have absolutely no information about. And that's really what it boils down to at this point. We don't have any kind of information from these people at all. And it's just impossible to budget without knowing what I'm going to have to do.

Miller: Ditto that.


Shifting Audiences

Even before pay-to-play arrangements began gaining traction and making it difficult for reps to get into hospitals, many institutions had already begun to change their ways of dealing with medtech sales reps. How has the purchasing power in the medical device marketplace changed in recent years?

Marshall C. Solem: We've definitely seen a continued increase in the involvement of other stakeholders—beyond the physician, surgeon, and clinical staff—in the decision process. Now, specialists in areas such as infection control, quality, materials management, purchasing, and so on, are playing a much larger role. And increasingly, depending upon the product, IT specialists are also getting involved.

These changes are really shifting the dialogue from a sale based on clinical effectiveness, to a sale that relies on economic factors and a much more overarching value proposition.

Consequently, companies are trying to figure out how to retool their sales forces, whether through training or other means. Often, they are retooling their messaging and their marketing materials in order to deliver this new, broader message, and to make them work with all the new and varied stakeholders in the hospital setting.

How does that trend change the relationship that your sales reps have with physicians? And how does it affect your company's sales strategies?

Adams: It's pretty clear that physicians have lost a lot of power and clout. Our company sells into the electrophysiology lab, and the connection has always been to their interventional partners. But now those interventional partners—because of the diminished status of the stent market—don't have the same financial clout in the hospital that they had in the past.

So, it's much more difficult for us to help the physician get his requests for the equipment and disposables that he wants through the purchasing department.

I don't know that particular purchasing decisions are actually being influenced by the purchasing department. But overall, administrative considerations are playing a larger role now than in the past. The hospital only has x dollars to spend, and it is going to make sure to expend that money only in departments that are making a profit.

So, I don't know if it's a purchasing issue so much as it is an administrative issue.

If your reps are selling less to physicians than in the past, does this also reduce the feedback and input that they get from physicians?

Adams: It's very clear to us that physicians don't know what they can purchase. When asked, they all say they want to buy those disposables and that console. But then they will also admit that they don't know if they have any money.

So then the sales rep has to go from the physician who is specifying the product to other hospital employees. And at this point, the whole game changes.

The lab director says, 'I don't have any money for that. I can't buy a piece of capital equipment. I can't even rent one.' And then the rep has to climb the ladder from there to the hospital administration, while at the same time coordinating every step with the purchasing department.

And at every rung of the ladder, the rep has to have a really, really, good story to tell about why this product is going to be not only beneficial for patients, but also an enhancement to the hospital's profit centers. Without that, even a product that already has FDA approval and third-party reimbursement coverage is not going anyplace.

Dale Hagemeyer: One way to combat possible decreases in feedback is to look to syndicated data sources such as Health Market Science (www.healthmarketscience.com), for data about which devices physicians are prescribing for their patients. These data are gleaned from actual insurance claims.

It is becoming critical that companies understand how effective their sales efforts are at influencing physicians. It is one thing for a physician to say that he or she favors a company's product. It is quite another for a company to be able to monitor physician behavior and have data to describe it.

What are companies like yours having to do to accommodate all of these different groups that are influencing sales?

Miller: Zonare is in the imaging business, with an ultrasound imaging device that physicians and sonographers use to diagnose patients. But a lot of the hospitals that we sell into are trying to commoditize products. In many departments, hospitals are trying to get their buyers and users of equipment to say that there is a set group of devices that are good enough—in effect, that it would be okay for the hospital to pick from any of two or three different equipment brands.

From this perspective, physicians have lost much of their previous influence over purchasing decisions, and the importance of clinical performance has been greatly watered down.

Nevertheless, we still try to identify the physicians and sonographers inside of a hospital or department that do have clout. And we try to teach them that, in spite of what the hospital is telling them, they still have a lot of power in making a purchasing decision.

Because Zonare is a small company, product and brand awareness is not as strong as with larger, more-established companies. So we need physicians to step in and say, 'I've got to have this and nothing else.'

We encourage physicians to speak up if they see a technology that makes a difference and offers clinical value, where the value proposition includes both better patient care and reduced cost. Instead of just rolling over, those physicians are urged to stand up and make it known which products they want.

Consequently, we are training our salespeople to identify the doctor-drivers within hospital departments who will help to make it possible to buy our products.

Adams: Mark, I'm curious about all the consolidation that's going on in your end of the business, where large imaging companies such as GE and Philips are gobbling up everybody else.

Do you think that the pressure being exerted by hospitals to reduce the number of vendors to only two or three is a driving force behind such mergers and acquisitions? In effect, is this a factor that is motivating companies such as GE and Philips to keep buying small companies—companies like yours—to make sure that they retain control over hospitals' lists of approved vendors?

Miller: Yes. There's no doubt that hospitals are trying to do business with fewer vendors. And at the same time, they want to keep companies such as GE and Philips on their approved list, so that they can buy those companies' systems. This does create an incentive for large imaging companies to snap up smaller, start-up players.

Another incentive results from the fact that such large players don't really innovate anymore. Their R&D departments don't generate innovations. Instead, they continue to make products similar to what they've had before. And when something new comes out that is innovative and makes a difference, then they'll buy it.

Do the circumstances that we're seeing in the device industry essentially compel small companies to be willing to sell when they reach the point at which they can't expand further without being part of a larger entity?

Adams: For several of the companies I've been with over the years, I was brought in specifically to build and sell them. So I have a little experience in this area.

At this point, it's impossible for a company to succeed by being a one-trick pony. A company will get to a certain level of revenue that corresponds to a certain level of required compliance activities, and one of several scenarios will emerge.

Publicly traded companies like ours really don't have much choice if they are approached by an unwelcome suitor. If the offers are anywhere near to being reasonable, they simply have to give in.

By contrast, privately held companies either run out of money or their venture capital or angel investors run out of patience. In the latter case, the investors then want some return on their investment or they want their money back.

The outcomes of these scenarios explain why you don't really see very many medtech companies that start from scratch and rise to annual revenues of $100 million, or are able to grow and successfully retain their independence over the long term.

Miller: Small companies like ours are very exciting places to work, but they do face a lot of barriers. Building a small company takes a tremendous amount of effort, but overall, the biggest tragedy would be if people stopped bringing new products to market and didn't innovate and do these kinds of things.

One of the biggest efforts that we are undertaking right now is in the area of national accounts. We're trying to get on contract with some of the key independent delivery networks (IDNs) and buying groups that influence a large number of hospitals.

That's where we're at a little bit of a disadvantage right now. And this speaks to what Mark was just talking about. It does take a lot of effort, a lot of energy, and a lot of dollars to get to this point. And sometimes it's just easier to join another company to accomplish this goal.

But it is very gratifying when the company does win a contract like we did. Because we have successfully differentiated ourselves, we won a contract with Kaiser Permanente, and we've also won a number of other IDN contracts. And these are making it possible for us to successfully go out and distribute our product.

In order to better differentiate themselves, some companies have begun to perform economic outcomes research so that they can provide that information to their sales reps. In your experience, what are companies doing beyond their clinical studies to support the economic case in favor of their products?

Solem: In our clients, we're seeing a lot of growth in health outcomes departments and reimbursement departments, so that companies can start tailoring their message and their value proposition to all these other stakeholders—particularly the economic stakeholders.

Some companies are putting in place special business-oriented reps—separate from their clinically oriented reps—to try to better understand and build a relationship with these other stakeholders in the institution. Sometimes a company can get its clinical reps to perform that role, so that there is only one person involved. In other cases, companies are splitting the business role and the clinical role into two different positions.

But they are clearly doing postapproval studies and tracking. And they are conducting lots of outcome studies in partnership with some of their best customers, so that they have a real story that they can tell to the economic stakeholders in order to be successful in this realm. Because it's clear that the clinical story alone doesn't cut it anymore.

So working with medical specialty societies and clinical thought leaders is really only one part of the puzzle, because companies still have to make the economic argument. Is that basically the situation in today's marketplace?

Solem: Absolutely.

Miller: When we teach and train our sales reps, we like to have them talk about the return on investment. We prepare them to perform a complete analysis of the economics of the decision to purchase or acquire a piece of capital equipment like ours, including the return on investment, how long it will take to pay it back, and what kind of revenues can be expected.

We also look at this issue from an R&D standpoint. For instance, we spend a lot of time investigating what product features will contribute to a better work flow—and hence, improved economic performance—for the users of our equipment.

Ultrasound is heavily used in both emergency departments and labor and delivery departments. In both settings, we realized that users are often carrying the ultrasound unit from room to room to room. To improve their efficiency, we reduced our unit's boot-up time from a minute and a half down to 15 seconds. And doing that cuts down overall costs significantly.

Hagemeyer: Medtech companies could learn a bit from their pharma counterparts about working with thought leaders. Medtech companies need to better map who these leaders are, who they influence, what channels of communication they use (e.g., Web, face-to-face, phone, direct mail, etc.), and how these influence networks can be used to extend a company's influence. For instance, the peer channel is growing in many areas, and is influencing the ways that we as consumers think about and approach information gathering. It is important to turn our business focus in the same direction.


Sales and Ethics

The marketing and sales practices of medtech companies are coming under increasing scrutiny. For example, in September 2007, five leading orthopedic manufacturers agreed to pay fines totaling $311 million to settle a Department of Justice probe into alleged industry violations of the Federal Healthcare Antikickback Act and the False Claims Act. How is this increased scrutiny affecting how medical device manufacturers (across all sectors) manage their sales functions?

Solem: We're hearing much more discussion from our clients about the need to keep sales and marketing practices within guidelines. Compliance is starting to become part of performance evaluations for regional vice presidents and managers, and obviously an expectation for individual sales reps.

Many companies are relieved that medtech sales practices are returning to an emphasis on which company can deliver the products with the best clinical and economic outcomes for their customers, rather than which company has the biggest or best entertainment budget.

However, in some of these discussions we still hear the lament that not everybody is playing by the same rules, and that competitors are playing outside the guidelines.

So, for the most part, companies welcome the use of guidelines because they think it's going to level the playing field. And that's especially true for small manufacturers that could never compete with the deep entertainment pockets of bigger companies. Those companies are hopeful when they sense that the playing field is becoming more level, but still perhaps just a little miffed that everybody is not quite playing fair yet.

Adams: From my perspective, the ethics, and morals, and principles of my company all trickle down from my chair to my sales force. And actually, each of us, as a sales manager, knows exactly what our people are doing—or pretty close—because the money that they spend has to come from someplace. And I'm the guy who has to sign off on expenses.

So I encourage our reps to do the right thing. And I explain to them on a regular basis that this is the way we're going to do business.

When I'm expounding to my reps and asking for more sales interactions with key positions and key opinion leaders, for instance, I make it very clear that those peoples' opinions should not be considered for sale. Because if they are, they are also for sale to somebody else with much deeper pockets that we couldn't compete with.

Unfortunately, some of our colleagues don't have the same ethics and principles. But unethical sales practices are less of a problem across the board than they are in specific sectors. There are some companies and distributors that call on specific types of medical specialties, and those people are more susceptible. Moreover, old-style distributor reps that seem to be prevalent in fields such as cardiac rhythm management, orthopedics, and some other businesses, tend to be a little more abusive with money, toys, gadgets, and giveaways.

I started as a sales rep in 1982, and at one time or another I have worked for most of the large players such as Johnson & Johnson, Boston Scientific, and Medtronic. In all the years I've been doing this, I have never seen those kinds of abuses. I play by the same rules now that I did when I was working there, and I've never played at that level. I've never taken anybody golfing, fishing, skiing, or to a bar with a pole down the middle of it, or anything else like that. I've got a great reputation with physicians as being an honest, honorable guy who knows the products they use, and I'm happy with that.

This is really sort of a 'buck stops here' kind of mentality. Everybody else in the corporate office may be able to claim deniability. But all of these practices trickle down from the vice president of sales, and it's that person's responsibility to make sure that the company adheres to proper practices.

Miller: In our area of business, so many different groups of people are involved in the decision to buy our equipment that there is little potential for abuses to take place.

Nevertheless, we're obviously doing everything we can to put policies and processes in place, so that our sales reps will do all the right things that have been spoken about here. For instance, we track each and every order on its own. And we have strict policies and processes to ensure that everything involved in the sale is included in the sales quote, with no side letters or riders.

Our company is also subject to two significant types of reporting requirements that limit the potential for abuses. First, because we have a contract to supply the Veterans Administration (VA), we have to report all of our deals to the government. And second, because we are a publicly traded company, the Sarbanes-Oxley Act requires that we follow the rules for revenue recognition, making sure that we have delivered on every verbal or written promise to every customer we've sold to. It costs companies a lot of money to track this kind of stuff, and those costs are especially stiff for small companies.

So ethics guidelines are only one means that companies can use to control sales practices. From a practical standpoint, reporting requirements such as those imposed by a VA contract or by the Securities and Exchange Commission's revenue recognition laws can be just as important.

Hagemeyer: I think that business strategist and author Don Tapscott has the right approach: transparency is a critical empowerer. Last fall I spoke at a conference with Senator Paul Sarbanes (D–MD). We had a chance to talk a bit about transparency as a philosophy as opposed to a requirement. It is quite liberating once you 'get it' and have the ability to 'do it.'

What percentage of your company's business is subject to the Federal Supply Service rules?

Miller: Probably about 15%.

Adams: For us it's probably about 5–8%.

Many companies have adopted the AdvaMed Code of Ethics as a guide for sales interactions with healthcare professionals. How do companies ensure sales force compliance with these policies (or others)? Are these policies adequate guides for keeping companies out of trouble? What kinds of activities do you undertake to make sure that all of your sales reps are trained in these policies?

Miller: We have not adopted the AdvaMed Code of Ethics. However, we have our own policies and processes in place to govern how our sales and applications people go out and make sales calls.

Solem: Particularly the larger clients that we work with have all pretty much adopted the AdvaMed code. But merely agreeing to such a code is never enough. To make sure that there is compliance throughout the company, the code really has to receive top-to-bottom commitment and buy-in, and programs have to be created to train employees about the code and promote its use.

Among our clients, we're seeing a lot of that kind of activity. They're not just giving lip service to their adoption of the AdvaMed code. They're also putting systems in place to make sure that implementation really happens.

Companies are creating the systems to track their sales-related expenditures. And in some cases, those systems may involve making some or all of managers' incentives dependent on compliance with the code.

Out of concern over the behavior of pharma sales reps, the District of Columbia recently voted to require the registration of pharmaceutical company sales reps. Do you think city, state, and regional authorities will begin to adopt this strategy for medical device reps as well?

Solem: I haven't heard a lot of backlash yet from outside sources, but it seems everybody thinks they are crazy.

We're seeing a lot of moves directed at the pharmaceutical industry. People are trying to limit the access that pharma reps have to healthcare providers, and limit their ability to use information on physician prescribing behaviors and things like that. But a lot of these moves—particularly in New Hampshire and the northeast—have been thrown out of court as not legitimate.

The effort in Washington, DC, has something of a different twist to it. It is motivated by a combination of ethics concerns as well as a desire to restrict promotional efforts that lack content. Those promotional efforts might not be unethical, but they are often more hype than substance, so there is still an interest in controlling them.

Whether these restrictions will survive future court challenges remains to be seen. But in the future, it seems likely we'll see more such efforts. How they will ultimately settle out is anybody's guess right now.

Hagemeyer: I work closely with pharma as well as medical device companies. I don't think this type of reaction will spread widely. The state gift laws have already restricted what reps can do in terms of influencing with things of value. It would take a lot of wrangling to get the states to agree on a federal version of this type of legislation. Watch for pharma to be the pattern, but don't expect much in the near future. The worst is over.

This summer, the French government is implementing a sweeping registration and certification program for sales personnel. It is a real nightmare for the companies behind those reps. Among all the EU nations, only the French are doing this, because it is so restrictive and labor intensive.

Fortunately, we're a long way from where the French are.

Are restrictions and requirements such as these likely to percolate into the medical device industry?

Adams: It always seems like everything ends up percolating into the device industry—including things like these kinds of pharma restrictions.

But device companies generally don't have five or six reps calling on the same doctors for individual products. That aspect of pharma sales seems to me to be a bit of an abuse. Doctors are only going to see so many people in a day. If they are seeing that many pharma reps, not only are they not seeing device reps, they are also not seeing patients.

The average doctor needs to see 30–60 patients a day just to be standing in their office space. But that's not possible.

So doctors basically extort the company to bring in lunch. Companies complain about it but, in essence, pharma is abusing the privilege. The fact that they are now getting dinged for it is probably their due.

I hope these new requirements don't trickle over to the device industry. We are not able to do the same things that have gotten pharma reps into trouble. Nor would we want to do so.


Structuring Sales Forces and Compensation Models

Medical device manufacturers have multiple options when it comes to structuring their sales forces. How are medtech companies determining whether to build direct sales forces, rely on independent sales reps, or formulate some sort of hybrid approach? What types of factors need to be considered?

Solem: Obviously, a lot of things need to be factored in. One of the biggest considerations—particularly for small manufacturers with a niche product, or even companies seeking to market a broadly appealing platform technology to medical specialists for a specific niche procedure—is whether the company can afford to build the critical mass of a sales force all by itself.

If the company can't afford to build that core group by itself, hiring independent reps, or going through a distributor or partner with a broader portfolio can be the way to go. In fact, being part of a larger sector-specific portfolio is often a good way for a start-up company to gain access to the market for its product.

In cases such as this, the question that company executives need to address is whether the use of one of these outside approaches will reduce costs or add value beyond what the company could do for itself. In some cases it does, for sure.

On the flip side are companies that choose to build their own direct sales forces. Doing so is quite expensive, but also gives companies a lot of advantages. Not the least of these is control over the way the company approaches its customers. Companies lose a lot of that control when they go through independent reps, which makes that a somewhat risky choice.

In our experience, there are four elements that companies generally consider when they are structuring their sales forces. The first is how the proposed structure fits with the company's product launch and market penetration strategies, not just today, but also for the future.

The second element is whether the structure will improve the effectiveness of the company's sales reps—whether they are part of a direct sales force or independent reps. In this regard, companies need to consider whether the proposed structure will make the sales reps more effective at communicating both the company's clinical and economic value propositions.

The third element is efficiency—essentially, what will implementation and operation of the proposed structure cost? Sales force structures that make use of independent reps are typically a little bit cheaper. On the other hand, companies may pay a little more for a direct sales force, but get increased effectiveness.

The last element is manageability. Companies need to consider whether they already have in place the systems and practices that will be needed to support the proposed sales structure. Or, if they don't, what it will take to implement such supporting mechanisms.

Once they have reviewed these elements, our clients are typically in a better position to make their decision. I'd say the general bias is for a company to go direct whenever it can, thereby keeping its destiny in its own hands as much as possible. But there are certainly situations in which an independent, distributor, or partnership type of arrangement makes sense.

How strong is the competition to recruit medtech salespeople? How does that competition affect your strategic thinking with regard to elements such as Marshall just described?

Adams: There are certain markets in the country, like the Plains States, where I would love to be able to hire a distributor, so that I wouldn't have to bear the expense of a direct sales rep. But it's very difficult to find distributor reps, or distributor organizations with multiple reps, that you can rely upon on a regular basis.

Those reps have a tough challenge. Not only do they have to sell products, they are also in a constant, frantic race to line up more clients. That's their lifeblood. Consequently, a company can never be really sure how much coverage it is actually getting from such an organization. And it's also tough to figure out whether the reps' contacts are appropriate for the company and its products.

CryoCor's area of specialization is electrophysiology treatment of atrial fibrillation. And in this realm, it takes a specific knowledge set for sales reps to be successful. I don't have any bias against distributors, but I don't typically find the knowledge set that we need in distributor reps. Moreover, I agree that overall, a company gets better coverage from a direct rep.

I don't have a model for the people I hire. I don't care if they are tall, short, old, or young, and gender makes no difference. All I really look for is just a good salesperson that can knock my socks off in an interview, and convinces me that they are the right person for that job.

Nowadays, however, one important criterion is how fast the candidate can hit the ground running. Smaller medtech companies, especially, just can't give a candidate 90–180 days to get up and rolling. We need somebody who is going to get in front of customers and begin making an impact in a very short period of time. Consequently, the candidate's history and what their experience enables them to bring to the table can be very important.

I also look for a person who is a good fit for the territory in question. In my experience, it isn't possible to hire in a blanket fashion across the entire country. I've watched the big boys try to do that, and it may work for them; but I can't afford to have territories open as long as they do. Consequently, I modify my hiring process to fit whichever region or territory I'm looking at.

What strategies are medtech manufacturers using to recruit sales personnel, both for domestic and overseas markets?

Miller: I've been in the business of selling diagnostic ultrasound equipment for a long time. In this sector, there are a lot of moving parts influencing the purchasing decision, and salespeople have to wear a lot of hats.

Here in the United States, going with direct sales reps is probably the best strategy for this sector. That determination is based mostly on our understanding of the four core markets that we address, and where we believe our greatest opportunities are going to be. To cover these key target markets, we believe our best strategy is to hire direct reps and compensate them very well—on the high end of the competitive scale.

Our strategy changes when it comes to overseas markets or markets of secondary importance. There, we may sell our products through dealers who may also have some kind of distributorship role. Overseas, in particular, we have fewer direct subsidiaries that are part of the company. We probably cover 75–80% of our overseas markets through a dealer-distributor type of network.

Merger and acquisition activity in the medical device industry continues to accelerate. Following a merger, overlap in account coverage and roles, downsizing, or even a need for relocation can lead to huge stress and unrest among salespersons. What are the most crucial considerations for medtech sales executives looking to effectively manage small- and large-scale sales force integrations?

Solem: One of the biggest issues that we see during integration is that the salespeople lose sight of the fact that their primary job is to sell to and support the customer. They wind up spending too much time on tasks related to integration, and the customer gets lost in the process.

And then, in the midst of that mayhem, competitors pounce. They pounce on a company's people, at all levels, and try to recruit them away. And they pounce on a company's customers, and try to lure them away.

So one thing that absolutely has to stay in the forefront during integration, is that the main job of the company and all of its employees is to take care of the customers. Way too often, this isn't what companies wind up focusing on.

A second big issue is for the newly merged company to focus on retaining its best people from both the buying and selling companies. Again, competitors are wise to the mayhem associated with mergers. Uncertainty within either of the merging organizations can make employees begin to look around for their best opportunities. And this impulse doesn't just come over recently hired or mediocre reps; even good, long-time employees will use company uncertainty to explore their options. So companies really need to have programs in place to make sure they are retaining their best people.

A third issue that often arises has to do with the models put together in the banking justification for the merger. Those models often incorporate greater expectations for sales synergies than are probably realistic in the marketplace. Consequently, they underestimate the size and type of sales force that will be necessary to cover all of the merged company's accounts. And the inevitable result is too much downsizing in the sales force. That is certainly a concern to be watched for when companies are merging.

Culture clashes between the buying and selling companies are also inevitable. Sometimes it's appropriate that the acquiring organization completely blend the purchased company into its ranks in such a way that the acquired organization just sort of disappears. In this case, the acquiring organization doesn't really look very different, except that its salespeople are now selling more products.

In other cases, it's much better for the merged company to identify and adopt best practices from both of its parent organizations. In this case, it's important that sales managers watch for practices that would be worth adopting, and then work through their implementation as part of the integration that will create the culture of the new organization.

A final consideration is speed. Mergers and acquisitions can be very large deals, and they often compel corporate management to focus on their internal affairs. But going through all of the details leading up to a merger can also waste a lot of time. When the deal is done, moving quickly into the integration phase and reestablishing good communications with stakeholders—not just internally, but also to the marketplace—can go a long way toward putting the merger event in the rear-view mirror. Then the newly merged company can get on with building and implementing the new strategy of the integrated organization.

Adams: I never keep more than a peanut butter jar in my desk drawer, because I never know when I'll be packing up and moving again. When a merger takes place, the VP of sales is always one of the first to go, usually accompanied by the CFO. We walk out the door about the same time, and I wave goodbye and thank the CFO for vesting my options.

What's really challenging right now is the environment that's been created by all of the mergers in the cardiology space, by the problems that Guidant-Boston Scientific is having, and by Johnson & Johnson cutting back after its ill-fated purchase of Conor Medsystems. A lot of reps are on the street because of these issues.

So now, when reps—and even sales managers—hear about a potential suitor, they are already heading for the door. An alarming number of people are saying, 'There are too many reps on the street from all these mergers and acquisitions, and I can't depend on our acquirer treating me properly. I'm going to protect myself by making sure I'm not the last guy out the door.'

It didn't used to be that way. In the past, reps felt that they were carving out a career for themselves in a newer or larger player. Or, they were excited about their options vesting.

This environment makes retention extremely difficult. Salespeople have to trust their company and its managers implicitly. But now, salespeople don't really trust anybody on a regular basis. That's why they are so independent and why they are doing what they are doing. But it's a real challenge for management.

So the mayhem that Marshall described is currently a serious problem?

Adams: Absolutely; there is no question. It has become the industry standard for reps to move about every three to five years.

Companies can lose the trust and interest of their reps almost on a whim. Once reps have worked for some companies, for instance, they never want to work for them again. Or, their friends worked for a company and didn't like it, or didn't feel they were treated well. Or, they previously experienced acquisition by a larger player, and they just don't want to go through it again. For any of these reasons, reps can be out the door very quickly.

In the case of M&A activities, some of these departures could be premature. Just because a company is being courted by a prospective suitor doesn't necessarily mean that the deal is going to go forward. There are all kinds of Securities Exchange Commission requirements to be met, and a lot of other factors that might kill off a deal. But none of those is of much use to the company if all of its sales reps have already left.

Is there a certain nervousness in the workforce?

Adams: Yes, you might say so, to some degree.

Solem: One can only imagine what went through the heads of the reps at Abbott Diagnostics last year, when GE said it was going to buy them—and then all of the sudden the deal fell through. So what happened to the Abbott sales force in the meantime?

Miller: I'm not even part of that business, and I had calls from Abbott reps.

I have been involved in a few mergers and acquisitions, and I believe that I've seen the good, the bad, and the ugly among them. But I do believe that the most important thing a merging company can do is to retain as many of its employees as it possibly can, focusing on the retention of salespeople in particular.

Very early on, companies must focus on what the sales management structure is going to be, so that they can quickly give their salespeople a sense of security. These people need to feel a sense of security from a financial standpoint. They need to know that they can continue to make the same money that they have been used to making or expecting to make.

Just as urgently, and perhaps even more importantly, salespeople need to know who they are going to be working for in their regional teams. Salespeople can be motivated by money. But in many cases it's who the reps work for and with that will determine how long they're going to stick around. Companies need to get those teams focused, motivated, and going in the same direction, so that they can begin to make everyone feel comfortable working with one another.

What are the most popular sales compensation models for medtech sales forces? How does this vary according to company size, or the type of devices or equipment the manufacturer produces? What drives the decision to adopt one compensation model over another?

Miller: For capital equipment sales, we have a compensation structure that's about one-third salary, and two-thirds variable.

For the variable portion of the pay package, we think that what works best is to have a ramped, plateau, or tier-type structure. So at the beginning of the period (typically the fiscal year), the company pays out at a target rate, which ramps up throughout the year as the rep brings in more sales. At the end of the year, the rep is making commissions at a higher rate than at the beginning.

On top of that, we put in place bonuses for hitting certain triggers or targets, enabling the rep to make additional money.

And at the end of the year, when a rep has exceeded target for the year, the company also pays upside money where the sky is the limit. What typically happens is that 20–25% of the company's reps reach beyond their target and are able to earn that upside money. They serve as models for everybody else. And that helps to provide motivation for others to do it as well.

Hagemeyer: If other industries are any indicator of how sales compensation models will evolve, don't expect changes in the model itself. Instead, look for more-automated solutions that allow reps more real-time visibility and ability to interact with their compensation plans. They will be able to do modeling, create what-if scenarios, and see a greater linkage between what they do and what they get.

Does that model work for a lot of companies, or is that a sector-specific approach? What alternate kinds of compensation models are being used for medtech sales forces?

Solem: This kind of structure is quite common. Below goal there is some form of goal-based payout, with the pay rate increasing as certain thresholds are crossed. And then, above goal, there are kickers that include commissions with accelerators. I'd say that's a very common plan across all sectors.

Certainly there are a number of companies where compensation is based purely on commissions from dollar one. That approach has merit in certain situations, particularly with capital equipment sales. But it's probably overused, or used in many situations where it's inappropriate.

We rarely see management by objectives (MBOs) as part of rep-level plans. They tend to be more at the manager level.

So rep compensation tends to be some combination of a goal-based portion and a commission.

Some of you have designed sales forces from the ground up. When you have an opportunity to do that, do you rely entirely on your own experience, or are there also tools available that enable you to explore the implications of various models? What tools are available to sales executives looking to enhance rep understanding of their companies' sales compensation and commission models?

Adams: I think it's strictly a matter of experience. When you're in a small, start-up company—even one that is publicly traded—it's rare to find executives who are accustomed to building a commercial sales organization. They've never done it before, so that task is all pretty much on the VP's side of the court.

Reps are looking for several fairly specific things. Of course, job security and financial security are the topmost items. But after that, risk and reward are big subjects in their minds—especially when they are interviewing with a small, start-up company.

That concern over risk and reward manifests itself in several kinds of inquiries. Naturally, they want to know what their base salary will be. Then, they want to know if the company offers a guarantee on commissions or, if not, a willingness to increase the base salary to a satisfactory level. Then, in return for taking on the challenge of selling for a small company, reps want to know what kind of equity position they can achieve. And finally, they want to know whether the company can offer a family benefits package comparable to those offered by large companies.

We've come up with a base salary that allows us to avoid a guarantee. At the same time, we're not drawing so much money that the reps don't have any motivation to apply themselves. We promise commissions from dollar one, just like everybody else, but with an understanding that this promise doesn't mean much. This is an issue that is peculiar to whether a company's products are capital equipment, capital equipment plus a disposable component, or strictly disposable, and it has to do with the cash flow of the commissions. But in our world, if a rep sells something, he will get a commission—and it doesn't really matter if it's dollar one, or dollar 437,000.

Selling equipment, such as Zonare's ultrasound imaging units, creates a crescendo of emotions for sales reps. They are continually racing through the technology evaluation process, and going through the budget process, and taking steps that can take months at a time. And that's exhausting; absolutely exhausting.

We have the advantage that we also sell a line of disposable products. Obviously, sales of disposables helps to improve our company's cash flow. But it also does the same thing for the sales rep, helping reps to fill in their revenue gaps. The reps see a commission every month—though on a smaller scale than when they make a big capital equipment sale—and that helps to level out their family finances. And that's a big thing.

Is the distinction between capital equipment and disposables an important factor for determining the type of compensation plan a company might put in place?

Solem: Absolutely. There are fundamental differences between those two types of plans.

We have heard a lot of discussion about sales force automation tools, but sometimes it isn't clear what products represent the cutting edge of functionality in this area. Do you have a sense of what the gold standard is in automation tools right now?

Solem: In terms of functionality, a couple of characteristics stand out as the current gold standard.

The first is customer relationship management—essentially, the ability to track various interactions that the company has with its customers, so that every sales call can be informed by that information. That way, reps can familiarize themselves with issues that their clinical or technical service counterparts have been dealing with, so that they're not blindsided by circumstances that they don't understand.

A second important function is providing reps with a way to understand the sales potential for their various products in different accounts. Systems with this kind of functionality include detailed information about all the accounts in a given territory, and enable reps to review that information for all of their accounts. That way, reps can identify where the potential is, where they've got good penetration, and where the best opportunities are—and then they can target their sales efforts at those opportunities.

Those two functions are probably the most important attributes that exist in the best systems currently available.

Adams: Last year, I walked the show floor for the American Hospital Association annual meeting, knowing that I wanted to standardize on a widely used customer relationship management (CRM) system. What I found is that there are really just three systems that are widely used: ACT!, GoldMine, and Salesforce.com. When I asked the reps for large companies what they are using, it became pretty clear that Salesforce.com has become the gold standard. According to my reps, it's easier to use than GoldMine, which can be awfully operator-specific.

So it looks to me, right now, as though Salesforce.com is the standard for rep software in the medical device industry.

Hagemeyer: The mud standard certainly exists, and that is sales force automation systems that are heavy on managerial functionality. Such systems give managers access to what the reps are doing, but they are so internally focused that they do little to help the rep. In these systems, functions like forecasting and pipeline management are suspect.

Bronze-standard systems offer tools that help manage day-to-day activities and relationships. They also help save time in generating quotes, managing the supply chain, and so forth.

Silver-standard systems have capabilities that help a rep understand customer relationships and the business. Reporting, dashboards, and alerts are all such capabilities.

Gold-standard systems have all of the aforementioned plus the ability to use data to create customer insights. They fully enable the mobile worker and are customizable at the user level.

I'd say what medtech companies generally use in the market are mud- to bronze-level systems. What is actually available for sale approaches silver. Gold is hard to achieve, because companies often offer some combination of medical equipment, supplies, and devices. Because the selling models for each of these areas is so very different, companies almost have to have a separate solution for each area. So far, few vendors have been willing to specialize to that extent.

Generally speaking, how sophisticated are medical device manufacturers in implementing sales force automation tools?

Miller: I've been with small-, medium-, and large-sized companies, and it seems to me that medtech companies of all three sizes want to adopt some kind of sales force automation or CRM tool. But their success in doing so is based largely on how easily the sales force is able to adopt or adapt to the tool.

A number of factors contribute to the success of a company in getting its sales reps to use a new tool. Some of the keys factors include whether the tool is easy to use; whether reps can readily navigate around in the tool; and whether the reps can access the system wherever they happen to be—inside a hospital, on the road, at home, or wherever.

We've invested in a product that gives us quite a bit of flexibility and enables our sales reps to manage all of their accounts. It stores all the information the reps need to know about each account. And it includes a quoting tool and a forecasting tool, so that the reps can prepare their 30-, 60-, and 90-day forecasts.

As far as which CRM system represents the gold standard for our particular industry, it's difficult to say. Siebel CRM has been used pretty widely, but reps seemed to have a lot of difficulties with it. I know a lot of guys in the beginning were using ACT! We moved them over to ACPAC (now Sage CRM), and our sales force seems to like it quite a bit. I haven't really used other systems.

Adams: I find that any program you can get reps to use is a good program. So long as they are putting in their data and not complaining, you're doing really well.

Solem: From a benchmarking perspective, the medical device industry is behind several hundred other industries in terms of its sophistication in deploying sales force automation tools. There are certainly a lot of systems out there, and they are all in use to various extents. But, in terms of really leveraging the power that some of those systems create, I'd say the medical device industry is a fair bit behind other industries.

This may not be fair, but I attribute some of this to the nature of the selling process for medical devices. Medical device sales reps have developed a sort of cowboy or Lone Ranger culture. The reps are very self-sufficient, very proud, and even egocentric—though not in a bad way. They can control their own destiny, and they don't see a need to be burdened with all of the administrivia that has often been associated with CRM systems.

Some of the early CRM implementations were certainly overloaded with administrative detail, and they probably fueled the adoption of that viewpoint about what CRM systems are. And even though such characteristics needn't be the case, the earlier perception still persists.

Consequently, the medical device industry has been really quite slow to reembrace CRM on its second time around. Other industries have done so, including the pharmaceutical industry, and all of them have surpassed the sophistication of the medical device industry in this regard—by a long shot.

Hagemeyer: Medtech could learn a lot from pharma and consumer goods. Both are more advanced because they tend to be more homogeneous, and because their markets are big enough to support specialized solutions.

Miller: I absolutely agree with that. And a lot of it has to do with the fact that you can't change an animal's stripes.

In capital equipment, the most successful salespeople—the ones that companies embrace—are like hunters. And those guys tend not to want to sit at a computer, no matter how often they're told that they have to use it, or how valuable it is. Instead, they like to carry things around in their own heads, scribble little notes, run from account to account—and make sales with their customers.

And when good results happen that way, management turns a blind eye to other transgressions. The company's attitude becomes, 'who cares if they're not doing exactly what we've asked them to do on the CRM.'

Adams: I have not yet seen a rep who can do both well. I have great paperwork reps who know everything the competition is doing, but their overall sales are not what I would like them to be. If I had to bank everything on one of those rep's territories, I'd be in a soup line some place.

And yet, I've got another rep who is absolutely my star, month after month and quarter after quarter. That rep is our innovator, the person who's going to make a significant contribution to the company's bottom line. But I have to struggle to get even basic paperwork from that rep—including expense reports.

Today's sales force automation tools offer a lot of capabilities—predictive modeling, territory management, key opinion leader (KOL) management, and so on. But the situation you're describing suggests that small and mid-sized medtech companies may never completely use those capabilities effectively. What's the return on investment for such systems under those circumstances?

Adams: I have a marketing person who has an MBA, and is probably one of the smartest people that I've ever been around. She's young, progressive, and well liked by the reps. She helps them with all the little things they need, and they appreciate it.

So basically, I have her monitoring everything the reps are doing on the CRM. They comply with her far better than they would with repeated e-mails from me. She can wheedle things out of them that I can't get. And this makes my reporting a whole lot more efficient.

The person that's interpreting and condensing the company's data, and helping the reps to compile their reports, can really make a difference about how much effective data the company's sales management gets.

Miller: A company's return on its investment in a CRM system has a lot to do with how actively the company pursues the information. A company that manages its information on a regular basis can probably get out of it what it put in. But it's very, very, very hard to measure.

Our CRM includes a quoting tool that's excellent. It's an outstanding part of the system that was probably worth our investment all by itself.

On top of that, our forecasting tool is also part of our CRM system. It enables us to manage our business through the regional and zone managers who oversee detailed operations and float their forecasts up to me. If we didn't have the CRM tool, it probably would be a lot more difficult to get accurate information, to use account histories as the basis for predicting future performance, and to project our expectations for coming 30-, 60-, or 90-day periods. Over the past six quarters, our forecasts have been right on target. So our forecasting tool has given us predictability that makes it possible for us to set expectations for the company properly. I don't think we could have achieved that predictability without such a system.

But I don't know if it really creates more business for us.

Solem: Sales force automation tools are never really the answer all by themselves. Many such tools are implemented as though they are a panacea capable of solving all of a company's sales problems—and just as many of them fail. And almost always, that's because they are not surrounded by the systems, programs, support, and communications that are essential to making them successful.

Rather than focusing on the costs of using a particular tool, companies should pay attention to determining what sales rep and customer behaviors and related processes it would like to change as a result of deploying the tool. And then, what else needs to be in place to ensure that those behaviors are changed? And what metrics can be tracked over time to confirm that the behavior changes have been accomplished? And finally, what value might there be to the company when those behaviors have been changed?

That might be a slightly more encompassing way to think about these tools. It's better than thinking, 'I'm deploying this piece of software that will raise costs a little, but everything is going to be peachy because this tool will increase sales a lot.' I don't think that's ever the case.

Hagemeyer: I don't think there is a medtech-specific tool that offers capabilities in territory management, predictive modeling, and KOL management. User organizations are still highly transactional in their focus, and are just starting to be more analytical in a disciplined way.

Greater focus on higher-order sales processes will ultimately result in more industry-specific solutions. But certainly, using more spreadsheets isn't the answer. For the time being, companies are having to make due with bronze and silver solutions, because gold solutions aren't available yet.

So, in order to make the best use of these tools, companies also need to put in place appropriate managerial and human resource structures?

Solem: Right; and not just the help-desk stuff. Companies need to determine how they're really going to use this information. And then they need to determine what will be necessary to support those uses. If necessary, the company should hire an MBA to help the reps gather or analyze the data they need to improve sales.

Hagemeyer: A fool with a tool is still a fool. Companies have to establish processes and then make sure the tools map to the processes. Companies also need to give their reps tools that make them more effective and efficient at what they do.

I don't think human resources functions can play much of a role in this process except for change management. The real job lies with sales management.

Copyright ©2008 MX

Philips’ Green Product Sales on the Rise

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Royal Philips Electronics (Amsterdam, The Netherlands) achieved a 33% increase in sales of green products in 2007. All three Philips sectors—healthcare, lighting, and consumer lifestyle—showed a significant increase in sales of green products during the year, resulting in total green product sales of EUR5.3 billion, compared with EUR4 billion in 2006.

For Philips to designate a product as green, the technology must offer a significant environmental improvement in one or more of the Philips green focal areas: energy efficiency, packaging, hazardous substances, weight, recycling and disposal, and lifetime reliability, compared to similar products on the market.

In 2007, sales of green healthcare products increased by 35%, boosted in particular by the company's magnetic resonance imaging (MRI) systems and patient monitors. For example, Philips' Achieva 3.0T X-series MRI scanner provides an environmental impact reduction of 32% compared with previous models, the company reports. In addition, Philips reports that its new IntelliVue MMS X2 patient monitor also has proven its green credentials by consuming 52% less energy during use than similar models.

Last year, green product sales accounted for 20% of total Philips sales, compared with 15% in 2006. In September 2007, Philips announced its EcoVision4 program, aiming to increase sales of green products to 30% of total revenues within five years. The company is also looking to invest EUR1 billion in green innovation and to improve the energy efficiency of its offices and production facilities by 25% in the next five years.

Copyright ©2008 MX