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URLS Worth a Virtual Tour

Originally Published MX September/October 2004

SPECIAL REPORT: IT IN HEALTHCARE

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Visions of the Future

Understanding how all the pieces of the healthcare IT puzzle fit together can be a daunting task. Following are a few Web sites that are worth a close look.

The official summary of President Bush's healthcare technology agenda is essential reading for everyone involved in the development, implementation, or use of healthcare IT systems. This quick look covers the crucial points—including the president's goal of achieving electronic medical records for all Americans within 10 years—and specifically refers to programs that will provide incentives to help reach that goal. The summary is available via www.whitehouse.gov/infocus/technology/economic_policy200404/chap3.html.

We've Got You Covered

Originally Published MX September/October 2004

ADVERTISING, DISTRIBUTION, & SALES

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Medical Device Marketing

Nalge Nunc International (Rochester, NY) is one of the world's most recognized and respected manufacturers of high-quality labware products. The company has a long history of success founded in the simplicity of listening.

When Palio Communications (Saratoga Springs, NY) began working on the Nalge Nunc product lines in 2001, its team members began by doing the same thing . . . they listened. By paying attention to the views of distributors, scientists, and their own team members with medical backgrounds, Palio's team members quickly realized they were in the midst of greatness.

Confidence, warmth, and humor were important qualities of the campaign for Nalge Nunc International developed by Palio Communications.
(click to enlarge)

FDA to Inspect Boston Scientific's Galway Plant

Originally Published MX September/October 2004

BUSINESS NEWS

In a continuing effort to determine the extent of manufacturing problems related to the catheter delivery system for Taxus drug-eluting and Express bare-metal coronary stents by Boston Scientific (Natick, MA), FDA has announced plans to inspect the company's production facility in Galway, Ireland, in "the near future."

The agency's decision to inspect the Galway plant was first revealed by the Wall Street Journal and was picked up by numerous news services. There is no mention of the inspection on FDA's Web site, nor has the agency announced a date for its site visit. Similarly, Boston Scientific had no public comment on the matter.

Manufacturers Get Lean to Trim Waste

Originally Published MDDI September 2004

Manufacturing



Those who advocate lean strategies tout the savings in labor, space, and time on the plant floor and beyond.

William Leventon

Manufacturers are increasingly turning to lean manufacturing in an attempt to cut waste from production time.

All manufacturers want to make products as efficiently as possible. But how good a job are they actually doing? “Everybody's trying to eliminate waste,” notes Mark DeLuzio, a business consultant based in Glastonbury, CT. “But there's still an abundance of waste in the typical manufacturing organization.” 

The reason? “Most companies run on a very traditional 1970s business model,” says DeLuzio, president of Lean Horizons LLC, a firm that teaches the principles of lean production, or simply “lean,” as some proponents refer to it. Developed by Toyota after World War II, the lean concept offers companies a business model designed to eliminate waste in product manufacturing.

Many medical device firms vouch for the benefits of lean. In some cases, the benefits extend beyond the plant floor to all areas of the business—and even outside the company walls. But to get the most out of lean strategies, practitioners must avoid hazards that cause many to stumble on the endless journey toward waste-free manufacturing.

Lean Definitions

In order to grasp the concept of lean, manufacturers must understand the term work as defined in Lean Lexicon, a glossary of lean-related terms published by the Lean Enterprise Institute (LEI), a nonprofit training and research organization based in Brookline, MA. According to the Lexicon, work is the human activity involved in production. Actions that constitute work can be divided into the following three categories:

• Value-creating tasks: Actions necessary for making products, such as welding or drilling.
• Incidental work: Actions necessary to make products, but that don't create value from the customer's standpoint. Such actions include reaching for a tool or clamping a fixture.
• Waste: Actions that (a) create no value from the customer's perspective and (b) can be eliminated from a process; e.g., walking to get tools that can be positioned within reach of a worker.
According to LEI, actions that create value as perceived by the customer are just a tiny fraction of the total activities in most enterprises (see Figure 1). So companies can reap significant benefits by eliminating wasteful activities.

How significant? Compared with conventional mass production, lean production usually requires only half the human effort, manufacturing space, and capital investment for a given amount of capacity, LEI claims. In addition, the organization notes, lean requires only a fraction of the development and lead time consumed by conventional production systems.
To this list of benefits, DeLuzio adds several others:

• At least a 50% improvement in quality per year, measured in parts-per-million defects or rejects.
• Dramatic improvement in on-time delivery in the first year.
• In the first two years, a 2% per month improvement in productivity.

Understanding Value

Figure 1. In a typical company, the greatest percentage of time is spent on tasks that are pure waste. Source: Lean Advisors Inc (click to enlarge).

To realize the benefits of lean, companies can apply a set of special tools. One of the most important of these tools springs from the concept of value, which Lean Lexicon defines as the inherent worth of a product as judged by the customer. 

A product is the result of a combination of actions. Some create value as perceived by the customer; others do not. Taken together, all value-creating and non-value-creating activities constitute a value stream. LEI defines a value stream as all the actions in a process that take a product from concept to launch and from order to delivery. Included are actions to process information coming from the customer and actions to change the product on its way to the customer.

To see a value-stream in its entirety, companies create a value-stream map, which is a bidirectional flow diagram that maps the following two processes:

• How products flow from suppliers to the manufacturer to end customers.
• How information flows from end customers to the manufacturer to suppliers.

The product's current path to the customer is shown in a current-state value map. Manufacturers can also draw a future-state map that incorporates process improvements that result from studying a current-state map.

Value-stream mapping produces the greatest effect when it is done by a cross-functional group that includes representatives of all the departments that own a piece of the process, notes Larry Coté, president of Lean Advisors Inc. (Ottawa, ON, Canada), a business consulting firm. “These people get to see the entire system from start to finish—everything the customer is paying for to get a product or service,” Coté says. “So they find out what their company actually does. Usually, people are amazed at what they see. You'll often hear the comment: ‘I didn't know we did that.'”

In many cases, Coté says, people looking at value maps see that they're creating extra work for others before and after them in the process. Value maps also make it easy to spot convoluted processes that cause production bottlenecks, according to Jerry Bussell, global vice president of operations for Medtronic Xomed (Jacksonville, FL), which develops and manufactures surgical products used by ear, nose, and throat specialists.

At the facilities of The Tech Group Inc. (Scottsdale, AZ), an injection molding and contract manufacturing firm, value maps help workers rearrange molding and assembly equipment on the shop floor to minimize transportation and wasted motion. The maps also help workers spot non-value-adding items such as inspection loops and inventory queues, according to Tom McLean, the company's manager of process improvement.

Waste-Fighting Tools

Besides value-stream maps, lean practitioners have many other waste-fighting tools at their disposal. One is called 5S, which comprises a set of techniques for removing waste from the workplace through better organization, cleanliness, and visual communication. The five Ss are sort, set in order, shine, standardize, and sustain.

At contract manufacturer Plexus Corp. (Neenah, WI), plant personnel conduct regular 5S audits, reports Scott Theune, the company's director of manufacturing process and technology. As they go through the production area, Theune and his colleagues refer to an audit check sheet, which prompts questions such as: Does everything on the production floor need to be there? Is it in the right place? Is it clean? Is it identified? “The audit helps us stay clean and organized,” says Theune, who credits lean for cutting lead time by more than 75% and space utilization by more than 25% at Plexus facilities. For a list of sample metrics, see Table I.

Another popular lean tool is standardized work, defined in Lean Lexicon as the establishment of exact procedures for each job in a manufacturing process. Benefits of standardized work include easier operator training, process documentation for all shifts, reductions in variability and injuries, and a baseline for improvement efforts.

At Medtronic Xomed, the standardized work initiative has produced written instructions telling people exactly how to do their jobs. “You find the best way to do something and make sure people repeat it that way, no matter who's doing the job,” Bussell says. Though it sounds simple enough, he adds that standardized work is “a hard thing to do, because human nature is to change things a little, twist the wrench a little bit different.”

Several lean tools relate to the concept of just-in-time production, defined in Lean Lexicon as making and delivering just what's needed, just when it's needed, and in just the amount needed by the downstream process. One of these tools is “pull production,” a system in which nothing is produced by the upstream “supplier” until the downstream “customer” signals a need for it.

Manufacturers establish pull production to eliminate waste caused by conventional push production, in which large batches of items are made at a maximum rate based on forecasted demand and moved to the next downstream process, regardless of the actual needs downstream, according to Lean Lexicon. Push production makes it almost impossible to produce the smooth work flow characteristic of lean production, Lexicon notes.

At MedSource Technologies Inc. (Minneapolis), a contract manufacturer that serves the medical industry, plants have established pull systems with customers and suppliers. According to Chuck Foster, the firm's director of value-chain velocity, the process starts when customers pull product from a MedSource plant. To replenish that inventory, MedSource pulls product through its own plant and from suppliers. Replenishment activities commence when inventories hit a “trigger point,” Foster explains. In some cases, MedSource and its manufacturing partners share inventory data on-line using special Web pages. 

Beyond the Shop Floor

Table I. An example of possible metrics for improvement. Source: MedSource Technologies (click to enlarge).

In the past, lean initiatives were aimed solely at process improvement on a company's shop floor. Recently, though, lean has spread beyond the manufacturing process to attack waste in all parts of an enterprise. Therefore, advanced lean thinkers no longer use the term lean manufacturing, Coté notes. “When you add manufacturing to the description of lean, you restrict your way of thinking about it,” he says. “Lean is much bigger than the one piece called manufacturing.”

So today, lean thinkers are focusing on new areas such as product development. In a traditional design process, engineers are left to their own devices when doing design work, “so if you have 10 engineers, you may have 10 different processes for designing a product,” DeLuzio explains.

When working with clients, DeLuzio tries to inject a healthy dose of standardization into design processes. His standardized design process includes a series of “tollgates.” Each tollgate is a checkpoint with a checklist of items that should have been addressed by that point in the process. The checklist includes standardization of components, design for manufacturability, and other items consistent with lean thinking.
The design process is a logical lean target because most of a product's cost is “baked in” during design, DeLuzio says. But in many cases, engineers design products without an understanding of how they will be manufactured or the costs of specified components and materials. To fill such crucial voids in education and experience, many successful companies rotate their design and manufacturing engineers, DeLuzio notes.

But successful products require more than just design and manufacturing expertise. “Many times, a marketing guy will look at a product after it's designed and say, ‘We can't sell that. That's not what the customer wants,'” DeLuzio says. “Then it's back to the drawing board to design the product all over again.”

DeLuzio tries to prevent such fiascoes by stressing the importance of a cross-functional design approach that includes input from marketing, finance, and other departments besides manufacturing and design engineering. The additional input can prevent design mistakes and save time, he says. 

At Medtronic Xomed, value maps of product development processes and subprocesses have revealed bottlenecks and other waste that can be eliminated. In the development of handheld surgical instruments, lean initiatives have cut non-value-added steps, standardized subprocesses, and improved handoffs between departments. As a result, time to market has been reduced 40–80%, Bussell reports.

A Recent Revelation

Besides eliminating waste from existing systems, lean is also being used to plan efficient new processes. Aiding lean practitioners in this task is a tool called the Production Preparation Process, or 3P. A method for designing a lean production process, 3P is one of the more recent revelations from the legendary Toyota Production System, notes Mark Hafer, vice president of Simpler Consulting Inc. (Ohumwa, IA), which advises medical device firms and other companies on lean implementation.

The key to 3P is upfront planning that right-sizes equipment and establishes key lean processes such as pull production from the beginning. “You do all the things you would want to do if you were starting with a clean sheet of paper,” Hafer explains, adding that this approach is more efficient than trying to adapt batch-oriented equipment and processes to lean principles.

According to Hafer, 3P still isn't widely known at this point. But he and his colleagues have already helped establish the practice at many firms. The results include substantial savings in process development, faster new product introductions, and better product quality. “It's been a tremendous boost for many of our clients, especially the medical device companies,” he reports.

Another boost for lean-minded medical firms comes from software, notes Joseph Vinhaus, vice president of regulatory compliance for Camstar Systems Inc. (Campbell, CA). Camstar's InSite manufacturing execution system software helps companies control and optimize production processes that are spread out in multiple locations. For lean practitioners, InSite offers features such as “electronic kanban” for more-efficient signaling of production needs (see Figure 2).

In addition, InSite includes Web Modeler, a Web-based tool that allows detailed mapping of production processes. The resulting maps show processes at a “granular” level, Vinhaus says, making it easy for users to spot duplicative steps and other wasteful activities. InSite also puts controls in place that prevent these activities from reappearing in the process.

More lean help is available from eMPower, a manufacturing process management software product from Tecnomatix Technologies Ltd. (Herzlia, Israel). eMPower features a central process repository (CPR) of all processes in a company's facilities. The CPR helps companies standardize processes and spread lean-related best practices throughout a multisite manufacturing operation, notes Ron Yosefi, manager of the software developer's U.S. electronics business unit.

To help factory personnel evaluate possible lean modifications before they're actually made, eMPower also includes a simulation tool for testing different production scenarios (see Figure 3). Although manufacturers have other options for performing simulations and additional lean-related functions, Yosefi maintains that the software simplifies lean implementation by integrating a number of different process management tools into a single package.

Regulations and Lean

Figure 2. Software often provides features such as kanban to 
optimize production processes. Source: Camstar Systems Inc.

Once a tool like eMPower identifies waste, it must be rooted out of the system. This part of the lean journey can often trip up medical device manufacturers, according to Hafer. As a result of device regulations, he points out, tasks may have to remain in a process even though they add no value and would otherwise be eliminated.

The regulatory compliance should have no effect on lean as applied to a new production process, McLean says. But compliance can make it harder to apply lean to a process already validated. In such situations, waste-reducing changes may require a manufacturer to repeat the validation process for the new system. According to McLean, the prospect of revalidation can be enough to kill a lean-related alteration of the production line. “Whether because of the cost or because we can't afford the downtime in production, I think there are cases where it just wouldn't make sense to do it,” he says.

However, Bussell thinks lean and regulatory compliance can reinforce each other. “The last principle of lean is to strive for perfection,” he notes. “I think that fits in very well in the medical device industry, because we always have to try to do everything perfectly.” In addition, he says, compliance requires validations and standard procedures that can give a boost to lean initiatives.

Why Lean Fails

Figure 3. Software can provide a 3-D-based definition of a sequence of events to help optimize the assembly process. Source: Tecnomatix Technologies Ltd.

Though Bussell touts lean as easy to understand and apply, lean initiatives don't always succeed. When companies fail at lean, it's usually because they start by trying to master individual lean tools, according to DeLuzio. Instead, he says, firms should begin their lean journey by developing an overall strategy for their business. If companies don't have a strategy, their customers won't see the benefits of lean initiatives. “You'll have a lot of good war stories to tell, but your customers will say, ‘You guys still stink,'” DeLuzio says. “And if your customers don't see benefits, the whole thing doesn't make any sense.”

Coté agrees, citing the pitfalls of what his firm calls exciting chaos—people turned loose to eliminate waste in their own departments or processes without a plan for the entire organization. People involved in exciting chaos “feel like they're doing something good for the company,” he says. Instead, they may simply be wasting time—for example, reducing waste in a process that will ultimately be eliminated. Worse, Coté says, they may be jamming up the next system in the production line. So exciting chaos can actually result in slower service and higher costs for the customer.

According to Coté, exciting chaos and its unintended consequences can be averted if individual lean initiatives are linked to a detailed future-state plan. With such a plan as a guide, he says, people know what to change, how to change it, and the proper sequence for changes to be made in order for the organization to achieve its goals.

Another pitfall in implementing lean is the failure to engage all the people in an organization. For starters, DeLuzio stresses, the CEO must be actively involved in the process. “In order to do lean, you have to drastically change the business and how you think about doing business,” he says. Therefore, lean initiatives “must be led from the top, not the middle.” But many CEOs, seeing lean as one of many ongoing company programs, delegate implementation to lower-level people who lack the power to make the necessary changes.

When lean leadership is lacking, some companies look outside their walls for the right people. These companies can get help from executive search firms like Phoenix-based TowerHunter. According to the firm's managing partner Terry Hindmarch, TowerHunter can match companies up with “subject-matter experts” who are well equipped to implement lean initiatives and executives who aren't lean experts but will effectively support and champion lean activities.

Today, some universities and institutes offer lean training and certification. But when the job requires lean expertise, Hindmarch advises companies to hire executives who have lean-related accomplishments to go along with their training.

In some cases, lean executive searches can lead companies outside the medical device field. When the leadership team already includes enough industry-specific expertise, “you can hire people who are experts in the kind of change you want to implement rather than experts in your industry,” Hindmarch explains.

Not Getting It

At all levels of the corporate hierarchy, many people new to lean will view it as simply the latest in a never-ending stream of new business improvement ideas. According to McLean, workers sometimes dismiss these ideas as “flavors of the month.”

Bussell has encountered the flavor-of-the-month attitude among workers. “People think [lean] is just the latest program, and it's going to go away,” he says. “This isn't a program. It's a journey. And there's no end to it, because you're striving for perfection.”

But some workers “are never going to get it,” Bussell concedes. Called “anchor draggers” or “concrete heads” in the lean vernacular, these people either don't understand lean or don't want to make the changes it requires. Instead of firing talented anchor draggers, Medtronic Xomed moves them to positions that won't affect the company's lean initiatives.

Talented employees who are resistant to change can be the biggest impediments to establishing lean, according to DeLuzio. Thus, he notes, Toyota estimates that companies will have to change 10% of their workforce—including people in senior management—to implement lean effectively. “But companies typically don't do that,” he says. “So these people end up staying around and jeopardizing the whole process.”

Tracking Wasteful Activity

At some companies, however, many workers may no longer be required after the arrival of lean, which often reduces the amount of activity needed to manufacture a certain amount of products. Just ask Jeff Hamelink, who sought a way to slash the amount of non-value-adding activity at Stealth Manufacturing Inc. (Savage, MN), a contract manufacturing firm that works with medical device companies. 

According to Hamelink, the firm's owner, the first step was tracking the amount of time plant employees spent on activities other than part manufacturing. Industrial scoreboards provided such data, but only in the form of hard-copy reports. Hamelink wasn't interested in such “after-the-fact” data. “I want to know what's happening today and what I can do to fix it today,” he says.

Working with an industrial sign manufacturer, Hamelink came up with a device he calls the Scoreboard. Measuring 18 in. high by 42 in. wide, the Scoreboard displays the accumulated downtime of a machine or line during the course of a day. During production, the Scoreboard builds a library of optimum cycle times for different jobs. Using these data, software developed by Hamelink determines accumulated downtime by calculating the difference between the normal cycle time and total elapsed time during the workday.

Besides using the Scoreboard in his own plant, Hamelink is offering it to other companies. At one plant, he notes, accumulated downtime readings and the resulting analysis of shop-floor operations helped reduce non-value-adding time so successfully that the user believes the firm can complete in a four-day work week the production that used to take five full days.

At Stealth Manufacturing, meanwhile, Hamelink says the Scoreboard and other lean initiatives have reduced the number of shop-floor employees from 36 to 11, while output has remained about the same. This may sound good to some corporate executives, but DeLuzio sees a danger in viewing lean as a downsizing exercise. “Once your people know you want to do lean just to take heads out, you get no buy-in at all,” he cautions. In fact, he adds, one of his clients is failing in implementation because management sees lean simply as a method for reducing the firm's head count.

Instead, DeLuzio tells clients to view and sell lean as a process for producing profitable growth. Coté agrees, stressing that companies need a growth strategy that employs the time, people, machinery, and floor space freed up by a lean transformation. “Since you're going to have excess capacity, your sales and marketing people have to get out there and start selling,” he says.

Lean Outside Your Walls

As envisioned by proponents like Coté, a lean transformation should encompass all the companies that share the value stream for a particular product. But according to McLean, The Tech Group has had trouble establishing lean partnerships with customers and suppliers. What's more, McLean says he has heard the same story from other contract manufacturers.

What's the problem? McLean notes that most businesses are set up with a traditional ordering system. But pull production requires sophisticated communications tools such as on-line electronic systems. “We haven't seen too many customers that are anxious to jump into that arena,” McLean says. “It typically means a pretty big change to their systems, and they don't see enough benefit to make radical changes to accommodate it.”

Moreover, some customers probably want upstream companies to carry extra inventory that can be quickly tapped to help meet unexpected surges in demand. “They'd like to have inventory sitting here at our cost,” McLean says. “And to be honest, we're probably no better with our suppliers.”

So how do you sell lean to your value-stream partners? Show them how lean will benefit them, Coté advises. For example, tell customers that some of the savings from a pull system will be passed on to them in the form of lower prices. Eager to share in such savings, Medtronic Xomed has established pull systems with more than 50 suppliers. These suppliers produce and send products based on spreadsheets from Medtronic that show what's being sold and consumed at the company, Bussell explains.

Impressed by the on-time delivery record and product quality of its lean suppliers, Medtronic Xomed is encouraging more suppliers to adopt the practice. In some cases, the company brings in the presidents of supplier firms to show off the benefits of running a lean operation.

On the supplier side, meanwhile, Parker Hannifin Corp. has developed pull systems with a number of OEMs. Larger OEMs have considerable lean experience, so they understand the value of a pull relationship with their supplier community, says Jan Santerre, Parker Hannifin's vice president of quality and lean enterprise.

On the other hand, some of the supplier's smaller customers still have a more traditional view of manufacturing. “They'll say, ‘Yeah, we understand. But we still want you to keep three weeks of material on your shop floor,'” says Santerre. To these companies, Parker Hannifin stresses that minimizing inventory lowers costs, resulting in less-expensive products for its customers. 

Besides reducing Parker Hannifin's inventory by about 20%, lean has helped the company maintain greater than 90% on-time delivery by slashing lead times. “If the customer wants something tomorrow, shorter lead times give us a much better chance to provide that [product] when the customer wants it,” Santerre says.

Impressive Results

At Medtronic Xomed, the benefits have been impressive. According to Bussell, some of the results of the company's lean efforts between 2000 and 2003 have included:

• A reduction in total production lead time in the Jacksonville facility of from 253 days to 129 days.
• An improvement in on-time delivery of from 85 to 96%.
• A 38% reduction in cost of shipped product.
• A 40% increase in productivity per employee based on annual sales.
• A 40% reduction in defective parts per million received by customers.
• A 50% reduction in plant floor space.
• A 57% reduction in rework.
• A 85% reduction in scrap.
• A 97% reduction in manufacturing cycle time.

Despite these results, the company has no plans to rest on its laurels. “As you get deeper into lean, you have to maintain a healthy dissatisfaction with where you are,” Bussell explains.

But that's not the attitude at all firms. Ignoring lean's kaizen principle of continuous improvement, some companies conclude that they've “done lean” after seeing some initial improvements, according to DeLuzio. “They get that first 40% [improvement], but don't challenge themselves and say, ‘How can I make that 400%?' So they leave a lot [of opportunities] on the table.” 

Copyright ©2004 Medical Device & Diagnostic Industry

Visions of the Future

Originally Published MX September/October 2004

SPECIAL REPORT: IT IN HEALTHCARE

To stay in step, medtech manufacturers will have to begin developing their products to meet increasing demand for integration and interoperability.

Brad Burg

There's no way to sugarcoat this news: when it comes to making use of the tools developed by the information technology (IT) revolution, the world's healthcare systems are lagging behind nearly every other industry.

There's no dearth of arguments in favor of the adoption of such systems. Among the most frequently adduced grounds for implementing IT systems are the potential for improving patient safety, gaining greater efficiency, and reducing overall healthcare costs. But these terms themselves incorporate a wide variety of potential benefits—and they're just a part of the picture.

Check It Out

Originally Published MX September/October 2004

ADVERTISING, DISTRIBUTION, & SALES

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Medical Device Marketing

"Making it from the pharmacy shelf to the checkout counter can be the toughest 100 yards in medical marketing." According to Aimee Roca, account manager at Photosound Communications (Princeton, NJ), that was the challenge the firm faced when it approached the package design for a newly approved consumer diagnostic.

Public service advertising for the Diabetes Network of Alberta Foundation developed by Medtronic Neurological's creative services group won a gold award in MMA's 2004 In-Awe competition.
(click to enlarge)

FDA Taps Schultz to Head CDRH

Originally Published MX September/October 2004

BUSINESS NEWS

Daniel G. Schultz

In late July, FDA announced that it has appointed Daniel G. Schultz, MD, as new director of the agency's Center for Devices and Radiological Health (CDRH).

Schultz has served as acting director of CDRH since April, when he replaced former center director David W. Feigal Jr., MD. Previously, Schultz was director of the Office of Device Evaluation.

In the position, Schultz will be responsible for FDA's review of all medical devices and radiation-emitting products, including magnetic resonance imaging equipment and x-ray machines. Schultz will also manage the ongoing implementation of FDA's medical device user-fee program.

Copyright ©2004 MX

It’s All about the Money

Originally Published MDDI September 2004

EDITOR'S PAGE



Wall Street is taking a renewed interest in the device industry—but only in certain kinds of companies. Others will have to get creative to attract investment.

The financial markets are once again warming up to the device industry. This good news, however, comes with a load of expectations, some of which are foreign to traditional medical device industry product-development and growth strategies. These expectations may reshape the industry and force some firms to seek alternative means of investment and growth. 

The evidence for this uptick in medical-device investment is not hard to find. In 2003, there were no initial public offerings for device companies. But only halfway through 2004, there have already been seven. In addition, large device makers are again interested in snapping up small ones that promise big growth, as shown by Boston Scientific's recent $750 million purchase of Advanced Bionics Corp. 

But as attendees at June's Strategic Research Institute Medical Device Investor & Corporate Development conference in Princeton, NJ, learned, the playing field is hardly level.

First, investors like biotech better than devices. Why? Because Wall Street prefers home runs to singles. That is, it tends to like firms with potential billion-dollar products than those with, say, potential $50 million products—even when the billion-dollar product is a far less sure thing. 

Devices with billion-dollar potential are rare, and the few that have it tend to be combination products. To date, only the largest manufacturers have been significant players in the combination-product market. Small companies wanting to play in this market, therefore, can't stick to the traditional growth pattern: a few rounds of venture-capital investing followed by an acquisition or IPO. To attract large amounts of early-stage investment, they will have to pattern themselves after the biotech companies. This could mean forging a key alliance with a major device or pharmaceutical player. It may even mean doing an IPO before its product is on the market while forging a persuasive case that it has a blockbuster in development. 

Second, those who have used traditional venture capital funding have to wait longer for an exit strategy to materialize. Frank Rahmani of the law firm Cooley Godward LLP (Palo Alto, CA) noted that the 29 venture-backed device companies that exited since 2000 averaged $48.7 million in funding, raised over five rounds of financing. This is much more money raised over a much longer time than was typically the case in the 1990s. The reason is that potential acquirers and public investors, having been burned in the past, are not pulling the exit trigger until they see more evidence that a company's products will succeed. The more safety and efficacy data for a company's product, and the farther along it is in the FDA approval and CMS reimbursement processes, the better chance the company has of being bought out or having a successful IPO.

Third, when Wall Street considers the device industry, it focuses almost all its attention on three popular sectors: cardiovascular, neurology, and orthopedics. If a company is not a player in any of those markets, chances are it simply will not attract significant investment. 

So what if your start-up does not have a product that fits into one of the currently favored criteria for investors? Get creative and be persuasive, for starters. And above all, gather as much evidence as you can about the marketplace need for your product.

There are investors defying the trends and looking for companies with some sort of hidden value. Some, like Ambient Advisors LLC (Los Angeles), specialize in “value unlocking.” They take companies with good technology but financial or management challenges and turn them into viable entities. Other types of investors specialize in seeking out singles instead of home runs. 

No serious investor will seek out a device company based on hype, however. The device company must take the initiative to prove to them that its product can be a winner without having to spend huge sums of money to get it to market.

Raising capital and growing a business isn't impossible for a small device company in the 21st century. But it takes more work than it used to. The industry is full of ingenious inventors. To attract investors, the business side needs the same kind of ingenuity.

The Editors

Copyright ©2004 Medical Device & Diagnostic Industry

Extrusion Firms Adapt to Demands for New Procedures and More

Advancements in medical device technology are having the expected ripple effect on both manufacturing and business for extrusion suppliers. In one key development, suppliers are picking up more outsourcing work from device firms looking to focus on their core businesses. The increase in outsourcing joins shifts toward tighter tolerances, the use of non-DEHP plastic, and consolidations among the trends that have swept up suppliers in their wake.


“We find more and more companies are looking toward outsourcing their tubing and extrusion requirements because of the cost associated with running in-house extrusion departments and keeping up with technology,” says Mark Saab, president of Advanced Polymers in Salem, NH. 

The savings come in equipment, personnel, and training costs, Saab points out. He adds that Advanced Polymers is seeing more device firms “looking to go outside” for production of both low- and high-volume products, although more of the interest is “in the low-volume side of the business.”

In fact, medical device manufacturers are farming out more nonessential chores in general, says Karen Bufalino, the marketing and customer service manager of Fluortek in Easton, PA. The custom extrusion company opened contract manufacturing facilities in Ireland because several large U.S. device makers had begun manufacturing there. The Fluortek facility “came on-line 18 months ago to provide this industry with a local, responsive supply-chain partner,” says Bufalino. She notes that her company “is constantly rethinking its role in the supply chain as customers continue to shift the burden of supply-chain management to their vendors.”

Customers for Advanced Polymers' line of primary medical balloons and thin-film heat-shrink tubing confirm Bufalino's experience. As an approved supplier of heat-shrink tubing to at least 50 different medical companies, Advanced receives a steady stream of phone calls from clients looking to consolidate their tubing suppliers, Saab says. 

“They tell us, ‘We don't want 100 vendors. Let's try to narrow the list down to 10 vendors or so.' A lot of the time, they'll send us their whole package and ask, ‘Can you [give us a] quote on this?'” 

Because of the high cost of running in-house extrusion services, device firms are increasingly outsourcing work to their suppliers.

Suppliers are “pushing us to do more and more for them,” Saab notes. That to-do list includes “tighter tolerances, faster turnaround times, and lead times being cut. More and more companies want us to do dock-to-stock shipping. They don't want to inspect product, so they qualify our products and our systems. They also look for just-in-time (JIT) supply agreements, where you have a purchase order to deliver product on a weekly, biweekly, or monthly basis.”

Device customers still want the extruder to keep “one or two releases on the shelf,” Saab emphasizes. This backup plan enables manufacturers “to push the next delivery to tomorrow instead of the scheduled next-month shipment.”

“Our customers, both OEMs and contract manufacturers, are requiring shorter lead times for engineering and development projects,” agrees Jamie Mui, product manager, medical, for Saint-Gobain Performance Plastics (Charmy, France). “Many customers are trying to reduce their inventories of components and expect kanban or JIT delivery schedules from us.”

The device industry's health has been good for Zeus Industrial Products, says Eduardo Braga, director of marketing for the Orangeburg, SC–based firm. “The continued strength and resiliency of the medical device market” has encouraged the polymer extrusion company, which launched a new line of nylon tubing in April 2004. Braga notes that the device manufacturers' movement “to outsource nonproprietary technology as manufacturers look for ways to improve overall yields and reduce manufacturing costs for components” has allowed the OEMs “to focus more strategically on their core competencies.”

Zeus has benefited from opportunities the trend has provided, Braga says. “Our products and services mix is uniquely positioned to provide tremendous efficiencies to our channel partners, who develop devices utilizing minimally invasive technologies.”

As device manufacturers continue to farm out nonessential production chores, companies such as Zeus have seen demand grow for “value-added services,” Braga adds. “The type of value-added services range from flaring to skiving, drilling, tip-forming, and even packaging and inventory management.”

Bunzl Extrusion, a supplier of precision thermoplastic medical extrusions, also has seen medical OEMs significantly increase their use of contract manufacturers, says Richard Brooks, vice president of sales and marketing. As a result, both OEMs and the contract manufacturers are requiring the Northborough and Athol, MA–based company to shorten lead times for engineering and development projects, he points out. Brooks adds that custom medical-extrusion companies are facing a strong demand “to become more vertically integrated. This includes the addition of subassembly of components and packaging to add extra value to our core extruded tubing products.”

For example, custom extrusion companies are more likely today not only to make the base tube for a catheter, but also “to offer all the postfabrication operations necessary to complete the catheter, such as irrigation holes, tipping, and printing.”

Outsourcing has been a mixed blessing for some vendors, however. Mike Badera, president of Precision Extrusion in Glen Falls, NY, says that the outsourcing trend has increased business opportunities for the company just as the poor economy has decreased them. Lately, a slightly improved business climate has brought more inquiries from device manufacturers, while a weak dollar has attracted more international business.

MicroSpec, a New Hampshire–based extrusion company, discovered that outsourcing can have its drawbacks, particularly when coupled with industry's increase in globalization and mergers. “We are noticing that the outsourcing of medical manufacturing to other countries is having a huge logistical detrimental influence on the delivery of quality product,” says Tim Steele, the firm's managing director. 

Steele says that quality, “which is oftentimes a subjective thing in the custom extrusion field, becomes more subjective” when the outsourcing firm is foreign. The language barrier presents problems when specifications that are “developed subjectively” at the U.S. headquarters of a device firm “become black and white, when they weren't necessarily developed as black-and-white specifications,” he explains. 

The result, says Steele, is that “the issue of quality, which wasn't an issue before, suddenly becomes a barrier to smooth operations. For instance, we have a product that we have been manufacturing for three years now that hadn't had a rejection from our American customers for the last two years. Suddenly everything is being rejected, and the product hasn't changed.” The product is a component of an extruded part that is put into a finished medical device such as a catheter, a guidewire, or a laparoscopic device. 

MicroSpec manufactures tubing with ID tolerances of ±0.0001–0.0002 in. and OD tolerances of 0.004–0.625 in. 

“We haven't changed a thing, and the product is the same, and yet it becomes an issue at the other end,” Steele says. The foreign team's unfamiliarity with the process is the primary problem. “They don't understand the product, even with the best transition team that might come through the door.” The company head says the confusion “is a problem for us, but it's more of a problem for our customer. We have to, in a sense, almost reinvent the wheel. They're not familiar with [the product], and they have to learn it. Because of the language barrier, [the learning curve] sometimes takes a year, a year and a half.”

Steele sometimes has to travel to the foreign site “to head one of those issues off at the pass,” which he notes also “adds travel costs, costs at our own end, and ISO costs.”

Steele has a fairly straightforward opinion of the reasons for outsourcing's growing popularity. “When products get outsourced, they get outsourced for one reason and one reason alone,” he insists. “Not because of quality, but because it's cheaper.”

Custom extrusion companies may have no choice but to shift some production across borders, Brooks of Bunzl notes. Suppliers focusing solely on extrusion “will eventually lose market share. Subassemblies and other extra-value operations need to be provided to service the growing requirements of today's medical OEM. To remain competitive, however, the assembly operations need to be based in a low-labor and low-cost environment such as Mexico or Latin America.”

Saab asserts that most outsourced extrusion work falls in a specific category. “We haven't seen a lot of extrusion work go outside the country, with the exception of commodity extrusion work. Usually, that commodity work is being done by the same company in their own facility. Like a Baxter, for example. They open a plant in Mexico or in Puerto Rico and set up manufacturing lines for extrusion vinyl tubing. And all of a sudden they're having problems when they've never had problems before.”

Pushing Technological Limits

Outside of outsourcing, several extruders say OEM requests for more-sophisticated extruded products have increased. Jim Dandeneau, president of Putnam Plastics in Dayville, CT, notes that an increasing number of devices such as catheters “are becoming smaller and increasingly sophisticated [and] therefore pushing the limits of polymer and extrusion technologies.”

The company, which is being acquired by Memry Corp., manufactures multilumen, multilayer extruded products for guidewires, catheter shafts, and other medical devices. Putnam specializes in precision extrusions with coatings in fluoropolymer, polyimide, and thermoplastic resin. Dimensions range from 0.002 to 0.750 in. and wall thicknesses from 0.0003 to 0.100 in.

“We are being requested to extrude thinner walls, as well as more-complicated configurations,” says Dandeneau. “Coextrusion is more popular than ever, with multiple materials extruded together to offer the unique property of each to the catheter.

“The tolerances are becoming tighter on simple monolayer extrusions,” he adds. “We are also getting many requests for extrusion over discrete lengths of wire or coils.” Dandeneau also says that the supplier's intermittent extrusion process has become more popular among device manufacturers trying “to avoid bonding soft tips on individual catheters.” 

Bunzl's Brooks says a demand for more-sophisticated devices is requiring companies such as his to develop more “high-tech extruded products.” In particular, manufacturers are looking for “minimally invasive” devices. He cites two examples of new OEM devices used in advanced medical procedures for women. Both use PEXbond paratubing from Bunzl's Pexco Medical Products unit. An outpatient procedure medical device uses paired PEXbond tubing and paired electrical conductors that are thermobonded together, Brooks says. “This product is a component of an impedance-controlled endometrial ablation system. The procedure is designed as an alternative to hysterectomy, conventional endometrial ablation, and hormone therapy.”

PEXbond paratubing is also used in an assisted breast-biopsy device for a nonsurgical procedure that significantly reduces the time of standard medical devices, according to Brooks. Irrigation and anesthesia are sent to the biopsy site through the tubing, which also uses air and suction to capture tissue culture, he says. “This device is the only one commercially available that operates under MRI guidance and gives women in the high-risk category for breast disease a fast and easy biopsy option over surgery.”

Because of the continuing device advances, companies such as Bunzl and Fluortek are facing more-stringent specifications than before. Brooks says custom extrusion “is moving toward six-sigma and lean-manufacturing philosophies to improve efficiencies and ultimately reduce costs.” 

Manufacturers are also demanding tighter specifications for catheters in particular, according to Brooks. Thinner walls “reduce the impact of trauma associated with the introduction of a catheter into the vascular system.” Bunzl's Pexco business has introduced tubing with a wall thickness of 0.008 in. for use as a catheter in veterinary applications.

Demands for smaller, more-sophisticated catheters are pushing the polymer and 
extrusion technology limits.

Fluortek's Bufalino says extrusion companies will continue to face demand for “downsized” products, reduced wall thicknesses, and tighter tolerances. Fluortek is committed to developing technologies in-house to meet changing customer needs, she emphasizes. “The reality of device life cycles dictates the need to meet requirements early in the development stages of a particular device. Mature products require suppliers like Fluortek to cut costs with consistent, lean processes.”

The entire industry “is going toward tighter tolerances,” insists Saab of Advanced Polymers. “Companies are much more interested in statistical process controls. They are also more interested in companies that can run very tight tolerances and prove it with both statistical data and also through quality control inspection techniques using very aggressive sampling plans that don't allow for any rejects in the system.”

Saab says device customers are now less tolerant, if you will, of any rejected product. “Companies expect product at virtually 100% yield, whereas in the past, companies were typically willing to accept some number of product that was out of spec.” He emphasizes that the industry's shift toward thinner walls, smaller diameters, and much tighter tolerances means that new devices “require extremely tight tolerances in order to function properly. In some cases, people ask for tighter tolerances when they don't really need it. But they expect it.” 

Dethroning DEHP

Regarding the 50-year domination of PVC in the industry, several extrusion companies are seeing increases in demand for tubing without the plasticizer diethylhexyl phthalate (DEHP). Bunzl's customers are exploring the differences in materials costs and processing techniques for PVC materials without DEHP, Brooks says. He notes that non-DEHP tubing is more difficult than standard materials to process. It also has more potential for cosmetic defects.

“The costs for extruded medical tubing produced with non-DEHP materials can be 5–10% higher than traditional DEHP grades,” Brooks emphasizes. “The major costs for the OEM, however, lie in the revalidation of the new material, which can range from $5000 to $50,000 and utilize their internal resources for 3 to 12 months or more.”

After receiving quotes, most customers analyze the costs and decide to stick with “traditional, plasticized PVC-grade materials, especially since there is no real proof of harmful effects in humans to date.”

At Fluortek, demands for products that contain DEHP, such as PVC tubing, “have declined substantially,” Bufalino says. “Fluortek has experienced little PVC replacement business because it leans toward custom specialty products as opposed to commodity-type tubes that have traditionally been extruded from PVC.”

PVC has never been a part of Zeus's product mix, notes Braga. He says the extrusion company has been working with several device manufacturers searching for alternative materials that have “similar performance characteristics and comparable price points” to PVC with DEHP plasticizer. The company has developed “a range of [polyamide] blends that are demonstrating positive results in field trials,” Braga says. He adds that one of Zeus's “raw-material-enhancement processes” could attract the attention of device makers if regulators take further steps to limit DEHP use in the industry.

Before 2004 ends, Saint-Gobain expects to introduce two new non-DEHP PVC product lines, says Mui of Saint-Gobain Performance Plastics. One of the new lines slated for introduction will be a nonphthalate. The company, known for its wide range of products such as Tygon and Bio-Sil silicone extrusions, offers non-DEHP PVCs known as S-74-HL and S-75-HL. Alternate non-PVC products offered by Saint-Gobain include thermoplastic elastomers and polyurethanes, Mui says.

“Our studies indicate that non-DEHP PVC will be in the United States in the near term,” and certainly within the next five years, the product manager notes. “Europe and Asia have embraced non-DEHP PVC and are requesting nonphthalates.” He adds that California “has pretty much caught on to the non-DEHP PVC market and taken the lead on this.” The industry is putting strong pressure on extrusion suppliers to hold down prices on alternatives to DEHP PVC products, Mui emphasizes.

“For extrusion, we have serious pricing pressures,” the product manager says. “We enjoy working with large companies that we can service worldwide. However, smaller companies in local markets drive prices down.”

Precision Extrusion “will use whatever material the customer asks for,” says Badera on the DEHP issue. “We have had some customers ask about it, but when they discover that the alternatives are more costly, they revert to the usual PVCs. It has become a big enough issue that our insurance company was questioning us on our use of DEHP materials.”

One aspect of the extrusion business remains constant through all of the industry segment's ups and downs, Advanced Polymer's Saab points out. “One of the issues with extrusion, to be quite honest, is that there's a significant part of the extrusion process that is still an art. It's not as much of a science, though there is a lot of science involved. It's not as cut and dried as, say, doing business where you can duplicate five molding machines and five molds. With extrusion lines, there's still an operator interaction and still adjustments that need to be made manually for guiding the product.” 

Copyright ©2004 Medical Device & Diagnostic Industry

From Image to Vision

Originally Published MX September/October 2004

COVER STORY

Interview by Steve Halasey

Almost by definition, executives of medical technology companies are visionaries. Whether their strengths lie in inventing medical products or creating opportunities for business growth, such leaders share an ability to conjure up ideas that few others have imagined.

One such executive with a vision of the future is Erich R. Reinhardt, DEng, president and CEO of Siemens Medical Solutions (Erlangen, Germany). As leader of one of the world's largest manufacturers of medical technologies—with 2003 revenues of nearly $9.3 billion—Reinhardt is well positioned to have a clear outlook on the healthcare marketplace.

Erich R. Reinhardt, president and CEO of Siemens Medical Solutions, on innovation and imaging in the future of healthcare.