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Roundtable: Field Service and Logistics

ADVERTISING, DISTRIBUTION, & SALES

Sidebar:

It hasn't been all that many years since medical device manufacturers discovered that their parts and repair services for capital equipment could be a valuable commodity to their customers.

Since that time, medtech field service and logistics have continued to evolve, offering increasingly sophisticated technologies for field support and even creating a lively market for third-party logistics providers. For this issue's roundtable discussion, MX called upon a panel of experts to provide their views about recent ad­vances and current trends affecting medtech strategies for field service and logistics (see sidebar).

MX: A decade or so ago, a lot of device companies would not have thought to consider field service and logistics a competitive business area or a profit center. Have most of them evolved since then?

Michael Aviotti: Cardinal Health employs a number of different models where service is a business or support center. Service is part of the lease for our dispensing products, so it's in essence a cost in that model. But on the infusion products side, it's a business model. Service for us is not a cost center or a profit center, I call it a business center.

Warren M. Gitt: At Hill-Rom, service is both a profit center and a cost center. There's a greater tendency for the repair service to be a profit center, so there's more emphasis on that.

Donna McBride: Because our firm is an outsourcing business, most of the companies we deal with view logistics and service as a P&L center. But for some, it's also a competitive advantage.

How do medical device companies plan the area of field service and logistics? Is it strictly a head count and a guess at revenue and costs, or is there more to it?

Nemetz: Our strategy is based on service being the major P&L center for the corporation. We're the major annuity stream for Toshiba. Service looks out over a long-term period of four or five years because we have our contracts. So, the strategic direction of the company has a lot to do with where it wants to take the service organization.

Gitt: I think that companies base their service planning on whatever history they have plus forecasts for sales activity—and then try to in­crease penetration to the installed base of equipment so as to get more service dollars.

One thing that's happening today that wasn't 5–10 years ago is customers going to Web portals to find out what's going on with their service orders, to order parts online, things of that nature. That's an additional cost and planning requirement.

McBride: This varies. Technology is enabling field engineers to be more productive. Engineers outfitted with handheld equipment can instantly scan a device and perhaps place a replenishment order while they're on-site. Our clients often come to us looking for recommendations on how to balance, for example, their inventory-carrying costs against the response-time requirements of their clients.


Intelligent Device Management

How has the technology of remote instrument monitoring, or remote diagnostics, evolved?

Nemetz: It's improved immensely. Our service engineers use the Blackberry to code their calls and order parts and notify us of where they are within the service call. And our Innovision headquarters facility has equipment to control all the remote diagnostics of our products. It's basically over phone lines to protect proprietary information, but we can get into almost all the systems at any time.

Aviotti: With our infusion products, which are wireless devices, we put a server into the hospital network. We have a piece of software on the server that tells if there's any software or hardware problem with the server or the applications on it. Then we can remote in to see what's going on.

On the dispensing side also, we have agents on all the equipment and on the major console. We can look at the hardware and software condition remotely via the Internet before we dispatch any service tech to the customer's location.

McBride: I think certainly there's a significant move toward sophisticated handhelds for technicians in the field. And definitely a move toward paperless communication. Also, because of the accessibility of more and more instrumentation via the Web or other type of interface through which remote monitoring can be done, technicians are better equipped and better prepared when they get to the point of service, without so much diagnostics being required.

Then there's a move to drive all the data the monitoring equipment acquires automatically into some central processing point, perhaps through the nurse's station or directly into some kind of interface with the enterprise resource planning (ERP) system at the hospital.

With respect to the attempt to be paperless, how does recordkeeping work in an environment with a lot of handheld devices, no laptops, no use of paper? Are people still able to keep track?

Gitt: If you set it up appropriately with bar codes and scanners and can move the data directly from the handheld into the ERP system, then it's not as difficult as one might think.

McBride: It probably improves the quality of the information that's stored, because it's been scanned in. You get more information, and it's probably more accurate. It also improves productivity, including that of the field engineers, because the self-diagnosis results in a higher first-time fix rate.


Customer Relationship Management

Should companies be paying more attention to customer relationship management (CRM), and should they be using CRM systems?

Gitt: Having the right kind of system in place to gather complaint information just makes sense: the more a company uses a system that helps it gather information about problems immediately and intelligently, so that it can be properly responsive, the greater the probability it is going to have happy customers.

Nemetz: I believe the reason we've been very successful in terms of customer satisfaction is not all the technology but our organizational structure. With the right organizational structure in place from top to bottom, the service engineer has support from a specialist, from an area manager, from backup support, and from a customer support manager.

McBride: With us, in many cases the customer interface is still handled by our client. The role we as an outsourcing firm would play is to provide the client's call center with real-time information to allow it to have conversations with customers based on up-to-the-minute data.

Manufacturers have to decide whether to maintain in-house staff for service and logistics or outsource all or part of it. Is there an advantage to one strategy over the other?

Gitt: I think it's a question of an organization deciding whether it has a core competency to provide service. A lot depends on whether it's a small organization that's just evolving into a significant market share or a large organization that can foot the bill to do this stuff right itself.

Outsourcing is becoming much more common, but companies don't go into that lightly.


Logistics

Larger companies might decide to have an in-house service and logistics group. Can emerging companies match them in this area?

Aviotti: We have the critical mass because of all the equipment out there. We looked into outsourcing service, but because of our size, we can do it more competitively than we could ever outsource it for.

Smaller companies may have to outsource because they don't have the critical mass to get the kind of coverage and service they want to provide, and it'll be a little more expensive than having their own in-house group.

Nemetz: I know there are a lot of good third-party companies out there, but when you get into the high-technology areas like computed tomography and magnetic resonance imaging where the advances come every couple of years, customers like the fact that the OEM has the background, the engineering, and everything else that may be needed to take care of that product.

Companies in some medical device sectors seem to have a parts depot every five miles to ensure timely delivery. How do differences among various sectors affect logistics and the postmarket supply chain?

McBride: It is driven somewhat by the size of the company, type of inventory, its ability to support forward positioning of inventory, whether it has a field engineer network that is in-house, and its delivery commitments to clients—it really depends. Things are changing, and the economy is driving this, as some companies are drawing back on size because they have fewer resources. They still have client base to preserve, so they tend to focus on core competencies and outsource other pieces.

Gitt: Whether it's a depot, trunk stock, or forward-positioned, inventory is largely based on three or four parameters. One is the criticality of the equipment—what it means to the end-user ultimately for it to be down. The second thing is the cost of the parts. Third is the size of the equipment in question.


What Comes Next

Where are things going in terms of companies responding to ongoing competition, the economic climate, and changing customer demands?

Nemetz: What we're trying to do is produce the most highly technical diagnostic imaging product we can. To hold down the cost of service support, we're just going to have to be as efficient as possible.

Aviotti: With all the CRM data we collect, all the input from customers, we continue to improve the product. Really, the way we're going to reduce cost is to continue to build quality into the products so there are fewer failures and less servicing.

McBride: The things we can bring to the table, I think, are innovative ideas on how to potentially make the field engineers more productive by doing spare sharing and device-specific kitting, so that they're sure they have the right part every time they go out on a service call.

Gitt: I think the current economic climate is going to cause end-users to take a hard look at whether they could extend the life of the product they have in use. If that's the case, then it places an additional burden on the service provider.

Copyright ©2008 MX

Roundtable: Field Service and Logistics

ADVERTISING, DISTRIBUTION, & SALES

Sidebar:

It hasn't been all that many years since medical device manufacturers discovered that their parts and repair services for capital equipment could be a valuable commodity to their customers. That realization made it possible for many medtech companies to negotiate more-inclusive contracts with their customers, and turned many companies' cost centers into profit centers.

Since that time, medtech field service and logistics have continued to evolve, offering increasingly sophisticated technologies for field support and even creating a lively market for third-party logistics providers. For this issue's roundtable discussion, MX called upon a panel of experts to provide their views about recent advances and current trends affecting medtech strategies for field service and logistics (see sidebar, 'Roundtable Participants').

MX: A decade or so ago, a lot of device companies would not have thought to consider field service and logistics a competitive business area or a profit center. Have most of them evolved since then?

Michael Aviotti: Cardinal Health employs a number of different models where service is a business or support center. Service is part of the lease for our dispensing products, so it's in essence a cost in that model. But on the infusion products side, it's a business model. We have to keep the sets coming in, and the consumables really are most important to the business.

Service for us is not a cost center or a profit center, I call it a business center.

Ted Nemetz: In all the companies I've worked for, service has always been a profit and loss (P&L) center—in fact, the major P&L center.

Warren M. Gitt: At Hill-Rom, service is both a profit center and a cost center. There's a greater tendency for the repair service to be a profit center, so there's more emphasis on that.

I think one factor in this is increasing consumerism and the emphasis on Internet convenience. People have such high expectations for speed and quality of service, and that's bled over into the medical technology business.

Donna McBride: Because our firm is an outsourcing business, most of the companies we deal with view logistics and service as a P&L center. But for some, it's also a competitive advantage.

How do medical device companies plan the area of field service and logistics? Is it strictly a head count and a guess at revenue and costs, or is there more to it?

Nemetz: Our strategy is based on service being the major P&L center for the corporation. So a lot of our dollars go back into research and development. You know, all of the company's compensation is based on what service brings in.

So, as we grow, our budget is put together in response to the growth of the installed base of imaging equipment that we hope to advance in the years going forward. We're the major annuity stream for Toshiba. Service looks out over a long-term period of four or five years because we have our contracts.

So, the strategic direction of the company has a lot to do with where it wants to take the service organization.

Aviotti: For our infusion business, the device we currently sell we designed so simply that it's really a parts business for us. It's quicker and easier for the customer to fix the instrument than it is to call up, get a return goods authorization, box up the entire unit, and send it back. So, our business is planned around parts and the availability of parts, and even more around user training. We're trying to keep the pumps going long enough, and to keep the customers satisfied, so that they continue running infusion sets through them.

When users go to buy the infusion device, they want to get an idea of what it costs to own it over five years. And on the basis of our experience with other people buying parts, we can tell them what percentage of their capital purchase they'll spend in parts—so long as they don't decide to use the device for something like bowling. Some people are very destructive with the devices, but most of the time we can predict pretty accurately how much they'll spend on parts.

Gitt: I think that companies base their service planning on whatever history they have plus forecasts for sales activity--and then try to increase penetration to the installed base of equipment so as to get more service dollars.

I suspect that the more complex the equipment the more unpredictable it becomes, but I honestly don't have a broad enough base of experience in that area to be sure. In some cases, what makes it difficult to forecast from a revenue perspective is the extent to which the service function is actually being sold. Because sometimes it's a tack-on for people in the sales organization who are more interested in selling product than in selling service.

One thing that's happening today that wasn't 5 to 10 years ago is customers going to Web portals to find out what's going on with their service orders, to order parts online, things of that nature. That's an additional cost and an additional planning requirement.

McBride: This varies. Technology is enabling field engineers to be more productive. Engineers outfitted with handheld equipment can instantly scan a device and perhaps place a replenishment order while they're on-site. Our clients often come to us looking for recommendations on how to balance, for example, their inventory-carrying costs against the response-time requirements of their clients.


Intelligent Device Management

How has the technology of remote instrument monitoring, or remote diagnostics, evolved?

Nemetz: Obviously, it's improved immensely. Our service engineers use the Blackberry to code their calls and order parts and notify us of where they are within the service call. And our InnerVision headquarters facility has equipment to control all the remote diagnostics of our products.

Because we're working in a critical-care environment, we try to predict any types of concerns or issues the customer will have before they actually occur. That way, when we get on-site, we have the right parts, the right tools, and the right people to resolve the problem as quickly as possible.

It's basically over phone lines to protect proprietary information, but we can get into almost all the systems at any time, in order to monitor system performance.

Aviotti: I speak again in terms of two groups. With our infusion products, which are wireless devices, we put a server into the hospital network. We have a piece of software on the server that tells if there's any software or hardware problem with the server or the applications on it. Then we can remote in to see what's going on.

So, we can maintain our network applications remotely. There's nothing on the hardware though, because, again, the break being a very simple matter, the customer does all that is necessary to fix it.

On the dispensing side also, we have agents on all the equipment and on the major console. We can look at the hardware and software condition remotely via the Internet before we dispatch any service tech to the customer's location.

In both cases, the hospital allows us access through its firewall. We come in through the Internet and look at our equipment after getting into their system that way. Once we're in, it's pretty much our box and our application and software. The only point of discussion is what, say, virus-control protection they want to put on there, and how we keep that up-to-date, and who does the patching on that as well as the operating systems.

McBride: I think certainly there's a significant move toward sophisticated handhelds for technicians in the field. And definitely a move toward paperless communication. Also, because of the accessibility of more and more instrumentation via the Web or other type of interface through which remote monitoring can be done, technicians are better equipped and better prepared when they get to the point of service, without so much diagnostics being required.

Then there's a move to drive all the data the monitoring equipment acquires automatically into some central processing point, perhaps through the nurse's station or directly into some kind of interface with the enterprise resource planning (ERP) system at the hospital.

With respect to the attempt to be paperless, how does recordkeeping work in an environment with a lot of handheld devices, no laptops, no use of paper? Are people still able to keep track?

Gitt: If you set it up appropriately with bar codes and scanners, and if you can move the data directly from the handheld into the ERP system, then it's not as difficult as one might think.

Of course, we al tend to be pack rats and like to have our paper around because we think we can get to it faster, but I really think that the days of lots and lots of paper are going away.

McBride: I think it probably improves the quality of the information that's stored, because it's been scanned in. You get more information, and it's probably more accurate. It also improves productivity, including that of the field engineers, because the self-diagnosis results in a higher first-time fix rate.

Let's talk a little about electronic medical records. Do customers have particular connectivity issues in that area?

Aviotti: Our dispensing products and the Pyxis products have for a long time had interfaces back to the medical record; so, when you take a drug out of the cabinet, it automatically populates that. It goes back to the pharmacy system, back to the replenishment system. The devices also send a message back to billing. And when a drug is taken out, that goes not only in the clinical record but also in any other record the customer wants us to send it to.

We just recently started sending infusion data back to the pharmacists so they can see what's going on and know when to do their premix drugs. The devices then also populate the electronic medical record with infusion data.

Of course, hospitals are liable for compliance with the privacy requirements of the Health Insurance Portability and Accountability Act (HIPAA). But as these systems are populating their data records, sensitive data are being transmitted. What kinds of protections are built into the systems to make sure that personal identifiers don't get out?

Aviotti: Obviously, it's part of everyone's quality training, so they're aware of HIPAA data. I don't know about the dispensing data, but with respect to the infusion data, we have processes to destroy the hard drive after we get that data. We would download that for the customer, and then built-in functions would destroy the hard drive of any laptop we've used to gather the data—or reconfigure it so the data are totally wiped out.

Gitt: I think that's right. I'd like to interject a couple of comments here as a person who's been responsible for third-party repairs and worked on a host of different types of infusion devices and ventilators.

We are trained—and we have internal processes—to eliminate any patient data still resident on a device when it comes to us. There's a requirement in most hospitals that they shouldn't let go of a device unless it's had any identifiable patient data on it removed. Nonetheless, from time to time devices slip through. So, what we do with the hospitals with whom we have a repair relationship is, we sign a document, which is an extension of the chain of trust as it relates to their HIPAA requirements, saying that we conform to their requirement to remove all patient-identifiable data.

Now, to clarify things: the data that are resident on many of the devices may be patient specific, but generally speaking it's encrypted such that you'd have to know the patient's identifying number before you could connect the data on the device with a particular patient. Within the walls of the hospital, as these intelligent devices communicate amongst themselves and with the ERP system of the hospital and the electronic medical record, I think they're encrypted in some fashion as well.

Aviotti: Yes, wireless systems started with the Web, and have led to wireless protected access—WPA and now WPA2. So there are a number of different ways that hospitals can encrypt data through their wireless capability.

Gitt: I would further note that manufacturers who are ISO 13485 certified, as a part of the certification process, have identified and discussed how they protect patient-specific data and how they comply with the HIPAA regulations.

Aviotti: That's part of virtually every contract we have in the infusion business: we have an agreement with the customer on HIPAA. It's fairly standard now with any kind of sale of capital equipment that the parties have a HIPAA agreement in place, or a business partner relationship agreement.

McBride: We see that also with other industries we serve, that use handheld devices that hold customer-sensitive data—not necessarily HIPAA related but customer specific data. The services that some of these clients request are end-of-life services, where we do data cleansing before some of these products go to liquidation or through other end-of-life channels. In some cases, it is the actual data cleansing. In others it may be secondary processing. Something was already done on-site, and we're doing a second check just to make sure that everything was cleared.

Is this all going to become much more complex when there are even more devices that are truly interoperable—where the data from one device is being used to drive another?

Aviotti: We have Care Fusion, a handheld that can interact with the Pyxis and pull drug data from it, and then actually program the pump off of that. So we are getting to where our different products—in series at least—are able to talk to each other. At other companies, the handhelds are reaching out, and other infusion devices are reaching over to the Pyxis side.

Yes, the complexity will grow as different pieces of equipment from different manufacturers start to interact with each other with data.

Gitt: I think all you have to do is to look at the evolution of the hospital software industry, and the ERP evolution within that, to see that it gets more difficult before it gets easier.

Inasmuch as there's a struggle over standards, that always occurs first, before the light goes on and people finally decide either to agree upon some form of middleware or to accept some sort of coding standard.

I think we've seen that happen now. Some of it, on the electronic medical record, was government driven, and that's helped to drive more teamwork amongst the developers of different kinds of software—hospital software, physician software, et cetera.

AAMI, the engineering-standard professional organization, has done a lot to try to bring these kinds of things together. They have active working groups, and they actually have a separate area where they're combining IT and biomedical and design engineering functions to an extent that perhaps will help. Along with AAMI, HIMSS (the Healthcare Information and Management Systems Society) is, I think, going to be a thought leader with respect to this. And also whatever, 800-pound gorillas in the manufacturing sector stand to derive the greatest benefit from getting things standardized.

But still, I think it's going to get tougher before it gets easier.


Customer Relationship Management

Should companies be paying more attention to customer relationship management (CRM), and should they be using CRM systems?

Gitt: Eyes are the windows of the soul, they say. Well, I think that the service department is one of the greatest windows into what's actually happening with customers.

Happy customers don't necessarily let you know they're happy, but when they're upset, customers are quick to call. They want folks to know immediately that they have a problem. It could be a logistics issue, a pricing issue, or even a service issue.

Having the right kind of system in place to gather complaint information just makes sense: the more a company uses a system that helps it gather information about problems immediately and intelligently, so that it can be properly responsive, the greater the probability it is going to have happy customers.

The companies I've worked for in the service environment do use a CRM system. It figures in a great amount of the time that the internal IT department interfaces with the service area, and there can be subcomponents within the call centers or the customer service department where some off-the-shelf type of CRM system is being used.

Nemetz: The number one objective of our organization is customer satisfaction. Toshiba holds many of the leading ratings in medical imaging. But one of the things we on the service side say is that sales sells the first product and service sells the rest.

There's even more to it than that. Not taking away from our sales organization, but when you're dealing with very high-end equipment that typically costs $1 million or $2 million for one item, it's a lot easier for sales to be effective if that product is as reliable as can be, especially in the critical-care area.

I believe the reason we've been very successful in terms of customer satisfaction is not all the technology but our organizational structure. With the right organizational structure in place from top to bottom, the service engineer has support from a specialist, from an area manager, from backup support, and from a customer support manager.

The technology today is helping us communicate much better through all levels of the organization, so we can respond as quickly as possible to customer needs. We have to be very agile in communicating to the management team and to the field, because we guarantee the OEMs 98, 99% uptime on their high-end Toshiba systems.

Aviotti: I agree about structure playing a role. We invest a lot into soft skills training, emotional intelligence, change management, and managing difficult customers. Any time we hold a training session for people that interact with the customer base, it's a combination of equal parts technical training and training in the soft skills.

McBride: With us, in many cases the customer interface is still handled by our client. The role we as an outsourcing firm would play is to provide the client's call center with real-time information to allow it to have conversations with customers based on up-to-the-minute data.

In a scenario where we're the entity that the customer is speaking to directly, we take the calls and record the information in our corrective and preventive action databases. But in most cases we're not in that position.

Manufacturers have to decide whether to maintain in-house staff for service and logistics or outsource all or part of it. Is there an advantage to one strategy over the other?

Gitt: I think it's a question of an organization deciding whether it has a core competency to provide service. The first step is serious introspection as to whether it has the capability and the desire and the willingness to do it. A lot depends on whether it's a small organization that's just evolving into a significant market share or a large organization that can foot the bill to do this stuff right itself.

As was suggested, there are a lot of soft skills, as well as other investments, involved in doing this thing appropriately. From my experience as a manager of a third-party service organization, I see a tendency to start small, to parcel out some segment of the service function and then see how well it goes. It can evolve into something as great as a total turnkey thing, where an organization doesn't even have a service department. It has outsourced the entire function.

What we've seen happening over the past five years or so is a big increase in the outsourcing of things that are surprising. It used to be subcomponents perhaps. Now it's total manufacturing. In some cases, it's design. You begin to wonder, what is a medical device manufacturer now?

I think service is one of the areas that is starting to peel away from being something that is closely held internally. But an outsource service organization has to have a track record. It has to be a trustworthy partner and be able to prove that it can provide almost instantaneous access to information. It has to have regular conversations with the partnering company, because there are quality issues, regulatory issues, customer satisfaction issues, and it's very complex.

Outsourcing is becoming much more common, but companies don't go into that lightly.


Logistics

Larger companies might decide to have an in-house service and logistics group. Can emerging companies match them in this area?

Aviotti: We have the critical mass because of all the equipment out there. And we know what our costs are. We looked into outsourcing service, but because of our size, we can do it more competitively than we could ever outsource it for.

Smaller companies may have to outsource because they don't have the critical mass to get the kind of coverage and service they want to provide, and it'll be a little more expensive than having their own in-house group.

Nemetz: I know there are a lot of good third-party companies out there, but when you get into the high-technology areas like computed tomography and magnetic resonance imaging where the advances come every couple of years, customers like the fact that the OEM has the background, the engineering, and everything else that may be needed to take care of that product, and therefore meet the customers' requirements.

All the companies I have worked for in that capacity have been large enough that it was much more efficient for them to manage service and logistics themselves. The service organization was a P&L center for all those companies, and they were because they knew they could provide satisfaction to the customer and still make a profit.

Companies in some medical device sectors seem to have a parts depot every five miles to ensure timely delivery. How do differences among various sectors affect logistics and the postmarket supply chain?

McBride: It is driven somewhat by the size of the company, type of inventory, its ability to support forward positioning of inventory, whether it has a field engineer network that is in-house, and its delivery commitments to clients—it really depends. Things are changing, and the economy is driving this, as some companies are drawing back on size because they have fewer resources. They still have client base to preserve, so they tend to focus on core competencies and outsource other pieces.

Gitt: Whether it's a depot, trunk stock, or forward-positioned, inventory is largely based on three or four parameters. One is the criticality of the equipment—what it means to the end-user ultimately for it to be down. If you've got millions of dollars invested in something that is a big revenue producer and it costs a lot of money to have a backup, then that certainly drives having inventory placed at a forward location, so there can be almost immediate repair.

The second thing is the cost of the parts. If the parts aren't very expensive, then you can afford to have a few more of them as backups, or even backup equipment.

Third is the size of the equipment in question. In some cases, relatively small equipment can be shipped around fairly readily. The pieces are not ultraexpensive, and it's affordable to send them back to the depot for processing.

Nemetz: I agree. It depends on the products. All of ours are basically critical-care products, very expensive. So we have a lot of forward stock locations that we try to monitor closely, so that we don't have excess inventory.

We keep good records on what parts fail on specific units and try to have them up front as quickly as possible. Of course, 90% of our equipment is under a contract, and we have to provide 98% uptime or else pay penalties. Because we have to get that part to the customer quickly, we have a lot of forward stocking locations.

Aviotti: With us, our infusion customers typically just buy parts and do their own repairs. They keep their own inventory because we have a very high fill rate. And because infusion's a critical area, they typically have more devices on hand than they use at one time.

On the dispensing side, some parts are actually kept at the customer location. There's trunk stock and there's forward stock.

So, we utilize all three methods to keep parts available.


What Comes Next

Where are things going in terms of companies responding to ongoing competition, the economic climate, and changing customer demands?

Nemetz: The economic climate today is really driving our business. We sell very high-end products. Customers want, obviously, the best technology we can give them to drive the image quality and optimize image-based diagnosis, but they're also very concerned about the cost.

What we're trying to do is produce the most technologically advanced diagnostic imaging product we can. To hold down the cost of service support, we're just going to have to be as efficient as possible.

Aviotti: With all the CRM data we collect, all the input from customers, we continue to improve the product. Really, the way we're going to reduce cost is to continue to build quality into the products so there are fewer failures and less servicing.

Especially with next-generation technology, we're asking how we can produce a device that has to be serviced less or is easier and quicker to service. We build that into our product development cycle now; at one phase, we put in requirements about installation and support. Those requirements have to be met before the product can move forward. We're building in the quality up front so that there's less servicing down the road.

McBride: The things we can bring to the table, I think, are innovative ideas on how to potentially make the field engineers more productive by doing spare sharing and device-specific kitting, so that they're sure they have the right part every time they go out on a service call.

Gitt: I'm a little bit more pessimistic about the next year or two. I think the current economic climate is going to cause end-users, the hospitals and other buyers of the equipment, to take a hard look at whether they could extend the life of the product they have in use. If that's the case, then it places an additional burden on the service provider in that they're going to have to keep dealing with some products that they otherwise might not have had to continue to service.

But I agree that the general goal is to develop equipment that requires as little servicing as possible. Downstream, that is what's going to happen. Ultimately, it will all boil down to customer satisfaction issues—keeping the customers as happy as possible—but I think it's going to be tough for a while for some service organizations to keep everyone happy.

Copyright ©2008 MX

Taking the High Road

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Photo by ISTOCK

Medical device companies that have developed a premium-priced novel therapy frequently fall into a common trap sprung when they aggressively market their products as soon as they receive initial FDA clearance.

Since device companies have to submit to the agency only such data as are necessary to support claims of safety and efficacy, FDA approval of a device often requires less clinical information than the physician end-users and the payers will want to see in evaluating the marketed device.

Nevertheless, investors eager for returns often misinterpret FDA approval as the green light for aggressively marketing a product. Without additional compelling economic and clinical evidence, however, early sales efforts may be terribly handicapped.

Maximizing the commercial po­tential of an innovative and premium-priced therapeutic device—particularly one targeting a clinical indication that is already treated by drug therapy—usually requires having clinical or economic data that are comparative with those of competitive standards of care and that involve a longer time frame than the data submitted to FDA for approval. If a company takes the high road and funds these more rigorous clinical trials successfully before energetically marketing the technology, it can potentially capture hundreds of millions of dollars of market value that a quick-to-market, low-road approach might leave on the table.

Management should research and determine the market's evidentiary requirements early in the product development cycle. Then, its clinical strategy should include explicit definition of data objectives for FDA approval as separate from those of the more extensive data requirements for winning market acceptance. Finally, management should make sure that the investors recognize that FDA approval is simply one step toward commercialization and that clinical research will continue beyond receipt of the initial FDA approval. The true green light for aggressive marketing is the availability of sufficient commercially relevant clinical or economic evidence.

Standards for Approval

In contrast to the Center for Drug Evaluation and Research, the Center for Devices and Radiological Health (CDRH)—the device side of FDA—is generally reviewing technologies involving far less inherent safety risk, or risks that are more easily studied. (Many are substantially equivalent to existing devices.) In addition, device claims can be more easily written in terms of alternative end points. For example, a surgical device intended for treating gastroesophageal reflux disorder might simply be said to enable implantation into the lower esophagus.

A representative sampling of the pivotal trials that led to recent device premarket approvals shows how little clinical data may be needed to attain approval (see Table I). Many of the devices listed in the table are invasive and either include a permanent implant or permanently reshape internal tissue; therefore, their manufacturers were required to file premarket approval applications, subjecting the devices to the most stringent regulatory process within CDRH. Nevertheless, none of these companies were required to follow patients for more than one year, and many were not required to conduct randomized trials.

Company
Device
Total Patients
Randomization
Period for follow-up
Angiolink Corp.
Vascular closure
362
2:1
30 days
Celsion Corp.
Transurethral    system for BPH
190
3:1
6 months
Crycor Inc.
Cardiac ablation
160
No
6 months
Cyberonics Inc.
Vagus nerve    stimulation for    depression
293
1:1
12 months
Medtronic Inc.
Brain stimulator
160
No
12 months
Medtronic Inc.
Renal stent
188
No
9–12 months
Micro Therapeutics    Inc.
Embolic system
102
1:1
Days
Microsulis Medical    Ltd.
Endometrial    ablation device
324
2:1
12 months
Table I. Relatively modestly scaled pivotal trials can earn FDA approvals. Source: FDA.

These days, when the term "evidence-based medicine" is used with increasing frequency, payers will reimburse only treatments that offer clinical or economic benefits. To definitively demonstrate such benefits generally requires the performance of a head-to-head clinical trial matching the new product against the current standard of care over a lengthy time period. The evidence needed to achieve a coverage determination is different from that FDA needs to determine the product's safety and efficacy and—depending on the therapy, disease state, and patient population—may have to be more voluminous.

Some of the FDA-approved products in Table I did not initially receive a positive coverage policy determination from payers such as the Blue Cross Blue Shield Technology Evaluation Center (TEC). For example, TEC found that the data supporting the use of vagus nerve stimulation (VNS) as a treatment for depression did not adequately demonstrate the effect of VNS on health outcomes in comparison with outcomes achieved with other therapies.1

Similarly, FDA approved the ThinPrep Pap smear developed by Cytyc Corp. (Marlborough, MA) as an advancement over traditional Pap technology. However, the clinical supporting data used to win FDA approval proved inadequate to address the data requirements of physicians and payers. Cytyc had to amass far more data before it could overcome the payer hurdle.2

The Launch Decision

Company managers and investors wrestle with these issues as they develop their commercialization plans. They may see a choice between going to market with only the data used to obtain FDA approval or investing in gathering additional data after the approval and before going to market. Taking the middle course of going to market on the basis of the FDA data and then gathering additional data is possible but tricky. It is usually difficult to capture a premium price for the therapy without additional data. Also, it is difficult to introduce a device at a low price and raise the price later.

The additional data that would moot these issues usually accelerate market adoption at value-based prices even as they facilitate reimbursement. However, being patient is not easy for a technology company. Gathering the additional clinical or economic data costs not only money but time, and therefore it delays the onset of revenues. This factor makes the ultimate decision that much more difficult.

(click to enlarge)
Figure 1. The value of Synapse Biomedical's device grows incrementally with the accumulation of more clinical evidence, increasing its price potential. Source: Synapse company data.

Adding to the complexity, many elements of additional data typically can be gathered. For example, consider the NeuRx pacing device for the diaphragms of mechanically ventilated spinal cord injury patients developed by Synapse Biomedical Inc. (Oberlin, OH). By examining the experiences of past device companies and anticipating the perspectives of physicians and payers from early in the product's development, Synapse has been able to optimize the trade-off between clinical development and the timing and pricing of its market launch. The management team conceived of possible indications for its pacing device and has chosen to pursue studies that capture incremental value with relatively low risk and relatively low expenditures of time and money (see Figure 1). The evidence from these studies will be accumulated before the company sets its price and launch plans.

Two realistic approaches are available to companies following the path of additional data gathering. The first is to launch the product at a premium price and then try to accelerate sales once postmarket clinical data are in hand. The other is not to launch the product until all of the compelling clinical data are collected.

The implantable cardioverter-defibrillator (ICD) provides a good example of a product that entered the market the first way. ICD sales grew relatively slowly until a compelling clinical trial demonstrated that implanting an ICD delivered a prophylactic benefit for many patients with congestive heart failure. The ICD companies earned strong profits throughout the timeline described, partly because they were able to set a high price at the beginning for their first indications.3-8

The second approach is more radical. One company exercising this discipline is Asthmatx Inc. (Sunnyvale, CA), which is developing Alair, a device that provides a bronchial thermoplasty treatment for asthma. By the time the company launches the product, it will have invested in at least seven trials studying approximately 550 patients, many followed for five years.9

Unfortunately, many companies have found themselves in error when they began actively marketing a new product without having first accumulated the best clinical or economic evidence. Restore Medical Inc. (St. Paul, MN) is an example of a company that might have benefited from taking a more patient approach.

Restore received initial clearance for its Pillar palatal implant system for snoring in 2002 and for obstructive sleep apnea in 2004 on the basis of data collected from trials whose scope was minimal. Years later, the product has still not taken off; sales have remained modest relative to the considerable size of the obstructive sleep apnea market the system addresses. In the 12 months ending September 2007, sales for Pillar reached $4.4 million; meanwhile, however, the company's sales, general, and administration (SG&A) expenses grew to $14.7 million.

Restore indicated in its 2007 Form 10-K that obtaining coverage—and, with it, likely physician adoption—will require publication of peer-reviewed clinical literature and completion of additional studies to demonstrate the clinical effectiveness of the Pillar system. Since the initial public offering—in less than two years—the company's stock price has plummeted to just one-fifth of its previous value, as Wall Street's expectations have remained unfulfilled. And now, Medtronic Inc. (Minneapolis) has acquired Restore for the low price of $29 million, two-thirds of which was the control premium.10

Conclusion

If management carries out the following six analytic steps, it should be able to optimize the company's commercialization plan.

  1. Identify potential alternative indications and claims for the technology in question.
  2. Estimate the cost and time required to gather the data needed for FDA approval to market the technology.
  3. Estimate the incremental revenue potential of each additional indication and claim.
  4. Estimate the incremental cost, in time, money, and risk, of gathering sufficient data to make clinical or economic claims that will be compelling to clinicians and payers.
  5. Forecast alternative scenarios in order to determine the optimal trade-off between additional investments in the accumulation of compelling data against the opportunity cost in terms of time and money.
  6. Determine how well the clinical plans and commercialization plans dovetail in order to ensure that management and the investors are aligned.

Simply planning to get a novel premium-priced therapy to launch as soon as possible, while an understandable temptation, may sell the device, the company, and investors short. With some patience, and the fortitude to wait for a state of full preparation, a medical device company can enjoy the rewards of an optimal launch—full-value pricing and strong market penetration.


References

  1. "Vagus Nerve Stimulation for Treatment-Resistant Depression," Blue Cross and Blue Shield Association, Technology Evaluation Center (TEC), Assessment Program 21, no. 7 [online] (Chicago: TEC, August 2006 [cited 11 August 2008]); available from Internet: www.bcbs.com/blueresources/tec/vols/21/21-07.html.
  2. M Maremont, "Cytyc Test for Cervical Cancer Offers Minimal Advancement, a Study Says," The Wall Street Journal (February 13, 1998): 1.
  3. "Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates; Final Rule," Federal Register 68, no. 148 (August 1, 2003): 45345–45672.
  4. K Steward and C Hu, Medtronic: Initiating Coverage Report (New York City: Credit Suisse, November 6, 2007).
  5. MR Bristow, AM Feldman, and LA Saxon, "Heart Failure Management Using Implantable Devices for Ventricular Resynchronization: Comparison of Medical Therapy, Pacing, and Defibrillation in Chronic Heart Failure (COMPANION) Trial," Journal of Cardiac Failure 6, no. 3 (2000): 276–285.
  6. AI Mushlin et al., "The Cost-Effectiveness of Automatic Implantable Cardiac Defibrillators: Results from MADIT," Circulation 97 (1998): 2129–2135.
  7. AJ Moss et al., "Prophylactic Implantation of a Defibrillator in Patients with Myocardial Infarction and Reduced Ejection Fraction," New England Journal of Medicine 346 (2002): 877–883.
  8. GH Bardy et al., "Amiodarone or an Implantable Cardioverter-Defibrillator for Congestive Heart Failure," New England Journal of Medicine 352 (2005): 225–237.
  9. T Salemi, "Asthmatx Breathes Easier," In Vivo 25, no. 6 (October 2007): 11–20.
  10. "Medtronic Signs Agreement to Acquire Restore Medical," press release [online] (Minneapolis: Medtronic, April 22, 2008 [cited 11 August 2008]); available from Internet: wwwp.medtronic.com/Newsroom/NewsReleaseDetails.do?itemId=1208882503881&lang=en_US.

Mark Speers is a managing director and partner and Susan A. Posner is a vice president at Health Advances LLC (Weston, MA, and San Francisco), a strategy consulting firm that focuses on the commercialization and growth potential of medical technologies.

Copyright ©2008 MX

Business Drivers

BUSINESS DRIVERS

Thurman

Randy Thurman has been appointed executive chairman of CardioNet Inc. (Conshohocken, PA), a wireless medical technology company focusing on the diagnosis and monitoring of cardiac arrhythmias. Thurman has extensive business development and investment experience and has been chair or director of numerous companies in various industries. Most recently, he served as chairman and CEO of Viasys Healthcare Inc. (Conshohocken, PA), which was acquired by Cardinal Health (Dublin, OH) in June 2007 for $1.5 billion. During his six years with Viasys, he increased the firm's value fourfold and led 12 strategic acquisitions. Prior to Viasys, Thurman was chairman and CEO of Corning Life Sciences (Acton, MA) and president of Rhone-Poulenc Rorer Pharmaceuticals Inc. Thurman also continues to serve as senior adviser to New Mountain Capital LLC, a leading private and public equity investment firm.

Russell

Medtronic Inc. (Minneapolis) has named CEO William A. Hawkins as chairman of its board of directors. As chairman, Hawkins succeeds Arthur D. Collins, who is retiring from the board after six years, in accord with the company's 2007 transition plan. Hawkins joined the company in 2002, and has served as CEO since August 2007. Prior to Medtronic, Hawkins held numerous executive positions in the medical technology field, most recently as president and CEO of Novoste (Springfield, VA). Medtronic also appointed Kendall J. Powell, chairman and CEO of General Mills, to be chair of the board's corporate governance committee.

Biophan Technologies Inc. (Pittsford, NY), a developer of next-generation technology for the medical device industry, has named Margaret V. Russell as chief financial officer. Russell was formerly partner, director, and senior manager at Insero and Co. CPAs PC. As part of Insero's outsource accounting services group, she specialized in software, pharmaceutical, and medical device companies. Prior to this, Russell served as manager of the assurance and business advisory services division at Arthur Anderson LLP and was senior auditor at PricewaterhouseCoopers LLP. Biophan also announced the retirement of Robert J. Wood, who has served as interim chief financial officer since June 2007.

Alex Chanin has been promoted to chief operating officer of Vital Signs Inc. (Totowa, NJ), a company that manufactures and markets single-use medical products for the anesthesia, respiratory, critical care, sleep therapy, and emergency markets. Chanin will retain his duties as chief information officer and, in addition, will be responsible for overseeing the company's subsidiaries. Chanin has a combined 20 years of experience in consulting, operations, research and development, and information technology within the pharmaceutical and medical device industries.

Hill

Intelligent Medical Implants AG (IMI; Zug, Switzerland) announced that Robert J. Hill has joined the company as vice president of operations. As an experienced medical device executive, Hill will help to bring IMI's product, the learning retinal implant system, to commercialization. Hill comes to IMI after spending 14 years in various director positions at Intervascular Inc. (La Ciotat, France). There, he led the company to ISO 9001/EN 13485 certification, CE marking, and FDA listing, and spearheaded the development of the world's first approved antimicrobial graft. Prior to Intervascular, Hill spent more than 10 years as a principal consultant at Pira International.

Wetekam

Volker Wetekam, PhD, has joined provider of clinical work flow and diagnostic imaging solutions, Agfa Healthcare (Mortsel, Belgium), as executive vice president for the company's global healthcare IT division. Wetekam brings to Agfa more than 14 years' experience in the healthcare IT sector at Siemens Medical Solutions (Malvern, PA). In his new position, he will define and implement the strategic positioning of Agfa Healthcare's IT division, which manages both the company's imaging informatics and its enterprise IT businesses.

Rockwell Medical Technologies Inc. (Wixom, MI), a specialty pharma company that develops, sells, and distributes hemodialysis products, has appointed Richard Zager, MD, to its scientific advisory board. Zager is currently the director of nephrol­ogy at the Fred Hutchinson Cancer Research Center (Seattle).

Taking the High Road

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Photo by ISTOCK

Medical device companies that have developed a premium-priced novel therapy frequently fall into a common trap sprung when they aggressively market their products as soon as they receive initial FDA clearance. This trap is common because many manufacturers fail to plan for eventualities beyond the sequence of product launch activities: designing a new device, obtaining approval to market it, and then selling it. However, while regulatory approval strategies obviously are needed to support commercial strategies, for some products they should not be mistaken as sufficient to warrant market introduction.

FDA is responsible for assessing the safety and efficacy of new medical devices. Since device companies have to submit to the agency only such data as are necessary to support claims of safety and efficacy, FDA approval of a device often requires less clinical information than the physician end-users and the payers will want to see in evaluating the marketed device.

Nevertheless, investors eager for returns often misinterpret FDA approval as the green light for aggressively marketing a product. Without additional compelling economic and clinical evidence, however, early sales efforts may be terribly handicapped. Disappointing revenues due to low pricing or weak market penetration could result. In fact, they might be dwarfed by the sales and marketing expenses of what turned out to be a premature launch. Such a shortfall, at a critical juncture in its history, can cripple a small company permanently as investors' expectations are shaken.

Maximizing the commercial po­tential of an innovative and premium-priced therapeutic device—particularly one targeting a clinical indication that is already treated by drug therapy—usually requires having clinical or economic data that are comparative with those of competitive standards of care and that involve a longer time frame than the data submitted to FDA for approval. If a company funds these more rigorous clinical trials successfully before energetically marketing the technology, it will generally be rewarded with higher realized prices and faster market penetration. This patient approach, which might be called the high road, can potentially capture hundreds of millions of dollars of market value that a quick-to-market low-road approach might leave on the table.

Management should research and determine the market's evidentiary requirements early in the product development cycle. Then, its clinical strategy should include explicit definition of data objectives for FDA approval as separate from those of the more extensive data requirements for winning market acceptance. Finally, management should make sure that the investors recognize that FDA approval is simply one step toward commercialization and that clinical research will continue beyond receipt of the initial FDA approval. The true green light for aggressive marketing is the availability of sufficient commercially relevant clinical or economic evidence.

Standards for Approval

In contrast to the Center for Drug Evaluation and Research, the Center for Devices and Radiological Health (CDRH)—the device side of FDA—is generally reviewing technologies involving far less inherent safety risk, or risks that are more easily studied. (Many are substantially equivalent to existing devices.) In addition, device claims can be more easily written in terms of alternative end points. For example, a surgical device intended for treating gastroesophageal reflux disorder might simply be said to enable implantation into the lower esophagus.

A representative sampling of the pivotal trials that led to recent device premarket approvals shows how little clinical data may be needed to attain approval (see Table I). Many of the devices listed in the table are invasive and either include a permanent implant or permanently reshape internal tissue; therefore, their manufacturers were required to file premarket approval applications, subjecting the devices to the most stringent regulatory process within CDRH. Nevertheless, none of these companies were required to follow patients for more than one year, and many were not required to conduct randomized trials.

Company
Device
Total Patients
Randomization
Period for follow-up
Angiolink Corp.
Vascular closure
362
2:1
30 days
Celsion Corp.
Transurethral    system for BPH
190
3:1
6 months
Crycor Inc.
Cardiac ablation
160
No
6 months
Cyberonics Inc.
Vagus nerve    stimulation for    depression
293
1:1
12 months
Medtronic Inc.
Brain stimulator
160
No
12 months
Medtronic Inc.
Renal stent
188
No
9–12 months
Micro Therapeutics    Inc.
Embolic system
102
1:1
Days
Microsulis Medical    Ltd.
Endometrial    ablation device
324
2:1
12 months
Table I. Relatively modestly scaled pivotal trials can earn FDA approvals. Source: FDA.

These days, when the term "evidence-based medicine" is used with increasing frequency, payers will reimburse only treatments that offer clinical or economic benefits. To definitively demonstrate such benefits generally requires the performance of a head-to-head clinical trial matching the new product against the current standard of care over a lengthy time period. The evidence needed to achieve a coverage determination is different from that FDA needs to determine the product's safety and efficacy and—depending on the therapy, disease state, and patient population—may have to be more voluminous.

Some of the FDA-approved products in Table I did not initially receive a positive coverage policy determination from payers such as the Blue Cross Blue Shield Technology Evaluation Center (TEC). For example, TEC found that the data supporting the use of vagus nerve stimulation (VNS) as a treatment for depression did not adequately demonstrate the effect of VNS on health outcomes in comparison with outcomes achieved with other therapies.1

Similarly, FDA approved the ThinPrep Pap smear developed by Cytyc Corp. (Marlborough, MA) as an advancement over traditional Pap technology. However, the clinical supporting data used to win FDA approval proved inadequate to address the data requirements of physicians and payers. Cytyc had to amass far more data before it could overcome the payer hurdle.2

It is worth noting here that the Centers for Medicare and Medicaid Services can issue a coverage determination that requires the concurrent collection of additional patient experience. With Medicare covering the necessary trial, this process provides what is known as coverage with evidence development. Other payers will sometimes reimburse products used in clinical trials.

Physicians generally will evaluate only diagnostics and treatments for which they are reimbursed. They are not going to subsidize their patients' VNS implants or their Pap smears. Within the universe of reimbursed options, physicians rely on robust clinical data as well.

The Launch Decision

Company managers and investors wrestle with these issues as they develop their commercialization plans. They may see a choice between going to market with only the data used to obtain FDA approval or investing in gathering additional data after the approval and before going to market. Taking the middle course of going to market on the basis of the FDA data and then gathering additional data is possible but tricky. It is usually difficult to capture a premium price for the therapy without additional data. Also, it is difficult to introduce a device at a low price and raise the price later. In addition, a company focused on developing an impressive track record is likely to find it difficult to explain low sales in the period following launch. The company might have been in a better position if it had not offered the product for sale so soon.

The additional data that would moot these issues usually accelerate market adoption at value-based prices even as they facilitate reimbursement. However, being patient is not easy for a technology company. Gathering the additional clinical or economic data costs not only money but time, and therefore it delays the onset of revenues. This factor makes the ultimate decision that much more difficult.

(click to enlarge)
Figure 1. The value of Synapse Biomedical's device grows incrementally with the accumulation of more clinical evidence, increasing its price potential. Source: Synapse company data.

Adding to the complexity, many elements of additional data typically can be gathered. For example, consider the NeuRx pacing device for the diaphragms of mechanically ventilated spinal cord injury patients developed by Synapse Biomedical Inc. (Oberlin, OH). By examining the experiences of past device companies and anticipating the perspectives of physicians and payers from early in the product's development, Synapse has been able to optimize the trade-off between clinical development and the timing and pricing of its market launch. The management team conceived of possible indications for its pacing device and has chosen to pursue studies that capture incremental value with relatively low risk and relatively low expenditures of time and money (see Figure 1). The evidence from these studies will be accumulated before the company sets its price and launch plans.

Two realistic approaches are available to companies following the path of additional data gathering. The first is to launch the product at a premium price and then try to accelerate sales once postmarket clinical data are in hand. The other is not to launch the product until all of the compelling clinical data are collected.

The implantable cardioverter-defibrillator (ICD) provides a good example of a product that entered the market the first way. ICD sales grew relatively slowly until a compelling clinical trial demonstrated that implanting an ICD delivered a prophylactic benefit for many patients with congestive heart failure. The additional trial data satisfied the clinician community's desire for evidence to justify increasing its use of ICDs. It also provided the evidence the payers needed for approving prophylactic reimbursement. The ICD companies earned strong profits throughout the timeline described, partly because they were able to set a high price at the beginning for their first indications.3-8

The second approach is more radical. One company exercising this discipline is Asthmatx Inc. (Sunnyvale, CA), which is developing Alair, a device that provides a bronchial thermoplasty treatment for asthma. Its CEO, Glen French, recently articulated the logic of pursuing this expensive and time-consuming path for the device. "It's extremely uncommon for a medical device company to be basically doing clinical work for 10 years before bringing a product to market," he said. "But we are entering a market where the only treatment options are drugs. . . . We knew we were going to have to take it up a notch and try to meet the same standards as many big drug companies."9 By the time the company launches the product, it will have invested in at least seven trials studying approximately 550 patients, many followed for five years.9

Unfortunately, many companies have found themselves in error when they began actively marketing a new product without having first accumulated the best clinical or economic evidence. Restore Medical Inc. (St. Paul, MN) is an example of a company that might have benefited from taking a more patient approach.

Restore received initial clearance for its Pillar palatal implant system for snoring in 2002 and for obstructive sleep apnea in 2004 on the basis of data collected from trials whose scope was minimal. Years later, the product has still not taken off; sales have remained modest relative to the considerable size of the obstructive sleep apnea market the system addresses. In the 12 months ending September 2007, sales for Pillar reached $4.4 million; meanwhile, however, the company's sales, general, and administration (SG&A) expenses grew to $14.7 million.

Restore indicated in its 2007 Form 10-K that obtaining coverage—and, with it, likely physician adoption—will require publication of peer-reviewed clinical literature and completion of additional studies to demonstrate the clinical effectiveness of the Pillar system. Since the initial public offering—in less than two years—the company's stock price has plummeted to just one-fifth of its previous value, as Wall Street's expectations have remained unfulfilled. And now, Medtronic Inc. (Minneapolis) has acquired Restore for the low price of $29 million, two-thirds of which was the control premium.10

The alternative route for Restore Medical's management would have been to amass compelling clinical data before mounting its selling effort and raising market expectations. Medtronic now has to decide how to time the relaunch of the product.

Patience Rewarded

In a perfect world, every management team would rely upon a complex calculus that involves weighing the risk and cost of each incremental step of data accumulation against the value that each step can create. However, in the real world, with both private and public companies feeling earnings pressures, many managers have been encouraged by company investors to underinvest in such data. It is striking, though, that some of the greatest medical device successes are products for which FDA mandated extensive trials. Drug-eluting stents are an excellent example: they were launched with compelling clinical data and were able to cannibalize more than half of the bare-metal-stent market within months.

Ignoring near-term earnings pressures is hard to do. Any new technology company that has reported losses for years will be eager to report revenues and break even. However, if management teams and their investors were to methodically evaluate the financial implications of taking the high road to market rather than the low road, they would often opt for the long-term high-road advantage.

Imagine a scenario in which a company has the choice either to go to market at a price point of $2500 on the data that were pivotal for FDA approval or to invest an additional $20 million in two more years of clinical trials before launching at a value-based price of $5000. The high road admittedly requires additional capital to finance the trials and the waiting period; management and investors will likely sustain significant dilution during this time. In fact, the company could run out of cash if it has not ensured that its investors are fully on board with the plan.

On the other hand, the quick-to-market path will likely achieve only a fraction of the market penetration attainable through being patient. Investing two years on the high road will often be rewarded with a dramatically higher valuation when the company ultimately launches the product at a higher margin and growth rate.

Before concluding, it should be noted that some of the generalizations expressed in this article must allow of exceptions. For one, some technologies can be targeted at different indications at equally different price points through slight changes in the device's operating parameters, size, energy source, and so on. Synapse, for example, has this opportunity. It can make both portable chronic units for patients with spinal cord injuries and acute units for weaning intensive-care patients off mechanical ventilators.

A second advisory is the need to consider the variety of competitive dynamics. For instance, an irrational competitor may launch a product with modest claims. Investing in more-compelling data under this circumstance may only create primary demand for both companies, benefiting the presumably weaker competitor. In this situation, it may be better to compete early with a lower-cost position.

Conclusion

If management carries out the following six analytic steps, it should be able to optimize the company's commercialization plan.

  1. Identify potential alternative indications and claims for the technology in question.
  2. Estimate the cost and time required to gather the data needed for FDA approval to market the technology.
  3. Estimate the incremental revenue potential of each additional indication and claim.
  4. Estimate the incremental cost, in time, money, and risk, of gathering sufficient data to make clinical or economic claims that will be compelling to clinicians and payers.
  5. Forecast alternative scenarios in order to determine the optimal trade-off between additional investments in the accumulation of compelling data against the opportunity cost in terms of time and money.
  6. Determine how well the clinical plans and commercialization plans dovetail in order to ensure that management and the investors are aligned.

Simply planning to get a novel premium-priced therapy to launch as soon as possible, while an understandable temptation, may sell the device, the company, and investors short. With some patience, and the fortitude to wait for a state of full preparation, a medical device company can enjoy the rewards of an optimal launch—full-value pricing and strong market penetration.


References

  1. "Vagus Nerve Stimulation for Treatment-Resistant Depression," Blue Cross and Blue Shield Association, Technology Evaluation Center (TEC), Assessment Program 21, no. 7 [online] (Chicago: TEC, August 2006 [cited 11 August 2008]); available from Internet: www.bcbs.com/blueresources/tec/vols/21/21-07.html.
  2. M Maremont, "Cytyc Test for Cervical Cancer Offers Minimal Advancement, a Study Says," The Wall Street Journal (February 13, 1998): 1.
  3. "Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates; Final Rule," Federal Register 68, no. 148 (August 1, 2003): 45345–45672.
  4. K Steward and C Hu, Medtronic: Initiating Coverage Report (New York City: Credit Suisse, November 6, 2007).
  5. MR Bristow, AM Feldman, and LA Saxon, "Heart Failure Management Using Implantable Devices for Ventricular Resynchronization: Comparison of Medical Therapy, Pacing, and Defibrillation in Chronic Heart Failure (COMPANION) Trial," Journal of Cardiac Failure 6, no. 3 (2000): 276–285.
  6. AI Mushlin et al., "The Cost-Effectiveness of Automatic Implantable Cardiac Defibrillators: Results from MADIT," Circulation 97 (1998): 2129–2135.
  7. AJ Moss et al., "Prophylactic Implantation of a Defibrillator in Patients with Myocardial Infarction and Reduced Ejection Fraction," New England Journal of Medicine 346 (2002): 877–883.
  8. GH Bardy et al., "Amiodarone or an Implantable Cardioverter-Defibrillator for Congestive Heart Failure," New England Journal of Medicine 352 (2005): 225–237.
  9. T Salemi, "Asthmatx Breathes Easier," In Vivo 25, no. 6 (October 2007): 11–20.
  10. "Medtronic Signs Agreement to Acquire Restore Medical," press release [online] (Minneapolis: Medtronic, April 22, 2008 [cited 11 August 2008]); available from Internet: wwwp.medtronic.com/Newsroom/NewsReleaseDetails.do?itemId=1208882503881&lang=en_US.

Mark Speers is a managing director and partner and Susan A. Posner is a vice president at Health Advances LLC (Weston, MA, and San Francisco), a strategy consulting firm that focuses on the commercialization and growth potential of medical technologies.

Copyright ©2008 MX

Contributors

CONTRIBUTORS

MX has always been a cross-platform venture of sorts, with a lot of additional content available exclusively by way of the publication's Web site. But there's never been an issue of MX quite like the one you hold in your hands, for which the amount of content available online is nearly equal to the amount in print.

One reason for all this extra online content is the complexity of this issue's articles, which involve contributed materials from a wide range of organizations. For "Achievements in Medtech Marketing", MX's annual coverage of the International Awards of Excellence (In-Awe) program, for instance, a large number of agencies submitted descriptions and graphics illustrating their winning campaigns. But to access most of these descriptions, readers will have to visit the expanded version of the article online.

Business Planning & Technology Development

A good way to gauge the level of innovation in medical technology that is characteristic of an identifiable region of the country is to examine and analyze patent data, which is what the Patent Board, a patent advisory firm, has done.

 
Oldach

As Paris Kucharski and Scott Oldach show in their article "Location, Location--Innovation", a region need not be especially prolific of either inventors or patents to be a leader ac­cording to a metric reflecting patent influence. Kucharski is an advisory services associate with the Patent Board (Chicago), and Oldach is its president. The auth­ors can be reached at pkucharski@patentboard.com and soldach@patentboard.com, respectively.

Also in this issue, MX editorial advisory board member Charles F. D'Agostino, founder and executive director of the Louisiana Business and Technology Center at Louisiana State University (Baton Rouge, LA), looks at the traits of university research parks that make them a breeding ground for medical technology ventures.

D'Agostino

D'Agostino's article, "The Academic Connection", reminds us that commercializing a technology involves much more than merely filing a patent. And just to clinch that point, many institutions have provided de­scriptions of their operations and some of the medtech ventures they support. To visit the full range of contributed descriptions, log on to the expanded version of this article via the MX Web site at www. devicelink.com/mx. D'Agostino can be reached at 225/578-7555 or via e-mail at cdag@lsu.edu.

Some medical device companies that develop a premium-priced therapeutic product and then market it as soon as they receive FDA approval to do so fall into a trap of their own making.

Speers
 
Posner

This is the case Mark Speers and Susan A. Posner make in their article "Taking the High Road". Patience, say the authors, and the will­ingness to bet extra early investment against the promise of a greater market footprint can help maximize the de­vice's price potential.

Speers is a managing director and partner and Posner is a vice president at Health Advances LLC (Weston, MA), a strategic consulting firm serving the medtech industry. They can be reached at mspeers@healthadvances.com and sposner@healthadvances.com, respectively, or by telephone at 781/647-3435.

Advertising, Distribution, & Sales

Zimmer

Some medical technology companies prefer to use a sales staff of their own to sell directly. Others find advantage in letting independent sales representatives or distributors do the selling. In his article, "Sales Force Strategies for a Competitive Advantage", John C. Zimmer explains the advantages and disadvantages of each option.

Zimmer is the president of Global Medical Alliance LLC (Middleton, WI), a consulting firm that aligns medical device manufacturers with independent sales reps. Zimmer can be reached at 608/836-3596 or via e-mail at jzimmer@globalmedalliance.com.

Copyright ©2008 MX

Sales Force Strategies for a Competitive Advantage

ADVERTISING, DISTRIBUTION, & SALES

In staffing a medtech company, its executives confront the questions of what type of sales force to employ and where to find the needed sales representatives. It is not unusual for a company to lack a clear perspective regarding the available options. But it probably knows that it must generate solid market share in multiple market segments in order to survive and thrive. Successful application of effort in building a sales force can provide the company with the competitive advantage it seeks.

This article reviews four common sales force structures: direct reps, independent reps, dealers and distributors, and hybrid sales force models. The structure that is most appropriate for a given medtech company depends heavily on such factors as the company's size, available cash, sales objectives, and need to establish a market share.

Direct Reps

Direct sales representatives are employees of the company whose products they sell. Sometimes called W-2 reps after the nature of their paychecks, they typically receive a base salary and, most of the time, are also paid commissions and bonuses. These reps represent exclusively the products and services of the company that employs them.

They can be further categorized as inside or outside sales reps. Inside reps almost always operate from within the company building, performing sales calls and sales support functions. Naturally, outside reps perform their duties outside the company, often working from home or from company-provided offices in their territory. Having a dedicated sales force focused on promoting only the company's own medical products or services can be a luxury. But this luxury, like most luxuries, comes at a cost.

The true expense of a W-2 rep in the medical industry today probably begins with a fixed cost of $100,000. This figure may be shocking to some medtech industry executives. Others will find it simply impossible to afford. The cost of adequately staffing a direct sales force with vertical market specialists is prohibitive for all but large companies, because the fixed costs are too high. And this fixed expense provides no performance guarantees, either.

Good news for large medical device manufacturing companies is that the pool of potential entry-level device sales reps continues to grow, as many college graduates are attracted to the opportunity to get a foothold in the lucrative medtech market. These new reps bring little or no experience to the job; however, they do have a desire to prove themselves to their first employers, who will be companies that can afford the cost and time required to train them.

Independent Sales Reps

Independent sales reps (ISRs), because of their self-employed status, are sometimes referred to as 1099s. ISRs perform a sales function similar to that of direct outside reps, but they work independently of any company they represent. They sell a number of related products, called a portfolio, on a straight commission basis. Other designations for sales reps of this type include manufacturer's representative and sales agent.

Being essentially business owners, independent reps absorb virtually all expenses themselves. Because they assume these expenses, companies that contract for their services pay them commissions at a higher rate. Independent reps' territories are often larger than those of direct reps. That is because greater geographic coverage may be necessary for achieving adequate compensation.

An independent sales rep will typically represent five to eight complementary product lines. Each line will have its distinctive price point and buying cycle so as to assure the rep a steady flow of income throughout the year. The rep will devote his or her time to the product lines that stand to pay the most over the long haul while requiring smaller investments of time.

Most ISRs are paid a commission between 10 and 30%. While these commissions are higher than the typical 2 to 5% paid to direct employees, the manufacturer nevertheless sees savings in this arrangement. Benefits such as medical, dental, and vision insurance, life insurance, disability insurance, unemployment insurance, 401(k)s, and annual bonuses are not offered to independent reps, nor are such perks as a company car or car allowance, laptops, cell phones, and expense accounts extended to them. For many companies, these savings can be substantial.

And not only do independent sales reps assume all expenses themselves; they also get paid—collect their commission—only after they have sold something, and in many instances only after the manufacturer gets paid for the product the rep sold.

Different commissions are paid for different products, depending on volume demand and repeat orders, or turnaround. Medical disposables, for example, often bring lower commissions of 5 to 14%, owing purely to the volumes usually characteristic of initial and repeat orders. Commissions for most medical equipment fall between 15 and 25%. Usually, commission rates will exceed 25% only for new product launches requiring some marketing work as well as selling, or if the rep is expected to warehouse inventory. This commission formula is particularly attractive to the smaller company with annual gross sales of less than $50 million. In fact, it is standard for the vast majority of medical device manufacturers starting out and in need of a sales force, which will naturally fall below the $50 million threshold.

A company that finds itself investing the same $100,000 in an ISR that it would in salary for a direct rep, through payment of a 25% straight commission, is assured of at least $400,000 in sales with none of the overhead or associated costs of an employee. This is ideal for companies looking to cut expenses while gaining a competitive edge.

Independent reps are generally proven top performers. Nearly three-quarters of the independent medical sales reps in the networking database of Global Medical Alliance (Middleton, WI) have had substantial medical sales experience, and two-thirds of them held positions in medical sales management before starting their own business.

Dealers and Distributors

(click to enlarge)
Figure 1. When direct and independent sales channels provide imperfect market coverage, dealers and distributors can fill the gaps. Here is a case, where market 3 lacks intensive coverage and market 4 is an insufficiently addressed opportunity, or perhaps even a hindrance.

In addition to direct and independent sales reps, dealers and distributors can play a role in a medical device company's sales efforts, too. They provide an ad­ditional option for selling products over a large expanse of territory.

Most dealers and distributors will buy products for somewhere between 35 and 55% off the list price, depending on price point and the volume purchased. Their compensation is derived from the margin of sales price over cost price. More often than not, they have a team of salespeople representing their lines.

Reasons for concern about selling exclusively through either dealers or distributors include the lack of selling time devoted to any one product line by any one person, and nonexclusivity: these operators are free to sell products similar to each other in a kind of open competition.

This business model, like that of the ISR, has proven effective in areas where it is not cost-justifiable to hire additional direct reps (see Figure 1).

Hybrid Sales Models

(click to enlarge)
Figure 2. A hybrid sales channel utilizes both direct sales reps and independent sales reps. By capitalizing on hybrid sales channels, a medtech company can penetrate 'middleman companies' such as outsourcing firms, contractors, and distributors, who in turn sell to dealers. This practice achieves a more complete sales mix among such intermediary companies that ultimately sell to end-users.

The medtech industry has also seen a trend among midsize and larger companies toward a hybrid model—the use of independent sales reps and distributors in conjunction with a direct sales force (see Figure 2). Utilizing such a combination of sales channels can enable companies to meet their sales objectives without sacrificing differentiation in the medical device marketplace. Ideally, a hybrid sales operation should open up prime market opportunities that afford the company the best chance for profitable penetration.

The hybrid model is generally suitable when the medical device manufacturer's product or market mix is quite diverse, when its existing sales network does not adequately cover a targeted market, and when specialized reps are available. To establish a smooth-functioning hybrid system requires first developing a clear sales channel design concept covering the full market reach. Then, management should adjust the design for each trading area according to its distinctive features. The contracts negotiated should include market exclusivity clauses or should achieve that end through customer assignments.

Once regarded as a solution reserved for small start-up companies or small divisions within large companies, the hybrid model with its incorporation of independent reps has become increasingly popular with larger companies. The reason is that ISRs complement the direct sales force's efforts in rural areas where the territory is expansive and where long-standing relationships are necessary to move product. Also, when maintaining such relationships requires more attention than a distributor can provide, the independent rep offers that capability.

Criteria for Selecting an Approach

To determine which type of rep to use to sell its products, an organization needs a clear understanding of itself, of the market environment in which it is operating, and of the factors likely to significantly influence its business in coming years. Management style, expense, and strategic needs are criteria a company should consider when deciding what type of sales force to create.

Management. If company management requires close control of the sales force, then a direct sales approach is to be preferred. Independent sales reps, true to their name, are not likely to accept close management. Regular communication via e-mail, voice mail, and conference calls are best suited for managing a direct sales force, while phone calls are the best means for communicating with independent reps. If management has a need for regular reporting, forecasting, and other weekly exercises such as clinical feedback and data gathering, then direct sales representation is optimal for maintaining fullest control over the sales force.

Cost-Benefit. When the expense of having a direct rep in a sales territory is not sustainable, using an independent rep may provide an economically advantageous alternative. The same goes when the issue is selling a particular product that is not the primary focus of the company. Cost directly assignable to the ISR sales channel is defined as variable cost. This means that the cost is zero at zero sales volume. Taken all together, manufacturers have a much better cash flow position when they use independent sales reps rather than a direct sales force.

Strategic Approach. If a company believes that well-established relationships and technical expertise are necessary to sell its device or service, then independent sales reps should in theory provide an edge over direct reps in terms of strategic advantage. This is not to say that direct reps cannot offer tenure. Many can, but they command a high base salary most of the time, increasing the liability of the company. Often, this kind of salary is out of reach for smaller companies and small divisions of larger companies, where large fixed compensation is typically reserved for owners or executive managers.

Another factor is that direct reps often require more-extensive training than independent reps do. One reason for this, of course, is that many companies hire direct reps straight out of college; these beginners have very little or no sales experience or knowledge or experience of the medtech industry. On the other hand, when a company hires an independent rep, that rep probably already has a relevant background. Such a rep can have an impact on the bottom line much sooner.

Conclusion

Different medtech companies have different needs when it comes to finding customers for their products through the sales function. A variety of approaches are available to them. Careful consideration of the options in the light of self-understanding should reveal which sales force strategy is most likely to deliver the competitive advantage each company seeks.

John C. Zimmer is president of Global Medical Alliance LLC (Middleton WI), a networking consultant firm that aligns medical device manufacturers with independent sales representatives.

Copyright ©2008 MX

Focused for Growth

COVER STORY

Sidebars:

In the world of medical technologies, it isn't uncommon for start-up companies to spend years in research and development (R&D) before ever seeking FDA clearance to market a product. But even after all that time, building a commercially successful product and company often requires much more.

At the beginning of this decade, just such a market challenge awaited Accuray Inc. (Sunnyvale, CA), creator and marketer of the CyberKnife robotic radiosurgery system. Founded in 1990, the company had spent years in R&D before the CyberKnife system finally received FDA clearance, in 1999, for the treatment of head, neck, and upper spine tumors. Shortly thereafter, in 2001, Accuray received FDA clearance to introduce enhancements to the CyberKnife system for the treatment of tumors anywhere in the body. Leading Accuray's charge into clinical and commercial success is Euan S. Thomson, PhD, who has served as the company's CEO and a member of the board of directors since March 2002, and as president since October 2002. Thomson joined Accuray from Photoelectron Corp., a publicly held medical device company. He previously held various positions as a medical physicist in the United Kingdom's National Health Service, and worked as a consultant for medical device companies, including Varian Oncology Systems and Radionics Inc.

(click to enlarge)
Accuray president and CEO Euan S. Thomson on technology development, clinical interest, and company growth.

In this excerpted interview with MX editor-in-chief Steve Halasey, Thomson describes the long process of research and development that led to Accuray's earliest commercial success, how the com­pany came to launch its initial public offering in February 2007, and how the company is working to build out the clinical applications of its platform technology.

MX: What intellectual property was Accuray originally founded on, and how did that develop over time?

Euan S. Thomson: Accuray was founded in 1990 based on technology that was developed in 1987. The original intellectual property related to the concept of the CyberKnife, which is a robotic delivery system for very accurate radiation treatments—so accurate, in fact, that treatment with the CyberKnife can destroy a tumor without significantly affecting the surrounding tissue.

The initial IP portfolio surrounding the CyberKnife remained relatively unchanged for years. When Accuray moved into its commercial phase, which ramped up between 2000 and 2002, we also started to ramp up intellectual property around the concept of the CyberKnife. We began to focus on the intelligent software that interprets the targeting information and guides the radiation beam with exceptional accuracy. We developed intellectual property around the software and hardware necessary for commercial implementation. Since then, we've been on a very fast intellectual property ramp-up, and, as of the end of last quarter, we have 30 issued U.S. patents. Our intellectual property holdings have grown almost exponentially since 2002.


Ramping Up

The company was founded in 1990 and moved into commercialization around 2000. That is a long ramp. What took so long? What was the company doing during that development phase?

It was an R&D phase. It's very difficult to launch a capital equipment product in the medical field. It's not the classic profile of start-up medical device companies, which usually start with relatively small products. Building a company around a large-scale multi-million-dollar capital equipment product tends to take a lot longer. The investment required is much higher, and reaching the point of commercialization takes longer.

How was the company's early R&D financed? In other words, how did Accuray manage to pay its bills during that long ramp?

We went through a long venture capital phase. But to a large extent, the company was funded by sale of the product itself. This was in the early days. The product was predominantly sold as a beta test system, prior to FDA clearance. On many occasions, it was sold at a price that was less than what it cost to build the system. But nevertheless, that revenue from one-off sales of the prototype systems really did help the company to fund itself.

The logic behind using advanced image-guided robotics for this particular application has always ap­pealed to clinical practitioners. So we were able to keep the company going through a very difficult phase based on the value of the product itself.

The company's initial public offering in 2007 represented a major infusion of capital for the company, beyond just the revenue that had been generated by sales. And that worked out pretty well for the company.

Yes, it did. We have a slightly different view of what a capital medical equipment product should be. The majority of companies—even large companies—still position their products as a single salable item with­out significant upgradability. That's not what we conceived for the CyberKnife. Because we were developing technology very fast and the clinical field was developing very fast, we put together service programs that offered access to upgrades for the CyberKnife. We positioned the CyberKnife as a platform—a core platform that we would always be supplying with the latest technolog­ical upgrades to keep the system up to date. And when those upgrades became embedded in our service programs, we were able to lock in many of our customers—a much higher proportion than would have signed on for mere service offerings. And we were able to offer our long-term contracts at a premium because they included access to upgrades.

When we went forward with our IPO, we had quite a unique profile. I think that was a lot of the attraction. We went into the offering—as is still the case today—with 90% of our U.S. customers under long-term service programs that command about $460,000 per year. And we went into our IPO as a company that already had sales attraction. We were an early-stage company that had sales and a vision. We'd proven that we could sell, and therefore we were able to go in with a degree of confidence and present Accuray as a fast-growing organization. We had proven capability, and we also had recurring revenues. New investors recognized that those recurring revenues would smooth out some of the lumpiness that people would normally be worried about with a capital equipment product.


The Clinical Side

At what point was it recognized that the CyberKnife system was good for use any place in the body?

Well, we're still not there with the 'good for any place' statement, but we're working on it. Our job is to explore the clinical value of the CyberKnife and explore the cases in which radiosurgery can be used. We support our physicians in trying new applications, and we do so through what we call the CyberKnife Society, which is a network of physicians who we fund but leave to manage themselves independently, in order to maintain the integrity of their communications. They support new users by telling them how most people are treating a new application, like how most people are treating prostate cancer or how most people are treating lung cancer. They help them put their clinical protocols together locally and also help them with the appropriate patient selection based on their own experiences.

At the time the CyberKnife received FDA clearance, who were your partners in conducting research, driv­ing adoption, and exploring other applications?

There's no one answer to that. It was many of our customers at many different sites. And the more customers we brought on board, the more we were able to broaden our clinical network. That said, there are key sites that have been instrumental in our success. Stanford was our initial site, and that site has always had a very active clinical program. But to be honest, Stanford's program is probably driven more by the original applications in intracranial radiosurgery and then long-term academic programs related to other areas. So that partnership is very, very, very valuable. But it's not as though Stanford has done this single-handedly. We also have very good clinical partnerships at Georgetown University. In fact, Accuray's list of partner sites includes nearly every single site we have. There have been pivotal people at many of our sites for many different clinical applications.

I presume that most of those sites are primarily interested in the clinical outcomes. Are you also able to study some of the financial outcomes? What kind of evidence have you put together to support new applications when it comes to reimbursement? And how do you do that?

We have various groups involved in the broader field of reimbursement. We also have groups of our customers who are collaborating to support their own reimbursement requirements. So we both have internal resources and external resources that are focused on reimbursement. In terms of the current reimbursement situation, CMS has identified codes that it feels are appropriate for CyberKnife treatment, and those are used pretty widely for Medicare patients. We've also had increasingly good responses from private payers.


Growing Sales

Accuray recently announced the fourth-quarter results of its fiscal year. The company saw revenue increases of 50% year over year. I would expect that the shareholders are happy.

It was a very good year for us. We saw strong year-over-year growth. When we went public, we worked hard to explain the uniqueness of the company and the company's approach to the investment community. I'll be the first one to admit that sometimes some investors understand that value and other investors don't see it. Much has been achieved, but at the same time, we still have much left to achieve. And I think there are many people in the investment world who are still sitting on the sidelines, as they did in the early days of Accuray, just waiting to see what happens next.

Do you receive resistance from hos­pitals and other institutions strictly on the basis of finance—institutions that would love to buy the system but don't have it in their budgets?

Yes, absolutely. We share capital equipment budgets with many other companies, and many physicians inside a hospital compete for the same resources. When we speak to hospitals, the challenges we face include budgets, timing, and space. Our equipment needs a dedicated room that has radiation shielding all the way around. It's a special room that's usually built for the CyberKnife. So finding institutions that have the budget for the machine and the budget for the construction is probably our biggest challenge.

At the end of June, Accuray reported a backlog of $647 million, which is impressive. How long will it take for the company to build all those machines and pull in that money?

Constructing the machines isn't the challenge. One of the biggest challenges we face is getting customers who are ready to receive the ma­chines. The construction program that takes place at a customer site is often our biggest holdup.


Into the Future

Beyond the growth figures that you're projecting, where do you see the company going into the future?

For the foreseeable future, we'll stay focused on the CyberKnife product. We're not anticipating or planning for massive product diver­sification. We feel that the clinical development of the CyberKnife itself is progressing extremely well. And we're seeing dramatically increased utilization for all of our clinical ap­plications. In addition, we're seeing very good clinical programs coming together.

We're waiting for some key publications that will validate the clinical model for prostate cancer. Such validation should increase demand immensely amongst both patients and physicians. In addition, we are initiating a study for treatment of operable lung cancer cases. I think the study itself is a form of validation of the CyberKnife as a credible product for the treatment of lung cancer. The main focus of Accuray's activities right now is to keep investing and supporting these clinical activities because the field for radiosurgery with the CyberKnife is huge.

Copyright ©2008 MX

Sales Force Strategies for a Competitive Advantage

ADVERTISING, DISTRIBUTION, & SALES

Sidebars:

In staffing a medtech company, its executives confront the questions of what type of sales force to employ and where to find the needed sales representatives. It is not unusual for a company to lack a clear perspective regarding the available options. But it probably knows that it must generate solid market share in multiple market segments in order to survive and thrive. Successful application of effort in building a sales force can provide the company with the competitive advantage it seeks.

This article reviews four common sales force structures: direct reps, independent reps, dealers and distributors, and hybrid sales force models. The structure that is most appropriate for a given medtech company depends heavily on such factors as the company's size, available cash, sales objectives, and need to establish a market share.

Direct Reps

Direct sales representatives are employees of the company whose products they sell. Sometimes called W-2 reps after the nature of their paychecks, they typically receive a base salary and, most of the time, are also paid commissions and bonuses. These reps represent exclusively the products and services of the company that employs them.

They can be further categorized as inside or outside sales reps. Inside reps almost always operate from within the company building, performing sales calls and sales support functions. Naturally, outside reps perform their duties outside the company, often working from home or from company-provided offices in their territory. A typical day for an outside direct rep involves traveling and visiting customers.

Most inside and outside sales reps collect such benefits as 401(k)s and stock options, and qualify for unemployment. They often qualify for health and life insurance as part of their compensation. Additional benefits for outside reps include an automobile package that may provide a company vehicle or a car allowance or gasoline card.

All direct reps report to a sales manager on a daily or weekly basis and are responsible for an exclusive territory (see sidebar, Scenarios Suggesting Direct Rep Selling).

A direct sales team can be quite advantageous for a company, providing the sales manager has chosen its members wisely (see sidebar, Benefits of a Direct Sales Force). In fact, having a dedicated sales force focused on promoting only the company's own medical products or services can be a luxury. But this luxury, like most luxuries, comes at a cost.

The true expense of a W-2 rep in the medical industry today probably begins with a fixed cost of $100,000. This figure may be shocking to some medtech industry executives. Others will find it simply impossible to afford. The cost of adequately staffing a direct sales force with vertical market specialists is prohibitive for all but large companies, because the fixed costs are too high. And this fixed expense provides no performance guarantees, either.

Good news for large medical device manufacturing companies is that the pool of potential entry-level device sales reps continues to grow, as many college graduates are attracted to the opportunity to get a foothold in the lucrative medtech market. These new reps bring little or no experience to the job; however, they do have a desire to prove themselves to their first employers, who will be companies that can afford the cost and time required to train them.

On the other side of the equation, the industry mergers, buyouts, and acquisitions of recent years have led to many well-qualified senior-level medtech sales reps losing their positions as direct reps. These tenured employees often become independent sales reps or start their own representative agency or distributorship, using their experience perhaps to sell product lines competitive with those of their former companies.

Independent Sales Reps

Independent sales reps (ISRs), because of their self-employed status, are sometimes referred to as 1099s. ISRs perform a sales function similar to that of direct outside reps, but they work independently of any company they represent. They sell a number of related products, called a portfolio, on a straight commission basis. Other designations for sales reps of this type include manufacturer's representative and sales agent.

Being essentially business owners, independent reps absorb virtually all expenses themselves. Because they assume these expenses, companies that contract for their services pay them commissions at a higher rate. Independent reps' territories are often larger than those of direct reps. That is because greater geographic coverage may be necessary for achieving adequate compensation. Most independent reps have a significant amount of medical industry experience, and leverage their established relationships when they go into business for themselves (see sidebar, Scenarios Suggesting Independent Rep Selling).

An independent sales rep will typically represent five to eight complementary product lines. Each line will have its distinctive price point and buying cycle so as to assure the rep a steady flow of income throughout the year. The rep will devote his or her time to the product lines that stand to pay the most over the long haul while requiring smaller investments of time.

Most ISRs are paid a commission between 10 and 30%. While these commissions are higher than the typical 2 to 5% paid to direct employees, the manufacturer nevertheless sees savings in this arrangement. Benefits such as medical, dental, and vision insurance, life insurance, disability insurance, unemployment insurance, 401(k)s, and annual bonuses are not offered to independent reps, nor are such perks as a company car or car allowance, laptops, cell phones, and expense accounts extended to them. For many companies, these savings can be substantial.

And not only do independent sales reps assume all expenses themselves; they also get paid—collect their commission—only after they have sold something, and in many instances only after the manufacturer gets paid for the product the rep sold.

Different commissions are paid for different products, depending on volume demand and repeat orders, or turnaround. Medical disposables, for example, often bring lower commissions of 5 to 14%, owing purely to the volumes usually characteristic of initial and repeat orders. Commissions for most medical equipment fall between 15 and 25%. Usually, commission rates will exceed 25% only for new product launches requiring some marketing work as well as selling, or if the rep is expected to warehouse inventory.

This commission formula is particularly attractive to the smaller company with annual gross sales of less than $50 million. In fact, it is standard for the vast majority of medical device manufacturers starting out and in need of a sales force, which will naturally fall below the $50 million threshold. According to the Dun and Bradstreet database of medical device manufacturers, only 4% of medtech companies have annual sales revenues totaling $50 million or more. For the remaining 96% of medtech companies, annual sales revenues fall below $50 million.

A company that finds itself investing the same $100,000 in an ISR that it would in salary for a direct rep, through payment of a 25% straight commission, is assured of at least $400,000 in sales with none of the overhead or associated costs of an employee. This is ideal for companies looking to cut expenses while gaining a competitive edge (see sidebar, Benefits of Contracting with Independent Sales Representatives).

Independent reps are generally proven top performers. Nearly three-quarters of the independent medical sales reps in the networking database of Global Medical Alliance (Middleton, WI) have had substantial medical sales experience, and two-thirds of them held positions in medical sales management before starting their own business. In addition, most have a college degree, have received additional advanced training, and have acquired sales and sales management awards while working in the industry. A typical ISR in the database is a white male between the late thirties and late fifties in age.

The U.S. Bureau of Labor Statistics stated a few years ago that it expected manufacturers to continue contracting out sales to independent agents rather than using in-house or direct sales forces. The investigation report noted that, "although the demand for independent sales agents will increase over the 2004–2014 projection period, the supply is expected to remain stable, or possibly decline, because of the difficulties associated with self-employment. This factor could lead to many opportunities for sales representatives to start their own independent sales agencies."1

Dealers and Distributors

(click to enlarge)
Figure 1. When direct and independent sales channels provide imperfect market coverage, dealers and distributors can fill the gaps. Here is a case, where market 3 lacks intensive coverage and market 4 is an insufficiently addressed opportunity, or perhaps even a hindrance.

In addition to direct and independent sales reps, dealers and distributors can play a role in a medical device company's sales efforts, too. They provide an additional option for selling products over a large expanse of territory.

The largest medical product dealers and distributorships are often publicly owned and operated. These entities generally purchase manufacturers' products for resale and assume ownership of the goods—including shipping, billing, collections, and even servicing—until they are sold. It is not uncommon for them to handle hundreds of product lines, many of which may compete with others.

Most dealers and distributors will buy products for somewhere between 35 and 55% off the list price, depending on price point and the volume purchased. Their compensation is derived from the margin of sales price over cost price. More often than not, they have a team of salespeople representing their lines.

Reasons for concern about selling exclusively through either dealers or distributors include the lack of selling time devoted to any one product line by any one person, and non-exclusivity: these operators are free to sell products similar to each other in a kind of open competition.

This business model, like that of the ISR, has proven effective in areas where it is not cost-justifiable to hire additional direct reps (see Figure 1).

Hybrid Sales Models

(click to enlarge)
Figure 2. A hybrid sales channel utilizes both direct sales reps and independent sales reps. By capitalizing on hybrid sales channels, a medtech company can penetrate 'middleman companies' such as outsourcing firms, contractors, and distributors, who in turn sell to dealers. This practice achieves a more complete sales mix among such intermediary companies that ultimately sell to end-users.

The medtech industry has also seen a trend among midsize and larger companies toward a hybrid model—the use of independent sales reps and distributors in conjunction with a direct sales force (see Figure 2). Utilizing such a combination of sales channels can enable companies to meet their sales objectives without sacrificing differentiation in the medical device marketplace. Ideally, a hybrid sales operation should open up prime market opportunities that afford the company the best chance for profitable penetration.

The hybrid model is generally suitable when the medical device manufacturer's product or market mix is quite diverse, when its existing sales network does not adequately cover a targeted market, and when specialized reps are available. To establish a smooth-functioning hybrid system requires first developing a clear sales channel design concept covering the full market reach. Then, management should adjust the design for each trading area according to its distinctive features. The contracts negotiated should include market exclusivity clauses or should achieve that end through customer assignments.

Once regarded as a solution reserved for small start-up companies or small divisions within large companies, the hybrid model with its incorporation of independent reps has become increasingly popular with larger companies. The reason is that ISRs complement the direct sales force's efforts in rural areas where the territory is expansive and where long-standing relationships are necessary to move product. Also, when maintaining such relationships requires more attention than a distributor can provide, the independent rep offers that capability.

Managing a sales force of independent sales reps is quite different from working with direct reps. Each group requires a different management style. The manufacturer should establish a management foundation that supports each appropriately in a hybrid operation.

Assigning specific geographical areas to reps in a hybrid arrangement, manufacturers should keep in mind that sales personnel invariably focus on products and markets that interest them and that give them the maximum return for their effort. A company cannot afford to create a territory for a particular sales rep just because it is convenient for the company. Attending to the best interests of all parties is the way to provide a return.

To ensure the success of a hybrid sales operation, support should come from the very top of the company. Unqualified support motivates sales reps like nothing else will.

Criteria for Selecting an Approach

To determine which type of rep to use to sell its products, an organization needs a clear understanding of itself, of the market environment in which it is operating, and of the factors likely to significantly influence its business in coming years. Management style, expense, and strategic needs are criteria a company should consider when deciding what type of sales force to create.

Management. If company management requires close control of the sales force, then a direct sales approach is to be preferred. Independent sales reps, true to their name, are not likely to accept close management. Regular communication via e-mail, voice mail, and conference calls are best suited for managing a direct sales force, while phone calls are the best means for communicating with independent reps. If management has a need for regular reporting, forecasting, and other weekly exercises such as clinical feedback and data gathering, then direct sales representation is optimal for maintaining fullest control over the sales force.

Control, however, should not be a managerial objective. The objective of any sales executive is to increase sales. Control is nothing more than a managerial style used to achieve company goals.

This does not mean that independent reps will not perform reporting, data gathering, and other tasks; they simply will not perform them with the same frequency as a typical direct rep. Direct reps are expected to perform a number of activities peripheral to the sales function itself in order to justify their base salary. Independent sales reps would quite naturally care more about productivity than activity, because without results, they don't get paychecks (see Table I).

Peripheral Sales Activity
Direct Reps
Independent Reps
Reporting
Daily
Monthly
Forecasting
Monthly
Quarterly
Meetings
Quarterly
Annually
Table I. The frequency with which direct and independent sales reps might be expected to perform certain communication activities in support of the selling function.

This means that sales managers should abandon traditional boss- subordinate control practices and expectations. Independent sales reps are essentially peer-level organizations that team up with a company to achieve a mutually desired objective—in-depth penetration of targeted markets in the rep's trading area—and should be treated accordingly. Recruitment, support, and monitoring of independent reps differ in kind from the approach taken with direct reps.

Cost-Benefit. When the expense of having a direct rep in a sales territory is not sustainable, using an independent rep may provide an economically advantageous alternative. The same goes when the issue is selling a particular product that is not the primary focus of the company. Cost directly assignable to the ISR sales channel is defined as variable cost. This means that the cost is zero at zero sales volume. Taken all together, manufacturers have a much better cash flow position when they use independent sales reps rather than a direct sales force.

Strategic Approach. If a company believes that well-established relationships and technical expertise are necessary to sell its device or service, then independent sales reps should in theory provide an edge over direct reps in terms of strategic advantage. This is not to say that direct reps cannot offer tenure. Many can, but they command a high base salary most of the time, increasing the liability of the company. Often, this kind of salary is out of reach for smaller companies and small divisions of larger companies, where large fixed compensation is typically reserved for owners or executive managers.

Another factor is that direct reps often require more-extensive training than independent reps do. One reason for this, of course, is that many companies hire direct reps straight out of college; these beginners have very little or no sales experience or knowledge or experience of the medtech industry. On the other hand, when a company hires an independent rep, that rep probably already has a relevant background. Such a rep can have an impact on the bottom line much sooner.

Recruitment Considerations and Costs

Whatever type, or types, of sales representation the medical device manufacturer opts to use, the company should give consideration to the costs associated with finding qualified reps. There are always costs involved in recruiting talent, whether the company employs internal resources to locate and attract sales reps or chooses to utilize an outside resource such as a recruiter or employment agency.

A company may believe that it can minimize the cost of recruiting by depending on its human resources department to place advertisements in magazines, newspapers, or Web pages. But this process can be very time-consuming once it comes to sorting through resumes, making e-mail inquiries, taking telephone calls, and setting up interviews.

Another consideration is the knowledge and experience of the person conducting the screening or interviewing. For an inside employee of the company to hire an administrative coordinator is one thing; but that person may be unqualified to hire a direct rep, much less an independent rep.

Therefore, some companies use professional recruiters or employment agencies in order to take ad­vantage of the skills and established networks only they offer. Medtech industry recruiters typically specialize in the recruitment of direct reps. Those operating in the United States number easily in the hundreds. Because so many are available to choose from, it is advisable to ask around in order to determine which industry colleagues have had success with particular recruiters.

Focusing on creating relationships with specialist medtech industry recruiters is advantageous because their pool of possibilities will consist largely of experienced medical device salespeople. Applicable experience greatly minimizes the amount of time the hired or contracted rep will need to get up to speed. By contrast, general sales recruiters and employment agencies often will have a network of available reps who are only looking to break into the medical device industry.

The only likely way to cost-effectively achieve maximum market penetration through sales representatives is to hire in the first place people who already possess all the requirements for doing the job. Thus, the search should be conducted intensively and aggressively, with clear objectives in mind.

Conclusion

Different medtech companies have different needs when it comes to finding customers for their products through the sales function. A variety of approaches are available to them. Careful consideration of the options in the light of self-understanding should reveal which sales force strategy is most likely to deliver the competitive advantage each company seeks.


Reference

1. U.S. Department of Labor, Bureau of Labor Statistics, "Sales Representatives, Wholesale and Manufacturing," in Occupational Outlook Handbook, 2004–2005 ed., Bulletin 2540 (Washington, DC: GPO, 2004).

John C. Zimmer is president of Global Medical Alliance LLC (Middleton WI), a networking consultant firm that aligns medical device manufacturers with independent sales representatives.

Copyright ©2008 MX

The Academic Connection

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Sidebars:

At the same time local governments are seeking ways to spur economic development in the life sciences industries or revitalize neighborhoods, many medical device manufacturers are seeking ways to decrease costs and form partnerships. University scientific research parks represent the perfect marriage for many device manufacturers and local government officials, as they facilitate connections and close collaboration among talented people. The resulting combinations have the power to create energetic atmospheres of innovation for the companies and economic renaissances for the communities.

Many start-up life science companies cannot justify or afford to purchase expensive resources and equipment for research and development purposes with the limited financial resources they possess. By locating in a research park, companies can often gain access to university laboratories and equipment through agreements that allow companies to purchase time on expensive equipment owned by the host institution.

(click to enlarge)
Researchers at the nonprofit InMotion Musculoskeletal Institute in Memphis work with industry to improve the treatment of musculoskeletal disease.

Companies can also gain access to the specialized knowledge possessed by university researchers, as the lead researchers are often faculty members themselves. The close proximity of research parks to universities enables the faculty member to maintain good working relationships with both the university and the company and its executives. This article takes a look at the varied benefits that university research parks can offer medical device manufacturers and provides examples of successful ongoing collaborations.

Building from the IP Up

Intellectual property is one of the most valuable assets of a medical device manufacturer, and such assets can originate from a variety of sources. While some companies that partner with university research parks bring their core intellectual property with them, others look to the universities themselves as valuable sources of ideas.

For example, Piedmont Triad Research Park, affiliated with Wake Forest University, works with university researchers to license or form start-up companies with university intellectual property. Wake Forest University Health Sciences is foremost in the expansion of a new park, which was designed by Sasaki Associates (San Francisco). The Biomedical Research Campus District alone will encompass 72 acres out of the 200-acre park.

When developing a relationship with a university research park, manufacturers will find that many points are up for negotiation, including issues surrounding the ownership of intellectual property that is brought into or emerges from the collaboration. Some research parks may want to have an equity stake in a company or its IP as part of the tenancy deal. Others may not. During negotiations, clear communication and detailed assessment of the value that both parties bring to the collaboration are key to settling on a fair and mutually beneficial arrangement.

Varied Research Offerings

The resources available at university research parks across the country vary greatly, as do the types of endeavors supported by the parks. Certain universities and their parks are de­signed to support specialized interests, such as specific device sectors, nanotech, biotech, clinical chemistry, clinical trials, or others. When considering a partnership with a particular park, manufacturers must consider the establishment's history in terms of the types of companies that the park has traditionally supported.

Likewise, the types of university departments that support or have relationships with the park—such as biomedical engineering, surgery, or molecular biology departments—speak volumes with regard to the type of intellectual capital that will be available to a budding company. The same can be said for the park's partnerships or other connections with large medtech companies.

In addition to intellectual re­sources, physical features of re­search parks run the gamut, and many parks are in the process of ex­panding or updating their facilities. For example, Technology Enterprise Park (Atlanta) is in the process of building an 11-acre park that will include a biotechnology complex just outside Georgia Tech University. The planned four buildings will feature open space inside each building, and customization of that open space for small manufacturers. The Emerging Technology Center, a 60,000-sq-ft wet lab and bioscience incubator located on the campus of Louisiana State University is another example of a facility that offers shared resources to medical device companies such as MaxiFlex LLC, which manufactures urological surgical devices.

Likewise, University Park at the Massachusetts Institute of Technology, developed by Forest City Science and Technology Group (Cambridge, MA), goes beyond simple access to a premier research institution. It is a 27-acre mixed-used development that combines 1.3 million sq ft of bio­tech research space with residential housing, a hotel, and commercial properties. It was the winner of the Urban Land Institute's 2004 Award for Excellence.

Another Forest City property, the Science and Technology Park at Johns Hopkins University, will offer similar amenities, along with 1.1 million sq ft of lab and office space. The facilities and access to Johns Hopkins University School of Medicine will offer medical device companies an excellent avenue for partnership formation.

Building Businesses

Many research parks offer direct business assistance to park companies. For example, the Virginia Bio­technology Research Park includes the Virginia Biosciences Development Center. The center provides assistance by evaluating potential university technologies, with the intent to spawn companies derived from university research. Once a company is established, the development center assists with business strategies and provides mentors to companies located in the park's incubator. The BioBiz program also places graduate-level business students inside biotechnology companies to assist with solving various business-related issues.

The Louisiana Business and Technology Center at Louisiana State University's South Campus Research Park offers management assistance, financial modeling, and small business innovation research grants to incubator and research park clients in the medical device and life sciences fields. The center employs full-time business counselors, including eight MBA graduate assistants and a counselor who holds both MBA and MD degrees, to assist technology companies.

Conclusion

Today, university research parks have evolved well beyond simply providing four walls and a floor to their harbored companies. Medtech companies can now find research parks with offerings that support nearly every stage of their development.

To find out more about research and science parks, and the benefits they can offer to medical device companies, contact the Association of University Research Parks, a 350-member organization that actively encourages and promotes university-industry interaction. The organization can be found on the Web at www.aurp.net.

Charles F. D'Agostino is executive director of the Louisiana Business and Technology Center and LSU South Campus Research Park (Baton Rouge).

Copyright ©2008 MX