Medical Device Industry Overview Essay
Medical Device Industry Overview
The Medical Device (“MD”) industry is one of the largest and most stable industries in healthcare with a global market exceeding $140B in revenue. The US represents approximately 60% of that revenue, or $85B in revenue, with historical growth rates unimpacted by recessions of ~ 8%*. While significant, only 4 % of US healthcare costs can be attributed to devices (source: King & Donahoe, “Estimates of Medical Spending in the US). The US market produces half of the world’s medical devices and consumes 40% of the world’s output. Nine of the top ten medical device companies in the world are US-based, and 6,000 US manufacturers employ over 400,000 people in the US. It is also a concentrated industry; the seventeen largest companies account for around 65% of the total industry revenue (source: Frost & Sullivan, “2003 Industry Outlook for Medical Devices”).
While the largest companies do command nearly two-thirds of total revenue, and employ many people, 80% employ fewer than 50 and 98% employ less than 500 employees. Innovation often comes from technology-based, single product, smaller companies. The initial segment target for the JI – the Neuorology segment – is a high growth but smaller segment. Exhibit A (see below) provides an overview of the US Device Market. As one can see from this Exhibit, device sales to the neurology segment are approximately US$3.1B (NB: these are 2008 sales; with historical growth rates 2013 sales would approach US$7.5B).
While a small market relative to other segments, it is also the highest growth segment – at an estimated 20 % per year (see vertical axis on chart for growth rates). In fact, the four fastest growing segments are orthopedics, neurology, cardiology and cosmetic/aesthetics (three of these four are target segments of the JI’s lines of business). Several of these much larger market segments – including cardiology at $24.9B and Orthopedics/Spine at $17.0B – will ultimately be added to the focus of the JI, but the initial thrust will be on the Neurology segment, where the current UBNS staff has tremendous international credibility. In terms of market trends in the device industry, outsourcing is a key strategy for reducing product development cost from 10-30% from traditional in-house development. With product development time usually ranging from five to ten years, outsourcing also allows companies to partner with smaller companies who bring a product focus but lack/need distribution, which the larger companies can provide.
Medical Device Industry M&A Trends
Over the past 25 years, , venture capital-funded device industry work has resulted in major innovations such as pacemakers, angioplasty, MRI, defillibrators, real time ultrasound, blood glucose monitoring and cardiac arrhythmia ablation. With the confluence of new biomaterials, advanced computing, nanotechnology, (microelectromechanical systems (“MEMS), all sorts of new product/device opportunities exist. Future potential is ripe in areas such as precise drug delivery, nano-neurostimulation, hypertension devices. According to the Medtech Report in May, 2011, consolidation has come to neurology segment of the US medical device industry, as larger, mainly public companies look for revenue growth. Stryker became market leader in 2010, buying Boston Scientific’s neurovascular business unit for $1.5B.
Boston Scientific has been trying to deal with crippling debt it took on in its merger with Guidant (?) 5 years ago… and is now shedding non-core assets. Covidien entered the market buying Ev3 ($2.6B) in 2010, the second largest player in the neuroscience market. J&J/DePuy acquired Micrus Endovascular ($480M) in 2010 and Synthes in 2012 ($19.7B) to become largest orthopedics/neurology business in world. New product areas include embolic coils, inter-cranial stents, liquid embolics and thrombectomy devices.
Major areas of disease focus include cerebral aneurysm, and acute and chronic ischemia (stroke-related maladies), a specialty of the UBNS team. The main driver of the interest in the “neuro” segment is that it involves minimally invasive, interventional techniques as opposed to full-blown surgery. These procedures are quicker and less expensive than conventional surgery, and are often accompanied by improved patient outcomes, less recovery time and ultimately less cost. Consequently, the initial expertise of the JI correlates closely with a growing area of interest for industry – minimally invasive EVNS procedures, and the products which will go with such procedures.
Initial JI Service Offerings: Training, Product Commercialization Consulting
& Clinical Research
The JI Best Practices Training Center focuses on delivering state of the art training curriculum in two main areas: hands on training and simulation training. A third area, a natural link to training, is new product development consulting (see page ). The customer value proposition assumes that a multidisciplinary approach to cardiac, stroke, and vascular disease management requires a high level of collaboration across vascular specialties. When delivered by the JI’s team of world leading neurosurgeons at the JI Best Practices Training Center, market leading neuro/endo vascular training programs for physicians and executives are created that are unparalleled in the marketplace today. With unprecedented resources, The JI training programs will deliver the most effective training for innovative companies, facilitating greater learning, comprehension and competency in neuro/endo vascular.
This will in turn drives increased adoption rates of breakthrough medical device products, resulting in a higher standard of patient care. These resources include state of the art equipment, didactic lecture, detailed product review, competitive assessment, simulation training to perfect technique, hands on placement in models, animals and cadavers, observation of actual cases in human catheterization labs performed by the trainers. Training programs are fully customizable to the client’s specifications. The customer value proposition will be refined and validated with customer market research in phase II.
JI Training Vision
The vision for JI Training is that it is modular, and can be expanded to other medical disciplines, such as cardiology, radiology, vascular surgery, and vascular medicine. World leading physicians in these disciplines will be recruited to the JI to make the vision a reality.
Training Market Overview
The training market consists of Continuing Medical Education (CME), industry sponsored training courses and consulting fees paid to independent physicians. CME is training for professionals to maintain licenses and knowledge around critical issues and is put on by accredited organizations. Approximately $2.4B was spent on CME in 2010, including both ACCME and state accredited providers. Physician participation in CME in 2011 was $11.4M, up from 3.7M in 1998. Approximately 36% was supported by industry through monetary and in-kind donations (equipment, supplies, etc.) while 64% was provided by other organizations, such as hospitals, health care delivery systems, nonprofit physician membership organizations, publishing and education companies, medical schools and other nonprofits.
Private Funding of Physician Training
Medical device companies currently sponsor physician training at accredited programs, either directly or through third party communication companies. They often select physicians to be luminaries for training other physicians. They will also hire physicians to be consultants in evaluating new products and encourage adoption and approval of their products. New products are also supported with more conventional marketing programs, promotions, public relations and trade shows. New laws require companies to report payments made to physician for consulting services starting in 2014. These payments can be significant. Cordis-Smith Nephew spent $9M. Medtronic spent $9M-$15M in 2011.
However with rising concern over the appearnce of conflict of interest in funding CME training, some companies are pulling back on support. Zimmer recently suspended funding of all CME courses and will restrict the way it funds courses in the future by deploying a third party, such as a professional society, to organize educational programs. Pfizer announced in 2008 that it would also no longer pay communication companies to arrange CME courses and only support medical education when developed and put on by hospitals and professional medical associations.
Need for Better Training
In addition to companies reducing their support for industry sponsored CME, companies are experiencing low levels of effectiveness with current product training methods. Only 20-25% of physicians actually adopt a product post- training, implying there is room to improve how training is provided for new products. As companies pull back on CME sponsored training they may now need to explore and have funds available to invest in training alternatives. There is a need for greater collaboration and customized training
. One example of a new breed of training program is known was developed by the Terumo Company in Japana. Its Medical Pranex™ Program combines medical practice and training with its R&D center. It generates and promotes new medical treatments that marry provider skills with Terumo’s manufacturing expertise. Participants learn sophisticated and complex medical technologies in an accurate clinical setting. Its serves as a site for interactions between providers, cardiovascular specialists and Terumo R&D for new product development. According to Terumo, “demand is outstripping the availability of educational training.” Over 50, 000 providers have visited since it opened in 2002.
B. New Product Development
Product development process time and costs loom large for medical device companies. Product development time ranges from 5-10 years. The process is capital intensive, and risks are high. Balloon angioplasty cost $3M-$4M to introduce to the market in the 1980s. Ten years later the cost for coronary stents skyrocketed to $100M. Companies need medical expertise to help them identify product winners and losers earlier in their development process. The JI is well positioned to support new product development. Outsourcing has become a key strategy for managing development cost and can reduce costs by 10-30%. Both large Fortune 500 companies and Contract Research Organizations (CROs) are now investing in startups. For example, J&J has an investment arm, JJDC Group, and Cato Research has Cato Bioventures. The 4 fastest growing segments in medical device new products are orthopedic, neurology, cardiology, and cosmetics/aesthetics. The neurovascular intervention segment is a $1B market.
Stryker became the leader in 2012 through its acquisition of Boston Scientific’s neuro vascular unit. Covidien entered the market by buying ev3, the #2 player in 2010. J&J/DePuy acquired Micrus Endovascular in 2010 and Synthes in 2012 to become the largest ortho/neuro business in the world. The driver for growth in intervention is that it is a quicker and less costly technique than conventional surgery, can improve patient outcomes and promotes less recovery time. Disease focus areas include cerebral aneurysm, acute and chronic ischemia.
New product discovery areas include embolic coils, intecranial stents, liquid embiolics, and thrombectomy devices. The JI, with its world-renown neurosurgeons and pioneers of minimally invasive neurosurgery offer unparalleled consulting expertise in the development of neurovascular devices. Partnering with the JI enables more rapid concept development and prototyping, feature improvement, product testing in simulated models, animals and cadavers.
Current investment climate for early stage medical devices
According to a joint report from the Medical Device Manufacturers Association and National Venture Capital Association, new venture funding has trended sharply down in recent years. In 2011, the approximately $200 million dollars which was invested was the lowest total in fifteen years, as was the number of mergers/acquisitions done – a mere 55 deals. The number of deals dropped in excess of 50 % from the 118 deals in 2007 (and recent peak of 128 in 2006). Funding has plummeted 73% since the recent peak of more than $700 million in 2007. When compared to the software industry, where $1.4B was invested in software deals, the highest such figure since 2001.
The reasons for these trends are numerous. As mentioned earlier, long product development times put a greater risk in an investment and a higher required internal rate of return. industry regulations hinder product development, and device development I capital intensive. The FDA has not gotten quicker in approving new devices, and now requires more and more testing before device approval is granted. These factors have grown more acute recently. One example is balloon angioplasty.
Balloon angioplasty cost $3-4M to bring to market in the 1980’s. Ten years later for coronary stents the same process cost $100M. Today experts suggest it can cost $200M to bring a simipar device to market/ In summary, new venture funding for medical devices is currently low, in spite of the industrys insulation from recession (industry and device spending was virtually unaffected through the fiscal crisis of 2008-10). Kick starting product development by partnering with companies via a new model could position the JI as a beacon of innovation the industry sorely needs. (Sources: Price-Waterhouse Coopers and the National venture Capital Association publication “VC Investments Q4 – MoneyTree – National Data.” ).
The third industry segment that the JI will participate in will be clinical research. The thirst for new drugs – which require extensive clinical research trails — for virtually every malady continues. Spending for prescription drugs continues its meteoric climb; the industry enjoyed 12% per annum growth during the 1990’s. Prescriptions are driving increased usage – annual per capita prescriptions increased from 7.9 in 1994 to 12.3 in 2005. Other factors driving demand growth include a population which is less healthy, the increase in chronic illness treatment, (moreso and faster than in prior years), drug companies which drive increased consumer demand via consumer advertising by the major drug companies, and Medicare Part D coverage, which has tended to increase utilization. To a lesser extent, DNA sequencing, stem cell development and bio-defense vaccines/drugs which are being pursued all have increased drug demand and the need for more clinical trial work Source: Peter Carlson/National Center on Education/2007).
Contract Research continues to grow
Instead of performing clinical trial work in house, many firms – for the reasons of speed and efficiencies – contract that process out to clinical research organizations, or “CRO’s.”Outsourcing clinical trials to CRO’s for pharmaceutical, device and biotech companies is on the rise. According to Frost & Sluulvan, 20210 study, it is a $24B global industry. Demand drivers include the aforementioned growth of drug market, the need for speed (CRO’s are often 30-50% faster) and increased complexity around the FDA requirements and trial process. Increasingly firms are farming out trials to CRO’s who boast better, more focused processes. The industry is highly fragmented: there are over 1,000 + CRO companies and two-thirds of them are based in the US. It is a growingly concentrated industry; the top 5 companies garner ~ 45% market share. Leaders are full service commodity providers offering one stop shop and global services CRO’s are often quicker and cheaper, and one month shaved off trails can equate to $40M in revenue, according to one report.
Core imaging labs are a growing part of the specialty support for firms such as CRO’s who run clinical trials (see next slide). The imaging core lab (ICL) business is one the JI is contemplating. Core Labs capture images which support/speed drugs/device clinical research (and applications with FDA. They provide an integral part of clinical trial work. There have been huge strides in the quality of the contrast agents over past 30 year. These contrasts agents allow the images of tissue – and subsequent medical issues – to be better understood, and thus a more customized – and often successful – treatment applied. – as the technology has gotten better the use of this modality has skyrocketed. Market demand for core imaging in part is driven by extensive FDA requirements, improvement in imaging technologies/contrast agents, need for speed in drug development work (imaging endpoints help application process immensely).
This Imaging function is often off loaded by CRO’s to imaging centers, so core labs are a vital part of the clinical trial ecosystem. So while CRO’s command a lot of market share, but work with niche players to provide needed services UBNS is already involved in ~ 15 clinical trials at any one time; most are in the area of medical device development. UBNS’s access to patients it can provide the needed support for the trials. Involving physicianssuch as the JI group in the design of the trial to leverage certain knowledge/capabilities seems to hold an opportunity. This should not be a primary area of focus for the JI initially, as it is a specialty unto itself.
However, there are unquestioned academic and clinical benefits about the JI being the lead on new, promising breakthroughs, and it makes sense that this line of business provides an opportunity. In summary, the JI should seek industry partnerships with leading CRO firms who could benefit from the domain knowledge of the JI group and state-of-the-art care practices in evaluating new procedures/drugs/devices, including next generation hybrid drug delivery systems using nanotechnology. There is a role for the JI if it can cut and costs from clinical studies, but it should focus – at least initially – in the ENVS segment.
The device industry has a clear need to improve training outcomes. It is estimated that only 20-25 % of expensive industry training leads to a physicians using a company’s product. Doubling that rate effectively doubles sales and enhanced investment/ROI in training. It is evident that MD’s need more effective training for them to garner the comfort in using new devices with more frequency. Large device companies do much of their own training and have invested millions in R&D/training facilities, but small to medium firms (SMFs) – the bulk of the firms in the industry – would often not have this capability. While large firms will no doubt look to supplement their in-house efforts with outsourced training – such as the type the JI could provide – smaller companies most definitely would seek this expertise.
Regarding product development, new medical devices improve patient outcomes and can cut care costs, especially in the four most prevalent causes of death and disability in the US: heart, diabetes, stroke and breast cancer (source: MDMA/NVCA report) The FDA has made it harder to bring new products to market. Coupled with the temporary financial meltdown of 2008, innovation has slowed Innovation potential for the future is significant, and new go-to-market models/partnerships could possibly address some current issues. The need for product development services and expedited/better designed clinical trials (to speed product development time) can shave millions of dollars off the development cost, and move new, breakthrough products to market more quickly.
The JI can help on both fronts. JI can assist industry by facilitating/speeding clinical trial work and testing and evaluating prototype products. It can help them identify their failures earlier, saving them millions of dollars in time and money on inventions which will ultimately be losers. Offering product consulting programs for product commercialization (a fee for service model for large industry; perhaps an equity-sharing arrangement with cash-challenged smaller companies) appears to meet a current market need. Access to high level MDs for product research is critical; JI can help test and provide valuable feedback in a cooperative, transparent manner, levering its world-class clinicians. The issues and concept is similar in the drug development world.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 1 October 2016
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