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Medical-device OEMs look to the long run

By: Gayle S. Putrich

May 21, 2013

BOSTON — As the global health-care market continues to grow by nearly exponential rates, industry leaders are looking to move the U.S. medical-device business forward by redefining the relationships of original equipment manufacturers and their suppliers.

Although economies around the world stalled in the last few years, it has not stopped their populations from getting older. The aging baby boomer generation in the U.S. and Europe, and the burgeoning middle class in developing countries like Brazil, India and China, are causing not just a general increase in demand for medical devices, but demand for innovative devices at the lowest possible cost, said industry leaders at the Plastics in Medical Devices conference, held May 13-15 in Boston.

"Innovation today has a new definition," said Randy Barko, president and CEO of Ximedica LLC, which provides product development services to medical-device makers and health-care companies. "It has to be something that's reducing costs out of the health-care delivery system. It doesn't necessarily mean it's the device." Innovation could come in the way the device is used, rather than a redesign, he said, or even in the way it is made.

The push for bottom-line cost reduction has been made even more difficult and more imperative by the advent of the 2.3 percent tax on total sales of medical devices — part of the 2010 Affordable Care Act potentially. That tax is driving up per-unit prices. With materials costs bottoming out now, on average at 40 percent of the total cost, the old-fashioned way of driving down material prices with negotiation is not sustainable, said Mike Kelly vice president of operations for Boston Scientific Corp. So supplier help on the design side is emerging as the new way to drive down total costs while coming up with ever-smarter devices and building new, long-term OEM-supplier relationships, he said.

"The suppliers that are going to be with us for the long run are going be very innovative and help us with the design chain, not just the supply chain," Kelly said.

Earlier and earlier involvement of suppliers in the design effort, whether designing a new device or making changes to an existing one, is going from a trend to a permanent way of doing business, said Matt Jennings, president and CEO of Phillips-Medisize Corp., based in Hudson, Wis.

The trend makes for a more holistic start-to-finish approach for the OEM, Jennings said, while giving suppliers a new look at a manufacturing process and a better understanding of their products' place in it. "It's a real opportunity for the supply base to understand where the bottlenecks are and where they can help," he said.

Closer OEM-supplier partnerships that result in a nimble business process and flexible product will help U.S.-based companies compete in the shifting global health-care market, said Dave Daum, senior director of global health-care solutions for Philips Respironics of Murrysville, Pa., just outside Pittsburgh. The Philips Electronics NV division makes innovative sleep and respiratory-care devices.

"We're really seeing we're in a global environment now," Daum said. "Other countries are developing devices U.S. companies thought they had a lock on, and we're seeing slow infiltration into U.S. market."

OEMs, some for the first time, are finding they have to compete in the local and global market, Barko said. And in a global economy, "local" means Boston, Ireland, Costa Rica and China, even for a U.S.-based company.

"You have to be local to service the customers locally," Barko said. His Providence, R.I.-based firm, Ximedica, is moving its Hong Kong headquarters to the Hong Kong Science and Technology Park, in part to be closer to collaborators and partners — making it easier to involve them in Ximedica's design and production process from start to finish.

"A lot of 'good enough' product is about to be coming out of China," he said. "It's up to us to take on that challenge and deliver."