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A New Prescription for Medical Devices

Innovations have changed the calculus of sourcing in the medical devices industry. Electronics manufacturing services (EMS) companies bring engineering expertise to the manufacturing floor that help drive innovation.

The medical devices industry wasn't willing to trade off the risks of loss of intellectual property, potentially compromised quality, and regulatory compliance for the cost savings from relocation to far-flung destinations like China or Eastern Europe.

Increasingly, it's hard for the industry to achieve the quality it desires without partnering with EMS companies. Increasing adoption of embedded intelligence, miniaturization, sensors, electronic control systems, and 3D video technologies for remote patient monitoring all call for skills outside of the core competence of these companies.

The revenue from outsourcing of medical electronics, at $16.56 billion in 2012, is expected to grow at the rate of 11 percent per annum until 2019, according to a study by Frost and Sullivan that was cited by Circuits Assembly.

The motivation for outsourcing was revealed by a study of 89 medical devices companies worldwide by the analyst firm, Axendia, which found that 79 percent of them were looking for skills outside of their core competence, 69 percent of them wanted to reduce the cost of development. Speed to market and improving quality were a close, respectively, at 56 percent and 55 percent.

Buying spree
The large EMS companies that were earlier focused on low-cost production of consumer electronics have been acquiring smaller companies with specialized skills in medical electronics to beef up their capabilities for this growing market.

Flextronics, for example, acquired Stellar for its expertise in microelectronics required for deep brain stimulation, cochlear implants for ears, and neuro-modulation, as well as in sensors and monitors. Flextronics medical electronics outsourcing business has been growing at an average rate of 21 percent per annum for the last three years.

Toronto based SMTC Corporation acquired San Jose based ZF Array for its skills in product design and rapid prototyping for complex electronics equipment in segments like medical electronics.

The outsourcing strategy for medical devices clients combines joint development programs with customers close to their facilities, regional sources of production in especially Mexico for lower shipping costs and faster delivery for products that need rapid iteration in the same time zone and low-cost commodity production in more distant places like China.

Creation Technologies typifies an EMS company focused on medical devices and similar low-volume and high value product that has all but two of its plants within North America. It has another plant in Mexico and one in China.

Mexico is a favored location of new product introductions where time-to-market is as important as keeping under budget during product development. Companies like Sanmina-SCI have found that clients are more receptive when they realize that frequent changes in engineering orders will not be stymied by time lags in bringing products to market.

The intelligence and miniaturization that electronics brings to medical devices is in early stages of adoption. The bias, in the near-term future, will be towards locating high-end manufacturing like medical electronics in the USA while the peripherals will still be produced overseas.

27 comments on “A New Prescription for Medical Devices

  1. elctrnx_lyf
    June 23, 2013

    Medical device development undergoing transformation due to the difficulty in fast adaptation of technologies into products is challenging without the support from expertise of smaller and niche companies. The low volume high quality manufacturing also opens up new opportunities for the EMS companies to serve such customers.

  2. prabhakar_deosthali
    June 23, 2013

    Medical devices manufacturing requires must stricter quality standards in parts inspection, stricter testing of the product , calibration procedures and so on.

    The EMS contractors who are used to manufacturing of consumer electronic products have to adapt to much stricter standards while manufacturing the medical devices

    The smaller companies with expertise in the medical device domain will have to keep a tight leash on their EMS contractors so that while taking advantage of the volume, the quality of the product is not compromised.

  3. Kishore Jethanandani
    June 23, 2013

    @Rich: Good point. Beyond a point, you start killing the Golden Goose. One study by the Cato Institute found that America accounts for more innovation in medical devices and health than all of Europe and Australia put together. That the low rate of innovation in Europe is mainly because the Government Hospitals refuse to pay for innovation. I do believe that Obamacare will be the death knell of the American innovation in medical devices. On the other hand, there are signs that American companies are already finding ways to workaround Obamacare by getting into self-insurance, all cash payments, etc.

  4. Kishore Jethanandani
    June 23, 2013

    @Rich: I am puzzled by your comment about the consumer ECG devices. These are available in the USA.

     

    About the Cato Institute study, it takes into account the innovations that have been in use. I had done a review of the study if you want to learn more

     

     http://news.heartland.org/newspaper-article/2010/01/05/us-lead-medical-innovation-under-threat-reform-bills

  5. Kishore Jethanandani
    June 23, 2013

    Both interesting points….It is my understanding that the US has a whole bunch of consumer medical devices for monitoring sleep, glucose, blood pressure. They form a part of the quantified self market segment. Are you suggesting that all of them happened because of imports from overseas?

     

    On the question of high prices of medical devices, it seems you left your thought incomplete. If it was not innovation, then are you suggesting its monopoly that accounts for the high prices.

     

    In point of fact, the development of medical devices is very expensive mainly because of the clinical trials involved. Electronics prices maybe falling but the rest of the cost is only increasing with more stringent regulation in more recent years.

  6. Kishore Jethanandani
    June 23, 2013

    Back to your comment on medical device innovation in the USA. I think you implied that the Cato study maybe flawed and that the innovation maybe faster than in the USA. 

  7. Kishore Jethanandani
    June 23, 2013

    I understand your point about classics and agree. By your own logic, the incidence of one example is a reason to question aggregated data otherwise there is not point in citing it I would think.

     

    I did describe the methodology CATO used and cited an article I had done in the past. So it seems you point was really that there are market segments where overseas companies will have enough strengths to gain entry and then expand. 

  8. hash.era
    June 24, 2013

    @Kishore: Yes the developments will be much more faster in the near future but those developments should be checked for quality as well.

  9. Taimoor Zubar
    June 24, 2013

    In point of fact, the development of medical devices is very expensive mainly because of the clinical trials involved. Electronics prices maybe falling but the rest of the cost is only increasing with more stringent regulation in more recent years.”

    @Kishore: I agree. The regulations are getting more strict which means companies have to not only meet the standards but also ensure that their products pass the different quality examinations. Other electronic devices do not face such high scrutiny and the costs can be kept low.

  10. Taimoor Zubar
    June 24, 2013

    The low volume high quality manufacturing also opens up new opportunities for the EMS companies to serve such customers”

    @elctrnx_lyf: I don't think EMS companies would want to serve low volume customers. Yes, they'd want to retain high quality buy it is in their interest to sell high volume because then the cost can be kept low and they can become more efficient.

  11. t.alex
    June 24, 2013

    I understand that the development of new medical device products is pretty costly due to the field testing, trials, and the relevant certifications.  From the supply chain viewpoint, if component vendors can provide comprehensive solutions to OEM customers so that they can shorten the time  to market, that would be great.

     

  12. Kishore Jethanandani
    June 24, 2013

    @Rich: The prices will come down with competition and as you said overseas companies have entry strategies. 

  13. Tom Murphy
    June 24, 2013

    Rich, Kishore:  I think you guys are mixing apples and organges.  First, yes, the US FDA is notoriously strict about quality standards for medical devices.  Most other countries accept the FDA standard as gold, although the Europeans and some other countries may vary their standards slightly.  Manufacturers, therefore, are generally well-served by adhering to the US standards.

    Medicare has little to do with standards. It is a payment system.  One could argue that Medicare pushes for lower prices, but we should keep in mind that the US still has the highest cost of healthcare per capital and its rate of inflation has been 3-4 times that of the general economy since the early 90s.  And Medicare has been there the whole time, creating a vast marketplace that benefits device makers.

    With Medicare, the market is far, far larger for device makers than without it. So any device maker is certainly going to consider that in its pricing formula.

    The private market for healthcare is getting as small as the number of very wealthy people in society — 1 %.   No major medical device maker is going to design products for the 1% — especially because they still need to meet FDA standards.

     

     

  14. Kishore Jethanandani
    June 24, 2013

    @Tom: Medicare is about payments and not standards. The issue is really how you reduce costs. There are all manner of ways to reduce costs that are detailed by Clayton Christenson in his book “Innovative Prescriptions”. I wish this book was the bible of Healthcare professionals but it goes largely unnoticed. The tendency of Medicare is to cut compensation for doctors and other professionals and medical devices or drugs. These are the very factors of production that reduce costs if used properly. Medical devices like ultrasound help to subsitute professionals with less skills for the more skilled and expensive manpower. All such ways to reduce costs by removing inefficiencies detailed by Clayton are largely ignored. Health cost inflation is continuing relentlessly for several decades for this reason.

     

     

  15. FLYINGSCOT
    June 25, 2013

    I was interested to hear that Mexico was the favored place for new product introduction.  What are the main reasons behind this?

  16. Kishore Jethanandani
    June 25, 2013

    New PRoducts go through iterations as they are tested in the field. Its hard to do that when you are in a different time zone. Also, time-to-market is an issue.

  17. Clairvoyant
    June 25, 2013

    Hi Kishore,
    How would a different time zone have an affect on this?

  18. Kishore Jethanandani
    June 25, 2013

    @Clairvoyant: For new products, manufacturers are more likely want to collaborate with the design and marketing team. And these teams are more likely to be in the USA. So it helps to work in the same time-zone compared to say India where you woul have to work at night.

  19. Tom Murphy
    June 25, 2013

    Certification of medical devices is very high because the stakes of failure could not be higher.  We are constantly hearing of devices — leg sockets, pacemakers, breast implants, defibrilators, and others — that fail after being implanted in a patient leading to injury, pain, additional surgeries, and death.  This leads to an enormous and costly drain on the healthcare system as well as an often-tragic outcome for the patient.  One could argue the standards are high, but I wonder if they are high enough.

  20. Tom Murphy
    June 25, 2013

    Your point is well-taken, Kishore. Yet, I have yet to hear of a single Medicare cost limitation that sounded unreasonable.     Billing for the doctors are separated from the treatment under Medicare, so your example of a doctor using ultrasound would be two separate expenses.   I'm glad the government is finally pushing the healthcare system to adopt modern information systems that can improve diagnosis, reduce unnecessary tests, avoid mixed-up prescriptions, and consolidate billing in a way that will reduce fraud and clarify charges. 

    I think Mr. Christiansen would approve of all those innovations, and I wonder why they haven't happened before now.

  21. Kishore Jethanandani
    June 25, 2013

    @Tom: There are many examples. One on the top of my mind is home care. Now it is well-known that costs incurred on nursing care or chronic illness generally is unbearably high and could be significantly lowered with home care. There are many technologies now including video, remote monitoring and even robotics to make this happen. Yet, there is very little movement towards this. 

     

    UCSF has some of the smartest doctors and health planners on this planet and things they have to say are fascinating both from a clinical point of view and from organizational and compensation point of view. As a resident of San Francisco, you might want to attend some of their conferences.

     

    There is also another book “Creative Destruction of Medicine” that I have started to read. Mindblowing. Let me say that the potential in Medicine is mindblowing and next to nothing has been put in practice.

  22. Kishore Jethanandani
    June 25, 2013

    @Tom: This is the age of personalized medicine and drugs and medical devices work for some patients and not for others. Its frustrating for the medical profession that the FDA does not get it. I am learning some of this stuff from my wife who is in the biotech industry and does regulatary compliance work.

     

    The point is to separate the cohorts of patients who respond to treatments and other who don't.

  23. Kishore Jethanandani
    June 25, 2013

    Clayton Christensen is calling for a dramatically new type of system rather than the piecemeal approach being taken now. He differentiates four types of situations and type of treatment a patient needs. Its hard to summarize a 500 page book but I will try.

    So hospitals should be places where a great deal of diagnosis is required. Here he wants to have a multi-disciplinary approach were all aspects are looked at compared to a situation today patients fo from one doctor to another till something works. Where it has been tried, this method improves quality of care dramatically. At this level, he calls for more use of databases to benefit from the collective experience

     

    Second, where diagnosis is proven and you know the steps to go through as in cardiology, clinics can lower cost by specialization in specific fields.

     

    Third, you have places where nurses treat simple things like cold, fever, allergies and the rest. Patients get this in the neighborhood.

     

    Finally, you have home care for the chronically ill. 

     

    Altogether, savings of a trillion dollars are possible which means about 50% reduction in costs.

     

  24. _hm
    June 25, 2013

    We are extravagant for our non-essential wants. So for anything related to medical devices, I first read Made in Germany or UK or USA before purchasing it. Incremental price difference is insignificant in purchase decision.

  25. hash.era
    June 27, 2013

    Do you mean that German products are much more cheaper is it ? 

  26. _hm
    June 27, 2013

    Connoisseur love product made by them. Looking at quality and beauty of product, cost of product is not important.

     

  27. hash.era
    June 30, 2013

    @_hm: Yes true but just because of the beauty and the quality you cannot define a high value for it.              

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