A Changing Landscape

Speakers hit a variety of industry hot topics at this year's fourth annual event.

ODT Staff Report

The fourth annual Orthopedic Design & Technology Conference and Exhibition returned to Fort Wayne, Ind., in early October. Once again, the program offered two days of content designed to answer manufacturing, business and regulatory questions. A few of the presentations are outlined below.

The event kicked off with a keynote address by Robin Young, longtime industry analyst and founder and president of RRY Publications, a publisher of market research reports based in Wayne, Pa.

Young told his audience that federal reimbursement cuts and reluctance among payers to fund new technology are threatening innovation in the orthopedic device sector.

“We are at a crossroads,” Young said. “There are key issues swirling around that are making innovation take second stage. Orthopedics has been the most innovative of all sectors. This is the place where you can try out new products relatively safely. But because of the changes going on, innovation is going to become a cost mediator that will help rationalize comparative effectiveness and a pay-for-performance mandate.”

Besides reimbursement cuts, Young named other threats to innovation: lawmakers’ attempts to regulate the relationship between physicians and orthopedic device companies; and closer scrutiny of the 510(k) process.

Young claimed the proposed $4 billion annual tax ($40 billion over 10 years) included as part of the Senate Finance Committee’s healthcare legislation to help fund healthcare reform would not kill innovation, as opponents fear, but instead would drive between 400,000 and 500,000 new patients to the sector. He said the “tax”—which amounts to about 2 percent annually—could be considered an investment. Industry trade groups have been vocal in their desire to have the fee removed from the proposed legislation (see Commentary on page 8). Young’s comments were controversial in an industry adamantly opposed to the proposed plan.

“For a 2 percent fee, it’s well worth it,” Young argued. “There is a knee-jerk reaction on the part of AdvaMed [Advanced Medical Technology Association] and the large [device] manufacturers that ‘no tax is a good tax.’ But this tax can be used to bring in more patients. The real issue is are you going to get enough patients to make the tax worthwhile? That is the issue. We are at a crossroads for sure.”

The Financial Outlook

Healthcare reform isn’t the only thing that device firms are concerned about. The battered financial landscape of the last year has slowed merger and acquisition activity in the medical device market, noted Timothy Schmidt, vice president at Capstone Partners, LLC, an investment banking firm based in Boston, Mass. The worldwide recession, low valuations and limited visibility have caused venture capital firms to be selective in their funding of medical device companies.

Deals that have gone forward in spite of the credit crunch and Wall Street meltdown have been more conservative than in the past, he told conference attendees. “Buyers have been very cautious,” Schmidt said.

Besides the conservative nature of recent mergers in the outsourcing sector, the deals also favor companies that provide either “one-stop shopping” services or specialized capabilities, Schmidt said. OEMs, he added, are attracted to suppliers or contract manufacturers that can provide an array of services because it allows them to focus on their core competency. Similarly, companies that provide a niche service to their partner or have good working relationships with suppliers are attractive to large OEMs because they help build credibility and open up markets that previously may have been inaccessible.

Schmidt said he does not expect the merger and acquisition market to remain sluggish for very long. Once economists and investment bankers get a better sense of the stability of the debt market and healthcare reform begins to take shape, merger activity will resume.

The Outsourcing Equation

The current condition of financial markets has made all areas of manufacturing challenging. The outsourcing process—domestically or internationally—presents its own set of obstacles and opportunities.

“These are interesting times we’re working in,” said Rod Wilson, director of U.S. procurement for Warsaw, Ind.-headquartered DePuy Orthopaedics.

Wilson said that outsourcing by orthopedic companies is a growing component of their success, but it’s a relationship that has to be crafted carefully—and current market forces make that kind of matchmaking much more of a challenge. Among the obstacles Wilson outlined were an evolving political climate, economic pressures, social changes, emerging markets and keeping costs down all while introducing new products. These, of course, are significant hurdles for any organization, but they become even more difficult to navigate when including an outsourcing partnership component.

With the changing political landscape, Wilson said it’s not a matter of “if and when but what” form the proposed healthcare reform will take and how it will impact companies. The recent economic downturn has forced all manufacturers to “run a bit more lean,” he said. And while social demographics (an aging population with greater orthopedic demands, for example) certainly are an incentive for the medical device industry, patient expectations also are increasing.

Correctly managing a successful outsourcing partnership—at least at DePuy, Wilson noted—requires more than a simple shift of responsibility.

To ensure that there indeed is value, medical device OEMs must have a checklist and be vigilant about managing the process. Wilson recommended a variety of “musts” that have worked for his organization.

The supply base has consolidated, and he predicts the shrinking number of suppliers to continue. Thus, it is important for companies to thoroughly vet their outsourcing partners not just for capabilities and quality, but also for financial viability to ensure continuity.

Evaluating Supply Chain Quality

Going beyond manufacturing as Wilson suggested means a broader view by OEMs of the entire process and the players involved. Orthopedic device manufacturers should evaluate the compliance programs they have in place for their supply chains to better prepare for the avalanche of new quality guidelines from worldwide regulatory agencies and greater scrutiny from the FDA, experts said.

“We have a new driver in the front seat. She’s got more budget, more resources, and she’s not kidding,” noted Nikki Willett, vice president of marketing and regulatory affairs for Pilgrim Software, a Tampa, Fla.-based software solutions provider. Willett addressed contract manufacturers and suppliers on the first day of the conference.

“What does Dr. [Margaret] Hamburg expect from you? In her own words, she expects ‘a commitment to compliance backed by a strong compliance program.’ If you haven’t looked at your supplier programs now, you’d better do it. The wiggle room you had before is no longer going to be there.”

It certainly won’t. According to Willett, the new FDA commissioner no longer intends to issue multiple warning letters to companies with quality control violations. She expects the offending company to take immediate steps to correct the problem even before a warning letter is issued. Post-inspection deadlines will be whittled down to 15 days (at the most), and companies also will be expected to develop a formal warning letter “close out” process, Willett said.

The number of warning letters is not expected to decline either. Last year, the FDA issued 98 warning letters to medical device firms for deficiencies in their quality systems and good manufacturing practices, data from Pilgrim Software showed. Eighty of those letters, or 82 percent, contained citations for production and process control subsystem deficiencies, the data indicated. The FDA expects to issue the same number of warning letters this year to device firms for supplier-related issues, Willett said.

Editor’s note: The 2010 Orthopedic Design & Technology Conference & Exhibition is scheduled for Sept. 21-23 at the Grand Wayne Center in Fort Wayne, Ind.