Innovations should take the pressure off margins while benefiting patients
In 2017, medical manufacturers will continue to take steps to offset shrinking margins; use more additive manufacturing and invest in developing 3D technology for higher volume use; and make more devices and equipment that connect to the Internet of Things, driven by demands related to the health of the aging, baby-boomer population, said some who monitor the industry.
Those are the dominant themes from observers at business intelligence firm IBISWorld, consulting company PricewaterhouseCoopers and SME, but other expectations focus on geographic concentrations of medical manufacturers in the United States and increased competition from Mexico.
Also, one observer said the industry will look to Washington to see if lawmakers react to pressure and repeal the medical device excise tax. The 2.3% tax was enacted to help pay for the Patient Protection and Affordable Care Act, and took effect in 2013. But after protests from manufacturers and industry groups, it was placed under a two-year moratorium that expires Dec. 31, 2017.
“I’m seeing that coming through the associations,” said Lauralyn McDaniel, medical industry manager at SME (Dearborn, MI), of the demand for repeal.
McDaniel was referring to the Advanced Medical Technology Association and the Medical Device Manufacturers Association, which advocate repealing the tax. They say the tax hampers innovation and costs growth and jobs. Both AdvaMed and the MDMA are among about 1000 signatories on a 2015 letter that urges Congress to repeal the tax. Congress has taken steps to repeal the levy, but has been unsuccessful so far.
Squeezed at the Margins
While advocates for device tax repeal exert pressure on lawmakers, medical manufacturers beset by deteriorating margins will continue their efforts to offset shrinking profits in 2017, said Kevin Lewis, leader of PwC’s medical device manufacturing practice (Boston).
“From a high-level perspective, we’ve seen deteriorating margins … leading to overall cost reductions,” Lewis said. “At the factory level, we see an emphasis on lean, where that’s appropriate, and in automation.”
Also driving operations improvements with a view toward the bottom line are investments by private equity groups, Lewis said.
As a result, manufacturers are outsourcing for devices and equipment; focusing on zero-defect production with some attention to supplier quality and holding suppliers responsible for that quality; reducing the complexity of their products and offerings so they’re more on-target with the majority of their customers; and tweaking the manufacturing network structure to favor production in low-cost countries such as Costa Rica, Puerto Rico, Malaysia, China, Ireland and Singapore.
Where companies are outsourcing, they’re doing so for injection-molded parts and bigger electromechanical products like imaging and diagnostics equipment.
Despite outsourcing for hard goods, Lewis said in consumables he’s seeing insourcing and in-shoring.
While companies are in cost-cutting mode, they’re paying a lot of attention to quality to eliminate the cost of defects, Lewis said.
“We’re seeing a lot of activity around building products right the first time,” he said. “And that’s a big emphasis we see emerging both in the focus of the FDA and the focus of manufacturers.” FDA refers to the US Food and Drug Administration.
Jack Curran, industry research analyst at IBISWorld (New York), said that as manufacturers try to maintain their profit margins in the United States, expect to see lower employment and less innovation in factories.
“They’re still likely to benefit in terms of revenue because of the aging population,” Curran said. “In general, people spend money in their later years on medical care and devices, plus we have a growing insured population.”
Adding More Additive
McDaniel said 2017 will be the year a lot more medical device manufacturers will use additive manufacturing, even for mass-produced devices.
“All the major orthopedic device manufacturers are looking into it or are already into it,” said McDaniel.
Lewis agreed with McDaniel that manufacturers will increase their use of AM, but more for patient-specific devices and outliers than mass-produced parts.
“It’s got a place, but right now because of how long it takes to manufacture additively manufactured technologies, that place is in custom applications,” he said.
In addition to patient-specific skull patches and cutting guides for knee surgeries, Lewis said, look for 3D-printed outliers. For example, stents come in a wide range of sizes, with the greatest majority in the middle of the size spectrum. Manufacturers may start to make those stents that are very small or large with AM, he said.
That’s not to say manufacturers think there’s no future for AM in mass production, Lewis said.
“We’re going to see a lot of investment [in the technology] with the goal of bringing 3D printing to high-volume work,” he said.
McDaniel said she also expects to see growth in biological 3D printing.
“I’m thinking, based on what I’m seeing, that 2017 is going to be the year that the bioengineered stuff really is going to get more attention,” she said. “There’ve been some developments recently.”
Those developments, McDaniel said, are both at Northwestern University (Evanston, IL), and include bioprinted ovaries that restored fertility in mice and synthetic bone that rapidly induced bone regeneration and growth.
“The porous structure that promotes in-bone growth is a huge advantage of AM,” McDaniel said.
Also playing into the increased use of AM in factories is FDA guidelines on the technology, a draft version of which was released earlier this year.
“To me, that seems almost like a benefit to the industry,” Curran said of the FDA’s guidance. “It’ll be faster for companies to have 3D-printed devices approved, and that will spur innovation. I think that’s going to grow AM.”
Connected to the IoT
If there’s one issue that industry observers can all agree on, it’s that more devices will be part of the Internet of Things.
“I think we’re going to see a lot more innovation with that in the next few years,” said Curran. “It’s an innovation that patients will interact with personally [which will grow demand].”
Demand from the public is rooted in psychology and consumerism, in Curran’s view. Consumers feel more in control of their health through the use of connected devices, and view unconnected machines as outdated, he said.
There’s also demand created by aging baby boomers with the need to diagnose, treat and monitor their chronic heart and kidney and diabetes.
Lewis said: “That part of the marketplace [IoT devices] is going to grow a lot faster than things like AM.”
He expects growth particularly in devices that monitor vital signs and other sensing and monitoring functions like diabetes management; total patient management and adherence; and data collection and analytics for use in population health.
Growth in the Midwest?
McDaniel said she expects to see more growth in medical manufacturing jobs in the Minneapolis-Chicago corridor, particularly in Minneapolis, where the number of employees grew even during the Great Recession. In Minneapolis, there were 13,859 people employed in medical manufacturing in 2008, while in 2014 the number was 21,518, a 55% increase, according to government figures.
“Especially low-volume, high-value devices [are made there],” McDaniel said, including pacemakers, insulin pumps and glucose monitors. “From companies like Boston Scientific and Medtronic.”
McDaniel said this growth in the number of manufacturing employees in the Midwest is occurring along with stability or shrinkage on the East Coast, Boston in particular.
Curran agreed, and cited the Minneapolis-based Mayo Clinic as a catalyst for device manufacturers who want to be close to health care providers who can test their products and, along with consumers, buy them.
PwC’s Lewis thinks the Minneapolis-Chicago corridor is holding its own, while California and the East Coast are not. But there’s something else at play, he said.
“When you talk about equipment, we see more movement outside the US instead of selected places in the US,” he said, citing increased production in countries like Mexico, Ireland, Singapore, Malaysia and China.
Competition from South of the Border
Curran said he expects to see increased competition for American medical manufacturers from Mexico.
“The Mexican medical device industry is expected to grow significantly in the next five years,” he said. “In Mexico, there’s been higher incidences of health concerns, a lot of diseases are increasing there, and the population is aging. So they’re actually growing their medical device industry.”
Curran said to look not only for increased competition from south of the border, but to expect continued competition from China, Germany and Japan, the current biggest medical products exporters to the United States.
Despite the competition and the challenges faced by medical manufacturers in the United States, the country is still the No. 1 device manufacturer, McDaniel said.