Medical device OEMs target cost savings
The convergence of growing cost pressures, weak global economies and a new excise tax are spurring efforts at medical device manufacturers to find ways to reduce costs ranging from layoffs and offshoring to improved designs and manufacturing processes. Officials of the Advanced Medical Technology Association–the sponsors of Advamed–are hopeful the excise tax will be repealed. But cost-cutting and improved management practices are sure to be implemented even if it is.
AdvaMed Board Chairman David Dvorak, president and CEO of Zimmer Holdings, said pricing for major orthopedics, such as knee and hip implants has turned “negative” due to cost pressures from hospitals and insurers. Major hospitals, such as Brigham & Womens in Boston, have formed teams to explore ways to reduce costs. One solution has been a new focus on standards from a small number of suppliers so that volume discounts can be applied. Hospitals are under pressure to meet new cost guidelines from insurers, who may, for example, only pay $25,000 for a total knee replacement.
Executives interviewed at Advamed also noted that demand from some medical treatment areas is actually declining in the United States. One example is cardiac rhythm management (CRM), where treatment methods are being reconsidered. When combined with continuing high unemployment in the United States, and weak European economies, there is very much a dramatically changed economic environment for medical device producers who had been used to years of rapid pricing growth.
“We have developed a variety of plans,” Dvorak said at a press conference that opened Advamed 2012. Steps that Zimmer (Warwick, IN) is exploring or actively implementing in an effort to maintain margins include use of strategic and shared sourcing, outsourcing to low-cost countries, and reduction in research and development.
Zimmer is targeting $400 million in operational savings by 2016. The company is number one in the $7.2 billion global knee implant market with a 26% market share and is number two in the $6.3 billion hip implant business with a 21% market share. Second quarter sales were slightly below the year-earlier period.
Strategic sourcing was widely implemented by other American manufacturers 12 to 15 years ago with outstanding results. Those efforts were also often combined with stepped-up efforts to manufacture in China. But many large manufacturers now say their growth in China will be tied to growing demand in China and not to offshoring of U.S. manufacturing jobs.
Higher costs in China and manufacturing problems have slowed the migration of manufacturing jobs to China. That feeling was reinforced by other speakers at Advamed. Cohera Medical was founded in Pittsburgh in 2006 to commercialize urethane-based surgical adhesives developed at the University of Pittsburgh.
“From the very beginning, we planned to be a virtual manufacturer,” said Patrick Daly, president and CEO of Cohera. “We thought we would achieve savings by going to China. But the stuff we got back, I wouldn’t touch with a 10-foot pole…Now I draw a circle around Pittsburgh and only deal with companies I can get to by driving or a short plane trip.”
OptiNose, which is developing breath-powered nasal delivery technology, also felt it would save by manufacturing in developing countries, but found that partnering trumps raw costs, said Ramy Mahmoud, chief operating officer.