Sage ERP I White Paper

Profitable Innovation
Medical Device Business Model for Growth
Proftable Innovation
Medical Device Business Model for Growth
Prepared exclusively for Sage by Cambashi, Inc.
www.cambashi.com
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The information in this report is from a wide
variety of sources that represent the best
information available to Cambashi Inc. This
report includes our interpretation of information
in the public domain or released by responsible
officers in relevant organisations. Some
information is from sources we cannot verify.
We survey judgement samples, and results are
not statistically significant unless so stated.
Cambashi Inc. cannot guarantee that the
report is accurate or complete. Information
changes with time. The analysis, opinions, and
estimates in this report reflect our judgements
as of writing but are subject to change without
notice. Cambashi Inc. shall not be liable for
any loss or injury resulting from use of this
information. All trademarks are the property of
their respective owners. Cambashi Inc. may
have a consulting relationship with a company
being reported on. It is not an offer to sell or
a solicitation of an offer to buy any securities.
Cambashi Inc., its staff, their families, and
associates may or may not have a position in or
with respect to any securities mentioned herein.
Table of Contents
The R&D Business Model .................................................................................................... 3
The Double-Edged Sword of Product Innovation ............................................................. 4
Integrated and Collaborative Processes to Grow ............................................................. 5
Total Product Lifecycle Management ................................................................................. 6
Risk Management ................................................................................................................ 7
Growing Beyond R&D .......................................................................................................... 7
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The R&D Business Model
The medical device industry thrives on the innovations generated by its large base of privately
held start-ups and small companies with less than 50 employees. Eighty-five percent of new
medical product introductions come from these businesses, according to the Medical Device
Manufacturers Association (MDMA),
1
yet profitability seldom occurs until after a companys first
$100-150 million in revenues (see Figure 1).
NEW PRODUCT INTRODUCTIONS
by Company Size
85%
< 50 employees
15% > 50 employees
Profitability > $100M
High Growth Segments
Orthopedic devices
Cardiovascular devices
Therapeutic devices
Diagnostic testing devices
Mobility assistance devices
Electronic home monitoring devices
After passing this size, many companies struggle to attain and maintain profitable growth due
to product and operational complexities as well as regulatory, legal, and financial risks. This is
further hampered in companies operating with an R&D-driven business model, which, as they
grow from a start-up, tend to add on functions in a disjointed manner and without integrated
information systems. In the U.S. profitability will be further constrained by the 2.3% sales tax on
medical devices, which is scheduled to go into effect in 2013 as part of the recent U.S. Health
Care Reform legislation.
Most of the profitable medical products firms have grown by acquiring smaller innovative
companies, outsourcing much of their operations, and expanding into emerging international
markets. While the larger companies dominate in revenues, they represent less than 1% of
the industry, which is listed as 8,000 businesses by the U.S. Department of Commerce. Even
among this top tier not all have consistent profits. For example, Boston Scientific turned a profit
in 2010 after four years of losses.
Despite the long-standing partnership with seasoned venture capital investors, many device
companies fail to break free of their R&D-focused culture as they grow into full production,
multiproduct-line growth businesses. This can seriously impact their long-term performance.
To achieve profitable growth, they must review and, in some cases, restructure their business
and deploy the new processes and integrated systems across the entire companynot just
R&Dto accommodate growth complexities and manage risks.
The Double-Edged Sword of Product Innovation
Product innovation is seen as the lifeblood of a medical device company by executives,
investors, and the marketplace. This singular R&D focus has led to an impressive history of
technology breakthroughs that has changed the quality of patient care around the globe.
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According to the MDMA, during the 1990s the R&D investment across the industry more than
doubled as companies raced to be first in new material technologies and to provide solutions
for heart disease, cancer, diabetes, and stroke. The pace of innovationwhether for new
products or enhanced product capabilitieshas not slowed down, and product introduction
rates are expected to increase dramatically in the next few years, even during the current
economic uncertainty (see Figure 2).
The challenge is to keep up with the increasing pace of innovation and greater complexity of
products while ensuring quality, safety, and regulatory compliance across an outsourced and
global operations network. Few medical device companies do all their own manufacturing and
instead outsource all or most production and distribution to contractors. Currently the U.S.
produces and consumes more devices than any other region. Yet this is now changing as
more U.S.-based firms establish manufacturing facilities in China, India, and Latin America to
address the emerging economies and their investments in healthcare. This global expansion
adds further complexity and risk to bringing products to market.
New product introductions (NPI) and product line expansions can place considerable stress on
a medical device company. Operations management becomes increasingly challenging with
every new product and expansion of product lines. Each new product introduction requires the
attention and coordination from departments across the organization, and very often they dont
fit the assumptions made for existing products. Our research shows that while the average
device company has five product lines, a growing number of companies are juggling up to
70 product lines in their portfolios. Within these, most products have about five configurable
options to address specific requirements. In addition, it is not uncommon for medical devices
to be complex electromechanical products made from more than 50 parts and a bill of
materials that is three levels deep.
A 2009 joint research study by Axendia, Cambashi, and FDANews on Total Product Lifecycle
(TPLC) management in medical device companies found that most medical device companies
were experiencing more new product introductions, but with slower times-to-market and few
able to improve in product recalls, product costs, engineering changes, quality problems, and
compliance penalties. To prevent product portfolio growth adversely affecting their ability to
operate efficiently, mitigate risks, and achieve profitable returns, medical device companies
need to make improvements in new product introduction time, development costs, quality, and
time-to-market.
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Integrated and Collaborative Processes to Grow
Growth companies are those that consistently achieve both revenues and profits, and
they stand out from others in the industry for their integrated and collaborative operating
environments. Not only are they benefiting from coordinated and informed decision
making across their organizations, but they have moved away from spreadsheet and paper-
based manual systems that are costly, slow, inefficient, and prone to inaccuracies and
missed information.
The most profitable device makers have identified business processes that add the greatest
value to their customers and investors. These are very often product management, product
quality, customer service, and manufacturing flexibilityall of which are affected by various
departments across their organizations and outsourced networks.
To manage these critical aspects of the business, market leaders have deployed application
systems that integrate their operations, measure performance, and facilitate cross-functional
collaboration. According to the TPLC study, the most commonly used information systems
are ERP, document management, asset management, and quality management. Over half of
companies in the study either have these in production use or in pilot or test. Smaller medical
device companies are much less likely to have implemented software then larger ones, as
Figure 3 shows. None of these systems stand alone. They are integrated into one another,
using ERP as the information backbone.
There are two areas of the business where growth leaders have focused their efforts to ensure
continued profitability as they accelerate new product introductions on a global scale: total
product lifecycle management and risk management. Both of these initiatives rely on process
and data integration and teamwork collaboration.
Total Product Lifecycle Management
Back in 1977, the U.S. Food and Drug Administration (FDA) used a sequential or Waterfall
diagram to illustrate control of new product designs. While the FDA did not intend it as a
recommendation, it was acted on as if it were guidance. Now the FDA is trying to counteract
that issue and strongly urging device makers to shift to a cross-functional, concurrent, and
systematic Total Product Life Cycle (TPLC) process, which integrates quality and compliance
into design controls and across the product life cycle (Figure 4).
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The Waterfall and other sequential design processes are deemed:
Insufficient, as products have become much more complex. o
Too slow in getting products approved and in the market. o
Ineffective for improving quality and regulatory compliance. o
This sequential approach of completing one entire development phase before getting design
review feedback has been used for many years now. At the same time, departments across
the organization have established their own type of paper-based or computer systems for
designing, testing, reporting adverse events, clinical and design documentation, and quality.
This sequential and isolated environment fosters a reactive approach to problems with design
or adverse events and makes it challenging to identify or resolve the root cause of a problem or
attain proactive new product introduction feedback.
Total Product Life Cycle, on the other hand, better represents how products are developed
and introduced into the market, including the interactions required between departments
and partners at all stages of design, through clinical trials, into production, and beyond the
sale for service. TPLC is an iterative, concurrent, and highly interactive environment that
relies on sharing product and process information as events occur, with everyone involved at
each stage of the products development and beyond. As a result, any nonconformance to
quality specifications or regulations is rapidly detected, and data is readily available to perform
root cause analysis. As intended, TPLC facilitates both building quality in and a culture of
prevention, rather than testing quality out and continual nonconformance and corrective and
preventive actions (CAPAs).
Risk Management
Much like building quality assurance into R&D, market leaders recognize that risk analysis needs
to be conducted at every stage of the product lifecycle and across its business and network.
Financial, legal, and compliance risks in medical device companies most often stem from
poorly executed product development and design transfer processes, poor visibility between
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departments, sites, and partners, as well as incomplete risk and root cause analysis, ineffective
correction actions, inconsistent data, and manually processed compliance paperwork.
FDA and similar regulators dictate that device makers must have formal processes of good
governance to identify and quantify potential risks, the scale of their impact, and their likelihood.
However, profitable growth companies have also integrated their operations with a common
information platform to establish a single system of record and to facilitate teamwork and data
exchange. That way, everyone has a full picture of potential risks at any point along the product
lifecycle or in operations. This enables a company to apply risk analysis at the earliest stages of
new product conceptualization to minimize financial and patient safety risks or in any business
activity. Equally important, more of these device leaders are connecting their risk analysis to
the CAPA process and to performance measures in order to determine the effectiveness of
process improvements and root cause analysis.
Growing Beyond R&D
Medical device businesses are finding themselves at a crossroads as they face greater risks
associated with more complex products, engineering changes, and multinational expansion.
Companies cannot afford to maintain a culture focused on R&D. Those that find it difficult
to recognize the cost of operating with manual systems and groups of people isolated from
others across the business are at a strategic disadvantage.
It is getting more obvious both to the FDA and to those working in device companies that the
current business model is unsustainable. It limits innovation to product R&D, which ironically
slows down new product introduction cycles and generates not only CAPAs, but audit
citations, adverse events, and recalls. The answer, which has worked well for profitable growth
companies, is the adoption of more formal cross-functional business processes combined with
companywide information systems that more fully support TPLC.
Medical device companies have the opportunity to grow and thrive with shifting worldwide
demographics. However, to do so, innovation must focus on how to ensure not only
breakthrough products, but sound business processes that can reliable generate profit.
1 Medical Technology and Venture Capital: A Fruitful yet Fragile Ecosystem, June 2009
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About Sage North America
Sage North America is part of The Sage Group plc, a leading global supplier of business
management software and services. At Sage, we live and breathe business every day. We
are passionate about helping our customers achieve their ambitions. Our range of business
software and services is continually evolving as we innovate to answer our customers needs.
Our solutions support accounting, operations, customer relationship management, human
resources, time tracking, merchant services, and the specialized needs of the construction,
distribution, healthcare, manufacturing, nonprofit, and real estate industries. Sage North
America employs 4,000 people and supports nearly 3.1 million small and medium-size
business customers. The Sage Group plc, formed in 1981, was floated on the London Stock
Exchange in 1989 and now employs 13,100 people and supports 6.2 million customers
worldwide. For more information, please visit the website at www.SageNorthAmerica.com
or call 866-308-2378.
About Cambashi
Cambashi, based in Cambridge UK and Cummaquid, MA, USA, provides independent
research and analysis of the business reasons to use of IT in industry worldwide. Its
specialist fields include Engineering, Enterprise, Plant, and Supply Chain applications and
the infrastructure to enable industrial firms to use IT effectively. Cambashi publishes market
size estimates in the Engineering Applications Market Observatory and multiclient studies in
Cambashis Industry Directions. Its clients vary in size from small to large and include most of
the leading software vendors and many pioneering IT users. Cambashi is a member of CATN,
an international association of consultants. www.cambashi.com.
2010 Sage Software, Inc. All rights reserved. Sage, the Sage logos, and the Sage product and service names mentioned herein are registered
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