Generic Devices

It’s time to scale! State of the Industry:

The medical device industry is estimated to be a whopping $120.4 billion dollar industry in the United States alone. Currently, many manufacturers have their products manufactured by an OEM-manufacturer in a foreign country and then import the product under their own brand, inspect to the relevant quality standards upon receipt and manage the logistics. Some brands will also import components and either package the product in the brands’ own packaging or integrate the components with additional components to finish the device.

Double margin

Everyone in the medical device manufacturing eco-system is facing cost pressures, so outsourcing all or certain elements of the manufacturing process makes sense. If a manufacturer can increase their margin with a qualified quality supplier outside of the United State, why wouldn’t they? On the other hand, when manufacturers are outsourcing their manufacturing, a double margin occurs. The manufacturer makes a margin when they sell to a healthcare provider like a hospital and the manufacturer that does the actual manufacturing also makes a margin on top of their manufacturing cost when they sell it to their customer, the ‘manufacturer’ in the US.

Problem

Take a look at recent articles in Time Magazine’s, A Bitter Pill and Bloomberg’s Uninsured Americans Get Hit With Biggest Hospital Bills, discussing the escalating costs in healthcare. In the Bloomberg article:

Rich Umbdenstock, president of the American Hospital Association, ‘doesn’t defend the pricing structure. He said it’s part of a “broken system” that has evolved over decades and that hospitals can’t change on their own. There is the problem. It is not sustainable’.

And, the only way to correct the problem is with complete transparency into the system from the raw material of the products that are being manufactured into medical devices through the patient discharge (and readmission-now being tracked). The system is essentially bankrupt and non-sustainable. And everyone knows this, yet, who is going to step up and begin to deconstructing the costs so that we can see into the actual costs associated with care?

Solution?

Putting aside the inefficiencies at the supply chain and hospital levels for this post, let’s look at the medical devices themselves. Public information gives us a window to the medical device manufacturers and their regulatory approvals and they can relatively easily be viewed at the FDA’s site, www.fda.gov. Careful review of the public information available from the Securities Exchange Commission provides a view of the financial margins that medical device manufactures can earn on their medical devices. Gross margins, net margins, operating expenses and executive salaries are generally available. While we don’t see item level gross margins, we can get an indication of the profitability of the manufactures by sector and begin to understand the margin structure of medical device manufacturers. What happens in the cost of goods sold line of a manufacturer is sometimes opaque as manufacturers might not have the accounting systems in place to properly capture raw material utilization, scrap, labor and overhead and manufacturing variance. Yet we can get a good idea of the margins that a manufacturer may realize for their products and business by reviewing the publicly available data at www.sec.gov/edgar.shtml

Generic Medical Devices

A manufacturer’s supply chain and the way that is manages may be their competitive advantage. The systems in place to manage vendors, quality, and finance can make or break the long term viability of a manufacturer. The leverage that a manufacturer can have with a supplier for negotiating price is often related to the size of the manufacturer and may be the sole competitive advantage when competing in the market place.

It may just happen – at scale:

Generic pharmaceuticals have laid the groundwork in the drug industry and you can also see it when you purchase products at Walgreens and CVS where the generic brands of over the counter products are priced significantly lower than brand name products. And now, it appears that it will happen at scale in the medical device industry. Articles and white papers highlighting generic medical devices include the following have been written:

  • White Paper – Generic Medical Devices Are Closer Than They Appear, www.fuld.com
  • The Future of Devices is Generic, September 23, 2011, www.mddionline.com/article/future-devices-generic
  • Economic Reality, December 3, 2010, MEDCITY News
  • Move by Cardinal Health May Signal Growth of Generic Medical Device Market, July 30, 2012, mddionline.com/blog/devicetalk/move-cardinal-health-may-signal-growth-generic-medical-device-market
  • Medical Devices – Going the Generic Way, January 3, 2012, www.go-metrix.com/content/news/27-medical-devices-going-the-generic-way

These articles highlight the market potential and the few examples of companies working in this space.

The Generic Pharmaceutical Association estimated in their 2012 Generic Drug Savings in the US that 192.8 billion was saved in calendar year 2011 from the use of generic drugs.  And in a report prepared by the US Government Accountability Office on January on January 31, 2012 that cited a Congressional Budget Office report from 2010, the average retail price of a generic drug is 75 percent lower than the retail price of a brand-name drug. That same GAO report indicated that total spending on prescription drugs in retail settings in 2010 was 84 billion dollars.

Will this happen at scale in the medical device market?  Time will tell.