Orthopedics’ Changing RD Dynamics

Nothing has generated more debate, chatter and worry in the medtech world lately than the medical device excise tax, which took effect at the beginning of the year. The 2.3 percent tax levied against medical devices has been the target of multiple efforts for repeal; a source of confusion for OEMs and contract manufacturing organizations (What counts as a device? Who pays the tax—the outsourcer or OEM?); and cost-cutting efforts including layoffs, two prominent examples being Warsaw, Ind.-based Zimmer Holdings Inc. and Kalamazoo, Mich.-based Stryker Corporation that laid off upward of 1,300 employees, which the companies claimed was in preparation for the tax. Naturally, more expenditure usually means more belt-tightening, and there is a slow-rolling growl that suggests research and development (R&D) could be under the chopping block next.

“I would definitely note a decline to some degree of new project R&D—it definitely seems to have cooled off,” said Patrick Pickerell, president of Pleasanton, Calif.-based Peridot Corporation, a full-service contract manufacturer. “It’s obvious to me that my customers are in a period of uncertainty and have decided to guard their little mounds of cash as opposed to sticking their necks out—which causes me to guard my little mounds of cash and not spend money as well, and the whole darn thing snowballs.”

Indeed, suppliers who can provide the widest variety of services will do best in an economy that’s forcing OEMs to cut costs, said Dorrie Myhre, sales and marketing specialist at Polymer Technologies Inc. (PTI), a Clifton, N.J.-based injection molding company. This, as well as leaning out the supply chain, streamlining logistics and the ability to meet price reduction requirements, has been what OEMs are seeking lately, she said.

Neal Goldenberg, president of PTI, predicted that if R&D is cut, “[OEMs] will postpone or cancel R&D projects until funds become available. There will also be more challenge in convincing companies to move to newer processes and technologies, where transfer costs are involved and risk is higher.”

For other contract manufacturing organizations, (CMOs), things are a little more unclear when it comes to OEMs outsourcing R&D. After all, there’s no real way of knowing where the nips and tucks are located from the outside (unless they are obvious, such as layoffs). “It’s hard for us to say ‘people are calling us or not calling us’ [for R&D services] because of the tax,” said Larry Acquarulo, CEO of Foster Corporation, a Putnam, Conn.-based polymer manufacturing company. “We’re a service provider of materials to companies and we continue to get R&D requests. Could we get more or less if the tax wasn’t in place? It’s hard to say. We’re a step removed in terms of that.”

It’s fair to say, then, that the answer to whether OEMs have been and will be cutting R&D costs is that “it depends.” The decision to slash R&D will hinge on what kind of services a CMO provides, what materials it works with, what manufacturing capabilities it has, etc. While there do seem to be signals suggesting medical device R&D could be the next sacrifice on the altar of the cost-control gods, measures such as the aforementioned layoffs could offset that affect. Hospitals recently have reported that some medical device manufacturers have been shifting the cost of the tax onto them. The Healthcare Supply Chain Association recently launched a website listing all companies it claims have done so in an attempt to blow the whistle on what it deems a less than savory practice.

Investing in R&D for new product development is financially risky, and in times of austerity, risk is less attractive. Since the tax, companies are more “risk averse,” noted Myhre. “While there is a trend to seek and leverage innovative technologies, they may not be willing to take the unknown risk or assume the transfer costs of transitioning to the innovative technologies becoming available,” she said. Which of course, doesn’t mean that innovation is not occurring. Building on existing technologies can yield new and exciting results as well, and that is precisely what orthopedic device companies do.

R&D only will suffer, said some industry experts, if companies identify it as a line item—and therefore is expendable when costs need to be cut—rather than an investment.

“[The tax] definitely did have an impact on our bottom line and we did have to find savings,” said Steve Ingel, president of the Global Bracing and Supports division of Vista, Calif.-based DJO Global. “But while we’ve looked at other ancillary areas to cut, R&D specifically is not one of them because we believe that R&D and innovation is critical to our success in the future.”

The medical device industry as a whole has remained healthy since the economic downturn of 2008, and orthopedics remains a high-growth area for devices. According to PricewaterhouseCoopers LLP’s MoneyTree Report, which tracks venture capital investment activity in the United States, while medical device investment dollars took a slight dip in the first quarter of 2009, the levels have remained constant since then. And though investment dollars are not at blockbuster levels post-2008, the number of deals cut per invested dollar is rising.

Push and Pull Factors Affecting R&D
While some OEMs may be willing to slow internal R&D efforts, their internal belt-tightening could mean they turn to trusted contract manufacturers for increased product development support.

With regard to Foster’s positive outlook on the R&D business it’s receiving, it’s worth noting that Foster specializes in advanced polymer technology such as bioresorbable plastics, which are hot in orthopedics now. Millennium Research Group, a medtech market research group based in Toronto, Canada, predicted in January that there will be a resurgence in the bone graft substitute segment that will help the U.S. orthopedic biomaterial market grow strongly, reaching nearly $3.7 billion by 2017. Bioresorbables, as the name suggests, degrade in the body after implantation so that after its use is over, it eliminates itself. This removes the need for a second surgery to remove a device that has served its purpose. Bioresorbables also can provide a controlled release into the bloodstream via slow degradation. In addition to bioresorbables, polymers that are simply deemed safe enough for implantation are in high demand, because there aren’t many. Polyetheretherketone polymer, commonly called PEEK, currently has a large stake in the orthopedic device market, as it is one of the few polymers that is robust, relatively inert, and radiolucent, among other characteristics. The relative steadiness of R&D business Foster is still seeing partly is due to the company’s foothold in the polymer market.

To give some perspective on the growth of R&D in bioresorbables and PEEK polymers in the past several years, Foster aggregated information from U.S. Food and Drug Administration (FDA) databases of implantable device names. In 2001, there was only one FDA-cleared device with PEEK featured in its registered name. In 2011, there were 17. Just in the first quarter of 2012, there already were six. Another example are patents issued by the U.S. Patent and Trademark office. There were 48 patents that referenced “bioresorbable” and “medical” in their description in 2005; in 2011, there were 311. And again, for the first quarter of 2012 (which is when Foster’s report was released), there were already 229 such patents.

“So there’s an awful lot of activity in polymers that are used for implants,” Acquarulo noted. “And those are two big name polymers or classes—the polyketones like PEEK and the bioresorbables. We’re only talking about a 10-year span where these numbers have really jumped up significantly.”

It’s certainly a boon to OEMs to have access to CMOs with expertise in developing specialty polymer devices. However, there are certain challenges that CMOs face in R&D for such plastics. One is that there are a limited number of raw material suppliers willing to supply specialty polymers to the orthopedic device market, because of a history of litigation associated with the industry, and because of the perception of a lack of value.

“[Orthopedic devices] is a very important and valuable market, but it’s not a huge driver in terms of pounds relative to other raw material markets,” Acquarulo explained. “So some of these companies—because of the history, because of the perceived risk, and because of the lower volume—tend to be a little bit more hesitant. It’s gotten better from the 1990s, for sure, when a lot of companies jumped out because of a number of litigation issues, but the portfolio of raw materials you can work with is still finite.”

Pound for pound, the amount of raw materials required for orthopedic implants is on the rise, however. Across the board, the need for newer and better joint implants such as hips is more urgent as large-impact markets such as the United States and China experience rapidly aging populations.

“Baby boomers and the high population of aging adults requiring surgical and orthopedic devices has driven the demand up,” said Don Olson, director of contracts for PTI. As metal-on-metal implants face extremely bad public relations problems, the demand for more implants for an aging population falls on the polymer/plastics side of the fence, which provides ample opportunity for companies that have polymer handling and development capabilities.

Metal-on-metal hip implants have been under fire for wear causing metal deposits in patients’ bloodstreams. One of the most prominent examples has been DePuy Orthopaedics Inc.’s (a Johnson & Johnson company) ASR XL Acetabular hips and Adept hips, which were recalled in 2010 and January 2013, respectively.

“In the orthopedic world, quantification and understanding of how parts wear is more important every year,” said Erik Novak, director of technology development of the Nano Services division of Bruker Corporation, based in Billerica, Mass. “This has driven us to provide more comprehensive and automated metrology solutions so that even small changes in parts can be rapidly and accurately determined. Concurrently, we are pushed to provide results faster and have spent a lot of effort to increase throughput while maintaining the highest quality surface and defect inspection capability.”

Metals used in orthopedic implants, such as titanium, also tend to be more expensive than polymers and plastics. As the push for lower costs continues, this is an important consideration when selecting which raw material to build a technology on. Besides PEEK, materials such as polymethyl-methacrylate, polylactic acid and polyethylene are “in line with market trends for cost efficiency versus titanium or highly expensive implantable alloys,” according to PTI’s Goldenberg. (See more on orthopedic material selection in this month’s feature article “Material Machinations.”)

The ubiquitous baby boomers not only have driven up the demand for more and better implants, they also are spurring innovation in other orthopedic areas.

“If you think about the total joint space in the United States—never mind the rest of the world—we have this whole set of baby boomers hitting the healthcare system and there’s probably not enough money out there in the system to put a total joint in every patient over the next 15-20 years,” said DJO’s Ingel.
“We’re the ninth largest orthopedic company in the world, but the eight in front of us deal primarily internal to the body, and we deal primarily external to the body. We believe that we are uniquely positioned to bring value to patients, payors, and providers along the continuum of care. The combination of our products enables patients to continue to lead active lives through both non-surgical as well as surgical means.”

Also on the rise is the demand for increasingly smaller devices, which creates a race for CMOs to remain capable of developing miniaturized devices while dealing with manufacturing technology that may not be able to keep up. The continued miniaturization of devices to suit the minimally invasive aspect of surgery is forcing part sizes down, explained Pickerell.

“In many cases, we’re still using somewhat conventional machining techniques and trying to adapt them to these ultra miniaturized part; that’s very, very challenging,” he said. “It in turn forces us to continue to invest in manufacturing technologies that are more suited for this miniaturization. That’s really driving where my business goes, the miniaturization to suit [minimally invasive surgery].”

One of the easiest ways to create miniature components and devices is to start from nothing and work your way up. Additive manufacturing (AM) has become vital in developing prototypes. Also known as 3-D printing, the process works by creating a component by layering rawmaterials down until the desired three-dimensional object is formed. AM potentially can save companies a lot of waste, unlike subtractive manufacturing, which only uses the amount of material strictly needed to make the component. As much as 95 percent of raw material can be lost when carving down a component in subtractive manufacturing. Because AM usually works with computer aided design (CAD), extremely complex, small parts can be machined without the tooling costs that accompany subtractive manufacturing. In Pickerell’s words, companies that don’t “jump on the 3-D bandwagon will be left in the dust” of the manufacturing floor—quite literally. “Our company made its fortune as a subtractive machining company, a chips on the floor kind of shop,” said Pickerell, referring to traditional manufacturing methods of making components by subtracting layers, carving them down. Now, Peridot is adapting.

“Alternative laser technologies are very hot. We always ran YAG [yttrium aluminum garnet] lasers and CO2 lasers, and now the cry seems to be for excimer, green and UV [ultraviolet] lasers and things like that,” said Pickerell. “There’s a lot of push from my company to expand into all of these alternative laser processes, which are better suited for non-metallic materials that a lot of these catheter-based devices are made of—so I’ve got a wide-open market right now for these new exotic laser processes, and that’s where I’m seeing a lot of the innovation from machine tool manufacturers.”

An excimer laser (sometimes called an exciplex laser) is a form of UV laser used in the production of microelectronic devices and micromachining. The UV light from excimer lasers is well absorbed by biological matter and organic compounds. Rather than burning or cutting materials, the laser adds enough energy to disrupt the molecular bonds of the surface tissue, which effectively disintegrates into the air in a tightly controlled manner via ablation rather than burning. This process makes them especially suited to removing extremely fine layers of surface material with almost no heating or change to the remainder of the material, which is left intact. So, excimer lasers are desirable for shaping precision micromachining organic materials including some polymers and plastics.

According to Bruker’s Novak, OEMs also are looking for more automation. Automation not only helps efficiency, it also aids in maintaining standards for regulatory agencies.

“We see those involved in the medical device industry looking for more general, more automated solutions for quality control and verification of their new products,” said Novak. “This is driven by the high cost of failure of parts as well as their desire to get newer, more effective products into the market and gain share. While our products are already highly automated, there is an increasing push to fully customize automation and analysis capabilities for optimal, hands-free metrology for research feedback as well as production control.”

Indeed, efficiency—and by effect, speed—is key. Even for an OEM that has R&D in house, sometimes outsourcing R&D may be the better option for a particular project.

“As a company, we don’t have a ‘it has to be made here’ philosophy,” explained Ingel of DJO, which does conduct most of its R&D internally. “If there’s something we need for a particular project, rather than think we can get there on our own, we leverage the expertise of more focused factories outside of DJO. It can be for any number of things from materials to design to tooling. It could be a composite that we don’t have an expertise in. Sometimes there are outside design firms that have us think about it differently—perhaps to create a more consumer look and feel that maybe we’re not thinking about. When we assess a project both from a speed-to-market aspect as well as core competency, it may improve our economics by using an outside resource.”

Anticipating the International Boom
While the rise in minimally invasive surgical techniques certainly is a major driver behind the miniaturization of orthopedic components and devices, the other side of the coin is the ever-expanding international market. While DJO does not offshore its R&D, it and OEMs like it cannot afford to turn a dead ear to the demands of the international market, which seem to be leaning towards smaller implants.

“What we tend to do is to coalesce our development efforts out of the United States and outside of where we do our R&D work here,” said Ingel. “However, we gain the inputs from our clinical champions in the other countries as well as our teams in other countries because we want to be mindful that there are different body styles and different markets that reimburse differently on certain products. So we take a very global lens to the development to make sure we don’t just create a product that’s only going to adapt to patients who are in the system in the United States, but is mindful of how healthcare is delivered for patient styles around the world. So we do most of the R&D work [in the United States], but definitely with influence from our partners abroad—our own company, as well as engaging positions from different markets around the world.”

Medtronic Inc. and Stryker Corporation made headlines last year when they ventured into the Chinese orthopedics market. St. Paul, Minn.-based Medtronic acquired China Kanghui Holdings, which makes trauma, spine, and surgical instrumentation; Kalamazoo, Mich.-based Stryker bought orthopedics firm Trauson Holdings Company Ltd. Leerink Swann analyst Danielle Antalffy told Orthopedic Design & Technology that Medtronic’s purchase in China “opens up the possibility for Medtronic to enter the orthopedics market in the United States” in the value segment, demonstrating how interconnected the “global” market really is.

Despite the fact that the BRIC (Brazil, Russia, India and China) markets have been growing over the past few years, device companies are still figuring out how to effectively develop products for those spaces.

“Many international standards for quality differ,” explained Novak. “While Europe and the United States are closely aligned, in Asia we have found that quality requirements are not yet at the same level. What is important to a given company’s U.S. or European operations may not be an issue in their Asian facility. Thus, we have to learn the challenges with each site and structure solutions accordingly.”

“BRIC countries are certainly developing rapidly,” agreed Ingel. “We have expanded into China, and we just expanded into India. We’re quite honestly still figuring out what that means. Sometimes the products need to be tweaked a little different, taking into consideration the way products are provided and paid for in those healthcare systems—whether the onus is on the patient or it’s provided through the healthcare systems. A lot of those things have influence, so I think the primary thing is while we’re in those markets we’re still learning what those markets mean. There’s certainly a lot of opportunity for growth there as economics improve and as those populations seek better healthcare.”