It's New. It's Improved.Who Needs It?Tim Smart
Robert J. Gallagher remembers two years ago, when investors were constantly calling his company, Acuson Corp., a maker of ultrasound equipment in Mountain View, Calif. Gallagher, the chief financial officer, would field questions from those seeking big returns from fast-growing technology firms. Then, "they just stopped calling," he says. "My phone volume is down by a factor of 10."
The specter of an overhaul of the nation's health-care system is weighing heavily on the $42 billion medical technology industry. At Acuson, sales last year tumbled 14%, to $295 million, as hospitals cut back purchases. Profits plunged 90%. U.S. Surgical Corp. is mothballing plants, freezing wages, and laying off workers after a $139 million loss in 1993. And even giants are not immune: General Electric Co.'s $3.6 billion medical equipment arm faces a 10% slump in U.S. business this year, analysts say, as health-care providers slow purchases of high-priced gear such as magnetic resonance imaging (MRI) machines. "The uncertainty around [health reform] is hurting the entire industry," says Frank M. Fischer, CEO of Ventritex Inc., a $25 million maker of implantable defibrillators that calm irregularly beating hearts.
FAT MARGINS. It isn't just Bill and Hillary who are giving the industry angina, however. Even before Washington attempts reform, the industry is being transformed by a profound shift in the marketplace. For decades, equipment sales were driven almost entirely by technological advances, as neither suppliers nor buyers worried about costs: Individual doctors and hospitals blithely passed those on. "We were always rewarded for introducing whiz-bang technology at a rapid pace," says Cynthia Danaher, imaging systems manager at Hewlett-Packard Co. Moreover, the Food & Drug Administration seemed willing to approve new technologies rapidly.
That model has collapsed with surprising speed. Increasingly, the primary buyers of medical equipment are cost-conscious groups that buy gear or dictate decisions for hundreds of doctors and dozens of hospitals. On the front lines are people like Mary Ann Richardson. As director of materials management for HAPSCO Purchasing Services Cooperative in Blue Bell, Pa., she tries to ratchet down prices. Recently, she requested bids on pacemakers on behalf of 23 hospitals. "When you're paying $6,000 for a pacemaker and you're looking at saving 30%, that's significant," she says. When operating-room-materials manager Jan Graham joined Pottstown (Pa.) Memorial Medical Center in 1990, the intra-ocular replacement lenses used in cataract surgery sold for $400 each. "Now, we're down to about $100," she says.
The new power of corporate purchasers is also altering the way everything from MRI machines to pacemakers are made. As it designs new ultrasound equipment, Hewlett-Packard's imaging division in Andover, Mass., now routinely consults with insurers and corporate health-care buyers on what they're willing to pay for improvements. "We're asking, 'What is this worth to you?'" Danaher says. "We now view the payers as our customers, too."
That shift has led some major players to rethink business plans. GE has been a minor competitor in the ultrasound market, which is dominated by companies such as Acuson. Instead, GE emphasized higher-ticket computerized tomography (CT) and MRI, in which it was the leader. But as hospitals have cut back purchases of these $1 million machines, GE is devoting more resources to lower-cost lines. It has spent $100 million developing a $200,000 digital ultrasound machine that can be upgraded for future advances in 3-D imaging. Manufacturers also are courting new markets. GE expects its sales in Asia to jump 45% this year, to $1 billion, as those economies build a medical infrastructure. Overall, America's trade surplus in medical products will surge 28%, to $6 billion, by 1995, predicts Salomon Brothers Inc. analyst Margo L. Vignola.
ON FURLOUGH. Companies that fail to adapt do so at their peril. Take U.S. Surgical. The $1 billion Norwalk (Conn.) company, which makes small instruments used in minimally invasive surgery, saw its sales tumble 25% in the second quarter of 1993 and 32% in the third quarter. Long dependent on surgeons to approve the purchase of its products, Surgical was blindsided when the buying decision shifted to administrators and consultants, who began demanding comparisons with products from Johnson & Johnson. That slowed purchases--and sent Surgical's inventories soaring. The company has furloughed 20% of its employees and cut $150 million, or 20%, from capital expenditures.
Cheaper products, lower prices, and thinner margins are changing the financial dynamics of the industry. "In the past, you could assume from 2% to 3% [annual growth] in price, 3% to 5% in volume, and then with new products, you were looking at a revenue stream growing in the double digits," recalls Earle L. Parker, treasurer at C.R. Bard Inc., a Murray Hill (N.J.) maker of catheters for heart and urological medicine. "You can't assume that anymore."
So venture capitalists have grown skittish. From 1988 to 1992, investment in small and developing medical technology companies surged 42%, to $426 million, according to the Health Care Technology Institute. But a recent survey of venture-capital firms found that fewer medical technology companies were receiving capital. Falling stock prices were partly to blame: They make it harder to recoup investments through initial public offerings. But "the No.1 concern is the FDA," which is taking longer on product approvals, says Casey J. McGlynn, a Palo Alto (Calif.) lawyer who sits on the boards of several medical-device companies.
In fact, in the wake of highly publicized problems with heart valves and breast implants, the FDA is approaching new devices with greater caution. In 1988, it took 78 days on average to get new versions of existing products approved; by 1992, that had stretched to 126 days. Similarly, the FDA granted premarket approval--the go-ahead to begin marketing--for 46 new devices in 1988; in 1992, it O.K.'d just 12. Moreover, the number of applications dropped, as companies slowed development in the face of more oversight.
HOME BLOOD TESTS. The long lead time for new products means companies need more capital to survive, says Russell Hirsch, a partner at Mayfield Fund, a Menlo Park (Calif.) venture-capital group. He adds: "We're looking for incredibly novel new devices." One recent investment: Focal Inc., a Cambridge (Mass.) company that uses biodegradable polymers to prevent surgical scarring.
For venture capitalists and established companies alike, medical technology that can trim or eliminate expensive hospital stays is a top priority. There's a growing emphasis, for example, on so-called point-of-care technologies that can be used at home or wherever health problems occur. Similar in concept to home pregnancy tests are blood-test kits that detect the chemical signs of high cholesterol and heart disease. Spectral Diagnostics in Toronto is developing a blood-analysis device as small as a credit card that paramedics could use to determine whether a patient is suffering from angina or a heart attack--so that the appropriate drugs can be administered immediately.
Executives such as Ventritex' Fischer believe the focus on cutting costs will only increase demand for high-tech solutions. The Ventritex defibrillator avoids the need for open-chest surgery by utilizing veins in the chest to place so-called "leads" on the patient's heart. It shortens hospital stays from more than a week to a couple of days and boasts a 97% survival rate for patients after three years. "We will do fine regardless of the environment that comes forward," says Fischer.
Maybe. But the days are gone when every little advance in technology brought increased profit to the industry. "Health care is starting to look like a lot of other industries," says Caroline Popper, medical director for Becton Dickinson & Co.'s diagnostic-imaging business. That means those who want to prosper will have to be nimble competitors whose products save money as well as lives.