R&D Strategies for the Medical Device and Diagnostics Industry

Strategic Management

R&D Strategies provides you with a comprehensive guide to the latest developments in medical device R&D. Drawing on information obtained from exclusive interviews with key R&D executives, this report enables you to investigate the issues affecting R&D programmes at the core of company strategy.

This report examines the global R&D initiatives that could help you safeguard crucial market share and includes information on.

This report describes the R&D climate in five major country markets, examining the healthcare policies and regulatory changes that affect R&D in each country. It covers the US, Japan, Germany, France and the UK and also profiles the EU, enabling you to gain a complete picture of R&D around the world.

R&D Strategies has chapters on the following product areas:

Case studies of a leading company operating in each product sector provide you with a practical insight into the key strategies for developing different products, allowing you to discover the strategies behind their success.

PUBLISHED: MARCH 1999
REF: CBS797E
PAGES: 145
PRICE: £750/$1,575/¥180,000

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CONTENTS
LIST OF TABLES
LIST OF FIGURES
EXECUTIVE SUMMARY
ABBREVIATIONS

CHAPTER 1 INTRODUCTION
1.1 Aims of the report
1.2 Scope of the report
1.2.1 Sectors included
1.2.2 Markets included
1.2.3 Companies profiled
1.2.4 Years covered
1.3 Methodology
1.3.1 Forecasting
1.3.2 GDP and GNP data
1.4 Currency exchange

CHAPTER 2 GLOBAL MARKET OVERVIEW
2.1 Introduction
2.2 The US
2.2.1 Structure of the healthcare system
2.2.2 Regulations
2.2.3 R&D trends
2.3 Japan
2.3.1 Structure of the healthcare system
2.3.2 Regulations
2.3.3 R&D trends
2.4 Germany
2.4.1 Structure of the healthcare system
2.4.2 Regulations
2.4.3 R&D trends
2.5 France
2.5.1 Structure of the healthcare system
2.5.2 Regulations
2.5.3 R&D trends
2.6 The UK
2.6.1 Structure of the healthcare system
2.6.2 Regulations
2.6.3 R&D trends

CHAPTER 3 COUNTRY PROFILES
3.1 Introduction
3.2 The US
3.2.1 The US healthcare system
3.2.1.1 Organisation of the US healthcare system
3.2.2 Medical device regulations in the US
3.2.2.1 Pre-marketing regulations
3.2.2.2 Post-marketing regulations
3.2.3 Reimbursement in the US
3.2.4 R&D funding in the US
3.3 Japan
3.3.1 The Japanese healthcare system
3.3.1.1 Organisation of Japan's healthcare system
3.3.2 Medical device regulations
3.3.3 Reimbursement in Japan
3.3.4 R&D funding in Japan
3.4 European Union
3.4.1 European Union regulations
3.4.2 R&D initiatives the EU
3.4.3 R&D funding in the EU
3.5 France
3.5.1 The French healthcare system
3.5.1.1 Organisation of the French healthcare system
3.5.2 Medical device regulations
3.5.3 Reimbursement
3.5.4 R&D funding in France
3.6 Germany
3.6.1 The German healthcare system
3.6.1.1 Organisation of the German healthcare system
3.6.2 Medical device regulations
3.6.3 Reimbursement
3.6.3.1 Reimbursement categories
3.6.3.2 Reimbursement schemes
3.6.3.3 Reimbursement catalogue
3.6.4 R&D funding in Germany
3.7 The UK
3.7.1 The UK healthcare system
3.7.1.1 Organisation of the UK healthcare system
3.7.2 Medical device regulations
3.7.3 Reimbursement
3.7.3.1 Principles
3.7.3.2 Process
3.7.4 R&D funding in the UK

CHAPTER 4 INDUSTRY TRENDS
4.1 Pressures on the industry
4.1.1 Cost constraints
4.1.2 Legislation
4.1.3 Structure of the healthcare systems
4.1.4 Increased competition
4.2 Company strategies
4.2.1 Diversification
4.2.2 Rationalisation
4.2.3 Alliances
4.2.4 Product targeting
4.2.5 Finance management
4.2.6 Market analysis
4.2.7 Models
4.3 Sector trends
4.3.1 The biotech sector
4.3.2 The cardiovascular sector
4.3.3 The diagnostics sector
4.3.4 The surgical equipment sector
4.3.5 The orthopaedics sector
4.3.6 The patient monitoring and medical IT sector
4.3.7 The respiratory sector
4.3.8 The diagnostic imaging sector

CHAPTER 5 R&D IN THE BIOTECHNOLOGY SECTOR
5.1 Funding of R&D
5.2 Strategic alliances
5.2.1 Alliances with government institutions
5.2.2 Alliances with universities
5.2.3 Alliances with companies
5.2.4 Alliances with medical groups
5.3 Organisation of R&D
5.4 Case study - Chiron Corporation
5.4.1 Products
5.4.2 Company finances
5.4.3 Research and development
5.5 Conclusion

CHAPTER 6 R&D IN THE CARDIOVASCULAR DEVICES SECTOR
6.1 Funding of R&D
6.2 Strategic alliances
6.2.1 Alliances with universities
6.2.2 Alliances with companies
6.2.3 Alliances with medical groups
6.3 Organisation of R&D
6.4 Case study - Medtronic Inc
6.4.1 Products
6.4.2 Company finances
6.4.3 Research and development
6.5 Conclusion

CHAPTER 7 R&D IN THE DIAGNOSTICS SECTOR
7.1 Funding of R&D
7.2 Strategic alliances
7.2.1 Alliances with government institutions
7.2.2 Alliances with universities
7.2.3 Alliances with companies
7.2.4 Alliances with medical groups
7.3 Organisation of R&D
7.4 Case study - Abbott Laboratories
7.4.1 Products
7.4.2 Company finances
7.4.3 Research and development
7.5 Conclusion

CHAPTER 8 R&D IN THE SURGICAL EQUIPMENT SECTOR
8.1 Funding of R&D
8.2 Strategic alliances
8.2.1 Alliances with universities
8.2.2 Alliances with companies
8.2.3 Alliances with medical groups
8.3 Organisation of R&D
8.4 Case study - United States Surgical Corporation
8.4.1 Products
8.4.2 Company finances
8.4.3 Research and development
8.5 Conclusion

CHAPTER 9 R&D IN THE ORTHOPAEDICS SECTOR
9.1 Funding of R&D
9.2 Strategic alliances
9.2.1 Alliances with universities
9.2.2 Alliances with companies
9.2.3 Alliances with medical groups
9.3 Organisation of R&D
9.4 Case study - Biomet Inc
9.4.1 Products
9.4.2 Company finances
9.4.3 Research and development
9.5 Conclusion

CHAPTER 10 R&D IN THE PATIENT MONITORING SECTOR
10.1 Funding of R&D
10.2 Strategic alliances
10.2.1 Alliances with government institutions
10.2.2 Alliances with companies
10.2.3 Alliances with medical groups
10.3 Organisation of R&D
10.4 Case study - Protocol Systems Inc
10.4.1 Products
10.4.2 Company finances
10.4.3 Research and development
10.5 Conclusion

CHAPTER 11 R&D IN THE RESPIRATORY EQUIPMENT SECTOR
11.1 Funding of R&D
11.2 Strategic alliances
11.2.1 Alliances with companies
11.2.2 Alliances with medical groups
11.3 Organisation of R&D
11.4 Case study - Glaxo Wellcome plc
11.4.1 Respiratory equipment
11.4.2 Company finances
11.4.3 Research and development
11.5 Conclusion

CHAPTER 12 R&D IN THE DIAGNOSTIC IMAGING SECTOR
12.1 Funding of R&D
12.2 Strategic alliances
12.2.1 Alliances with companies
12.2.2 Alliances with medical groups
12.3 Organisation of R&D
12.4 Case study - Siemens Aktiengesellschaft
12.4.1 Diagnostic imaging equipment
12.4.2 Company finances
12.4.3 Research and development
12.4.4 Strategies for success
12.5 Conclusion

APPENDIX EXCHANGE RATES

LIST OF TABLES
Table ES.1 Pressures on sectors of the medical device industry, 1998
Table ES.2 Average R&D expenditure of large companies as a percentage of net sales in the biotechnology and surgical equipment sectors, 1998
Table 1.1 Product segmentation
Table 3.1 Non-defence R&D expenditure in the top five medical device markets
Table 3.2 Expenditure on R&D - international comparison of special tax-related rules for current expenditure, equipment and buildings, 1998
Table 3.3 Expenditure on R&D - international comparison of tax-related incentives, 1998
Table 3.4 Growth of the US medical device market, 1994-1997
Table 3.5 Medicare: Part A and Part B - main differences
Table 3.6 SBIR and STTR requirements
Table 3.7 NIH awards by institute in $ millions, 1987-1997
Table 3.8 Non-defence R&D expenditure in the US, 1985-1995
Table 3.9 Japanese reimbursement reductions, 1997-1998
Table 3.10 Japan's non-defence R&D expenditure, 1985-1995
Table 3.11 Differences between EUREKA and other EU R&D programmes
Table 3.12 Growth of the French medical device market, 1993-1996
Table 3.13 France's non-defence R&D expenditure, 1985-1994
Table 3.14 Germany's non-defence R&D expenditure, 1985-1995
Table 3.15 The UK Government's expenditure on the NHS, 1991/92-1998/99
Table 3.16 UK's non-defence R&D expenditure, 1985-1995
Table 5.1 R&D expenditure of five biotech companies, 1997
Table 5.2 R&D expenditure as a percentage of net sales by biotech companies, 1998
Table 5.3 Chiron's revenue and income, 1993-1997
Table 5.4 Chiron's expenditure on R&D, 1993-1997
Table 6.1 R&D expenditure of five cardiovascular companies, 1998
Table 6.2 R&D expenditure as a percentage of net sales by cardiovascular companies, 1998
Table 6.3 Guidant and Medtronic's R&D expenditure, 1993-1998
Table 6.4 Medtronic's net sales and income, 1993-1998
Table 6.5 Medtronic's expenditure on R&D, 1995-1998
Table 7.1 R&D expenditure of five diagnostics companies, 1998
Table 7.2 R&D expenditure as a percentage of net sales by diagnostics companies, 1998
Table 7.3 Abbott's major diagnostic test systems
Table 7.4 Abbott's sales and income, 1993-1997
Table 7.5 Abbott's expenditure on R&D, 1993-1997
Table 8.1 R&D expenditure of five surgical equipment companies, 1998
Table 8.2 R&D expenditure as a percentage of net sales by surgical equipment companies, 1998
Table 8.3 USSC's net sales and income, 1994-1997
Table 8.4 USSC's expenditure on R&D, 1995-1997
Table 9.1 R&D expenditure of four orthopaedics equipment companies, 1998
Table 9.2 R&D expenditure as a percentage of net sales by orthopaedics companies, 1998
Table 9.3 Biomet's sales and pre-tax profit, 1996-1998
Table 9.4 Biomet's regional sales, 1994-1998
Table 9.5 Biomet's R&D expenditure, 1992-1998
Table 10.1 R&D expenditure of five patient monitoring companies, 1998
Table 10.2 R&D expenditure as a percentage of net sales by patient monitoring companies, 1998
Table 10.3 Protocol's revenue and income, 1995-1997
Table 10.4 Protocol's net regional sales, 1995-1997
Table 10.5 Protocol's expenditure on R&D, 1995-1997
Table 11.1 R&D expenditure of five respiratory equipment companies, 1998
Table 11.2 R&D expenditure as a percentage of net sales by respiratory equipment companies, 1998
Table 11.3 Glaxo Wellcome's sales and pre-tax profit, 1995-1997
Table 11.4 Glaxo Wellcome's regional results, as percentages of the total, 1996-1997
Table 11.5 Glaxo Wellcome's R&D expenditure, 1995-1997
Table 12.1 R&D expenditure of five diagnostic imaging equipment companies, 1998
Table 12.2 R&D expenditure as a percentage of net sales by diagnostic imaging companies, 1998
Table 12.3 Siemens' revenue and net income, 1993-1998
Table 12.4 Contribution of Siemens Medical System's sales to total net sales, 1994 and 1998
Table 12.5 Siemens' net regional sales, 1993-1998
Table 12.6 Siemens' R&D expenditure, 1993-1998
Table A.1 Exchange rates for some major currencies against the $

LIST OF FIGURES
Figure ES.1 The top five markets for medical devices as a percentage of the global market, 1998
Figure ES.2 Average R&D expenditure of large companies as a percentage of net sales by product sector, 1998
Figure 2.1 The global market for medical devices, 1997
Figure 2.2 Healthcare expenditure in the US, 1992-2003
Figure 3.1 Healthcare expenditure in the US, 1992-2003
Figure 3.2 Non-defence R&D expenditure as a percentage of GDP in the US, 1985-1995
Figure 3.3 Healthcare expenditure in Japan, 1992-2003
Figure 3.4 Segmentation of medical purchasers in Japan, 1996
Figure 3.5 Segmentation of medical payments in Japan, 1996
Figure 3.6 Japan's non-defence R&D expenditure as a percentage of GDP, 1985-1995
Figure 3.7 Healthcare expenditure in France, 1992-2003
Figure 3.8 France's non-defence R&D expenditure as a percentage of GDP, 1985-1994
Figure 3.9 Healthcare expenditure in Germany, 1992-2003
Figure 3.10 Germany's non-defence R&D expenditure as a percentage of GDP, 1985-1995
Figure 3.11 Healthcare expenditure in the UK, 1992-2003
Figure 3.12 The UK Government's expenditure on the NHS, 1991/92-1998/99
Figure 3.13 UK's non-defence R&D expenditure as a percentage of GDP, 1985-1995
Figure 4.1 Japan's population and predicted demographic development (in thousands), 1993-2020
Figure 4.2 Average R&D expenditure of large companies as a percentage of net sales by product sector, 1998
Figure 4.3 The Ansoff matrix
Figure 4.4 The Boston matrix
Figure 5.1 Chiron's expenditure on R&D, 1993-1997
Figure 6.1 Guidant and Medtronic's R&D expenditure as a percentage of net sales, 1993-1998
Figure 6.2 Medtronic's net sales and income, 1993-1998
Figure 7.1 Abbott's expenditure on R&D, 1993-1997
Figure 8.1 USSC's net sales and income, 1994-1997
Figure 8.2 USSC's expenditure on R&D, 1995-1997
Figure 9.1 Biomet's sales and pre-tax profit, 1996-1998
Figure 9.2 Biomet's R&D expenditure as a percentage of sales, 1996-1998
Figure 10.1 Protocol's net sales and net income, 1995-1997
Figure 10.2 Protocol's net regional sales, 1995-1997
Figure 10.3 Protocol's expenditure on R&D, 1995-1997
Figure 11.1 Glaxo Wellcome's sales and pre-tax profit, 1995-1997
Figure 11.2 Glaxo Wellcome's R&D expenditure as a percentage of sales, 1995-1997
Figure 12.1 Siemens' net sales and net income, 1993-1998
Figure 12.2 Contribution of Siemens Medical System's sales to total net sales, 1994 and 1997
Figure 12.3 Siemens' net regional sales, 1993-1998
Figure 12.4 Siemens' R&D expenditure, as a percentage of net sales, 1993-1998

EXECUTIVE SUMMARY
The medical device industry is undergoing a process of drastic change as new legislation and healthcare cost constraints have increased the market pressures and crushed many of the weaker companies. If it was a question of 'only the strong survive', the large companies could sit back and be complacent, but even large companies, such as Siemens, have seen their profits fall in 1998 and the situation has become one of 'only the wise survive'.

A company stands or falls by the products it sells and never have companies needed wisdom more than now in deciding which products to launch into the hostile environment of the medical device market. A company's R&D programme is therefore essential to its prosperity and this report investigates the factors that influence R&D initiatives and discusses the R&D strategies that companies in the industry have used to succeed.

It would be useful for company strategists if the medical device industry could be considered to be one homologous market. Unfortunately this is not the case and different product sectors have to react to different pressures. The major pressures that affect all of the industry's sectors are listed in Table ES.1.

Table ES.1: Pressures on sectors of the medical device industry, 1998

Direct influences Indirect influences
Physical disorders National economies
Demographics Healthcare economics
Environmental factors Healthcare systems
Healthcare priorities Healthcare policies

The indirect market influences are discussed for the five major markets of the medical device industry - the US, Japan, Germany, France and the UK (Chapter 3). These markets currently have the highest value and are predicted to remain the top markets into the next millennium.

Measures are being taken by many government organisations to streamline market entry for new products, by bringing in legislation to simplify the entry of a product into one market if it has already been approved for entry into another. But, despite these efforts, individual markets remain strewn with inconsistencies. For example, companies that wish to take advantage of the fact that France is a participant in the Euro currency initiative should also be aware of the singular attitude that the country has towards the Conformit� Europ�ene (CE) mark (the European standards mark) and this is also discussed in Chapter 3.

With regard to the healthcare priorities cited in Table ES.1, the one recurrent theme in 1999 is the emphasis that purchasers are placing on cost-containment. However, money-saving is not only the concern of purchasers and, in this time of unstable economies, suppliers are cautious about how much investment they place in developing new products that do not provide significant advantages to the purchaser.

Frequently R&D funding comes from the revenue produced by product sales, and the proportion of sales revenue allocated to R&D varies between product sectors. The product sectors profiled in this report include: biotechnology, cardiovascular devices, diagnostics, surgical instruments, orthopaedic devices, patient monitoring, respiratory products and diagnostic imaging - chosen because they are the areas that are exhibiting the most R&D activity in 1999.

Unlike the pharmaceutical market which is relatively homogenous, there is a great deal of variation in the R&D strategies used within the medical device industry. These vary from sector to sector and whereas some sectors at the forefront of scientific discovery, such as the biotech industry, concentrate their resources on research, other more established sectors, such as the surgical equipment industry, concentrate on development.

The mechanism of funding R&D also varies across the industry sectors, with some areas receiving more grant aid than others. This is reflected in the amount of research funding that originates from sales and an example of this variation is shown in Table ES.2.

Table ES.2: Average R&D expenditure of large companies* as a percentage of net sales in the biotechnology and surgical equipment sectors, 1998

Sector R&D expenditure (%)
Biotechnology 29.4
Surgical equipment 6.3

Note: * Definition varies between sectors.

Within each product sector there is generally little variation between the proportion of sales revenue that companies allocate to R&D, although there is often a distinction between that made by large companies compared with small companies. These differences are illustrated and discussed in the various sector chapters (Chapters 5 to 12), however, the average expenditure of large companies within the profiled sectors is shown in Figure ES.2.

The difference between the levels of R&D funding by small and large companies partly arises from the fact that although sales revenue is one of the major sources of funding, it is not the only one. Smaller companies often take advantage of these alternative sources of funding and this is also discussed in Chapters 5 to 12.

Funding is not the only issue which companies have to consider when developing their R&D strategy. Other major factors include:

These factors are important across the entire breadth of the medical device industry, but the weighting that is placed on them varies across the individual sectors. For example, a cardiovascular implant device will be subjected to more stringent regulatory testing than a patient monitoring device and companies from these sectors therefore differ in the emphasis they place on regulatory requirements when planning their R&D strategies. All of these factors are important, however, and companies that incorporate them appropriately into their R&D strategy will launch a successful new product. An illustration of the importance of this has been given by Guidant's President, Ronald Dollens, who attributes his company's success to its investment in R&D. This has resulted in 35-50% of Guidant's sales consistently coming from products introduced within the previous 12 months. According to Mr Dollens, in order to succeed a company must therefore produce four to six products every 6 months.

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