Implantable medical device companies are fascinating and frustrating. In many cases, we see mature companies with good product margins but outsize selling costs well above 15% of sales. It is a labor-intensive endeavor to make and distribute medical devices, apparently requiring hordes of well-dressed career salespeople and fleets of company cars. This army of hardworking men and women spend their days driving, parking and dressing in green to cover surgical cases.
At one time, it absolutely made sense to spend time in the operating room to help surgeons hone their technique. No device can implant itself, and the skill of the surgeon was critical to the success of the device and the subsequent outcome. Reps shared techniques from one doc to another, they made suggestions that saved time and they shared the latest in a rapidly evolving field.
But many of the device categories have had only incremental improvements in many years. Does it make sense anymore? Newcomers to the market are flabbergasted by this indulgent and anachronistic expense. Now pressures are making companies rethink this model. Fairly radical concepts of “rep-less” models are tiptoeing into the market. Wright Medical, Smith & Nephew, Medtronic and many other blue-chip companies are considering or piloting such models. Maybe case coverage is just an old-fashioned custom waiting for enough margin pressure to send it the way of the dinosaurs. We see a rapid evolution in expectations happening in some countries in Europe as governments get involved in national tenders and group purchasing organizations, or GPOs, start to bite into previously healthy margins, causing modification to the time-tested models.
But at a conference last month in Berlin, I heard so many manufacturers working the B2B space outside health care lament the low-cost entrants. “Things haven’t been the same since the Chinese came.” That was when I realized just how different most of our markets are. We don’t have to deal with “cheap imports.” In fact, in many device categories, the number of new entrants in recent history is really very limited, foreign or otherwise. It strikes me that a big reason for this is that our original zeal for service and pleasing our clinical customer has created a full-service model that provides tremendous barriers to entry. Is the Indian prosthetic knee company unable to get a foothold because the established companies send a rep to keep the surgeon company during the implant? Does the Chinese pacemaker stay in China because the incumbents have device communicators and support clinics and surgical device suspends?
It can’t be just case coverage but really the entire service model that pervades the device industry creating this barrier. We send nurses to help new insulin pump patients start their therapy. We have an army of medical representatives who drive SUVs to deliver trunk stock or occasionally intercede to get surgical sets to a spine surgery. Our certified wound ostomy-care nurses consult the hospital on the dressing strategies for particularly troublesome and perplexing wounds. We maintain surgical training centers to help surgeons learn new techniques in the pig lab. Spend a day with a device rep covering cases—what you see is someone who appears to be indispensable, an integral part of the procedure, as aware of the surgeons’ preferences and practices as the nurses who are employed by that OR day in and day out. We built this market with all of these services that made surgeries easier, faster and with better outcomes. And now this same sales model is becoming a burden. We ask ourselves as margin pressures mount if we really need to do all of these things anymore, and it is true that this will have to evolve. But at the same time, the dilemma is to evolve with prudence, lest these natural barriers built over many years come down and fundamentally transform the market.
I think we need to see evolution; we need to rationalize everything we have offered at “no cost” and ensure everything we are doing truly has value. We will stop some things as the market tells us they aren’t worth the cost we incur, asking instead for these previous implicit and indivisible costs to be subtracted from the purchase price. This is natural. It will be tempting to strip it all away, but this can be reckless and invite unwanted base product comparisons, allowing the dreaded words “clinically acceptable” to bless even more options to the purchasing agent. It could even be tempting to itemize the services, but this too is likely a slippery slope toward à la carte. Instead we need to do two things:
- Reinforce the value. While it seems obvious, many of the things we do on behalf of clinicians are not visible to their nonclinical counterparts. But some are, in fact, critical, outcomes-enhancing, time-saving services that really should be visible to all decision makers considering the options. Articulating the value of our product, our services and our partnership is a critical success factor to avoid commoditization and, consequently, an important skill to develop in our sales team.
- Innovate, with special emphasis on business innovation. We need to stop thinking about hospitals as a physical building that houses surgeons. Instead, the hospital should be thought of as a business, a factory, with quality, throughput and cost targets that need to be met. This means the services we provide should expand to wrap even more value into the offering. Transactional services, consulting services, appropriate use programs, logistics. This innovation will ultimately create a stickier offering, with new barriers, and will potentially open new business models.