Design, Development, and Manufacturing Partners – An Age of Abundance

August 25, 2016 - Jim Reed, Vice President of Business Development and Marketing

Predicting the future and planning a path through the uncertain medical device world is not easy.  We all occasionally take a glance in the rearview mirror to reflect and marvel at where we’ve been and how we got here as an industry.  Of course, company Securities and Exchange Commission (SEC) filings tell us repeatedly that “past performance does not necessarily guarantee future performance”, and we concur.  But, lacking a crystal ball, understanding the past and drawing lessons from that journey is a far better proposition than having no roadmap at all.

In the 1990’s, the world looked very different.  Start-ups tended to follow certain patterns.  With a plentiful supply of venture capital funding, start-ups seemed to populate nearly every office park in the Twin Cities.   And, there were a plethora of potential exit opportunities, including many mid-to large-sized companies as likely acquirers.

These start-ups, even at early stage, were very much traditional companies.  That is, they typically had both an office suite and significant numbers of actual full-time employees.  General management, finance, regulatory, engineering, and even upstream marketing were represented by industry professionals who had physically joined the company and committed to its future.  In fact, it was not uncommon to have small-scale production happening in a back room and a business plan that contemplated internal manufacturing early on.

Taking a company public in the 1990’s was also vastly less expensive than it is today.  In fact, it was possible to take a company public for just a few hundred thousand dollars versus the millions it costs today.  Going public and staying public were real and practical options for small companies in the era before Congress decided to protect us from ourselves.  Sarbanes-Oxley compliance has saddled substantial new fixed costs on smaller companies, making it impractical for them to stay public, stay small, and stay operating all at the same time.

Externally, the environment was also very different twenty years ago.  Physicians had strong purchasing power, and new products generally encountered minimal price pressure.  Annual, if not semi-annual or quarterly, price increases were expected, and higher prices for products with additional features were the order of the day.

The typical start-up company today is a very different animal.  First, on average, the quality of management, product conceptualization, and business plan sophistication are all higher.  Simply put, in a more competitive and constrained funding environment, only relatively solid ideas with very high potential can secure substantial funding.

Second, today’s start-up must be capable of handling more demanding clinical, regulatory, and reimbursement  requirements.  The bar to achieve regulatory approval is higher today than in the past, and longer clinical trials are often required.  Inevitably, this implies larger financial investments in product concepts earlier on.  Once regulatory clearance is gained, obtaining product reimbursement  is a separate hurdle given the current cost pressures on payors and providers.  Compared to the 90’s, the market now expects a more mature company with a more proven product concept.

Third, start-ups and smaller operating companies no longer live in an environment that allows for high fixed-cost burn.  To survive, companies must match timing of cash outlays with forward, value-creating progress on their product, clinical, or regulatory plans.  Additionally, they must be able to switch into cash conservation mode during the inevitable delays in critical path processes – clinical data development, regulatory progress, or clinical publications – require a pause in other spending.

Today’s early stage start-up usually has fewer than five employees, sometimes as few as two.  A Chief Executive Officer often leads the business and raises money;  a Chief Technology Officer or Vice President of Research and Development is responsible for most everything else; and consultants and strategic partners comprise the rest of the virtual organization.

Some consulting partnerships, like accounting services and human resources/payroll, have historically been outsourced as they are not industry-specific, and well-developed infrastructure exists everywhere.  Similarly, for decades, regulatory consulting has provided a widely-established network of specialists to support work that is highly variable and episodic.  Clinical research organizations (CROs) also provide support to the industry and are selected based on experience in certain clinical research fields, geographic reach, service levels, and subjective confidence in the CRO team’s ability to execute.

Arguably, the single biggest structural change in the start-up and operating company world is the emergence and evolution of design, development, and manufacturing strategic partners.  Such partners have proliferated in a field where building up and maintaining systems, infrastructure, and a team with the right set and breadth of skills is very capital-intensive and time-consuming.

The movement towards outsourcing design, development, and manufacturing was brought about in part by necessity, but also by changes in technology.   In the past, a widely-distributed team spread across the country was simply impractical.  But with tools such a WebEx, GoToMeeting, Google Docs, SharePoint, email, and inexpensive videoconferencing, geographically-distributed teams are now the norm rather than the exception.

Technologies such as Google and LinkedIn have proven effective and efficient as means of connecting companies and consultants with very specific expertise.  While companies can quickly find a very esoteric skills match, consultants are able to access and accumulate a critical mass of potential clients who need their specific niche skills and background.  Today, we are spoiled by good strategic design, development, and manufacturing partner choices where previously such good options either did not exist or existed in much less refined and evolved forms.

It is true that the device world is not the same as it once was.  We face real capital constraints, real regulatory and reimbursement uncertainty, and a level of competition and price pressure that are very different from what we saw in the 1990’s.  But in this area, at least – the existence of a great variety of strategic design, development, and manufacturing partners who can help make your product a commercial reality – we are dramatically better off than we have ever been.