Medical Device Link.

Originally Published MX November/December 2001

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

The European View: Through Emerald Spectacles

By building a base in venture capital and R&D, Ireland’s medtech industry is preparing for the next leap forward.

Moderated by Norbert Sparrow

Despite more than a decade of progress toward the elusive goal of harmonization, the member states of the European Union (EU) continue to pursue very independent policies when it comes to the medical technology industries. Medtech manufacturers feel the differences in national policy especially in key areas that affect business planning, including the availability of capital, tax policies, workforce development, and government support of R&D infrastructure.

The roundtable participants, clockwise from far left: Mary Harney; Iarla Mongey, press secretary for Harney; Tom McCabe; Brendan McDonagh; Norbert Sparrow; and Martin Cronin.

Ireland has been among the most active of the EU’s member states in recruiting medtech manufacturers. According to Ireland’s Investment and Development Agency (IDA; Dublin), 80 medical device companies, including 13 of the world’s top 20 device firms, have significant operations in Ireland. In addition, more than 120 overseas pharmaceutical manufacturers have facilities in the country. Together, these two sectors employ 33,000 workers.

To find out what’s next for Ireland’s hotbed of medtech activity, MX convened a special panel of government and industry representatives in conjunction with the Medical Equipment Design & Technology Exhibition and Conference (MEDTEC), which was held this September in Galway, Ireland. As indicated in the following excerpts from this roundtable discussion moderated by Norbert Sparrow, group editor for European Medical Device Manufacturer, participants had a lot to say about the direction of Ireland’s medtech industry (for information about the participants, see sidebar).

MX: How are changing business conditions affecting the ability of multinational companies to invest in the Irish medtech sector? What advantages, if any, do Irish medtech companies have in weathering the slowdown?

Martin Cronin: The medical device industry in Ireland has continued to grow, despite the economic difficulties of the past 12 months. The main reason for such continued growth is that six of the top 10 medtech companies in the world have substantial operations here. And as these companies have been acquiring more businesses, they have been moving some of those acquisitions to Ireland. So far, we’ve been doing very well. Obviously, the terrible events of recent days will have a significant effect on business, but right now nobody can predict to what extent.

Brendan McDonagh: OEMS in Ireland are also experiencing growth in the suppliers sector. Employment in the medical device industry has grown by 30% in the past two years, and we have seen no visible signs of downturn. Such growth is probably indicative of the sector itself; healthcare tends to be more recession proof than other sectors.

Bernard Collins: The nature of the medical device industry is such that it generally tends to be unaffected by short-term, cyclical events. So we don’t see any particular glitches or hiccups coming as a result of recent events.

In general, the wide landscape of medical technology in Ireland is becoming more attractive to medical device manufacturers. Historically, companies that relocated to Ireland came here because of employee availability, low costs, and low taxes. While taxes are still a driving force behind site selection in Ireland, the rate is now more medium- than low-cost.

It’s the additional capabilities that have come about in the last few years—and they are very proven capabilities at this stage—that’s making Ireland increasingly attractive to medtech companies. Among these are the availability of experienced senior management and the country’s proven ability to adopt technology while retaining flexibility and responsiveness to service. So the conditions are right for the medical device industry to continue growing in Ireland, but probably in a slightly different direction than it has grown up until now.

Ian Quinn: We’ve got interests both in medical devices and outside medical devices. Having OEMs in the country is absolutely no protection against a downturn. Having great capabilities is also no protection against a downturn. It’s the inherent nature of the healthcare sector that the demand stays steady. That’s what is protecting us.

So the best protection against periods of economic slowdown is the stability of the medtech industry itself?

Quinn: Yes, more than anything else. The Creganna Group has a subsidiary in the electronics industry that has seen a significant downturn, while our medical devices operation has not. The medtech industry is relatively very stable.

Mary Harney: Prior to the awful events of September 11, we were fairly confident that the medical device industry was going to continue to grow in Ireland—over the short term. Clearly, as a country that’s very dependent on free trade and on global economic circumstances, we’ve been affected by the downturn in the tech sector, but not as adversely as might have been expected. We trade about 150–160% of our gross national product, and that trading experience is the reason why we’ve been so successful.

But I’d like to resume discussion of the advantages that Ireland can offer the medical device industry. Another panelist already mentioned the tax position. We have the lowest corporate tax rate in all of Europe. We have a guarantee that the tax rate won’t be higher than 12.5% until the year 2025, which I don’t think anyone else could make. We have a very young population and a good education system. We have the capacity in our education system to produce the technical expertise—the high skill that’s required for the medical device industry. I suppose the challenge is that we won’t be able to compete with low-cost economies. We can compete in terms of productivity, but we can’t compete with low, basic manufacturing activity. We’ve got to move up the value chain—to get more into product development and design.

Of the 76 foreign medtech companies in Ireland, about 35 of them have an R&D function. I think the first challenge for us is to increase the amount of research and development that we’ve carried out in the Irish economy, to have a more integrated sector, where not just the manufacturing occurs here, but the research and development, the customer support, the technical backup.

After the events of September 11, there’s a huge uncertainty not just for the United States, but for every country in the world, and that’s going to affect business in all sectors. This clearly isn’t the time for people to make big, strategic decisions about the future.

Tom McCabe: In a global situation like the one we have at hand, there is tremendous uncertainty. It’s difficult to determine the outcome because we don’t know what actions the United States will take over the next several months—or even years—in response to the attacks of September 11. Our industry has been somewhat recession proof, because there’s a need for healthcare, whatever else is going on in the world. Perhaps elective healthcare may be less buoyant, but there continues to be a huge demand for medical devices manufactured in Ireland.

With all the recent uncertainty, some device manufacturers are concerned with Ireland’s place in the supply chain and the fact that it is heavily dependent on air and sea transportation. From a business perspective, those concerns must center on what changes we will see in transportation with regard to inventory supply management.

There may be some changes in the supply chain unfolding over the next few months due to the interruption suffered as a result of the tragedy in the United States. Instability in the supply chain—for critical materials, for example—may affect Ireland’s performance. We must ensure that we can deal with any further interruptions.

However, healthcare manufacturing in Ireland continues to be a strong sector and should continue to play a pivotal role in the country’s economic future. We therefore have reason to be optimistic.

Growing R&D

The emphasis on R&D has been a hallmark of recent governmental and industry efforts in Ireland. What sort of impact has this had on business? Is it more than public relations, in other words? Is there something substantial to this?

Collins: Speaking on behalf of the Irish Medical Devices Association (IMDA; Dublin), this is a subject over which we’ve had ongoing dialogue with both the government and IDA. We met with Minister Harney a year ago to discuss this subject in terms of developing partnerships. We have also met with IDA on several occasions.

Both the government and IDA have realized that support for R&D is a real need if the medical device industry in this country is going to progress. There tends to be a gap between psychological buy-in and conceptual buy-in. There also tends to be a gap between buy-in, translation of that support into policies, and then the translation of policies into practicalities.

So, is the emphasis on R&D support in Ireland hype or is it real?

Quinn: It’s not hype. We are supplying many R&D departments in Ireland as well as in Europe and the United States. We have seen prototypes developed in the Irish R&D departments progress through FDA and CE approval to worldwide production and distribution.

So the emphasis has a direct impact on your business opportunities.

Quinn: Yes. I’m not saying there’s enough of it, but it is there.

Harney: Ironically, one of the things that has attracted activity—the low level of corporate tax—can sometimes be a difficulty when it comes to attracting R&D.

The other issue is having enough people to engage in R&D. One of the initiatives that the government has undertaken is to establish Science Foundation Ireland, which invests in basic research for niche technologies in IT and biotechnology. That’s a more medium- to long-term strategy that we could never have afforded to consider before now.

The remaining panelists, from near right: Dick Lenehan; Bernard Collins; Ian Quinn; and William Cobert, publisher of MX.

McCabe: We do need to create a Silicon Valley–like environment for medical devices in Ireland. We need to find a way to encourage scientists to come visit. If you look at many of the businesses that are in the United States—for example, on the West Coast—there’s a lot of innovation and all kinds of technologies, not just in electronics, but also in devices and healthcare. It’s difficult to attract those people to come and live in Ireland for all kinds of reasons. It’s in our best interest to examine those reasons, define the gap between where we are now and where we need to go, and try to bridge that gap. That’s how we will encourage people to come here—to grow a mind-set.

Collins: Yes, I think there is a need to encourage more R&D. We’re working very actively at doing so on a number of levels in the government system. But it’s certainly true that there’s a lot of R&D going on; the evidence of that lies in the fact that we now get visits from supply companies that have come to manufacture their products in Ireland and also end up putting in engineering groups.

Dick Lenehan: If you look at the overall picture of R&D, the government is providing increasing amounts of funding to third-level institutions for basic research, and that is creating a pathway for new technologies. In addition, IDA is bringing in research-based multinationals. We’re in the business of encouraging the indigenous industry to grow. Half of the companies have been created over the last 7 to 10 years, so it’s a relatively new sector and therefore very R&D intensive.

Factors Influencing Business Strategies

There are a number of pressures that may affect business development strategies for medical device companies: availability of capital, human resources, regulatory issues, reimbursement, and so on. How have these factors had a direct impact, for better or for worse, on business development in Ireland?

Quinn: The effect of FDA regulations appears to vary from company to company. Given the same trigger event, for instance, some companies will notify FDA immediately while others will make a year-end notification. Our conclusion is that FDA is treating all these companies in the same manner, but the companies’ own quality assurance departments aren’t all the same.

The second effect we see is that larger companies take a lot longer to deal with regulatory matters than smaller companies do.

McCabe: Given the nature of medical devices and the nature of the regulatory procedure, it is absolutely vital that many of these products are heavily regulated by an independent firm. As a customer—and we’re all customers at some point—I’m glad for the strict regulation, because it’s critical for the effectiveness of our procedures and for the integrity of our products. I don’t see it as a problem, but as a necessity.

The long and the short of it is that businesses operating at a global level must work with FDA, notified bodies, and other international regulatory agencies. And their success is evident, because they have established relationships with them.

So it’s the regulatory issues that are foremost?

McCabe: The reasons for Boston Scientific’s presence in Ireland aren’t because of regulatory issues. We’re here because it’s a favorable economic climate and environment to be in, and it offers a terrific workforce.

What about in terms of business plans?

McCabe: The pressures that we as device manufacturers face are largely competitive. That is more so as everything matures. There’s a lot of consolidation going on in industry. Boston Scientific has been a part of some of that, as a number of recent acquisitions indicate. Consolidation will continue, I’m sure. That will probably be the dominant trend in the near future. The competitive pressures are here, and they are as severe as they’ve ever been, and will continue to be so.

The support we’ve had here in Ireland enables us to better deal with the economy we’ve been in. We’re able to give a more competitive position to the company because we’re here. So we’re very glad we have a presence in Ireland, and that we’re able to leverage that presence to be successful.

Collins: I think we’ve got to distinguish quality issues from regulatory issues. If you look down through the history of medical devices manufactured in Ireland, you would find very few Irish companies that have had major recalls or quality problems in the marketplace; that has never really been an issue.

The gaps that exist are in terms of competencies within the country for the regulatory and marketing areas. To grow the industry—to enable the R&D to fulfill its job—we’ve got to fill in the regulatory and marketing gaps.

You’re right, the regulatory gaps depend on the company you’re dealing with, which division, and how long it takes. But those gaps need to be filled as a matter of national priority. Because we have been in a full-employment economy, government policy has tended to emphasize developing indigenous industry, rather than creating a multinational base. And that’s probably right, except that you have to look at some exceptions. And the exceptions are in areas where indigenous competency that industry needs is lacking—such as in regulatory affairs and marketing—but exists among the multinationals. We should promote the development of those competencies within Ireland.

Finding Capital

I’m curious about availability of capital and cost of capital and whether that’s become an issue for you? Certainly, within the last 12 months the availability of capital has been restricted dramatically, and for a lot of start-up companies, funding has become a real issue. Is this an issue that’s keeping you up at night?

Lenehan: Venture capital in Ireland has been identified over a number of years as an area where we have a real market gap. Companies that have been really looking have had to go out to the Internet and to the international markets. We as a government and a government agency have been trying to stimulate the development of venture capital in Ireland.

That effort has grown quite aggressively in recent years. We’re certainly aware that Irish VC firms are not currently focused on life sciences and medical technology. That’s an area we hope to address in the near future to try to stimulate an indigenous VC industry focused on life sciences and medical technology that is open to coinvesting with the international VC companies. Because of what has happened in the world economies, it is becoming harder and harder for companies to source capital. But we hope that will change when the economy starts to come back. We are not immune to international trends.

Collins: For large multinationals, the internal rate of return on capital is 15 to 20%, so borrowing money from outside to get the internal return is a no-brainer. But companies that need to get capital have difficulty getting it because they’re not multinationals.

Harney: We haven’t had a venture capital market in Ireland. It’s only in its infancy. When I went to Israel, what really impressed me was how well developed their venture capital market was and how successful it had been in growing the technology sector. In Ireland, among the indigenous population, that money tends to go to land and property. Hopefully, that’s going to change.

What is the current state of venture capital in Europe in general?

Harney: It’s way behind.

What synergies exist between the Irish electronics and IT industries and the medical product manufacturers of smart devices and wireless devices?

Cronin: Well it’s certainly something I have strong hopes for. The biggest microelectronics research center here, which would be one of the three or four biggest in Europe, has a strong life sciences program. They’re developing sensors for the analysis of DNA. They’ve developed a microfluidics capability to go with that. They’re working on nanotechnologies to place components in multichip modules—the kind that are used in pacemakers, for instance.

Collins: The medical device industry is learning, and it’s learning a lot from technical employees—especially about quality systems and how to apply standards. Considering the downturn in the electronics industry, with a small bit of investment you can take quite a lot of technical resources from the electronics industry and convert them to quality engineering–type functions.

McCabe: The greatest synergies are in R&D. Instead of using an endoscope, for instance, why not have the patient swallow a miniaturized wireless camera? As such products get smaller, it becomes easier for medical device manufacturers to consider medical procedures that were previously unthinkable.

Copyright ©2001 MX