Medical Device Link.

Originally Published MX November/December 2003

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

With careful planning, overseas expansion may be a medtech company's best pathway to growth.

Moderated by Steve Halasey

In a rapidly globalizing economy, U.S. medical technology enterprises of every size and type are thinking of selling their products abroad just as soon as they can arrange the regulatory approvals and the logistics. The process of going global isn't easy, especially for smaller companies. But help is available.

And foresight is key. Consideration of every aspect of the endeavor, starting from the moment overseas marketing or operational expansion is contemplated, is necessary to ensure steady progress toward launching in a foreign market.

Intellectual property (IP) protection, adoption and reimbursement, distribution, facility siting, and regulations pertaining to document translation are among the topics discussed by several experts in global growth from the company perspective with whom MX spoke (see sidebar).

MX: How important is international intellectual property protection for medical device companies?

Glen Paul Freiberg: It is very important. Gen-Probe has a patent portfolio that is really the basis for its continuing success. We have not done extensive licensing of the patent portfolio and instead have chosen to enter into partnership agreements for distribution around the world. That has been quite successful so far.

The remaining challenges are where we will be entering new areas, such as certain parts of Asia, where there is more of a general understanding of reverse engineering and less respect for intellectual property.

Jerrold S. Seeman: I certainly agree. Obviously, a company's IP portfolio is a critical asset and part of the company's core equity. Preserving that, even with the highly developed social and legal and regulatory structures that exist in Europe, still requires management and direction.

Charles M. Fleischman: Digene has a direct operating company in Brazil and uses distributors throughout much of Latin America and Asia. In many of the less-developed countries, there is a lower degree of protection provided by traditional IP mechanisms. That is a concern for us. It is balanced by the fact that those are not our initial target markets.

Some companies want to commercialize their products in the big countries, such as China or India. The infrastructure to protect intellectual property in those countries will come in time. Although not directly related to the infrastructure to support medical reimbursement, it will become more linked as those countries build a sophisticated infrastructure.

Freiberg: As important as it is and as helpful as it is, the system is still so ambiguous that companies must sometimes wonder if the gains from owning intellectual property exceed the legal fees involved in defending it from all of the challenges. As a result, some companies do not file, but keep the formulae or processes as proprietary. The patent system itself, both in the United States and overseas, seems to be a legal-fee feast. I do not know if that is due to inefficient patent filings or just the ambiguity of the rules, but if there would be a way to improve the system, to clarify it somewhat, it would be a great help to all of commerce.

Seeman: There is a kind of convergence slowly making its way throughout the Continent such that filings in one IP arena or under one regulatory scheme are finding acceptance with relatively little modification in others.

Protecting Patents

In terms of a strategy for filing patents covering different market areas, does the order in which patents are filed make a difference for market penetration?

Fleischman: It does to some extent, because some of the laws are different, though the world bodies have worked hard to harmonize them as far as when the clock starts ticking and when public disclosures get made. However, in general, companies file their intellectual property, and patent activity happens, long before they have a commercialized product. That is more in the research and development phase as opposed to picking the target markets for commercialization.

Some companies say that if they really want to keep trade secrets they just do not file the patents. What is your sense of that approach?

Seeman: Common sense is probably the rule. There comes a point at which, to protect a technology and have recourse to damages, the company must submit it to the regulatory schema that is the international patent system.

Freiberg: It probably would be useful to split that discussion between process and product. If I could improve a process so as to reduce my cost of goods and compete better, I might want to keep that in-house too.

But with Gen-Probe's product lines it is very difficult not to disclose, because everybody wants to publish on it and the scientific community wants to exchange information. So, publishing a genetic sequence used to diagnose a particular bug is normal and expected in our case.

Harmonization and the Language Question

What are the key challenges regarding regulatory harmonization for a company that is trying to enter the global marketplace?

Fleischman: In Europe, the IVD Directive, which is already somewhat enforced and becomes fully enforced this December, is a significant factor in how we plan our commercialization activities. Outside of the United States and Europe, unfortunately, many countries are developing their own individual regulatory oversight and registration procedures that are not always harmonized.

Freiberg: The key challenge is to understand the local environment in a foreign area. So far, Gen-Probe has had success with its distributors and has put together an effective system with its distributors and its authorized representative under the IVD Directive. But the big challenge will be the rapidly expanding EU and the synchronization and coordination of all it takes to distribute in its many member countries.

As mentioned earlier, the local-language challenge is a big deal.

Seeman: A country like Luxembourg, which hosts the EU Translation Center and where most employees in the multicultural workforce are multilingual, can buffer some of those language and translation issues.

You are still talking about a significant expense, though, to translate into 12 or 13 languages instead of six.

Freiberg: Time and expense, and, in the case of a complex assay, there is often a need for technical verification of the country-specific translation by laboratory personnel.

Fleischman: The translation and labeling issues are brutal. It costs roughly $100,000 per country to get everything labeled in the various languages.

Is it worthwhile?

Fleischman: That is clearly a consideration. Digene is going through it now. In some countries, the cost of compliance is not justified by the commercial opportunities.

Is the integration of the regulatory system within the European Union, the harmonized approach, working well overall?

Freiberg: The sense I have is that the implementation of the Medical Devices Directive, and the inspection and certification system that resulted, is now understood and is moving forward pretty well. On the other hand, the IVD Directive does not fully take effect until December. Evaluating how well that part is going to work must wait until full implementation.

Seeman: I think we are seeing that it is beginning to operate better than previously. All legislation involves issues to be worked out when it is new, but this system seems to be working. The proof is simply that it is supporting native industries in medical devices and healthcare.

Launching in Europe

If the system in Europe is working so well, why aren't more companies launching there first?

Freiberg: There are multiple answers to that question, but the first is that getting an FDA clearance first confers a seal of approval.

Another thing about going overseas first is the need to arrange for a distributor, especially if a company is small. The distributor takes such a big piece of the action in its share of the profits. For a start-up, that might not be the best way to initiate a revenue stream.

The other consideration is that many of these start-ups may not have the business development expertise to find and negotiate appropriate distribution agreements in Europe.

Fleischman: There are two major distribution issues. One is control of the message, the ability to make sure that the customer, that is, the laboratory, understands what the product is and when and how it should be used. The distributor, if one is used, needs sufficient margin to run its business. But consecutive markups sometimes price the product out of the arena where reimbursement is available.

Are the logistics and distribution problems in Europe different from those in Latin America or Asia?

Fleischman: Yes, in respect to electricity and water and whatnot. In general, getting the product there is not the hardest thing in the world. Rather, it is making sure that the laboratorians, physicians, and patients are aware of the technology, how to use it, and how it can help them.

Adoption and Reimbursement

Is adoption a problem in Europe? Is payment a problem?

Fleischman: It has to be addressed on a country-by-country basis. Each country is significantly different. They have different healthcare reimbursement methodologies; some have national healthcare, some have private insurance, and some have mixtures. Companies have to identify the payers and address their concerns. Many of the countries want local indigenous data, so it is not an easy process. Efforts should be focused on getting the greatest bang for the buck.

Freiberg: Many in the diagnostic industry have found in France that reimbursement is being used to control distribution. A few years ago, the country conducted its own study of glucose monitors. My understanding is that it was a flawed study that used venous blood samples when it should have been using capillary samples. Nevertheless, as a result of the study, many of the products on the market were restricted. This practice seems to defeat the idea of competition and harmonization through the directives.

How unified is the reimbursement situation for medical technologies across the European Union?

Seeman: It certainly is not seamless; it is still something of a checkerboard. But I would return to the notion of convergence. I think that as the EU has evolved to be a contender as a trading bloc, as a commercial bloc of disparate countries—and especially as it admits new members from Eastern Europe and elsewhere—there is incentive for it to make itself almost seamless across borders in terms of reimbursement and regulatory schemes from country to country. But it is not there yet.

Freiberg: The challenge is, again, if a company is not based in Europe and is not large, that it has to be cognizant that that should be part of its agreement with its distributor. The distributor should be capable of supporting the design process to make possible success in the reimbursement effort.

Seeman:I certainly agree with that. Reimbursement is also part of the labor costs that may at some point have to be considered. It is all part of the social structure; one of the variables that companies consider when making a European site decision is the social labor costs or what may even be hidden costs.

Freiberg: And as these countries and companies become more cognizant of the reimbursement strategy and the regulatory strategies, it seems that more and more countries are beefing up their regulatory bodies. So, all aspects of reimbursement, registration fees, and cost structures are getting much more complicated for a company that is going to be an international distributor.

Planning Ahead

At what point in a company's life cycle should it be thinking about all of these issues?

Freiberg: Right away, because one of the things we have seen in ISO and FDA regulation is a concept called design control, but design control leaves out the subjects of reimbursement and cost of goods. Concurrently with its development of design control policies and procedures, a company has to form a business plan. If it cannot estimate its cost of goods, cost of sales, and reimbursement, it could easily have a problem down the road.

Fleischman: Emerging companies should think about these things at inception, because it is very likely that they can get initial commercialization outside of the United States before they have FDA approval here.

Seeman: Considering the cost of compliance and the interlocking variables that all have to come together to make a profitable overseas enterprise, our sense is that you cannot be too forward-looking too soon.

Fleischman: That is why Digene chose to enter into relationships with distributors in many countries right away—just to have them help the company generate gross margins and continue to fund research, development, sales, and marketing.

Seeman: Certainly, the point at which a company thinks that it wants to expand beyond a domestic opportunity is the time to really begin due diligence.

Siting

If a U.S. company were thinking about expanding into Europe, how would it know that that was something that should be done? What questions would need to be addressed before moving facilities overseas?

Fleischman: Well, in many areas of the world, the company would balance import duties and whatnot against the costs and benefits of either manufacturing or assembling in various countries. The issue is mainly management oversight—the ability to successfully control your overseas operations.

Freiberg: When Gen-Probe acquired a company in Wales, it was because we already had a relationship with it and that is where it was. We had been paying royalties on our acridinium ester molecules, and purchasing the company was a wonderful opportunity for us. We will be helping them develop more of their research, more of their product lines.

Seeman: Companies thinking of expanding into Europe treat it almost like New York real estate: it's location, location, location. But of course it is a great deal more complex than that, depending upon whether they are going there for distribution, or R&D, or some combination thereof, with perhaps a financial structure like a holding company or a corporate headquarters.

Going to Europe, and every component of it, has to be evaluated and weighted and always matched against the business plan. Each country is going to present its own advantages.

Fleischman: Digene has a facility in Maryland where all of our core R&D takes place, but the company also undertakes a lot of clinical trial activity outside the United States. Today, we are very comfortable with that structure. However, if we were generating enough revenue in some foreign country, we might consider locating there to save on labor- or facility-related expenses and import duties and looking for opportunities to lower our landed price there.

Is it safe to say that those evaluations are based specifically on the products that the company is involved in manufacturing?

Seeman: Products, but future-oriented R&D as well. Sometimes a first approach to Luxembourg involves something like a corporate headquarters or distribution hub, but then is followed by questions about establishing an R&D facility there. So the evaluation is actually based on both the present business and probably a 5- to 10-year forward-looking plan.

Is the situation similar in Asia?

Freiberg: Some of the bigger countries seem to be on a more rapid modernization pace than they were 15 or 20 years ago. A thing we need to remember is that long before President Nixon made his contribution toward opening up China for us, many of the European countries were already over there. So a lot is going on in Southeast Asia with European-based companies.

Copyright ©2003 MX