Schafer: Maturing medical device industry must change

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: May 21, 2013 - 7:57 PM

For Norm Dann, it’s pretty simple.

“If the medical device industry is going to survive,” he said, “the business model has got to change.”

It’s now a mature, slow-growth industry, he said. It has to make simpler and less costly products. And companies have to significantly shrink their hugely expensive sales and marketing organizations.

These are not the observations, by the way, of some industry critic from the realm of media or politics. Dann is about as device industry establishment as they come.

In fact, he’s one of the reasons Minnesota even has a disproportionately large base of medical device companies.

A former venture capitalist, sales representative and Medtronic executive, Dann turned 86 in April and is continuing his work as a consultant and board member for a number of medical device companies.

And with all that experience has come clarity on how the business has to change. “The market,” he said, “it’s absolutely the best teacher.”

When Dann started working with medical devices more than 50 years ago, it was one of those emerging markets that only start-ups like Medtronic seemed to want to enter. As the device business started to take off, a key player in driving the growth was the individual sales rep working directly with physicians.

The physicians didn’t know what a pacemaker was, and the thought of implanting one in someone’s chest sounded crazy. They hadn’t been trained in any of these new gadgets, and they depended on the sales rep to understand how a product worked and how patients could be safely treated.

Dann observed that teaching a physician about a new pacemaker happened to be an excellent way to spend enough time to build a deep personal relationship. And because the doctor controlled the purchase and wasn’t overly concerned about price, it was an excellent way to sell, too.

For a while Dann operated a sales and service company that worked for manufacturers. One time the firm lost one of its product lines, and so his reps had to go to docs and explain that they would no longer be handling a main product line. According to Dann, their response? “We don’t care, you’re still going to be taking care of us, right?”

That model, taking care of the docs, worked well for decades.

“We built this huge, extravagant business,” Dann said. “The sales and marketing costs are now twice what they are in other mature industries. We have this huge distribution capability, and it just isn’t needed for a 20-year-old product.”

Senior research analyst Thom Gunderson of Piper Jaffray & Co. said larger medical device companies have an average sales, general and administrative expense of about 33 percent of sales, and he generally thinks the administrative piece is about 4 to 6 percent of sales.

St. Jude Medical had sales, general and administrative expense of about 35 percent of net sales in its most recent quarter. If Dann is right and it should be closer to companies in other mature industries, look at the 3M Co.

This is something other than apples-to-apples, of course. But 3M also employs salespeople, marketing staff and product managers, and had expenses on this line of about 21 percent of sales.

St. Jude is thought of as a well-managed company in its industry, but getting those expenses to 21 percent of net sales would mean taking out about three-quarters of a billion dollars in annual expense.

Gunderson said the most vulnerable part of the device company sales model may be the actual sales rep, who has historically been both a highly skilled and a highly paid part of the team.

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