By Tim Kofol, S2N Health
Fact: the prices of medical devices, whether innovative or commodity, are under significant pressure from all corners and in all parts of the globe, and will continue to be for the foreseeable future. Fact: whether seeking to please public shareholders or angel investors, medical device companies need their products to carry healthy profit margins (or at least the promise of them) atmarket ASPs. So if pricing is tight and margins aren’t to be sacrificed, the spotlight turns to costs. In this health care climate, low COGS are replacing premium pricing as the key to profitability. The large, established medical device companies rely on their vast manufacturing teams to pull dollars (or Yuan) out of production costs to maintain gross margins that range from 32% (HSP) to 58% (COV) on the low- to mid-tech end, and 67% (BSX) to 75% (MDT) for the high rollers.
For emerging med tech companies developing “innovative products to address significant unmet medical needs” (quoting every investor deck we’ve ever seen), the aspirational gross margins demanded by investors generally hover around 75-80%. In reality, decent margins aren’t usually achieved until ~$50 million in revenue and 3-5 years on market, and profitability can be an important milestone for strategics keen on non-dilutive acquisitions. All of these forces are moving COGS up that management priority list even in the earliest stages of development.
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To get the inside scoop on how emerging med tech companies can get a handle on COGS as they design their first products, we talked to Rev1 Engineering, an outsourced medical device product development house that specializes in working with development stage medical technologies. The Rev 1 folks gave us three tips for managing product costs both at initial launch and scaled production.
1. COGS are not just about material cost
Speed and efficiency in manufacturing can equate to significant margin dollars gained. Design for Manufacturability (DFM) is the best approach for minimizing costs over the life of the product. The goal of DFM is to achieve higher manufacturing yields and greater throughput via process development. Once a design is locked in, regulatory hurdles can limit flexibility and make product changes very expensive and time consuming, so teams should really consider delaying design freeze until all processes and COGS are vetted. If you don’t invest the time and effort up front, then you can pretty much plan on absorbing high manufacturing costs until the next sensible opportunity for regulatory re-filing.
2. Shelf life is critical
Many devices are launched with short shelf lives that get extended over time as the testing data rolls in. With hospitals tightly controlling inventories and many first devices sales happening outside the home country, a customer- and shipping-friendly shelf life is ever more important. Begin shelf life extension efforts as early as possible to facilitate early commercial sales. Also be sure to keep an eye on, and minimize where possible, disposal, retrieval, swap-out and freight costs. These are all non-value-added, expensive activities that can really impact margins in an unanticipated way.
3. Select suppliers carefully
Get an early start on developing supplier strategies to optimize capacity, production capabilities, and pricing leverage with suppliers. Often the quick-turn prototype supplier of development materials is not able to compete at volume and will bring risk to the commercial ramp if transitions to scale suppliers aren’t made in a timely manner. Avoid development delays by using quick-turn component suppliers for prototypes (or even print them yourself with a 3D printer), and in parallel qualifying prospective suppliers of key materials for commercial scale manufacturing way ahead of the anticipated sales ramp.
The ultimate goal, and balancing act, is to have functional product asap for testing, piloting and fundraising, while preparing for longer-term commercial success. “Management teams need to make smart trade-offs between speed to prototype and future profitability at scale,” says Rev 1. “You have to spend some money to save money, and sometimes the right call is to pace development to implement the right production and sourcing strategies for the long haul.”
Tim has applied his analytical and financial skills to the medical device industry for over seven years. Before co-founding S2N with Amy Siegel, Tim worked as a strategic marketing consultant for Seventh Sense Biosystems and as a software engineer for Aspect Medical Systems.
