ii' EXECUTIVE SUMMARY THE MEDICAL DEVICE INDUSTRY IN MASSACHUSETTS f fit u' Ian Clayton-Matthews University of Massachusetts Boston Acknowledgments The authorgratefullyacknowledges the supportand assistance ofthenumerous My individualswho helped carrythis studyto a successful conclusion. special thanks go to SusanMachuga, assistantprofessorofaccountingand finance at UMass Boston, forherexcellentassistance in researchingthe medical devicespublic companies inMassachusetts and the United States. Mygraduateassistant, Udaya R. Wagle, provided mewith constanthelp andresearchondemand throughoutthe project. I would also like to thankThomasJ. Sommer, executive director of MassMEDIC. His knowledge ofthemedical deviceindustr)'and his timelyand helpful assistance were absolutelynecessary. StevenLandau, directorofeconomic research and analysis at the UMass Donahue Instimte, provided friendlysupport and good advice throughout the project. Iwould also like to thanktwo reviewers who gave meuseful comments and additional insights: Peter Doeringer, professor ofeconomics at Boston University, andYolanda Kodrzycki, assistantvice president. Federal Reserve BankofBoston. The editorial and research staffofthe DonahueInstitutewere alsoinstrumental in the production ofthis report: Carolyn DashMailler, managingeditor; Kathleen Lafferty, editor; Rebecca Loveland, research analyst. Finally, this reportwould nothave been possiblewithoutthe followingindividuals, who so thoughtfoUyoffered their time so that I could learn aboutthe medical device industry. In a real sense, theyare coauthorsofthisreport: Joel \Wmstcm,founderandvicepresidentofviarketing.AssuranceMedical Bruce Beauchemin, vicepresidentofRegulatoryAffairs, BostonScientificCoiporation CeceNewman, chanvnanandexecutivevicepresident, D&R ProductsCo., Inc. Richard B. Newman,president, D&R ProductsCo., Inc. David Fleming,ffvupseniorvicepresident, Genzyme Corporation Mark Speers, managingdirectorofHealthAdvances, Inc. Dr. David Glass,associatedirector. OfficeofSponsoredResearchandLicensing, MassachusettsGeneralHospital John Wallace, chiefoperatingofficer. Nova BiomedicalCoiporation John Brooks,geiteralpartner, Prism VenturePartners Hooks K.Johnston,Jr.,seniorvicepresident. Smith +Nephe-iv Endoscopy Kevin Connors,generalpartner, Spray VenturePartners JayCaplan, vicepresidentofoperations, ThoratecCorporation David Sheehan, associatedirector, UMassMedical, OfficeofCmmnercial Venttiresand IntellectualPropeity s EXECUTIVE SUMMARY THE MEDICAL DEVICE INDUSTRY IN MASSACHUSETTS Alan C1ayton-Ma11hew University of Massachusetts Boston Alan Clayton-Matthewsisan assistantprofessorandthedirectorofquantitative methodsin thePublicPolicyProgra?nat the University ofMassachusettsBoston. He isalsopresidentoftheNew EnglandEconomicProject. MassMEDIC MassachusettsMedicalDeviceindustryCouncii Hooks K.Johnston,Jr. Chairman Thomas Sommer J. ExecutiveDirector Written and produced bytheUniversityofMassachusetts Donahue Institute's Economic Research andAnalysisdivision. Steven Landau Director Carolyn DashMailler ManagingEditor Rebecca Loveland ResearchAnalyst RuthMalkin andAndrewHall ResearchAssistants Kathleen Lafferty CopyEditor Nina Dudley Designer Copyright2001 UniversityofMassachusettsDonahueInstitute ThecontendsofthispubHcationmaybereproducedonlywithpermissionoftheauthor. ThisstudywasfundedbyMassMEDICandtheUniversit\-of.MassachusettsEconomicProject.Copiesof thefullstudyareavailablefromtheUniversityof.MassachusettsDonahueInstitute(413)545-0001. Thispublicationcanbeviewedon-lineatwww.donahue.umassp.edu. CONTENTS How Is the Medical Device Industry Defined? 1 Overview 2 Massachusetts Medical Devices in a National Context: State Rankings 2 Basic Characteristics ofthe Massachusetts and U.S. Medical Device Industry 4 Number and Size ofEstablishments 4 Industrial Composition ofthe Medical Device Sector 4 Productivity 4 Demographic Characteristics ofMedical Device Manufacturing Workers 5 Occupation 6 Education 6 Employment Wages, Salaries, and Benefits 7 Age, Gender, Race, and Ethnicity 7 The Economic Impact ofMedical Devices on the Massachusetts Economy: Industry Linkages 8 Industry Linkages: Suppliers 8 Industry Linkages: Customers 9 The Economic Impact ofMedical Devices on the Massachusetts Economy: The Multiplier 9 Current and Future Trends 10 Employment 10 Wages and Implied Productivity 10 Exports 11 Trends in Products, Markets, and Technology 11 Venture Capital 13 The Role ofHospitals and Universities 14 Government Regulation 14 The Food and DrugAdministration (FDA) 14 510(k) Submissions 15 Premarket Approval Submissions 15 FDA Industry's Perception of Regulation 15 Health Care and Financing Administration (HCFA) 15 HCFA Industry's Perception of Regulation 16 Policy Considerations 16 Conclusion 17 Endnotes 18 References 20 Digitized by the Internet Archive 2015 in https://archive.org/details/nnedicaldeviceindOOclay We benefitfrom medicaldevices throughoutourlives,youngandold, healthy andsick. Prenataldevelopment ismonitoredby ultrasound i^u.. Spons,nj,„esareMa,nosed.nh MRImacUn.andfi.ed with arthroscopic tools. Heartblockagesare clearedwith angioplasties — anddrug-coatedstents. Devicesijjclude thesimple andmundane eyeglassesand — — thermometers andstretch to the boundariesoftechnology laserscalpels, needles embeddedwith microprocessors, magneticresonance imagingmachines, andartificial hearts. Allareproductsofthe rnedicaldevice industry. THE MEDICAL DEVICE INDUSTRY IN MASSACHUSETTS HOW IS THE MEDICAL DEVICE INDUSTRY DEFINED? Medical devices have drasticallyreduced theinvasivenessofsurgical procedures, short- enedrecoveryrimes, and lowered medical costs. This trend iscontinuingatarapid pace, aidedbyadvancesin electronics and biotechnology. Fordiabetics, forexample, internalpumpstomonitoranddeliverinsulin are beingdevelopedandmaybe the closest thingyettoan artificial pancreas. Medical devices and biotechnologydevelopmentsare becomingmore complementaryovertime, as devices ofincreasingsophistication and minia- turization are used to delivernewpharmaceutical and biotechnological products. In the future, nano devices maybe used to deliverbiological agents directiyto cancercells. The field ofmedical devicesis the largerpartofamedical science sectorthatsupports thehealth servicessector. Accordingtostatistics fi-omthe 1997 EconomicCensus (DepartmentofCommerce, 2000a), themedicalsciencesectorinMassachusettswas composed ofthree industrygroups: 1. Medical devices consisted of264manufacturingestablishmentswith 20,756 employees, a payroll ofS989million, and shipments of$4.0billion. 2. Pharmaceuticals consisted of57 manufacturingestablishmentswith 5,612 employees, a payroll of$270 million, and shipments of$1.8 biUion. 3. Biotechnologyconsisted of282 research establishmentswith9,311 employees, apayroll of$589million, and shipmentsof$1.5 billion. Altogether, the medical science sectorconsisted of603 establishmentswith 35,679work- ers, apayroll ofover$1.8 billion, and shipmentsof$7.3 billion. This sectoris therefore largerin size than several keyhigh-technologysectors. Itis largerthan computers and office equipmentorelectronic components (includingsemiconductors), which had recentemploy- mentlevels of25,600 and 31,000, respectively. THE MEDICAL DEVICE INDUSTRY IN MASSACHUSETTS OVERVIEW and medical instruments, and electromedical and Massachusetts medical devices contribute to the electrotherapeuticinstruments. heahh and quaHtyofHfe ofpersons here in the Importantlinkagesexistbetweenmedical device manu- state and around theworld, which maybewhyso manyof facturers and manufacturersofelectronics, producersof the sector's industryexecutives, scientists, engineers, and precision metal components, andplastics productionworkers chose careers in this field. On a more manufacturers. — — mundane butstill important level, the production of Everydollarofoutput produced bymedical suppliersis medical devicesalsocontributesto the economic health associated with another45 cents ofgoods and services produced byotherfirmsinMassachusetts, and every Medical Device Employment in Massachusetts, 997 100jobs in medical devicesis associatedwith an 1 BY Industry additional 79 jobs in the state. Employmentand wages in medical deviceshavegrown UBORATORY APPARATUSES fasterthan in manufacturingas a whole. ANDFURNITURE The agingofthe population and growth inworldwide IRRADIATION APPARATUSES percapita incomes should provide a platform forstable SURGICALAND MEDICAL and steadygrowthofthe sector. INSTRUMENTS Research, development, and improvements in techno- logy,sovital to this sector, aresupported in largepartby the state's hospitals and bv'suppliersofventure capital. Federal governmentregulation bythe FDAand the HCFAdirectlyimpactthesector'sgrowth and f1 ELECTRAONMDEDICAL profitability. Indirectly, theyimpact the quantitv- and ELECTROTHERAPEUTIC qualityofhealth care services available to the general APPARATUSES 23% population. In orderto fostercontinued growth inmedicaldevices INVITRODIAGNOSIIC and to keepMassachusetts in the forefrontofthe SUBSTANCES SURGICALAPPLIANCES industry, state publicpolicyshould focus on providing 7% OPTHALMICGOODS ANDSUPPLIES qualitvpublic education, workon loweringthe high 11% costofliving in Alassachuserts, promote .Massachusetts SOURCE:U.S.BUREAUOFTHECENSUS.1997ECONOMICCENSUS as a place to dobusiness, and developa liaisonwith the andvitalityofthe Commonwealth. The purpose ofthe industrj'. this reportisto enumerate theways in which the sector MASSACHUSETTS MEDICAL DEVICES affects the state's economy, quantifythese effectswhere possible, and explore currentand future trendsin the IN A NATIONAL CONTEXT: STATE RANKINGS industry. As a preview, the keyfindings ofthe report maybe Usingfourmeasuresofeconomicsizeand impact — brieflysummarized as follows: from the 1997 EconomicCensus value of Massachusetts is a leadingstate in the productionot shipments, employment, pa\Toll, andvalue added (labor — medical devices. plusoverhead) expressedinboth absolutesize and per Medical deviceworkers are more highlyskilled, better capita terms,Minnesota andMassachusettsappeartobe educated, and betterpaid than workers inmanufactur- the two topstates in the productionofmedical devices. — ingasawhole andin the economyoverall. ThoughMassachusetts does notrank firston anyofthe ProductioninMassachusetts is concentrated insurgical eightcriteria, itrankshighon all. THE MEDICAL DEVICE INDUSTRY IN MASSACHUSETTS 2 Interms ofsheersize, California and Illinois rankfirst form eachstate's total score as the sum ofits rankscores andsecond, respectively, on all fourmeasures. on each category.' Usingsuch a simple scheme, Massachusettsranks third invalue ofshipments, fifthin Minnesota andMassachusettsrankfirstand second, employment, third in pa\Toll, and fourth invalue added. respectively, on the fourpercapita measures and tie for Minnesota ranks fourthin value ofshipments, fourth in third on the fourabsolute size criteria. Combiningall employment, fourth in payroll, and third invalue added. eightcriteria,Massachusetts ranks second behind NewYorkranks third in employmentand fifth in pavToll, Minnesota, and ahead ofCalifornia, Illinois, Connecticut, and Florida ranks fifth in bothvalue ofshipments andval- and Utah. ue added. In termsofpopulation and overall economic The thrustoftheserankingsisconfirmed by acti\'ity, California, Illinois, NewYork, and Floridaare far conversationswith industryexecutivesin the largerthan eitherMassachusettsorAlinnesota, so their Commonwealth. Minnesota andMassachusetts have simi- higherrankings on measures ofabsolute size do not laragglomeration economies, with a favorable mixof indicate a higherconcentration ofmedical device highereducation, medical, and high-tech industries. manufacturing. To rankstates in terms ofconcentrationof Whybe concerned abouthowMassachusetts ranks in medical device activity, percapita comparisons are measures ofmedical device production relative to other appropriate. states? The one-word answer is "exports." Over halfthe Intermsofpercapitameasures,Minnesota ranks first outputofthe Commonwealth's medical device industry onallfour,whereasMassachusettsranksthirdinvalueof is exported to otherstates orcountries.^ Because shipments, employment, andvalue added, and second in revenues from exports are ultimatelyreceived by pa\Toll. Utah,with a small presence in termsofabsolute Massachusettsworkers and suppliers ofcapital to the size, rankssecond inemployment, fourth invalue of state's medical device companies, industries that export shipmentsandvalue added, and third in pa\Toll. Connecti- support the state economy's health and growth. Given cut, roughlyhalfthesizeofMassachusettsin absolute size, the agglomeration economies that are favorable to — rankssecond invalue ofshipmentsandvalue added, fourth production ofmedical devices that is, the state's inemployment,and fifthin pa\Toll. Illinoisranks fourthin concentration in higher education, teaching hospitals, — payroll and fifthin employment, andNebraska ranks fifth precision production, and electronics Massachusetts invalueofshipmentsandvalueadded. would be expected to rankhigh in measures ofrelative Onewayto combine these criteria intoa single productionvolume, and itdoes. comparisonmeasure is to assignarankscore toeachand Rankings of Top Five Medical Device States by Production Characteristic Absolute Size Per Capita 1 VALUEOF VALUEOF SHIPMENTS EMPLOYMENT PAYROLL VALUEADDED RANK SHIPMENTS EMPLOYMENT PAYROLL VALUEADDED CA CA CA CA MN MN MN MN I IL IL IL IL 2 CT UT MA CT MA NY MA MN MA MA UT MA 3 MN MN MN MA 4 UT CT IL UT FL MA NY FL 5 NE IL CT NE Source:U.S.BureauoftheCensus, 1997EconomicCensus THE MEDICAL DEVICE INDUSTRY IN MASSACHUSETTS 3 BASIC CHARACTERISTICS OF THE 1997 on capital expenditures forall medical device MASSACHUSETTS AND MEDICAL U.S. manufacturingestablishmentsinthestate. DEVICE INDUSTRY Industrial Composition ofthe Medical Number and Size ofEstablishments Device Sector According to the 1997 Economic Census, there InMassachusetts, the largest industryin the medical were 264 manufacturingestabUshments in the device sector,with 37 percentofmedical device state's medical device industry. These companies employment, is surgical and medical instruments. The employed 20,800workers, or 3.39 ofeverythousand resi- nextlargest,with 23 percentofemployment, is dents. Nationally, therewere 335,800 employees in 1997, electromedical and electrotherapeuticapparatuses. In or 1.26 per thousand residents. The industryis thus 2.7 contrast, these two industries comprise 31 percentand 16 times as concentrated inMassachusetts as in the nation percentofnational medical device employment, overall. Thevalue ofshipments from the state's respectively. The relative concentration ofthese two manufacturing facilities totaled $4.0 billion, with a industriesinMassachusettsreflects the state's payroll in 1997 of$1.0 billion. comparative specialization in precision specialty Aggregate salesare dominated bya handful oflarge production and electronics. companies. In a 2000 Boston BusinessJournal surveyof The distributionofemployment inMassachusetts thelargest25 medical device employersinMassachusetts, amongtheothermedical deviceindustriesis 11 percentin 1999sales ranged from $2.8 billion for Boston Scientific surgical appliances and supplies, 9 percentin irradiation Corp., the largestcompany, to $2.5 million forUroMed apparatuses, 9 percentin ophthalmic goods, 7 percentin Corp., the 24th-ranked companyin termsofsales. invitro diagnosticsubstances, and4 percentin laboratory As of1998, there were justovertwo dozen apparatuses and furniture. Relative to the nation asa Massachusetts-headquartered, publiclyheld medical device whole, Massachusetts has a higherproportion ot its companies, with $3.2 billion employmentin irradiation apparatusesand a lower in sales. Although thevast proportioninsurgical appliancesand suppliesandinvitro majorityofcompaniesare diagnosticsubstances. privatelyheldandsmall by comparison (approximately Productivity halfofthese manufacturing /Another important industn-characteristic is productinty. establishmentsweresmall, In conjunction with emploNinent, producti\it)- employingfewer than 20 determines the sector's contribution to the economic employees), theyare productand income itgenerates. WTiereasMassachusetts criticallyimportantto the manufacturingoverall is characterized byhigh productiv- vitalityand technological advancementofthis industry. ityrelative to the nation, medical devices is a high- One indicatoris the scale ofventure capital funding, productivit}'sector relative to manufacturingwithin whichistargeted tosmall start-ups. Overthe four Massachusetts.Accordingto the 1997 EconomicCensus quarters endingin the third quarterof2000,venturecapi- (U.S. DepartmentofCommerce, 2000a), productivityin tal fundingreceived bythestate'smedical device firms medical devices, measured by thevalue added per totaled $314million (PriceWaterhouseCoopers, 2000). To production worker hour,^ exceeds thatotoverall illustrateits magnitude, this investment is roughlyequal manufacturinginMassachusettsby 52 percent, capital to the total research and developmentspendingofthe 26 expenditures perworkerin medical devices exceed those Massachusetts-headquartered publiclyheld medical device ofoverall manufacturingin Massachusetts by 26 percent, companiesin 1997 andisnearlytwicetheamountspentin and the proportion ofemployeeswhohold non- photocourtesyofSmithirNephew, Inc.,EndoscopyDivision THE MEDICAL DEVICE INDUSTRY IN MASSACHUSETTS