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Major trends in healthcare are redefining the medical and surgical equipment market. In the light of difficult market conditions, many medical device companies are responding by cutting back on research and development projects. For example, Medtech giants like Medronic and GE Healthcare have been reducing research and development spending as a percentage of sales and relocating budget to non-technology related growth drivers, like marketing, regulatory compliance etc. This is despite the fact new innovations and easy-to-use designs have never been more important. Consequently, contract development is becoming a means to cut costs and reduce risk for medical device manufacturers.
Healthcare budget cutbacks by governments in developed economies are putting pricing pressures on medical device manufacturers globally. Implementation of rigorous government initiatives, such as additional excise duty of 2.3% on medical devices in the US, or, in the UK, the Department of Health’s new “efficiency programme” designed to radically cut costs, is creating unfavourable conditions for medical device producers. Changing dynamics in the healthcare industry are encouraging medical device buyers to increasingly focus on value-for-money medical equipment and have heightened the importance of hospital managers and financiers in medical device buying decisions.
As medical device producers cut costs, product design and development is becoming an increasingly more important part of outsourcing. The revenue of leading contract development companies like Shandong Weigao Co Ltd and Sterigenics International Inc has been recording double-digit growth over the last couple of years.
Contract development is cost-effective for the medical device manufacturers. Depending on the company and the product, contract development may help to save up to around 15% of total production costs. Using contract development services can also help to avoid excess labour and engineering costs, as new product development projects often require rapid recruitment of employees for short-term assignments. Finding temporary help can be time-consuming and staff training usually takes longer than initially planned. Also, bringing temporary employees to the device development project may increase the confidentiality risks. Consequently, outsourcing is a good tool to reduce a number of risks.
As a result, many medical device contract manufacturers are stepping up their game to meet this growing need for contract development. The contract development companies have been entering into strategic alliances or making acquisitions in recent years in order to widen product ranges as well as expand supply and distribution channels. For example, in 2013, Sparton Corporation acquired Beckwood Services Inc in order to gain access to wider geographic coverage.
Currently, however, the medical equipment companies mostly outsource the development of considerably lower-risk devices and those that do not fall under the core competence of a medical equipment producer. Despite this, more medical device manufacturers increasingly trust that medical device development companies have a pool of engineering talent and can efficiently apply suitable technology to the product concept. As medical device companies previously liked to do everything from scratch, the growing product development outsourcing is evidence of a shifting culture in how medical devices are produced. As a result, contract development will become an increasingly more important part of medical device production.