DRAFT
Case studies of Israeli Medical Device Companies
IFISE Project
Dan Kaufmann
Chen Levin
Efrat Zakai
The Jerusalem Institute for Israel Studies
Table of contents
Overview of the medical devices industry 4
1. The medical devices market 5
The medical device sector in Israel and in Italy 6
1. Israel 6
2. Italy 10
Quantitative and qualitative results 14
1. Research sample 14
2. Summary of results 15
3. Entrepreneur background 16
4. Trigger and reasons for company foundation 18
5. Sources of finance 20
6. Contribution of the investors 23
7. Licensing, patents and knowledge 26
8. Profile of successful entrepreneurs 27
Critical points and policy recommendations 30
Overview of the medical devices industry
A medical device is defined by the U.S. as an instrument, apparatus, implement, machine, contrivance, implants, in vitro reagent, or other similar related article, including any component, part or accessory which is:
1. Recognized in the official National Formulary, or the U.S. Pharmacopeia, or any supplement to them.
2. Intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease in man or other animals.
3. Intended to affect the structure of any function of the body of man or other animals, and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.
Confusion sometimes exists between unregulated consumer products and medical devices. Products are not considered medical devices if they have general utility but are neither dedicated to, nor intended or promoted for, medical applications.
General
While public equity markets have warmed considerably towards biotech companies during the last year, medical device and diagnostic companies have not benefited as widely from the genomics hype that has driven biotech IPOs and market caps. Although financing for mature medial device companies is better than is was last year, start-up companies still face significant problems with securing capital.
Like biotech companies, medical device and diagnostic companies also face FDA and European regulatory processes which is a critical and time consuming step contributing to long product development cycles. Initial approval marks the beginning of a very complex approval process. In the United States for example once FDA approval is secured, a device or diagnostic must be approved for reimbursement by the Health Care Financing Agency (HCFA), which is the administrator for Medicare and Medicaid Programs. HCFA’s judgements often influence a private insurer’s decision to provide reimbursement for a particular device. HCFA’s reimbursement approval process is also lengthy and ill-defined and can often make or break a young company.
These alone are often frustrating challenges for medical device companies. In addition, they are also faced with the uncertainty of the healthcare market.
The demand for medical devices is influenced by an increasing patient population and the focus on health care cost containment and preventative therapies. Medical devices include a broad range of surgical devices and equipment used in cardiovascular, orthopedics, respiratory, ophthalmic, neurology, urinary, disposable, infection and more.
1. The medical devices market
The global medical device market was valued at over $100 billion, of which $43 billion was generated from the U.S. market.
The U.S. is still the largest medical device market and leads the world in advanced medical technologies. The U.S. medical device industry is expected to grow at a compound annual growth rate of 9 percent between 1999 and 2004. It will continue to develop new innovative devices in minimal invasive surgery, cardiovascular, and orthopedic implants. However, cost containment constraints in the healthcare system have contributed to hospital cutbacks in medical device purchases.
The medical device industry outside of the U.S. has grown significantly in recent decades. During the 1980’s, markets outside of the U.S. accounted for less than 25 percent of the global medical device industry. Today, it represents about 60 percent. Latin America and Asia (excluding Japan) are the fastest growing regions in medical devices.
Western Europe is the second largest market and accounts for nearly 25 percent of the global medical device industry. Similar to the U.S., Western Europe will continue to invest in research and development and develop new technologies in surgical devices.
In Germany, for example, the market for medical devices is estimated at USD 12.5 billion (2000), approximately 13 percent of total health expenditures. There are roughly 1,200 local medical device manufacturers, which produced medical devices valued at USD 8 billion in 1999. The major consumer group is the in-patient, hospital sector, accounting for USD 7.5 billion in the year 2000, followed by the out-patient sector valued at USD 5 billion. As a result of health reform 2000 and cost and cost-containment measures, local production is expected to increase only moderately by 1.3 percent per year in the next years. Experts consider medical devices a growth market with excellent potential for U.S. suppliers of innovative and price-competitive products. U.S. medical device exporters to Germany hold a 30 percent market share and, with CE marked products, will continue to find excellent potential in Germany and other European countries.
In Asia, the Japanese market has the highest level of advanced medical technologies and economic development. Countries such as China and India will have greatest growth potential due to their large population and developing healthcare system. Also, countries in Southeast Asia will exhibit high growth as their economies and healthcare systems continue to improve.
Latin America is also one of the fastest growing markets in the global medical device industry. Countries such as Mexico, Brazil, Argentina and Chile are becoming more industrialized and are expected to show significant growth in medical disposable supplies and equipment.
The structure of the medical device industry has been changing due to acquisitions and mergers. Multinational manufacturers are consolidating in order to establish greater presence around the world. Some of the largest medical device companies have a number of subsidiaries such as Johnson & Johnson (e.g., Ethicon, DePuy, Cordis, J&J Medical, Critikon), Boston Scientific (e.g., SciMed, Microvasive, Schneider, EP Technologies) and Tyco International (e.g., Kendell, Shewood Davis & Geck, U.S. Surgical).
The medical device sector in Israel and in Italy
1. Israel
Israel’s healthcare sector remains amid a period of uncertainty. The continual political instability of recent years has been a marked factor in this malaise; healthcare policy has changed frequently and often faced widespread opposition. A major issue of contention is cost containment measures proposed in the wake of growing expenditure levels.
The Israeli medical device market is the largest in the Middle East and was valued at an estimated US$400 million in 2000 (Medistat, 2001). Despite the existence of a vibrant and rapidly expanding medical industry in Israel, the market is still heavily dependent upon imported goods. Market growth has been limited to below one per cent per annum in recent years, against a background of the economic slowdown and continued attempts by the government to contain costs.
Medical regulations
All medical devices, whether manufactured locally or imported, are subject to a Ministry of Health directive. The registration Authority is the Medical Device Department of the Ministry of Health.
Market for medical equipment and supplies
The Israeli medical device market is the largest in the Middle East and was valued at an estimated US$400 million in 2000. Per capita spending on medical devices in 2000 stood at US$66. Medical devices imported from the U.S. account for over two thirds of the market, with Israeli manufactured products contributing around a further 20%.
Both imports and exports have risen strongly throughout the 1990s (see figure), although 1997 and 1998 saw import growth decline considerably while exports continued to increase sharply. The growth in exports has been particularly strong since 1994, with the effect of increasing Israel’s positive balance of trade in medical devices nearly seven-fold to US$404.2 million in 1998.
Source: Meidstat, 2001.
Domestic production
Israel has a strong medical device industry, with approximately 150 companies with a combined turnover of over US$600 million. Around 80% of domestic production is exported.
Israel has several companies of international renown, including Laser Industries (ESC Medical), Oridion Medical and Mennen Medical. Israel’s best known medical device companies, Elbit Medical Imaging, and its subsidiary, Elscint, were split up and sold during 1998.
Many of Israel’s smaller companies are characterized by their high-tech innovative products, a result of strong government backing for R&D.
Leading domestic manufacturers include Aerotel Ltd, Agar Eletronics Ginosar, Atlas Researchers Ltd, AVR Communications Ltd, Card Guard Scientific Survival Ltd, CMT Technologies, Deldent Ltd, Elbit Medical Imaging, ESC Medical Systems, Medoc, Mennen Medical Ltd, Teva Medical, Oridion Medical, Tius Elcon Ltd and Tuttnauer Co. Ltd.
Teva Medical is a subsidiary of Teva Pharmaceuticals, one of the largest pharmaceutical manufacturers in Israel. Teva Pharmaceuticals also claims to be the largest manufacturer and supplier of hospital disposable supplies in Israel, through its wholly owned subsidiary, which was formerly known as Adam Medial Products Ltd. This company was founded through the merger of Trevenol Laboratories Ltd and Migada Medical Equipment Industries Ltd. Teva Medical’s range of disposables encompasses IV products, surgical sutures, blood bage and other products that complement Teva’s pharmaceutical lines. Travenol also provies home services.
Teva Pharmaceuticals reported a 36.5% rise in sales in 2000 to US$1.7 billion. Operating profit increased by 34.8% to US$244 million, with net profit rising 27% to US$148 million. Hospital supply revenue accounts for around 6% of Teva’s total turnover, standing at US$68.98 million in 1997.
Exports of hospital supplies only account for a limited share of total sales. They are based largely upon the ported IV cannula, Veno-O-lit, which is sold predominantly in Europe, and the SampLink blood sampling device for blood collecion bags, which is sold mainly in the US.
ESC Medical Systems, incorporated in Israel in 1991, manufactures medical devices utilizing lasers and proprietary intense pulsed light technology for non-invasive treatment of varicose veins, hair removal, skin cancer, skin rejuvenation, and other aesthetic applications. The company also markets surgical lasers for a variety of medical applications including ENT, OB/GYN and neurosurgery. ESC Medical plans to change its name in late 2001, pending shareholder approval, to Lumenis.
Corporate offices are located in Israel, where manufacturing, R&D and international sales are headquartered. Wholly owned subsidiaries in the USA, ESC Medical Systems Inc., Luxar and Sharplan Lasers, serve as the nucleus for direct sales in major North and South American markets. Other subsidiaries are located in France, Germany, Italy and the UK.
In 2000, the company had sales of US$161.6 million, an increase of 13.7% over 1999. Operating income stood at US$22.3 million in 1999, with net income at US$17.3 million.
In April 2000, ESC Medical acquired Coherent Medical, a manufacturer lf laser and light based technologies for medical and aesthetic applications. In March 2001, ESC Medical signed an agreement with the Germany company Karl Storz GmbH & Co., for the worldwide distributin of its GyneLase, used in the treatment of menorrhagia.
Exports
Exports of medical equipment and supplies have more than trebled since 1992. Israeli medical exports increased by 19.6% in 1998, standing at almost US$710 million. Exports have been traditionally strong in the electromedical and medical X-ray equipment sectors, due primarily to the presence of Elbit Ultrasound and Elscint. However, exports of electromedical equipment and miscellaneous medical and surgical instruments have surged in recent years to lessen the proportion of exports derived from imaging equipment.
In 1998, exports of electromedical equipment amounted to US$224 million, an increase of 81.9% over 1997 and equal to 31.6% of the total. Exports of medical X-ray equipment rose by
21.5% in 1998, worth US4210 million and equal to 29.7% of the total. Israel exported medical equipment valued at US$452 million in 1998, an increase of 23.5% over 1997.
The principle recipient of Israeli medical exports is the USA, accounting for 37.9% of the total in 1998, worth US$269 million. The EU accounted for 40% of exports in 1998, with Ireland the leading destination.
2. Italy
Medical regulations
European regulation of the medical device market is currently in a transitional phase. Old national regulations are in the process of being replaced by new EU medical directives which, it is hoped, will lead to greater conformity and harmonization of the European medical market. This is being done at present through two directives; one which covers implantable devices incorporating a power source, and a second one which covers the vast majority of medical devices from basic walking aids to sophisticated scanners.
Market for medical equipment and supplies
The Italian market for medical equipment and supplies is the fifth largest in the world and the third largest in Western Europe, behind Germany and France. In 1999, the medical market was valued at around US$3,350 million, equivalent to US$58 per capita. Despite having a strong manufacturing sector, Italy has a large balance of trade deficit in medical devices, exceeding US$1 billion in 1998.
Expenditure on new medical equipment is subject to government cost constraints. According to a survey of Italy’s electromedical industry association, ANIE, public funding for new electromedical equipment in 1997 amounted to only around US$235 million, around 20% of 1989 expenditure levels. This lack of investment has led to equipment becoming “dangerously old”. Only 34% of all medical devices in public hospitals and clinics had been installed in the previous five years, and18% were more than ten years old.
A combination of the recession, which affected most of Western Europe and government efforts to constrain public healthcare spending, contributed to a sharp fall in the value of Italian medical device imports in 1993. Exports showed more resilience, continuing to increase, albeit at a slower rate than in previous years. Stronger growth resumed over the next couple of years, peaking at 20.9% in 1995, before falling back to 3.3% in 1997. In 1998, however, import growth picked up to 9.7%.