Rich European market beckons U.S. device manufacturers - Industry Overview

In the 1990s, "globalization" has emerged as one of the most ubiquitous of business buzzwords. It's the Oklahoma Land Rush writ large, with everyone from breweries to automakers scrambling to stake their claim to millions of Chinese or Czechs comprising vast, untapped markets. This megatrend is affecting the medical device industry as well - although, as usual, with a particular spin. It's timely, then, to take a look at the opportunities and challenges posed on the other side of the Atlantic.

Until relatively recently, the biggest impetus for establishing an overseas presence could be summed up in three letters: FDA. The rapidity of the approval process abroad only emphasized the hurdles faced at home. The 800 days it takes for a Class III device to be reviewed here makes an interim cash flow of German marks and French francs a necessity. And many firms have set up full manufacturing capability abroad in an effort to cut down on both onerous shipping costs and response times to local markets. So it is that many U.S. device firms are expanding faster abroad than they are at home, bolstered by a steady stream of foreign acquisitions.

To be sure, other countries will beckon as long as the U.S. approval bottleneck remains. But even if that bottleneck were to disappear tomorrow - and progress is being made in that direction - aggressive overseas expansion will continue apace. In fact, the vast potential of foreign markets in their own right, rather than barriers at home, is now the most compelling reason to look abroad.

How big is the overseas market? By the year 2000, Europe is projected to represent about 40% of the device market - up from about a third today. For some devices, Europe has already become a bigger customer than the U.S. Much of this has been spurred by the post-Communist economic boom; Germany, as well as much of Eastern Europe, has made significant investments in its health care infrastructure that is just now starting to become apparent.

The importance of a dedicated sales presence

Increasingly, taking advantage of these opportunities means having a dedicated presence on the ground in Europe. While it was once the case that European sales and marketing could be managed stateside, that time has passed. Each increase in volume underscores the role of logistics - no small consideration, even as the European Community becomes more of a reality. There will be fewer hurdles after the E.C. directives take full effect in 1998, but that scheduled change has had the unintended effect of creating an interim period of regulatory flux. And there are many significant emerging markets, such as those in the former Eastern bloc, that remain, at least for now, outside the E.C. Additionally, it is important to remember that navigating one's way through European regulation is an extremely labor-intensive process. In contrast to the U.S., where laws are constructed to be as specific as possible, in Europe legislation more often acts simply as a guideline, with details to be hammered out in meetings with officials of various ministries and departments.

Despite these obstacles, there are many reasons for the device executive to be excited at the prospect of a European billet. In many ways, the forces at work in the health care industry will be familiar. Much of Europe has been following the American lead - with the difference that reform there is largely directed by the government rather than by the market itself. But the move to product differentiation by cost, the increased emphasis on primary care, and the resource allocation mindset all will make an American feel right at home.

One significant difference, however, is the structure of medical research funding. In the United States, government and academia bear the brunt of research costs. For many specialties on the other side of the Atlantic, however, research funding is largely shouldered by industry. Obviously, this presents significant opportunity for a firm looking to establish a market presence. At the same time, however, facilities have a natural tendency to hedge their bets by establishing sponsorship agreements with more than one company. As a result, in many categories earning 100% of a facility's business is all but impossible. Device companies with manufacturing plants on the Continent also need to be aware of the growing expectation of physicians there to be included in basic R&D. Increasingly, European doctors are of the opinion that their long record of excellence at the clinical trial level confers to them the right to work as partners on a more fundamental basis.

America's marketing ingenuity

One comforting universal is the effectiveness of solid sales and marketing. While Europe may comprise dozens of cultures, the fact remains that a stenotic heart valve is the same for a Swede as for a Spaniard. This poses an opportunity for the American sales and marketing savant who can cut through the cultural differences to create a straightforward, uniform message. After all,marketing expertise, just like medical technology, is a key American export. It's understandable for the sales and marketing executive confronting the European challenge to find himself or herself more than a bit overwhelmed by the multitude of audiences. But Europe, precisely because of its diversity, is fertile ground for a focused, disciplined approach. The message of cost containment, service and outcomes is ultimately the same in any language.

Michael T. Kelly, a former vice president at St. Paul, Minn.-based St. Jude Medical, now leads the worldwide medical device practice at Russell Reynolds Associates, an executive recruiting firm. Jacques Bouwens, formerly St. Jude's human resources director for Europe, now heads the European branch of the practice.

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