Something New, Something Used, Something Sterile: Stryker Embraces Recycled Medical Devices

6/29/11Follow @xconomy

Stryker has not been shy about shopping for acquisitions of late. Last year, the Kalamazoo, MI-based company bought Boston Scientific’s neurovascular unit for a cool $1.5 billion, its most high profile (and expensive) deal in recent memory.

But I’d argue Stryker’s most significant purchase of late occurred in 2009 when the medical device maker bought Ascent Healthcare Solutions for the relatively small sum of $525 million.

Why? Ascent is one of the nation’s largest recyclers of single-use medical devices and the natural scourge of new medical device makers like…Stryker. In this corner of the medical device business, companies like Ascent and SterilMed take previously used devices like ultrasound catheters and compression sleeves, spruce them up, and sell them back to hospitals. That process, known in the trade as reprocessing, obviously cuts into sales of original device manufacturers. Why buy a new catheter when you can buy an almost-good-as-new-one for half the cost?

A cynic at the time might have theorized Stryker’s purchase of Ascent was a ploy to exterminate a pest from the market. Stryker says its motive was quite the opposite.

“I’m not saying it was ‘if you can’t beat them, then join them,’” says Marci Kaminsky, Stryker’s vice president of communications and public policy. “We saw it as a burgeoning industry that we would like to be a part of.”

In some ways, Stryker’s embrace of a business it has long opposed speaks volumes to not only the growing popularity of reprocessors but also the shifting healthcare landscape bedeviling the broader medical device industry.

By some estimates, reprocessors generate $250 million to $500 million a year in sales, a small, but fast-growing slice of the overall medical device pie. A 2009 report by GlobalData estimates the reprocessing market will generate a 9 percent annual growth rate and hit $1 billion in sales by 2015.

Faced with a weak economy, hospitals are trying to control costs by shunning shiny new devices in favor of less expensive reprocessed products, analysts say.

“The economic recession has played its part in boosting the reprocessing industry,” the GlobalData report says. “Dwindling cash reserves have pushed hospitals and clinics towards tightening hospital spending. In the U.S., it has now become the norm for hospitals to reprocess [devices]- with some level of processing now being undertaken in 70 percent of hospitals nationwide.”

Understandably, medical device makers are not too pleased. Though reprocessed devices are typically inspected, restored and sterilized, the industry has argued the products are still unsafe.

“The reprocessing of medical devices designed to be used once is inherently risky,” said Stephen Ubl, then president of the trade group AdvaMed, in testimony to the House Government Reform Committee in 2006. “These extremely small and/or structurally complex devices are difficult to properly clean and sterilize. In addition, the cleaning process can have a debilitating effect on the durability of materials in these devices.”

Ubl also urged Congress to ask the Food and Drug Administration to hold reprocessed devices to the same safety and efficacy standards as original devices.

Over the past decade, the FDA has increased its oversight of the reprocessing industry.

Following legislation passed in 2002, FDA imposed additional requirements for about 70 types of reprocessed devices. The agency also required labels so that users would recognize such devices. FDA now inspects reprocessors and monitors reports of adverse events involving reprocessed devices.

With some reprocessed devices that were originally cleared through the 510(k) process, the FDA requires companies submit additional “validation” data regarding cleaning, sterilization, and device performance. The typical 510(k) process is simpler, in which medical device companies just need to show their new product is substantially equivalent to an older one.

Cynics here could say that by raising the regulatory bar on reprocessors, AdvaMed and its members were doing what they could to snuff out their low-cost competitors. Ironically, the original device makers’ push for more FDA oversight of reprocessed devices has helped reprocessors gain credibility among customers, says Laura Schrader, a former medical device consultant who’s now CEO of 3D Biomatrix in Ann Arbor, MI.

With all of the testing and regulatory hurdles now in place, “you know you’re going to get a device that works,” Schrader says.

Big medical device companies aren’t the only ones wondering whether reprocessing is the way to go. In 2008, the Government Accountability Office (GAO), the investigatory arm of Congress, released a report that said it lacked enough data to compare the safety of reprocessed devices versus original devices.

However, the agency concluded: “given that the available data, while limited, do not indicate that reprocessed [ devices] present an elevated health risk.”

Reprocessed devices, however, still face a “bleak future,” GlobalData says. Original medical device makers’ continued campaign for more regulation could drive up the cost of reprocessing devices, potentially erasing any price advantage they enjoy over new devices, the report says.

Lars Thording, Stryker’s senior director of marketing and public affairs for the Ascent business, has been quite vocal in decrying what he calls the “desperate tactics” of the medical device makers to thwart reprocessors. For instance, companies like Johnson & Johnson are pushing for exclusive sales agreements with surgeons that would shut out reprocessed devices, he says.

But there are larger macroeconomic factors shaking up the medical device industry that are working in the favor of reprocessors. In major categories like cardiac rhythm management (pacemakers and implantable cardioverter defibrillators), devices have become less about innovation and more about cost and volume.

Gone are the days where there is “technological innovation for the sake of technological innovation,” Thording says. “That’s fundamentally different from how medical device makers think, to push out innovative devices to move the bottom line.”

And hospitals need to save cash. The GlobalData report estimates a 100-bed hospital can save up to $100,000 a year by using reprocessed surgical tools like laparoscopic trocars, ultrasonic scalpels, and multi-clip appliers.

Of course Stryker already knows this. The company plans to invest heavily in Ascent, which it recently renamed Stryker Sustainability Solutions.

While Stryker units typically operate their own sales teams, the company is moving towards a more unified approach. That puts Stryker in the awkward position of trying to sell both its new devices and reprocessed ones to the same customer. In essence, the company may be competing with itself.

But that’s not how Stryker sees it. The company envisions itself as a partner that will help hospitals best meet their needs, which includes saving money.

“In order to compete, we have to offer more than just innovative products but also cost savings,” Kaminsky says. “We want to be the wingman to hospitals.”

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