In June 2008, Indiana-based interventional medicine device company Cook Medical agreed a significantly expanded contract with Tennessee healthcare purchasing giant Healthtrust Purchasing Group, to supply some of its 1,400 acute care facilities with medical devices in the areas of peripheral diagnostics, peripheral intervention, vena cava filters and peripheral stents.
This was undoubtedly a red letter day for the two parties involved, as well as of interest to the clinicians and healthcare professionals on the receiving end. What's more interesting about this deal at a wider level is that it is illustrative of exactly the sort of contract agreed day in, day out in Europe and the US between medical device manufacturers and distributors, and contract service providers. It also indirectly illustrates some of the issues manufacturers need to consider when making the crucial decision of who to partner with when bringing products to market.
One of the interesting elements of this deal is that HealthTrust Purchasing Group is what is known as "group purchasing organisation" or GPO. This is an organisation that, as its name suggests, supplies devices to groups of hospitals, nursing homes and other health-relating agencies, using its buying clout to leverage discounts.
GPO and geography
The GPO market is a vast one in the US. 96–98% of US hospitals are estimated to use GPO contracts, with sometimes as many as four GPOs being used per facility. What's more, around 70% of the $250bn spent each year on medical and non-medical products in the US is estimated to be allocated through GPOs, with GPO revenues expected to be worth almost $140bn by 2011, according to researcher Frost & Sullivan.
In a market of this size, whether you are a US medical device manufacturer looking to extend your market or a European one trying to break in, selecting the right trade partner and contract service provider is a decision not to be taken lightly. Yet, particularly for those introducing new products into the US, it can be a decision fraught with difficulty, says Shawn Walker, president of the Independent Medical Distributors Association (Imda) and a director at Massachusetts-based anaesthesia firm Bay State Solutions.
A common pitfall made by medical device manufacturers coming from outside is to go for a national distributor or a GPO because it seems like the easier option.
"Because the US is so large and there are such distances and geography involved, manufacturers often choose the path of 'least resistance', which is to sign on immediately with an individual distributor that has national coverage, rather than take the time to investigate smaller, more regional speciality dealer options," Walker explains. "Another potential mishap is to license technology to, or otherwise partner with, a large manufacturer with existing distribution in the US."
This may give the manufacturer a sense of getting immediate access to someone with national reach. However, on closer inspection it may not necessarily be the best option, particularly if you have locked yourself into an exclusivity agreement from which it is virtually impossible to later extricate yourself.
"One of the pitfalls of going with a large manufacturer or distributor is that you risk falling to the bottom of the pile," Walker adds. "A national distributor will probably have multiple product areas and multiple sales teams and so you potentially will be losing control of how your product is marketed. When working with a manufacturer, you effectively surrender your ability to develop your own brand in the US.
"If you have signed an exclusivity agreement with a national company and its reps fail to perform for you in all geographies, you cannot take the product away from them. What this means is that you could have unproductive territories 'tied up' for extended periods of time with little or no recourse. So there are a lot of issues of control and how much focus your product or device is getting with a national company. It is important to enter these types of relationships with your eyes wide open –ensure that you have contractual provisions for 'carving off' territories that fail to perform to expectations."
The difficulty with taking the regional approach is that it is potentially much more time-consuming in that you have to do all the due diligence and matching up the different pieces of the distribution quilt, as it were. "Either you have to do it yourself or partner with someone who can shepherd you through that process," Walker says. "Speciality distributors are a unique population, in that most focus on specific clinical specialities and types of customers, so it is important to know that your potential distribution partner calls on the types of clinicians and departments that would use your product. The ideal speciality dealer should have a portfolio of products that fit with your device, as well as numerous relationships within the clinician population you wish to market to.
Another common pitfall is for manufacturers to sign up regional distributors without an advance understanding of where their exclusive territories lie, and how those territories fit together to cover the whole US. "This becomes important because most speciality distribution companies insist on having exclusive marketing rights throughout their whole geography," adds Walker. "They will not accept a situation where they are stuck with partial territories – those that are left over due to overlapping coverage."
Medical device manufacturers also need to bear in mind that the medical device distribution supply chain in the US is somewhat "quirky", points out Andrew E Van Ostrand, vice-president of policy and research at the Health Industry Distributors Association (HIDA). This is in part because medical device manufacturers will often work directly with physicians and clinicians throughout device production, testing and useage. There may even be instances where the device representative is in the operating room with the clinician helping to advise and educate them on the best use of the device.
GPOs will often have dedicated contracts with specific manufacturers and so potentially have a lot of power when it comes to controlling the flow and distribution of products. Similarly to Walker, Van Ostrand emphasises that device manufacturers therefore need to be clear how "their" GPO works and what sort of relationships exist between it and specific physicians and hospitals.
"You need to understand the GPO's world and its existing relationships," he explains. "You also need to recognise the cost requirements of directly distributing your product or device. You need to be aware of the potential gains or losses of relinquishing direct control of your product over to a distributor."
"Whatever distributor you choose, you need to be absolutely sure they completely understand your market and are educated about your product. There needs to be a well-trained, well-educated sales team who will be able to answer physicians" questions. They will also need to be able to understand the specific needs of the hospital or institution."
For example, if your device is one that is focused on the treatment of obesity, it may be that there is a full suite of other, complementary products already on that distributor's books, This means that the distributor clearly already has a good 'entrée' into that market and that it may be possible to link products together when it comes to purchasing devices.
"If the distributor has already been a service provider for that hospital over the years it will have the pulse on those ordering trends," Van Ostrand points out. "Rarely are medical devices used, or purchased, in a vacuum."
At a practical level, when it comes to the wording of the contract, the IMDA has a standard distributors' agreement on its website that can act as useful template for device manufacturers. As a minimum, the issues that need to be addressed include exclusivity, length of contract, what the obligations are on both parties, how GPOs will be handled, termination for cause and exit clauses.
"It is possible, even probable, that you will want to get out of a contract without cause at some point," Walker explains. "You might go public, or hire your own sales force. You might sell the technology to another manufacturer, or simply create a new product that supersedes your existing product. If the relationship with the distributor is truncated for any of these reasons, the distributor will need to be remunerated for the role they have played in helping you get to that point. This should be spelled out in the contract far in advance, so that these types of transitions occur smoothly and with minimal interruption of service for the customers.
"It is important to get the lie of the land. You need to partner with someone who will determine whether or not your business model will work over here, too. The US marketplace is very unique. You may have inadvertently overpriced or underpriced your device or perhaps the packaging may be all wrong for the US market. It is important to be open to discussions with your distribution partners about changes you may need to make in your marketing strategy and your product so that it 'fits' here."
A GPO contract can be a useful asset to many manufacturers, but ensuring that the precise market is targeted for a product may often be an overly complex process. Understanding is the key to ensuring that such a partnership benefits manufacturer and GPO alike.