Medical device industry: the changing business and talent landscape by Korn Ferry

Medical device industry: the changing business and talent landscape by Rodrigo Ara첫jo, Richard Arons, Jerome Bucher, Ulrika Hagle, Ling Li, and Robert Ruh

September 2011 Expansion in emerging markets in Asia and South America is critical to medical device manufacturers looking for top line growth. But finding the requisite talent and leadership is rife with difficulties, including hyper-local needs, state-run competitors, and high turnover.

Across the developed world, makers of medical devices face a perfect storm of increased regulatory scrutiny, more stringent reimbursement requirements, and aggressive new procurement practices. In search of new top line growth, manufacturers are all looking to a land some call OUS, for Outside the United States, and others call BRIC, for Brazil, Russia, India and China. But seeking salvation in emerging markets brings its own challenges, not least in talent acquisition, management, and retention. How did we get here? Not so long ago, medical devices were seen as the less risky alternative to biotech in the race to apply innovative technology to health care. Devices typically had lower regulatory hurdles, shorter time to market, and fewer outright failures than biopharmaceuticals. In addition, acquisition by big players often provided a quick exit strategy for founders and early-stage investors. But that has changed. Technological innovation is still prized, but it only gets a player a seat at the table. A series of high-profile recalls and other self-inflicted wounds have prompted politicians to view medical devices with a sharper eye and, in turn, prod the Food and Drug Administration to raise the bar on clinical trial outcomes. Health care reform in the United States and diminished government revenues across the European market have netted tougher reimbursement protocols. At the same time, providers have become savvier buyers, shifting major purchase decisions from surgeons to supply chain specialists schooled in the tough procurement protocols of heavy industry.

“ The regulatory environment has become very difficult in the U.S. Soon it will take as long in the U.S. as in Japan to get product to the market.” J. Raymond Elliott Chief Executive Officer, Boston Scientific

Factor in the stagnation since the 2008 financial crisis, and it is no surprise that makers of medical devices face an unfriendly environment with no respite in sight. In this tough climate, the robust economic growth in Asia and parts of South America is like a bright light in the darkness, and device companies have focused on those markets. But making headway in what used to be called the Third World is not easy, and results have been variable. This paper will explore the challenges and opportunities, and the specific implications for talent strategy in emerging markets.

Headwinds hitting the sector When The New York Times and Washington Post run front-page headlines about failing hip implants, faulty heart defibrillators, and over-used arterial stents, politicians take notice. And despite the popular rhetoric about reducing regulations to benefit business, elected officials’ inevitable reaction to these news stories is to lean on the FDA to get tougher with device makers. FDA officials respond by asking for more detailed data, more relevant endpoints, and more clinical trials, all of which increases the money and time required to bring a new device to market. Approval times in the United States have become so protracted that some device makers now launch new products in Europe rather than wait for the FDA. In some cases, FDA review has taken so long that companies are already selling second or third generation devices abroad while still awaiting initial approval in the U.S. “The regulatory environment has become very difficult in the U.S.,” said J. Raymond Elliott, chief executive officer of Boston Scientific. “Soon it will take as long in the U.S. as in Japan to get product to the market.” And while regulatory delays have a negative impact on device companies’ revenues, they also restrict patients’ access to advances in health care technology. Executives say the FDA is well aware of these problems, as well as industry and political discontent with the agency’s performance, and seems to be trying to address these issues. But there is no evidence yet that their efforts are paying off in better performance. “It is increasingly difficult to get new products cleared by the FDA and into the market,” said James V. Mazzo, Abbott Medical Optics’ president and AdvaMed chairman. “This is a major headwind for innovation.” In Europe the headwind is reimbursement. A CE Mark—indicating that the product has met the European Union health or safety requirements—doesn’t necessarily mean the product is market-ready. Healthcare payers want more comprehensive trials to establish clinical efficacy and to demonstrate compelling healthcare economics.

“Technology and innovation can no longer succeed on the cool factor alone,” said Scott Herring, Vice President, EMID/EbD of Covidien. “It has to be complemented by an economic proposition that ultimately delivers a cost-effective solution to the market.” European providers have also become more sophisticated buyers of health care technology. With many countries implementing austerity practices to reduce debt, there is tremendous pressure on hospiHospitals have begun to create dedicated procurement tals to be smarter with how they departments or purchasing organizations. They often spend their money. No longer do hire professionals from other industries that know how individual surgeons choose what to squeeze pennies. products they want to use. Instead, hospitals have begun to create dedicated procurement departments or purchasing organizations. They often hire professionals from other industries that know how to squeeze pennies.

Talent that can make a difference In such a market, product features and price alone do not drive the buying process. Sales executives must be able to address cost-of-care and efficiency improvements, value-added services and comprehensive solutions. They must also understand the needs of varied stakeholders— including clinicians, procurement staff, hospital executives, and local policymakers—and be able to communicate effectively with each type of customer. This requires not only solid relationship-building and negotiating skills, but also a firm understanding of health economics and the mechanics of reimbursement. “One way of justifying price premiums will be through services,” said Rob ten Hoedt, president for Europe at Medtronic. “We must be seen as a partner of the hospitals—helping them solve their problems and acting as a full-service provider.” Key account managers won’t necessarily come from sales, but from other areas of the business, he said. “They are able to make large deals, connect with senior leaders, and have abstract thinking. On the other hand, new technologies will be adopted by the doctors first and here it will be important to have product specialists interfacing with them.” Often overlooked, quality assurance is an area ripe for transformation. This is a critical function for all device companies, but of greatest significance in implants, where product failures can be tragic for patients, and reports of defects often make front-page news. Nevertheless, many companies still have patchy quality control systems, as reflected in the high number of warning letters issued by the FDA. Too often the quality function is reactive rather than proactive.

New patients in emerging markets The tougher regulatory and reimbursement environment, coupled with a deep and protracted recession in the United States and Europe, provide a stark contrast to rapid growth in many emerging market countries. Particularly in parts of South America and Asia, millions, and potentially billions, of people will enter the middle class and gain access for the first time to modern health care practices and technology. As these patients become more engaged in their health care options, they influence the market, impacting government, healthcare agencies, regulatory affairs, and reimbursement policies. In Latin America, the need for better and faster health care is driving the industry to implement regulatory changes and to adopt more mature operational systems with effective monitoring processes all across the region. In Sao Paolo, Brazil’s largest city, more than 90 percent of hospitals, public and private alike, are expanding. They are building new facilities, therapeutic areas and specialties, responding to 30 million people a year entering the health care consumption market. Nevertheless, there is still a huge demand to improve patient access to basic healthcare in Latin America. “There is low penetration for high-tech solutions, In Sao Paolo, Brazil’s largest city, more than 90 percent which are still very expensive of hospitals, public and private alike, are expanding. and accessible mostly through They are building new facilities, therapeutic areas and government,” said Jim Hogan, specialties, responding to 30 million people a year Regional GM for Medtronic and based in Miami. entering the health care consumption market. Growth is also strong in Colombia, newly stable after decades of drug violence and political strife, as well as Argentina, which has emerged from its own severe financial crisis. Chile, long the continent’s economic leader, is growing more slowly but is also expanding healthcare offerings whilst Peru has promising opportunities to develop potential business in healthcare.. In Asia, China and India are often thought of as already “emerged,” while other countries are still in progress. That sentiment may exaggerate the state of health care delivery in the largest countries, but it points out the need for country-specific strategies. Across the continent, primary health care is finally reaching the masses, but what works in India may not work in Indonesia or Vietnam.

Even in China, the scale of health care providers, the still-modest per capita income, and even the physique of individual Chinese may dictate a solution quite different from the U.S. or Europe. A 100-bed hospital in China will not likely buy the same multi-million dollar imaging device as a major U.S. teaching hospital. A Chinese surgeon’s hands may be smaller than his European counterpart. In response, many medical device companies are designing and manufacturing products locally for Asia.

Consumer demands, competitor dangers “We see a shift of innovation, with R&D centers moving to China and India,” said Jean Luc Devleeschauwer, Regional Vice President at Novartis Vaccines and Diagnostics Hong Kong. “The customers and end users will have more impact on the next generation of products.” In the past, said Devleeschauwer, “this region was viewed as a developing market and hence ‘accepted’ whatever was sent from the west. The customer profile has now changed,” he said. “The person who now runs a hospital in China may have been to the same university as the executive who is running a hospital in the U.S.” Doing business in Asia often means competing with state-owned conglomerates in addition to other multinationals, and some governments are not reluctant to use regulatory processes as a form of protectionism. While transparency and compliance with ethical business practices have improved, they may still not reach Western standards in many markets. “What is different in Asia Pacific is that unlike the West—the U.S. and Europe—where the market is often dictated by the competition, here in Asia Pacific, it is very often driven by government,” said Harry de Wit, President, Asia, for Covidien, who is based in Singapore. “In Korea, where the government lowered the reimbursement, the entire medical devices and equipment market was hit.” At the same time, Asian markets are adopting some of the same sophisticated procurement practices prevalent in the West. “Surgeons tended to be the decision makers in the past, but in the more sophisticated markets such as Hong Kong, Taiwan, and Korea, procurement and tender processes as well as other government initiatives have kicked in,” said de Wit. This change is “resulting in roles that are increasing in importance such as Government Affairs, Regulatory, Health Economics, and Medical Affairs,” he said.

“What is different in Asia Pacific is that unlike the West—the U.S. and Europe—where the market is often dictated by the competition, here in Asia Pacific, it is very often driven by government. In Korea, where the government lowered the reimbursement, the entire medical devices and equipment market was hit.” Harry de Wit President, Asia, Covidien

The talent war escalates Medical device companies have long fought the talent war on two fronts: attracting high potentials in a highly competitive job market, while working equally hard to develop and retain the best people already on board. Both the increased regulatory and reimbursement pressures in the developed world, and the growing need to build capacity in BRIC countries, have escalated and globalized the war for talent. Talent pipeline in Latin America is experiencing a lack of ready now people with strategic mindset in critical roles and high caliber people in key positions such as BU Directors, Sales, Supply Chain as well as GMs in

small geographies in the region. “Low attractiveness of top talent within the healthcare segment tends to change profiles and identify new people from other industries to sustain growth and drive transformation within organizations” says Mauricio Ortiz, VP & GM Americas at Boston Scientific. In the past the war for talent combatants were only multinational corporations, fighting for people with a depth of experience and international exposure, whether for secondment or education. Now Asia’s state-owned conglomerates and the local companies are looking for the same sort of profile, and they are talent combatants were only prepared to search globally.

In the past the war for multinational corporations, fighting for people with a depth of experience and international exposure.

Being sent to Asia used to be considered a hardship posting, and Western executives’ compensation packages would be filled with perks and special incentives. That has changed dramatically over the last five years; now only high potentials are even considered for postings to Asia, especially to China. Asia is considered a plumb job to prepare for bigger leadership roles back in the home office, or in another foreign posting in a more mature market. As a result Western executives often do not stay in Asia more than five years.

“Even in China, the fit is not there. Returnees are not accepted as they are viewed by the locals as being too Western.” Jean Luc Devleeschauwer Regional Vice President, Novartis Vaccines and Diagnostics, Hong Kong

High turnover rates across the entire region present a challenge to multinationals, which bear the training costs for these individuals. “Although employee turnover is still considered high,” de Wit said, “we are below the industry average. We do not want to be perceived as the training ground for the competition.”

Expats and returnee shortcomings While repatriation of some of the scores of Asian students that have sought higher education in the West could provide one source of talent, executives say there are often both skills-based and cultural obstacles. “Even in China, the fit is not there,” said Devleeschauwer of Novartis. “Returnees are not accepted as they are viewed by the locals as being too Western.” Difficulties in matching talent to geography are not unique to Asia. “It is difficult to get talent to move east and often people from Eastern Europe don’t want to go back after they’ve been in Western Europe,” said Peter Nicklin, President of Baxter Europe. “There is a career perception that the East is a backwater. And because market access has become so important, it is harder now to bring in expats to these markets. You need local people who have the contacts and really understand the system.”

Regardless of geography, medical device companies face a shortage of experienced regulatory talent. Incumbent regulatory specialists are graying, and young applicants are scarce. “The increasingly difficult regulatory environment makes finding capable regulatory affairs people especially challenging, said Mazzo of Abbott.

Acknowledgments

Korn/Ferry International would like to thank all of the executives who contributed their thoughts and insights for this paper. Brian Concannon CEO, Haemonetics

In this challenging hiring environment it is helpful to use assessment tools to look behind the résumé, to see what drives the individual. Experience alone does not determine if a person will be successful in a role; cultural fit is vitally important. Successful recruiting at this level also demands that the organization and the professional services firm move beyond a vendor/client relationship and really act as one, partnering to spot key talent.

Rob Reindl

Corporate Vice President, Human Resources, Edwards Lifesciences

Ray Elliott

CEO, Boston Scientific

Jim Mazzo

President, Abbott Medical Optics

Peter Nicklin

Corporate Vice President & President, Baxter Europe

Scott Herring

A new generation of leadership Senior leadership in the emerging markets poses an additional talent challenge. Given the need to drive growth from these regions, companies cannot continue to project that leadership from remotely headquartered locations. Seconding expatriate Americans or Europeans no longer suffices for managing business in BRIC countries. Companies now need to recruit locally. If new products are going to be developed for local markets, that new leadership must have strategic and upstream marketing skills, and must be able to guide product development in the target country. Leaders also need entrepreneurship, managerial courage, and the ability to be creative and manage innovation. This is far different than when region heads and country managers primarily had to manage sales and distribution. Additionally, the ethics of the industry infers the need to act with honor and character.

Vice President, EMID/EbD, Covidien

Pierluca Giuliani

Vice President HR EMEA, Johnson & Johnson MD&D

Johan Malmquist CEO, Getinge AB

Rob ten Hoedt

President, Europe & Canada Medtronic

Roland Diggelmann

Managing Director, Region Asia Pacific, Roche Diagnostics

Shankar Kaul

VP, Baxter Healthcare Asia, Renal, Asia Pacific & General Manager SEA\India

Jean Luc Devleeschauwer

Regional VP and GMA/P, Novartis Vaccines & Diagnostics

Wayne Spittle

President & CEO Asia Pacific, Philips Healthcare

Harry de Witt

President, Asia, Covidien

John Capek

Medical device executives say they see a bolder generation of young leaders coming up, individuals who have the appetite to more aggressively go after these big emerging markets, and to extend decentralized empowerment. Companies that once succeeded by exporting Western efficiencies must become locally effective. The winners will be leaders who can strategically run a company locally, while remaining true to the parent organization’s competencies and cultural strengths.

EVP Medical Devices, Abbott

Jose “Joe” Almeida

President and CEO, Covidien

David Perez

Chairman of the Global Blood Management, Terumo Corp.

Jim Hogan

Regional GM, Medtronic

Jen Vieira

Regional HR Latam, Covidien

Martha Liano

VP HR Latam, J&J

Paulo Bolgar

HR VP Latam and Canada, Baxter

Mauricio Ortiz

VP & GM Americas, Boston Scientific

Ivan Tornos

former VP & GM Americas, Covidien

Sabine van der Meulen

HR Director Latam, Medtronic

Rodrigo Araùjo is the Regional Market Leader of Latin America for Korn/ Ferry International’s Global Life Sciences Market, based in São Paulo rodrigo.araujo@kornferry.com

Richard M. Arons, Sc.D., is Office Managing Director of Korn/Ferry International’s Princeton office and focuses on Medical Devices and Diagnostics assignments. He personally provides a range of talent related services to his clients, including senior executive search and executive coaching. richard.arons@kornferry.com Jerome Bucher is Regional Market Leader, Asia Pacific, for the Global Life Sciences Market, based in Beijing. Mr. Bucher has worked in China for over twenty years and leverages his local insights and cross-cultural sensitivity to work with multinational companies in pharmaceutical and medical device industries. jerome.bucher@kornferry.com Ulrika Hagle is the Managing Partner of Korn/Ferry International’s Life Sciences Market for EMEA, based in the Firm’s London office. She is a member of the Firm’s Global Life Sciences Market. Ms. Hagle focuses on advising senior leaders in the medical device industry on talent issues. ulrika.hagle@kornferry.com Ling Li is Vice Chairman, Global Life Sciences Market for Korn/Ferry International, based in the Firm’s Hong Kong office. Since joining the Firm in 1991, Ms. Li has been involved in an array of senior-level search initiatives throughout the region, with a focus on Greater China and Asia Pacific. ling.li@kornferry.com Robert Ruh, Ph.D., is Global Sector Leader for Medical Devices and Diagnostics, based in the Firm’s San Francisco office. Mr. Ruh has spent the majority of his career helping life sciences companies to recruit and develop their executive leadership teams. robert.ruh@kornferry.com

About The Korn/Ferry Institute The Korn/Ferry Institute generates forward-thinking research and viewpoints that illuminate how talent advances business strategy. Since its founding in 2008, the institute has published scores of articles, studies and books that explore global best practices in organizational leadership and human capital development.

About Korn/Ferry International Korn/Ferry International, with a presence throughout the Americas, Asia Pacific, Europe, the Middle East and Africa, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to attract, deploy, develop, and reward their talent. Visit www.kornferry.com for more information on the Korn/Ferry International family of companies, and www.kornferryinstitute.com for thought leadership, intellectual property, and research.