After the crisis

As surely as pandemics change the way people think and act – transmuting toilet paper into a two-ply elixir – it is changes in the way we behave that cause pandemics. The weeks of semi-random panic buying, though, didn’t quite counterbalance the long march of globalisation down the routes it has created for diseases to emerge and spread. Even lockdowns, and the growing acceptance of remote interactions they’ve brought about, are largely aesthetic adjustments in the context of the knotty system that undergirds the way people live and work. In many cases, they might have made the world more dependent on it.

“People talk about a new normal,” says Andrew Thompson, director of therapy research and analysis at GlobalData’s medical devices unit. He pauses, sighs deeply, and pauses again. Six seconds pass before he continues the thought. “I think things will revert to business as usual,” he says, forlorn.

Before 2020, the sun radiated, the earth spun and doctors carried out procedures – all safe in the knowledge that consumer preference followed faithfully after medical need. Major disease outbreaks featured in risk assessments, but disease outbreaks looked like swine flu: they didn’t stop joints being replaced, cataracts corrected or cancers screened. Medical device companies had never faced a revenue shock like lockdown and as much as Covid-19 might have revealed the weaknesses of medical supply chains, it’s also driven newly cash-strapped manufacturers to the panicked, survivalist thinking that makes people stockpile toilet rolls.

“In my experience, companies, having suffered a revenue shock, do tend to be more focused on survival than the longer term,” says Thompson. “It’s a wake-up call – but it’s difficult for companies to focus on the future if they’re trying to claw back present revenues.” This is the medical device supply chain in late 2020: not fighting the last war, but the peace that came before it.

Take orthopaedics, for instance, where revenues fell more than 30% year-on-year (70% in the US in Q2). Zimmer Biomet, which lost $208m in Q2, estimates that its backlog of deferred patients represents $700– 800m of future revenue – but the virus is killing them. If a company hadn’t worked out supply contingencies, or entered into the costly process of nearshoring their supply chains when all that extra money was coming in, what chance is there that they’re going to find the will to do so while staring down the barrel of a shortfall? Some may have had to make staff redundant, losing skills and further narrowing their options in the process. Others might have lost upstream suppliers to the collapse of the airline industry. If they weren’t dualsourcing beforehand, they’re in no position to start now. Worse than that, such losses might mean an OEM can no longer fulfil its major contracts, causing it too to fail and leaving the rest of its suppliers with potentially terminal holes in their order books. A shrinking supply chain is not a diversifying one. No number of political pronouncements can change that fact.

Remain agile

Covid-19 is a hell of a stick, in other words – big enough to make companies cower if they don’t have some carrots to chase. Todd Abraham, vice-president of operations for Ivantis, a US start-up that produces minimally invasive stents for the treatment of glaucoma, thinks they’re out there. Before the Trump administration’s tax cuts and commitment to deregulation, Abraham already felt companies were moving away from offshoring as they became more attuned to the importance of total landed cost, rather than just comparing the price of labour in different markets. “Ironically, most medical devices only have 10% to 30% of product cost made up by labour,” he says. “We’re all better served focusing upon the 70% to 90% of product cost that isn’t.” Personally, his decisions about where to base manufacturing have always been driven by intellectual property and technology concerns – keeping high-complexity, shortlife cycle and high-margin products (transcatheter heart valves, for instance) as close to home as possible, and only considering cheaper geographies for commodity components and low-complexity, longerlife, lower-margin products (like diagnostic catheters).

Not that this has been Abraham’s biggest concern recently. Kevin Stout, executive director of the Medical Device Supply Chain Council (MDSCC), calls him the “poster child” for companies who saw their earnings fall off a cliff. Ivantis’s first year was the second most successful venture-backed first product launch in history. In the US, however, the company’s stents can only be implanted during cataract surgeries – the most impacted elective procedure in the country.

“Up to 14 March 2020, we were on track to be the number one ever for the first two years,” says Abraham. “Then, on 15 March, life was over as we knew it.” Business fell by approximately 95%. “We dropped off the face of the earth.”

More by luck than genius, as Abraham puts it, Ivantis correctly guessed how US medical systems would ramp up procedures through summer and autumn – reaching around 50% of pre-pandemic levels in June and 80% by September. In the meantime, he had to rely on the interactive, “open Kimono” relationship he’d cultivated with Ivantis’s most critical suppliers in the good times to work out how to scale back orders, without endangering any node in the network. Helpfully, those of his vendors that also made parts for ventilator manufacturers wanted to delay theirs to focus on meeting pandemicspecific needs. He was only too happy to oblige.

Of course, now, the US’s reserve stocks are overflowing with excess ventilator capacity, despite the fact that most of the federal government’s contracts were cancelled long before the original terms were met. Ivantis got lucky with elective surgeries – almost all guesses about ventilator needs were wildly off the mark. Thompson, for one, is slightly concerned that the US might be sued by some suppliers for breach of terms. That wouldn’t be a great look for a country trying its utmost to attract device manufacturing back to its shores.

A survey carried out by GlobalData in the earlier stages of the pandemic suggests that this might not be going as well as hoped. “Obviously, everyone was concerned about disengaging from Chinese suppliers at the time, or so they were saying,” Thompson explains. But as far as doing anything about it? “Surprisingly, most North American manufacturers said, ‘No, we’re not going to change our supply chain’. More European ones said, ‘Yes, we’ll be looking at it’.”

Some of that comes down to the fact that US companies are more likely to outsource manufacturing to Mexico than their European counterparts. Thompson’s contention, however, is that European OEMs – used to operating in a less uniform regulatory environment and switching between, say, Italian and French suppliers in the normal course of business, not to mention planning for Brexit – might be a little bit more agile and less locked into particular patterns than American ones.

Abraham, who evangelises about the value of lean methodologies for increasing agility, makes a similar point about the flexibility of smaller companies. He was able to convince Ivantis’s board to approve large investments in qualifying secondary suppliers for their stents’ critical parts by stressing their fiduciary responsibility to protect the company. From a regulatory perspective, such a process is just as costly and arduous as qualifying the original suppliers and, until a crisis like Covid-19 hits, the benefits of doing so are close to zero. Moreover, public OEMs with large portfolios have far too many critical components to dual-source all of them. “And they’re judged by Wall Street, so they don’t get any credit,” Abraham adds. “It’s very tough to justify huge expenditures in the hopes of something bad happening.”

As such, out of the industry issues brought to light by the pandemic, Abraham ranks a lack of agility, both in terms of companies’ supply chains and the ways they’re regulated, as a bigger problem than any dependence on trading partners like China. Indeed, he compares security measures like dual-sourcing to product liability and workers’ compensation insurance; but, whereas regulation mandates both of the latter, it often dissuades companies from taking steps to protect their supply.

Moreover, if a lack of agility is actually a bigger problem than globalised supply chains, there’s a complication coming that Abraham fears could make things even worse: the EU’s Medical Device Regulation (MDR). As he tells it, US manufacturers used to look up to Europe’s “smarter” regulatory framework. Now, with the MDR, he thinks an overemphasis on risk management is telling them to divert supply and manufacturing away from Europe, much as inflation and the political climate is making them wary of China.

“Originally, quality’s job was to make sure that you didn’t ship a bad product,” explains Stout from the MDSCC. “Now we’ve changed it to make sure we don’t ever make it, because if you can’t make it, then you obviously can’t ship it. But you can add so much regulation that basically the product becomes totally impractical to make.”

Thompson, too, notes that the EMA lacks the resources and expertise to quickly adapt to its increased role under the MDR, which isn’t good news for local adherents of lean methodologies. The US Food and Drug Administration, meanwhile, with what Thompson calls its “army” of inspectors, showed the value of its infrastructure by quickly approving new and converted ventilator manufacturing plants, at times even installing staff on location full-time. Nothing of the sort would be possible in Europe under the MDR. As a result, innovative companies outside Europe and the US are likely to shift their focus on winning approvals from the former to the latter – potentially recentring the market in the process. Nonetheless, with the rest of the planet harmonising towards global standards, Thompson doesn’t see the Trump administration’s push to deregulate becoming a meaningful trend over the longer term.

What the future holds

So, to recap, Abraham ranks manufacturers’ dependence on offshore supply as the third biggest issue highlighted by the pandemic, just behind a lack of agility. Number one is almost too obvious to say out loud: the potential for unprecedented and previously unimagined changes in demand. It’s downstream in the supply chain, in hospital wards and retirement homes, where that issue has been felt most keenly. It was the need for private hospitals to reopen as quickly as possible that saved Ivantis, and it might also be health systems that are best placed to catalyse change over the longer term.

“The drive might, in the end, come from customers,” explains Thompson, “if they’re worried about the future security of supply, and add it into tenders and how they select suppliers.” That would have a decisive impact on the cost of healthcare, but with global backlogs and the likelihood that many more lives will be lost because procedures and diagnoses were prevented by Covid-19, it might be a price governments and providers are willing to pay. Even if that doesn’t become a concrete policy, some of Thompson’s industry contacts believe product managers with supply chain experience might begin to predominate. Indeed, for all the 33 companies of the Ventilator Challenge UK consortium did to build UK equipment, Thompson himself notes that its most impressive achievement was marshalling an efficient global supply chain for components.

“This industry has typically been R&D and sales driven,” adds Stout. “They’re the kings. But [I think] 2020 is the year of the supply chain, because supply chains demonstrated how critical they were to companies being successful in any environment.” Of course, as the head of the Medical Device Supply Chain Council, he would say that. But, maybe, in the wake of this “new definition of a worst-case scenario”, he’s being heard more clearly.

“We’ve still got [two] months of 2020 left,” says Abraham. “I’m taking side bets on an alien invasion. They’re extending their supply chain.”