Medical device manufacturers can navigate out of the pharmaceutical shit creek they find themselves up
My take on how they navigate the new AI world; shut medical device factories with no job losses; and how partnerships and licencing are the key to reducing overheads and maintaining profits.
I'll start with a caveat - I say medical devices companies are up shit creek; but Medtronic made $33 billion operating profit last year, so I'm sure they're not shitting themselves just yet. But in the manner of artistic flair, I'll elaborate on why I think the tactics that have got these companies this far may not get them any further…
There’s some very interesting statistics that are being banded around the internet. It’s rumoured that some cosmetic surgeons in L.A are reporting a drop of 30-40% of liposuction enquiries off the back of the rapid rise in GLP-1/semaglutide use. Airlines are starting to see some significant fuel savings because there’s less collective body weights from the passengers in the plane on some routes. Some food manufacturers and distributors are starting to display losses on the past quarter’s earnings owing to the reduced demand for volume of their products.
Some of these changes are good for some businesses; others less so. It’s the natural collateral damage of technological advancement, and is largely inevitable for the most part, in nearly any industry.
But there’s always that disparity; winners and losers. And my take is the obvious winners in this season of AI is undoubtedly pharmaceutical companies; and the losers could be the medical device manufacturers.
With the increasing advent of AI integration into research and workflows, the pharmaceutical industry is advancing at a rapid rate; testing and batch iterations which used to take years to complete can now be computationally simulated in hours or days.
Take the new wave of weight-loss drugs. The first iteration of semaglutide - Ozempic - took nearly 20 years to conceptualise and release into the market, first debuting in 2017. The next iterations came just two years later -less than one tenth of the original development time - in 2019; and then Wegovy and Mounjaro - the main brands prescribed today - made their debuts around 2021 in 2022 respectively. Conceptual inertia means it's still very much a focus of research today, and there are plenty of compounds undergoing reviews and testing currently, with initial trials demonstrating even more improvements over the existing marketed products.
Noone is feeling the effects of developments such as this more than the traditional medical device manufacturers; as their traditional hardware solutions are being quickly shirked for a tablet or injectable solution as an alternative. Any consumer with a choice will nearly always choose the path of least resistance - its a trait that’s innately ingrained into every human being.
Who wants to undergo rigorous and restrictive diet and exercise regimes with insulin tracking, when you can just inject yourself with Mounjaro once per week and get the same results?
There are press releases citing various reasons and excuses, but the warning signs are there - quietly restructuring diabetes devices divisions into new companies, or laying off large amounts of staff in order to reduce overheads.
After all, if people are skinner with less risk of diabetes, then being in the diabetes management and insulin administration business isn’t a good place to be.
The reality is that pharmaceutical development has been turbocharged by the implementation of AI.
The operational shift in the corporate structures of medical device companies indicate that they’re acutely aware of the impact of the newest technology is going to have on the staples of their businesses.
So what’s the safest sector to build their business on? My thoughts are orthopedics, surgical instruments and diagnostics; all largely sectors that pharmaceuticals or AI can’t do much for.
Orthopedics
When tissues and bones are damaged or broken, there’s not huge amounts pharmaceuticals can do to help - unless something is created which manages to regrow damaged tissues.
But in reality, it's never that simple either. Exogenous growth hormones and anabolic steroids have been in regular use since the 1960s. Tissues and bones don't just need regrowing - it needs regrowth in the correct amount, shape and geometry to match and reduce any further complications later on.
Therefore, for orthopedics, it's more typical for a hardware-based solution to be favoured. It can be fitted and adjusted to be perfect shape and size, and capable of lasting for the entirety of a human life.
Medical device companies have the benefits of years of manufacturing experience; but are arguably rather over-leveraged by their assets now that the new market is likely much smaller.
My suggestion would be to direct themselves out of this situation by retaining the monetization, but to strip huge amounts of the overheads associated with running a large manufacturing plant producing thousands or millions of standardised parts.
This could be done by creating micro-manufacturing facilities nationwide at a local level; each workshop 3D-printing orthopedic devices to integrate directly into patient’s anatomy based on 3D scans from the diagnostics or removed tissues. This is a way to vertically integrate the manufacturing skillset of the medical device companies on a local level, and will enable control of material supply also. It enables the closure of a number of the main, large factory sites, which would be attractive to be repurposed into data centers in the current market. All of the skilled workers from those factories could be used to run the micro-facilities - ensuring no displacement or loss of jobs; greater autonomy and more favourable working conditions for staff; and retaining all of the existing skillsets.
I think this is actually the key to saving manufacturing in most industries - I’ve written an article doing a deeper dive on this which you can read here.
The supply stays the same, and the quality stays the same. Alloys such as titanium can be laser sintered in a small workshop integrated into the local city hospitals. No capital or cashflow needs to be tied up into holding stocks of inventory, and everything is produced to order, so there should be a lower percentage of waste. All energy bills are covered by the hospitals funds, and failed parts can be easily recycled to be re-sintered if required.
If the demand doesn't exist for full time production of medical devices, then there remains the option use diversify into contract machining for other industries.
Surgical Instruments and Theatre Equipment
Specialist solutions for theatre fitouts and then consumables and disposables in particular; it's a model that's worked flawless for dental tools - which have largely stayed the same in design and operation since the 1990s. Something that becomes tried, tested and loved so much it doesn't need reinventing. A lower total addressable market admittedly, but a loyal one that will always have a requirement for good products.
If I was operating in this sector, I'd be dedicating time and money into a portable and semi-autonomous device that closes wounds quickly to result in the least amount of scarring. Necessary in every operating theatre - from those on battlefields to those in the biggest of hospital campuses.
Diagnostics
Pharmaceuticals can treat problems, but the rapid identification of the problems is really where I believe the future value lies. AI can be integrated into those devices to a fair degree, but it’s a sector that’s relatively well safeguarded by the existing suppliers - and will always require some form of hardware component to measure some form of data or metric in the test subjects.
The top level move would be doubling down with a merger or,acquisition between Medtronic/Siemens Healthineers/Stryker/GE Healthcare to create one or two businesses supplying top level diagnostic equipment for hospitals - expanding on MRI, X ray and Ultrasound capabilities to encompass the diagnosis of nearly any human medical condition.
I'd also create a division which develops a local (or at-home) solution for quick diagnosis of medical ailments. I’d put a self-service machine in every pharmacy section of Walmart.
Then, after I’ve developed that, I’d be approaching Apple to licence it - either it’s proprietary software solutions or a hardware sensor to be integrated into the Apple Watch - tapping into all the benefits of the higher revenue from addressing a larger market, whilst managing to mitigate against all consumer level technical support and marketing, which will be taken care of by Apple.
There may be a million reasons why any of the above suggestions will never be feasible, and I won't pretend to have any significant knowledge of the internal affairs of any of these businesses.
They often attract criticism by monetising healthcare, lumped into the same basket as Big Pharma. But the reality is these companies are essential to our existence - and we should all be working together to ensure their continued success; the work their profit margins generate for research and advancing medicine is critical.
We need that investment to outpace the stupidity and fragility of human biology, habit and choice.
TH
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