This classification covers establishments primarily engaged in manufacturing orthopedic, prosthetic, and surgical appliances and supplies; arch supports and other foot appliances; fracture appliances, elastic hosiery, abdominal supporters, braces, and trusses; bandages; surgical gauze and dressings; sutures; adhesive tapes and medicated plasters; and personal safety appliances and equipment. Establishments primarily engaged in manufacturing surgical and medical instruments are classified in SIC 3841: Surgical and Medical Instruments and Apparatus. Establishments primarily engaged in manufacturing orthopedic or prosthetic appliances and in the personal fitting to the individual prescription by a physician are classified in SIC 5999: Miscellaneous Retail Stores, Not Elsewhere Classified.
339113 (Surgical Appliances and Supplies Manufacturing)
In the late 1990s, surgical appliance and supplies manufacturers hoped to benefit from the solid market growth that had characterized the industry for over two decades. However, several issues clouded the industry's future: slow product approvals from the Food and Drug Administration, the potential overhaul of the U.S. health care industry, and reduced availability of outside investment capital. Demographic factors and export opportunities, however, are regarded as sources of optimism for the industry.
The value of industry shipments increased from $15.23 billion in 1997 to $18.86 billion in 2000. Industry players spent $6.23 billion on materials in 2000, up from $5.28 billion in 1997. The total number of employees in 2000 reached 97,815, compared to 85,646 in 1997.
The entire medical device industry, which is divided into six sub-industries, shipped about $42 billion worth of products in 1993. The surgical appliances industry described in this classification is the largest of those divisions, accounting for about 33 percent, or approximately $14 billion, of total medical product sales in 1995. In 1997 the industry shipped $14.7 billion worth of products.
The top five states by number of manufacturers for 1997 were California, with 238 establishments; Florida, with 113 establishments; Texas, with 111 establishments; New York, with 102 establishments; and Pennsylvania, with 86 establishments.
The industry experienced overall growth, large capital investment, and high profit margins in the early 1990s—often indicators that an industry has not yet reached maturity. While high-tech devices accounted for most revenue and profit, other segments offered limited opportunities. For example, personal safety equipment and some appliances, such as wheelchairs and crutches, represented sectors of modest growth.
Personal consumption expenditures accounted for about 22 percent of industry sales in the 1980s. Government purchases, including purchases through health care facilities and hospitals, consumed about 15 percent of industry output. Hospitals represented an additional 14 percent of the market, and doctors and dentists purchased about 4 percent of manufacturers? goods. Approximately 14 percent of sales were attributable to exports, and 12 percent of industry revenues were classified as gross private-fixed investment in the early 1990s. Miscellaneous consumers, which accounted for the remaining 19 percent of sales, included child care services, construction industries, correctional and educational institutions, the U.S. Department of Defense, and police departments.
Products. Surgical, orthopedic, and therapeutic appliances and supplies accounted for over 88 percent of industry output in the late 1980s, with orthopedic and prosthetic appliances comprising the largest share. Orthopedic equipment refers to devices used in the preservation, restoration, and development of the form and function of the extremities and spine. The term "prosthetic appliances" in this industry refers to devices related to artificial limbs and joints. Popular hip and knee replacement devices, for instance, reduce pain and allow patients to regain mobility.
Prosthetic and orthopedic appliances represented approximately 20 percent of industry sales in the late 1980s. Artificial joints, the largest single segment, accounted for about 6.5 percent of total sales, while artificial limbs made up less than 0.5 percent of shipments. Electronic hearing aids represented over 3 percent of revenues, and elastic braces and supports represented about 1.2 percent of shipments. Additionally, arch supports accounted for 1.5 percent of sales, and replacement and add-on parts for orthopedic and prosthetic devices accounted for 12 percent of industry shipments. This industry segment also includes the following products: bone plates, screws, and nails; mechanical braces; elastic stockings; surgical corsets; splints and trusses; and intraocular lenses, or lens implants.
Therapeutic appliances and related supplies include a wide array of surgical dressings and devices. Surgical dressings, which include elastic bandages, plaster, gauze, and cotton swabs, represented nearly 13 percent of total industry sales in the late 1980s. Bed pads, adult diapers, and incontinent pads constituted an additional 6 percent share, and wheelchairs and other patient transport appliances accounted for about 2.5 percent of shipments. Examples of other products in this category are surgical kits, tongue depressors, breathing devices, and therapeutic whirlpool baths.
In addition to the 88 percent of the market represented by the products described above, this industry also encompasses a variety of personal and industrial safety equipment, which includes protective clothing, welders' hoods, motorcycle and racing helmets, fire-fighting suits and breathing apparatus, safety gloves, bullet-proof vests, ear and nose plugs, safety goggles, and space suits.
Prosthetics date back to 600 B.C. during the Roman Empire, when artificial legs were used to help amputees regain mobility. It was not until the 16th century, through the efforts of French surgeon Ambroise Pare, that prosthetics became a science. His work lead to the development, during the 16th and 17th centuries, of replacements for upper extremities. Metal hands, some of which contained moving parts and springs, became popular prosthetics in Europe during the 1600s. They were replaced in the 1700s by two innovations: a single hook, or a leather-covered, nonfunctioning hand attached to the forearm by a leather or wooden shell.
Public acceptance of prostheses, as well as improvements in design, paralleled major wars during the 18th, 19th, and 20th centuries. In particular, World War I and World War II boosted the use of prosthetics, which benefited from the integration of new lightweight metals and better mechanical joints. Advances in materials and mechanical design proliferated during the post-World War II era, when the development of indwelling materials, such as coated steel, inactive metals, and durable synthetics, gave specialists new ways to replace or mend body joints and parts. New materials and mechanisms also made possible the creation of artificial limbs that more closely mimicked the natural body.
The term "orthopedics" was given to that specialty in 1741 by Nicholas Andre, a Frenchman. Orthopedic surgery originally applied only to the prevention and care of deformities in children. However, the branch soon grew to encompass treatment of extremities, the spine, and associated structures of all humans. The first institute dedicated to the treatment of skeletal deformities was established in Switzerland in the eighteenth century. One of the first notable devices introduced by the industry was the Thomas Splint, which was used for leg fractures. An important U.S. leader in the development of therapeutic orthopedic devices was F.H. Albee (1876-1945), who developed the motor bone saw in 1909.
Rapid advances in medical technology caused a shift in orthopedic treatment during the 20th century from the use of braces, splints, and other mechanical devices, to surgical procedures. Such procedures incorporated implants and devices that helped surgeons perform such advanced operations as spinal reconstruction, skin grafts, tendon transplants, limb lengthening, restoration of shattered bones and joints, and bone grafts.
Surgical advances in the twentieth century, which paralleled both orthopedic and prosthetic breakthroughs, greatly increased the demand for procedures and treatments that required apparatus developed and manufactured by the surgical appliance industry. In addition, generous employer-sponsored health care plans made large sums of insurance money available for such equipment. Indeed, as a result of overall increased U.S. expenditures on health care during the 1950s, 1960s, and 1970s, sales of orthopedic and prosthetic appliances skyrocketed. Sellers of surgical dressings and other supplies realized similar gains.
The 1980s. By 1980, the surgical appliance and supply business had grown into a $5.0 billion industry that employed over 40,000 workers. This growth epitomized the immense proliferation of U.S. health care expenditures, which rose at an annual rate of more than 15 percent throughout most of the 1960s and 1970s. By the early 1980s, in fact, Americans were spending more than 10 percent of their gross domestic product on health care. The demand for surgical appliances and supplies continued to balloon throughout the 1980s, as money spent on health care soared. Between 1982 and 1990, industry revenues grew an average of 8.6 percent annually. Moreover, despite manufacturing productivity gains, industry employment increased more than 25 percent during the same period, to exceed 85,000.
Driving revenue and profit growth during the decade was the development of high-tech, high-cost prosthetic and orthopedic devices. Better and stronger artificial joints, limbs, and associated devices allowed specialists to deliver treatments unheard of just a few years earlier. As surgical procedures in general increased, the demand for surgical dressings, drapes, and other supplies grew as well. Exports, too, provided significant profit opportunities.
Silicone Implant Settlement. In 1994 eight companies that manufactured silicone breast implants agreed to contribute nearly $4.7 billion to a fund for two million women worldwide who have had breast implants. The agreement marked the single largest product liability settlement in U.S. history. The fund was expected to cover routine testing, medical care, and surgery (including implant removal), for the next 30 years. As the Detroit Free Press noted, "the settlement attempts to resolve two and a half years of bitter controversy and one of the stormiest chapters in U.S. medical history." Companies making the largest contributions to the settlement were Bristol-Myers Squibb Co., Baxter Healthcare Corp., and Dow Corning Corp., once the country's foremost producer of implants.
Healthcare Recoveries, Baxter Healthcare, Bristol-Myers Squibb, McGhan Medical, 3M, and Union Carbide all participated in the $50 million silicon breast implant settlement, which originated in 1992. This was one of the first instances in which health care payers received medical expenses on a large scale involving a personal injury class-act suit. Dow Corning declined their original contribution and filed for bankruptcy protection in Michigan.
Despite strong markets in the late 1990s, medical device manufacturers faced several hurdles to continued success. Concerns emerged about a lack of outside investment capital necessary to fund research and development of new products, as analysts pointed to the uncertainties associated with various health care reform initiatives. Industry participants were also suffering from costcontainment pressures, which particularly affected lowtech items such as surgical dressings, drapes, and sutures. Increasingly cost-conscious hospitals were working to ensure that prices of conventional supplies remained near the overall inflation rate. Despite these issues, the value of industry shipments increased substantially each year between 1997 and 2000, growing from $15.23 billion to $18.86 billion. During this time period, the cost of materials grew from $5.28 billion to $6.23 billion.
Industry Regulations. Many manufacturers of such high-tech products were even more concerned with a slowdown in FDA new product approvals. New stringent approval requirements were keeping some new products out of the market and diminishing outside investment in new product development. FDA restrictions were expected to loosen, however, as a result of congressional pressures to quicken the FDA's new medical product review process.
The Future. A rise in services and procedures provided in outpatient settings will stimulate demand, as will an aging U.S. and world population. The home health care market, which includes kidney dialysis items that can be used in outpatient settings, implantable infusion pumps, and nutritional therapy products, was expected to realize significant profits as a result of the U.S. Congress's passage of the North American Free Trade Agreement (NAFTA).
After the early 1990s, buyouts increased within the medical equipment supply industry because of increased demand for cost reduction and quality medical care, combined with a decrease in inpatient hospital usage and increase in outpatient care (outpatient surgery, home health care, and rehabilitation).
Merger and acquisition activity was also on the rise. In 1995, for example, Johnson & Johnson acquired Cordis, a top manufacturer of angioplasty and angiographic equipment, for $1.8 billion in stock. The largest infection control company, Steris Corporation, purchased Amsco International in 1996. These two companies had combined earnings of $45 million on $545 million in revenues for 1995 and combined assets worth approximately $450 million.
St. Jude Medical Incorporated acquired Cyberonics Incorporated (maker of implantable devices for epileptic seizure prevention) for $72 million in 1996. Medex Inc. was bought by Furon Co., California, for $160 million in 1996. Medex, a leader in plastic components, had sales of over $99 million in 1996. Its new company, Furon, makes silicones, thermoplastics elastomers, and thermoplastic polyurethanes, which were expected to help Medex expand its product line.
Tyco International Ltd.'s Healthcare Products Group was one of the largest suppliers in this industry, with sales of approximately $1.5 billion. Tyco International's growth was in part spurred by the purchase of Kendall International Inc. of Massachusetts in 1994. In second place was St. Jude Medical Inc. of Minnesota, with approximately $1 billion in sales for 1998. Third, with approximately $500 million in sales, was Ethicon Endo-Surgery, Inc., a subsidiary of Johnson and Johnson.
The 1,634 companies primarily engaged in the industry employed 81,881 workers in 1997, representing a jump from less than 70,000 in the early 1980s. The number of industry employees grew to 97,815 in 2000. Of this total, 61,035 held production jobs. Production workers received an average hourly wage of $13.55. Assemblers and fabricators comprised about 15 percent of production positions. Positions in sales and marketing accounted for 7 percent of industry employment, and white collar administration jobs accounted for less than 3 percent.
A 1998 survey of 140 companies in this industry reported that 76 of these companies had increased their workforce by 10.4 percent. Of those, 26 had increased their workforce by 40.4 percent in the previous 12 month period.
The industry's work force was expected to grow through the year 2000 and beyond. Manufacturing positions, for example, were expected to rise by 10 to 50 percent between 1990 and 2005, according to the Bureau of Labor Statistics. A few positions, however, such as electrical and electronic assemblers, were expected to fall by over 25 percent. Jobs in sales and marketing were likely to rise by more than 70 percent, and positions related to engineering, math, and science were expected to increase by 50 percent to 65 percent.
In 1997, California, had the largest number of surgical appliances and supplies employees, with 11,994 jobs. New Jersey had 6,521 employees, and Indiana had 6,384 employees.
As domestic prices and market growth declined in the early 1990s, manufacturers were increasingly looking overseas to boost profits. In 1989, surgical appliance and supplies producers exported less than 10 percent of their output, but then the rapid growth of foreign markets and the demand for high-tech implanted devices led a surge of export growth. Because U.S. medical equipment producers offered the most advanced products in the world, they controlled approximately 50 percent of the world export market in 1990. Between 1990 and 1993, the industry increased exports by an average of 18.3 percent annually. By 1993, the industry shipped nearly 14 percent, or $1.87 billion, of its total production overseas, with Canada, Mexico, and Germany having purchased about 50 percent of all U.S. exports. In contrast, importers served less than 7 percent of the U.S. market in 1993. In 1997, other factors favoring U.S. sales were the absence of customs duties levied on medical surgical devices and no other major trade restrictions.
By 1998, the industry exported 29 percent of its output valued at approximately $4 billion overseas. Japan, Canada, the Netherlands, France and Mexico purchased the majority of these exports.
Rapid export growth was expected to continue through the early 2000s. Standardization of European Community (EC) medical device regulations was expected to stimulate sales in that region, which already consumed 36 percent of U.S. exports in 1992. Popular export items to the EC include respiratory products, orthopedic equipment and supplies, and artificial joints. In particular, the European market for orthopedic products increased from $1.44 billion in 1995 to a projected $1.89 billion in 2001. Hip implants dominated the European market, with increased demand also for renal supplies and peritoneal dialysis, which both facilitate at-home care.
Japan entered the nursing care product market because of the government's drug price reductions and decreased medical supply profits from other markets. Imports were expected to grow at an approximate 5 to 8 percent annual increase in 1997 and beyond, with the imports of U.S. industry products growing at an estimated 5 to 10 percent.
Other parts of Asia and Latin America presented new inroads for industry growth as well. The overall medical device market for Asia and Latin America grew two to four times more than Japan, Europe, and the United States, according to a Health Industry Manufacturers Association (HIMA) study released in 1996. Countries showing potential as growth markets included Brazil, China, India, Korea, Mexico, and Taiwan.
For example, infection control devices experienced increasing demand in the late 1990s in China and India. Steris Corp., a manufacturer of such items, expanded international operations to accommodate the demand.
Many surgical appliance and supply manufacturers relied heavily on development of new technology to create high-profit products and to increase market share—particularly for orthopedic and prosthetic devices.
Johnson and Johnson was among the industry leaders in developing new products. In 1995, besides the One Touch Profile System, an advanced home blood glucose monitoring system, the company introduced the Endopath Optiview Optical Surgical Obturator, giving physicians the ability to see multilevels of tissue while operating; Fibracol Collagen-Alginate Dressing, an advanced surgical dressing; the EZ45 Thoracic Linear Cutter, which allows a videoscopic approach to surgery; and Ortho Summit Processor, which automates blood virus testing.
The first over-the-counter HIV test was made available in 1996 and was nationally available in 1997. The introduction of this product may have an effect on laboratory equipment sales.
In the late 1990s and 2000s, research was expected to emphasize development of better metals and plastics, new non-metallic plastic and ceramic products, and new synthetics that could be used to create implants. Although outside investment capital for new product development waned in the early 1990s, various government partnering programs promised to boost research and development funding. For instance, the Clinton administration backed programs such as the Defense Technology Conversion Council to transfer military and other public technology to the private sector.
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