SIC 3841
SURGICAL AND MEDICAL INSTRUMENTS AND APPARATUS



This category covers establishments primarily engaged in manufacturing medical, surgical, ophthalmic, and veterinary instruments and apparatus. Establishments primarily engaged in manufacturing surgical and orthopedic appliances are classified in SIC 3842: Orthopedic, Prosthetic, and Surgical Appliances and Supplies; those manufacturing electrotherapeutic and electromedical apparatus are classified in SIC 3845: Electromedical and Electrotherapeutic Apparatus; and those manufacturing X-ray apparatus are classified in SIC 3844: X-ray Apparatus and Tubes and Related Irradiation Apparatus.

NAICS Code(s)

339112 (Surgical and Medical Instrument Manufacturing)

Industry Snapshot

The first medical instruments of precision were used in the seventeenth century. Not until the eighteenth century was surgery recognized as a specific science. Rapid technological advances in the twentieth century have given the United States the most advanced surgical device industry in the world. In addition to serving a critical role in the care of Americans, the medical and surgical instrument business has the added benefit of being a nonpolluting industry that employs more than 100,000 individuals.

Organization and Structure

Major consumers of industry output in order of market size include foreign consumers, the federal government, medical and health services, doctors and dentists, hospitals, individual consumers, and drug companies.

Like other knowledge-based businesses, the medical and surgical products industry is growing rapidly. However, unlike many technology businesses, barriers to entry are significant. Companies often must incur huge start-up costs to cover research and product development. Furthermore, acute technical expertise typically is needed to develop proprietary knowledge necessary to differentiate products from others in the marketplace and to obtain approvals and patents. Companies that overcome these hurdles, however, can reap large profits if their products succeed.

Products. The industry encompasses a plethora of non-electric diagnostic and therapeutic surgical devices. Diagnostic equipment is used to identify physical problems based on signs and symptoms. Therapeutic devices treat ailments and illnesses. Some of the largest general categories of equipment are hand instruments, monitoring equipment, intravenous apparatus, syringes, and catheters.

Examples of hand instruments include forceps, knives, saws, retractors, clamps, bone drills, and other products. Forceps are used to grasp, pull, and hold objects during delicate operations. Several monitoring devices also exist. Gastroscopes, for instance, are used to view the interior of the stomach. Cystoscopes provide a view of the interior of the bladder. Likewise, a laryngoscope is used to study the larynx and vocal cords. Ophthalmoscopes permit inspection of the retina, and stethoscopes are used to listen to internal organs, particularly the heart and lungs. Intravenous equipment basically consists of IV transfusion apparatus, which transfer blood or other fluids into the body.

Catheters, an important industry segment, are tubes that are inserted into various body cavities to drain liquids or remove material. Cardiac catheterization involves introducing a small catheter into a vein and then passing it into the heart. This procedure allows doctors to get accurate diagnostic measurements or to clear blocked arteries. A more advanced procedure, angioplasty, incorporates a tiny balloon into the procedure. As an ultra-thin catheter is slipped into an artery, the balloon is inflated, widening clogged arteries. Catheters are also used to drain urine and other bodily fluids.

Other devices produced in the industry include tonometers, speculums, skin grafting equipment, sphygmomanometers, silt lamps, hypodermic rifles, surgical probes, operating tables, needle holders, inhalators, and bone plates and screws.

Federal Regulation. An important dynamic influencing the industry's production and profitability is Food and Drug Administration (FDA) regulation. The FDA is responsible for insuring that all products sold in the industry comply with federal safety standards. The FDA possesses the authority to recall products, temporarily suspend devices it deems high-risk, and impose monetary penalties for violations.

The 1990 Safe Medical Devices Act (SMDA), which defined procedures for bringing medical products to the market, is one of the most significant pieces of legislation governing producers. Among other stipulations, the SMDA requires certain manufacturers to track patients that should be notified in case of product failure; submit follow-up reviews for certain implants and devices; and, when applying for pre-market clearance, provide a summary of safety and effectiveness data for each device.

One practice presently under FDA review is the reuse of disposable medical instruments approved for one-time use only. Without much federal oversight and against devise maker's advice, hospitals often take intrusive medical devices, apply toxic chemicals, and then sterilize at high temperatures. Prompted by the cost-cutting pressures demanded by managed care, this little-known practice has spawned a "reprocessing" industry with revenues in excess of $40 million.

Every year, nearly two million patients become sick and 90,000 die from infections contracted while in the hospital. There is no hard data at present linking infection with the reuse of disposable medical equipment, but the savings resulting from recycling are easy to calculate. For example, an argon beam plasma coagulation probe used to stop bleeding in the gastrointestinal tract costs $190. If used 10 times it would cost $24 per procedure, even when the cost of cleaning and sterilizing is added.

Hospital administrators and the reprocessing companies on whom they increasingly depend say equipment manufacturers are raising false claims to protect sales. But the Association of Disposable Device Manufacturers says patient safety, not corporate profits, is the real issue.

Background and Development

In the early 1600s, an Italian professor named Sanctorious was the first doctor to employ diagnostic instruments of precision in the practice of medicine. Using a pendulum made from a cord and a weight, he was able to measure a pulse rate by adjusting the weight until it swung at an even tempo with the patient's pulse. Sanctorious later implemented a type of thermometer that could measure a patient's weight and temperature. Both inventions were influenced by his friend Galileo.

The seventeenth and eighteenth centuries produced several advancements in surgical and anatomical knowledge. Noted physicians such as Englishmen William Harvey, John Monro, Robert Sibbald, and Archibald Pitcairne contributed to the science and helped establish some of the first formal educational institutions for doctors. Microscopes, injection needles, and instruments of dissection were a few of the tools that allowed researchers of that period to gain a comprehensive understanding of the internal human structure, as well as of physiological processes.

The most important American contribution to the advancement of surgery came in the mid-1800s when doctors Crawford Long, Gardner Colton, and Horace Wells perfected the use of ether and nitrous oxide anesthetics. The nineteenth century also brought important inventions such as the ophthalmoscope, the sphygmomanometer (for measuring blood pressure), and the stethoscope. Invented in 1816, the first stethoscope consisted of a perforated wooden cylinder that transmitted sounds from the patient's chest to the doctor's ear. Perhaps more important than new instruments, though, was a gradual understanding of germs. This evolution led to the use of antiseptics, as well as surgical caps, masks, and rubber gloves in the 1890s.

Although surgical tools and techniques advanced throughout the eighteenth and nineteenth centuries, surgery remained a relatively crude science up until the early 1900s. Despite their knowledge of germs, most surgeons before 1910 continued to operate without gloves, masks, or caps. They commonly wore the same smock until it was caked with blood from several surgeries and would continue using instruments that had been dropped on the floor. Surgery was usually performed in a theater-type setting before an audience as the patient lay on a narrow wooden table. Instruments were usually forged steel and had wooden or ivory handles. Because amputation was one of the most common procedures, the saw was a favored tool.

Better anesthetics, specialized surgeons, and X-ray machines prompted a transition to more scientific surgery and the demand for more sophisticated instruments. New materials, such as stainless steel and plastics, broadened the scope of the device and apparatus industry. New equipment such as catheters, suction devices, intravenous infusion apparatus, and various mechanical and electrical diagnostic devices opened up new surgical specialties, such as neurosurgery and cardiac and urinary tract surgery.

Instruments and apparatus introduced in the postwar period were numerous. Inert metals, such as vitalium and tantalum, were used to create wire and mesh devices that could be left inside the body. Nylon thread and special plastics revolutionized heart surgery. Orlon tubes became arteries, and plastic sponges patched heart defects.

By 1980, the medical instrument and apparatus industry shipped nearly $4 billion worth of products each year. Such dynamic sales growth since the 1960s was attributable to several factors. Employer-sponsored health care systems developed after World War II offered few incentives for providers to control costs. As a result, expenditures on instruments and apparatus, as well as other health care products and services, ballooned. In fact, throughout the 1970s and 1980s, U.S. health care expenditures rose at a rate of more than 10 percent per year.

During the 1970s and 1980s, one factor attributable to growth in health care expenditures was increased demand for health care. Largely, the development of more advanced procedures and equipment spurred growth by enabling the health care industry to deliver more comprehensive and higher quality care. Indeed, U.S. expenditures on health care jumped from 6 percent to more than 15 percent of the gross domestic product (GDP). Some of the fastest growing segments included instruments for angioplasty, cardiac catheterization, and orthopedic operations.

As expenditures leapt during the 1980s, development and sales of instruments and apparatus blossomed. Although manufacturers made massive investments in product research and development, yearly expenditures on industry products often jumped to more than 10 percent between 1980 and 1990. Furthermore, exports continued to grow as foreign markets looked to the United States as a source of state-of-the-art surgical instruments and apparatus. Throughout the 1980s, in fact, U.S. firms dominated more than 50 percent of the world market for surgical supplies.

By 1990, the medical instrument and apparatus industry was generating more than $10 billion worth of products each year. Stellar sales growth was attributable to several factors, the main one being employer-sponsored health care systems developed after World War II that offered few incentives for providers to control costs. As a result, expenditures on instruments and apparatus, as well as other health care products, grew at an annual rate of 10 percent throughout the latter decades of the twentieth century.

Despite strong growth and optimism, competitors were facing significant obstacles to continued profitability as they entered the mid-1990s. Growing regulatory costs and barriers, decreased access to investment capital, and increased competition in the health care industry all posed formidable challenges. Furthermore, some large segments of market sales (such as catheters) appeared to be entering a stage of maturity; the result meant slower growth and reduced profit margins.

According to the 1993 MDDI survey, which polled industry executives, inadequate funding for growth and research and development was a primary concern. Although a traditionally significant source of medical device research and development funding, declining venture capital was a major reason for the shortfall. As FDA regulations increased, venture capitalists viewed new projects as riskier.

FDA Stymies New Products. Besides a capital shortage and the threat of nationalized health care, the most prolific problem facing manufacturers in the early 1990s was a slowdown in FDA product approvals. In 1993 producers were still scrambling to learn how to comply with stringent new product standards imposed by the 1990 Safe Medical Devices Act (SMDA). After the FDA's initiation of the SMDA, approvals for new products fell dramatically. Although the FDA received 5,000 applications for new devices resembling products on the market in 1991 and 1992, the number of approved products slipped from 3,000 in 1991 to 2,500 in 1992. Furthermore, in mid-1993 the FDA had a backlog of 1,400 applications that had been pending for more than three months (historically, the norm was closer to 20). Product Marketing Applications (PMAs) showed even greater declines. Usually submitted at a rate of 60 to 70 per year, PMA approvals fell from 47 in 1990 to 27 in 1991, and to only 12 in 1992. The FDA was also under Congressional order to review 130 products that went on sale before 1976. FDA approval for new medical devices in 1996 took an average of 2.2 years, which was twice the amount of time the same process took in 1992.

In an effort to speed the process, the medical device industry began supporting proposed user fees. Under the proposal, firms were required to pay a fee for each application processed by the FDA. A similar fee system implemented in 1993 for pharmaceutical firms was costing that industry approximately $36 million per year. However, the FDA had reason for caution. It came under fire in the 1980s and 1990s for approving a heart valve connected with 300 deaths and for permitting the sale of silicone breast implants.

In response to FDA initiatives, the Medical Device Manufacturers Association (MDMA) was formed in November 1992. It succeeded the Small Manufacturers Medical Device Association that was established in 1980. The organization's focus was to ensure that FDA regulations did not adversely affect the industry, particularly smaller manufacturers.

Congress ultimately loosened the collar on the FDA's regulations of the surgical and medical instruments industry in 1996. U.S. companies no longer needed FDA approval for products intended solely for export. The provision ensured that Europe became the industry testing ground for U.S. companies.

Industry growth in sales during the 1990s was attributable to a promising new sphere of "minimally invasive" surgical instruments. These devices allowed surgeons to conduct complex operations without the pain, time, and expense associated with conventional procedures. Laparoscopic and endoscopic devices, for instance, involved the insertion of narrow tubes, called trocars, into a patient's abdomen. A laparoscope inserted into the tube is used to take pictures of the patient's inner organs, and miniature devices sent through the tube are used to perform complex surgical procedures. The market for minimally invasive devices was expected to explode in the 2000s.

Indeed, because of the changing dynamics of the health care market, cost-containment pressures were driving the growth of money-saving procedures like angioplasty and laparoscopy. As purchasing decisions in the 1980s and 1990s shifted from physicians to hospitals and managed care facilities, producers were being forced to demonstrate the cost effectiveness of their products. Devices that could reduce hospital stays, increase labor productivity, and facilitate patient care in less expensive settings had become the dominant growth market by the mid-1990s.

With the dawn of the new millennium came a promising new generation of "minimally invasive" surgical instruments. Many of these new devices originated in the lucrative field of sports medicine. When San Francisco 49ers tight end Brent Jones dislocated his shoulder, he normally would have had to have surgery followed by six months or more of rehabilitation. Instead the 49ers team surgeon turned to a company called Oratex that made a slim probe only 2.3 millimeters wide. Inserting the probe through a puncture the size of a pencil point, doctors were able to tighten Jones's distended ligaments by bombarding the ligament's collagen with radio waves. Instead of being out for the season, Jones returned to the field in five weeks.

Often called "electronic scalpels," tiny probes were being used to treat damaged spinal disks in ways that would have been impossible with cut-and-sew surgery. Traditionally, back pain only can be eliminated by removing the damaged disk or fusing vertebrae with plates or rods. By the late 1990s, more than 700,000 people a year elected to have this surgery in the United States. Using a probe was much less invasive. Instead of slicing open the chest, a wire-like probe was inserted into a patient under local anesthetic. Inched into the gel-filled center of a damaged disk, the probe released a burst of radiation that shrank the stretched rings of collagen and cauterized inflamed blood vessels and nerves that had intruded into the damaged area.

The cost containment pressures flowing from managed healthcare, and the growing need for procedures like angioplasty and laparoscopy, promoted increased use of probes which have been proven to reduce hospital stays, increase labor productivity, and facilitate patient care in less expensive settings.

By the close of the twentieth century, the medical and surgical equipment business had become one of America's leading export industries. It entered the new century with export sales of more than $4.5 billion. (When sales from opthomological devices are added in, export revenues jump to nearly $14.4 billion.) Ironically, Japan, America's leading competitor in this market sector, was also the biggest consumer, accounting for exports worth $731.4 million, according to the U.S. Department of Commerce.

Current Conditions

The value of shipments of surgical and medical instrument manufacturers totaled approximately $23.56 billion in 2001, up from approximately $21.77 billion the previous year, according to the U.S. Census Bureau's Annual Survey of Manufactures . Among the largest growth sectors in this industry in the United States were wound-care and cardiovascular products.

Into the twenty-first century, the industry as a whole was quite mature. Particularly, specific sectors—including urinary catheters, suction tubing, and conventional gauze dressings—have utilized advanced technology in manufacturing and have reached the full potential of their application. Due to these factors, the emphasis will continue toward reducing costs. Laser micromachining—used for the last 10 years for manufacturing many devices in the sector, including needles, stents, and catheters—has seen recent advances due to more advanced lasers and techniques that have led to the continuing miniaturization and accuracy of medical devices.

Other market trends in the early 2000s included products that incorporated pharmaceutical products with traditional device properties, or "hybrids." Products utilizing these new hybrid technologies included coated stents and impregnated dressings. New products in the wound-care sector incorporate antimicrobial agents and growth hormones that not only protect the wound, but actively aid in the healing process. New fibrin sealants were also developed as an alternative to traditional wound-care and closure products. These sealants were projected to generate revenue growth of 174.6 percent from 1995 to 2002. Growth factor dressings and vascular stent grafts were estimated to each grow 46 percent in the same time frame.

With the cost of health care rising and managed care an ever-growing force, consumers increasingly turned to self-care devices to maintain their health and reduce visits to medical professionals. Self-care device sales were on the rise, with blood pressure monitors alone generating $145 million by the end of 2002. A new breed of wrist blood pressure monitors were popular among consumers due to their user-friendliness and low cost. Other new consumer products included air activated heat therapy wraps that delivered heat for up to eight hours to ease muscle and joint pain in the body.

Insulin pen needles also saw advances during the early 2000s. In 2002 BD Consumer Healthcare introduced what it claimed was the shortest insulin pen needle on the U.S. market. The BD Ultra-Fine III 5-mm Mini Pen Needle was 38 percent shorter than the 8-millimeter needle and 60 percent shorter than the original 12.7-millimeter needle. BD claimed the reduced size made the needle more comfortable to use. Another improvement in needles came in 2002, with Amgen's SimpleJect Auto-Injector System. The needle was disguised in a needle guard and a syringe-loading device that automatically removes the needle cap. The goal of the SimpleJect was to eradicate the negative psychological effect needles can cause. As of late 2002, only patients with rheumatoid arthritis were using SimpleJect.

In a move to completely eliminate needles altogether, Innotech USA gained FDA approval to market its FriendlyLight LightLance Laser Skin-Perforator. The device captures blood samples via laser instead of a needle. Aimed at people with diabetes, the new device launched in 2003.

Advanced diagnostic tools in development and due to hit the U.S. market during 2003 and 2004 include hightech artery plaque-detecting apparatus to be used with catheters. These devices could find the exact spot in the artery where plaque has built up, which would greatly aid in the treatment of heart related illnesses.

An aging population (some 76 million baby boomers) requiring more health care will augment overall growth in this sector. In addition, U.S. firms were well positioned to take advantage of emerging foreign markets. Increased efficiency of the FDA approval process should diminish industry costs, though the high rate of investment in research and development is expected to continue.

Industry Leaders

One of the largest manufacturers of surgical and medical instruments and apparatus is Baxter International Inc. and its subsidiary, Baxter Healthcare Corp. The Deerfield, Illinois, industry giant had $8.1 billion in sales in 2002.

Siemens Medical Solutions of New Jersey, a subsidiary of Siemens in Germany, employed some 4,500 people in the United States during 2000 and 2001 and had worldwide sales of $8.3 billion, with sales in the United States accounting for 52 percent of that figure.

Other companies with significant international sales are Medtronic of Minneapolis, Minnesota, ($6.4 billion in 2002 sales); Becton, Dickinson & Co. of Franklin Lakes, New Jersey ($4 billion); Boston Scientific Corp. ($2.9 billion); and United States Surgical Corp.

Despite the dominance of a few massive competitors, such as Baxter and Siemens, the industry remains relatively diversified. Like most growth industries, revenues are spread among many niche firms that have developed proprietary products or production techniques, or excel at marketing or distribution.

One of the most active is Colorado MEDtech of Boulder, Colorado, which makes medical equipment ranging from catheters and respiratory equipment to radio frequency amplifiers used in magnetic resonance imaging systems. In 1999, Forbes magazine named it one of the 200 best small companies in America based on $65 million in annual sales and a 36.1 percent return on equity. One other small company admired by analysts is Priority Healthcare of Altamonte Springs, Florida. It distributes specialty pharmaceuticals and medical supplies to oncologists, outpatient dialysis centers, and home care markets.

Workforce

Difficulties gaining FDA approval have caused some U.S. companies in this industry to focus their attention overseas when introducing products. One study conducted by the Wilkerson Group for the Health Industry Manufacturers Association showed that roughly 10,000 industry jobs with average salaries of $50,000 are being exported yearly. But the flow of jobs, and to a lesser extent investment, is expected to decline as America's population continues to age.

More than 21,000 companies employing well over 100,000 people are licensed to produce medical devices in the United States. Assemblers and fabricators comprise 14 percent of the industry's workforce. Inspectors, testers, and graders account for 3.4 percent, and manufacturing supervisors make up 3.3 percent. Other blue-collar manufacturing positions represent an additional 60 percent of the workforce. Sales personnel accounted for 6 percent of nonlabor workers, and secretaries and clerical staff accounted for about 5 percent. Relatively high-paying engineering positions accounted for over 6 percent of the workforce, and white-collar managers and executives represented about 3.3 percent. Each job category is expected to grow, especially those in engineering, management and sales.

America and the World

With roughly one-half ($2.7 billion) of Baxter International's 1996 sales coming from outside the United States, this industry giant more than doubled the 1993 surgical and medical instruments export figures of all U.S. companies ($2.6 billion). Although the U.S. share of the global medical device market fell from 60 percent in 1980 to about 50 percent in 1993, rapid expansion of global markets allowed domestic producers to sustain record export growth throughout that period. America's share of the world market was expected to decline to 40 percent by 2000, though export sales volume should rise steadily, even outpacing domestic growth. U.S. exports totaled more than $4.8 billion in 2000, with the European Union capturing the largest segment of that market at $2.1 billion, followed by East Asia with $1.1 billion.

As the new century opened, the United States remained the world leader in medical device technology and maintained an especially dominant role in medical and dental instruments and supplies. But U.S. dominance did not go unchallenged. Japan and Germany made significant strides in some market segments, such as hightech electromedical equipment and some diagnostic machines. Furthermore, Japan planned to increase its investment in medical device research and development to catch up with capital expenditures made by its U.S. and German counterparts.

Although Japan had the second largest market for medical devices in the world, it was hard to enter because of protectionist barriers. The Asian recession of the late 1990s also affected sales adversely. But as Japan's population continues to age, sales of U.S.-made medical equipment was expected to increase. Other leading export markets remained the European Union, Canada, Mexico and Southeast Asia. The largest buyer of U.S. goods was Canada, followed closely by Japan and Germany. Those three countries, combined with France and Mexico, consumed around 50 percent of all industry exports.

Research and Technology

Besides new product development, manufacturers were also concentrating on increased productivity going into the mid-1990s. A number of new flexible computer-integrated manufacturing techniques were being implemented. These techniques promised to synthesize manufacturing operations and promote international production standards. New information software had been developed, for instance, that helped device manufacturers integrate and manage software development, design changes, and testing data. The primary goal of such techniques was to reduce labor costs and increase productivity. Other companies were experimenting with cost-saving approaches like cellular manufacturing. By assigning a cell, or team, of workers responsibility for production of each product, some companies had increased productivity by 25 percent and improved product quality.

The medical and surgical device and apparatus industry is heavily driven by technological advances. For manufacturers that devised new and better devices to help remedy ailments and illnesses, care providers were afforded an enthusiastic market. Life-saving procedures that were unheard of before 1970, such as angioplasty and coronary bypass, were commonplace when the new millennium began. Industry profits boomed, partially as a result of the increased demand for these procedures.

New procedures accompanied new products. Shape-memory polymers, for instance, are polyurethane-based polymers that can undergo and retain dramatic changes in hardness, flexibility, elasticity, and vapor permeability when exposed to heat. Among other uses, the resins could be used to form catheters that remain stiff until inserted into the body. Similarly, new plastic springs offered an alternative to metal components in operations requiring resistance to corrosion and static charges.

Silicone balloon cuffs that could be made through extrusion, rather than molding, offered producers of laparoscopic and other devices the advantage of reduced production costs. Likewise, new injection-molded components provided more efficient prototyping of new instruments and devices. Other new or improved products included miniature cables, high-tensile wire, heat-shrinking tubing, and a variety of minimally invasive instruments.

Further Reading

"FDA OKs Innotech Skin-Perforator." Drug Store News , 12 August 2002.

Gower, Timothy. "Is This Artery About to Blow?" Fortune , 24 June 2002.

"Home Health Care." Drug Topics , 18 November 2002.

Kolata, Gina. "Single Use Medical Devices are Often Used Several Times." New York Times , 10 November 1999.

"Laser Micromachining." Medical Device Technology , March 2003.

"New Design for Syringes." R&D Magazine , September 2002.

"Packaging Challenges." Medical Device Technology , March 2003.

"Self Care Gains as Health Care Costs Rise." MMR , 13 January 2003.

U.S. Census Bureau. Annual Survey of Manufactures , 20 December 2002. Available from http://www.census.gov .

U.S. International Trade Commission. Exports: 339112 Surgical & Medical Instruments and Apparatus , May 2003. Available from http://www.ita.doc.gov .

Weinberg, Neil. "Blood Money." Forbes , 22 March 1999.



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