Head, shoulders, knees & toes

By Bette Flagler, September 14, 2007 @ 6 am

‘Operation’ © 2007 Banc of America Leasing & Capital LLC, licensed for use by Hasbro. © 2007 Hasbro. All Rights Reserved

Hospitals aren’t just fun and games, and medical professionals are very particular about the equipment they use. Bette Flagler discovers why more and more of their gear is designed and built in New Zealand 

On a scale of one to ten, how much do you really care where the tumbler for your clothes drier is manufactured? Four? Maybe five? Sure, you want the thing to be dependable and last a reasonable length of time, but really, it’s not that big a deal. On the other hand—on that same scale—where your new knee is made is likely to score nearer ten. And for the surgeon who will wedge the joint into your leg, the origin of the tools used ranks pretty high, too.

Stephen O’Neill is the chief executive of Enztec, a Christchurch company that makes joint implants and orthopaedic instruments. The company started in 1993 when Paul Morrison, a young toolmaker working at Hamilton Jet, visited a mate in the hospital. He chatted with surgeon James Burn who mentioned some problems he was facing in the operating theatre.

While Burn stayed busy treating patients, Morrison kept his day job and plugged away on solutions for the surgeon at night. After a few years, tired of watching snow come in the gaps of his workshop and sick of sleeping in the back of his truck, he left Hamilton Jet to take Enztec more seriously. Then, in 2002, he reached a crossroads: Enztec was either going to be a serious medical devices company or it wasn’t. Serious won. Morrison hired tradesmen he enjoyed working with who were good problem-solvers and over the next couple years the business grew massively. In 2005, O’Neill was hired as the first general manager; today there are 25 people working at the site, products are shipped around the world, and investment has come from the likes of Auckland’s Birnie Capital Partners.

Stephen Norrie is a partner at Birnie. He and his gang like the orthopaedic market for the same reason any investor would: it’s deep and getting deeper. In the US alone it’s worth US$5 billion per year, and as baby boomers get old those who aren’t getting fat expect to keep running marathons forever. It’s pretty much a guarantee: whether you’re a couch potato or not, joints feel the burden of age.

Birnie Capital Partners came to Enztec following an investment in US-based Omni Life Science, a company that designs, manufactures and distributes hip and knee replacements. But hand a surgeon a hip or knee and you’ll get the cold shoulder; include the tools to insert it, and you’ve got a customer. The joint needs to arrive in the operating theatre with quality, precision instruments designed to work with that specific prosthetic, says Norrie. New variations of hips and knees are constantly coming onto the market and each requires different instrumentation. While the initial design comes from the US, it’s great, he says, to have the chaps in Christchurch working dynamically with the development team in the States.

“That’s important,” says Norrie, who sits on Omni’s board, “because the quality of the instruments you offer a surgeon is a big factor in whether or not he’ll take your implant. If you give him bad instruments, he’ll go somewhere else.”

“We’re never going to be a large-scale manufacturer. We can’t compete. We’ve got a brand that says ‘different’, that’s a little bit ‘designy’. Our future has to be in intellectual property”

Omni is only one of many companies employing Enztec as a hired brain. Another is DePuy Orthopaedic. Recently purchased by Johnson & Johnson, California-based DePuy has an annual turnover of US$4 billion and doesn’t stop at knees and hips—it also supplies ankle, elbow and shoulder implants. While big companies like DePuy may be very good at project management, says O’Neill, they don’t stand up when it comes to innovation. For ideas, they come to Enztec.

“We’re never going to be a large-scale manufacturer. We can’t compete. We’ve got a brand that says ‘different’, that’s a little bit ‘designy’. Our future has to be in intellectual property.”

But Morrison is quick to point out that there’s nothing wrong with being a manufacturer. Sure, there will be cheap and cheerful mass production in other locations, but for high-quality products with associated IP, he says, New Zealand is perfectly poised. “We’re isolated, haven’t been regulated to death and global companies see us as early adopters.

“There are all these romantic stories about New Zealand being innovative and smart,” says Morrison. “That’s true, that’s where we come from,” but, while he admits that Enztec bought into the idea of being the ‘smart prototype company’, he warns against getting too caught up in the romance.

Development and prototyping, he says, are difficult and expensive. “We did that for six years and then we saw the profit margins in manufacturing. There is nothing embarrassing about manufacturing products.”

Or making money. Unlike that other modern healthcare sector—biotechnology—this one doesn’t require vast capital investments or aeons of time to get a product to market or see a return on investment. And, while a handful of New Zealand biotechnology companies are racing to be the first with a commercial product, biotechnology is still pretty much unproven ground for us; on the other hand, medical devices has a proven success in Fisher & Paykel Healthcare.

A producer of devices for respiratory humidification, obstructive sleep apnea and infant care, Fisher & Paykel Healthcare had sales of nearly $290 million in the 2006 financial year, and the first six months of the next financial year showed a year-over-year increase of 28 percent. It hogs 90 percent of the sector’s income, producing both low volumes of high-quality (and high-cost) medical equipment as well as lower-IP, high-volume consumables.

“We started,” says Fisher & Paykel Healthcare chief executive Mike Daniell, “thanks to a researcher 30-odd years ago who wanted a better way to humidify gasses for ventilated patients. We developed that and continued to improve it. We saw additional things those patients needed. More recently, we thought, ‘There are other patients. If we changed this a bit, it could be used for them.’”

Morrison thinks Fisher & Paykel’s three-pronged incremental approach can work for Enztec, too: improve what you’ve got; provide more for each patient if you can; and identify more patients to whom the technologies can be applied.

Enztec’s Burn still owns a substantial part of the business, continues to practise medicine and is actively engaged with the ideas team. It’s a rare arrangement for New Zealand, says Robert Gilmour (who also has an interest in Omni), a managing partner of venture capital and fund management firm Finistere Partners.

“There’s no history [in New Zealand] of clinicians going to smart engineers and making devices,” he says. “It’s very different in the United States. Clinicians or groups of clinicians get together with engineers to devise unique solutions for small market subsections. Enztec’s the only example of a collaboration between engineers and doctors [here] that I know about.”Gilmour has had a chance to look around. After studying medicine in Otago, he completed surgical training in Melbourne and subsequently held academic appointments at both Monash and Stanford universities. When he retired from practice, he was serving as the medical director of Victoria’s sport medicine centre and, along the way, Gilmour developed orthopaedic products for his own—and other—companies in the US and Europe. When he returned to New Zealand in 1987, he founded Bodyworks Healthcare in Auckland, followed by Bodyworks Inc in California in 1998.

If you’re in the market for a Offset Cup Impactor and matching Cup Impactor Set, Enztec has you covered

Gilmour has had a chance to look around. After studying medicine in Otago, he completed surgical training in Melbourne and subsequently held academic appointments at both Monash and Stanford universities. When he retired from practice, he was serving as the medical director of Victoria’s sport medicine centre and, along the way, Gilmour developed orthopaedic products for his own—and other—companies in the US and Europe. When he returned to New Zealand in 1987, he founded Bodyworks Healthcare in Auckland, followed by Bodyworks Inc in California in 1998.

All of the five investments in medical devices held by the US office of Finistere Ventures are the result of clinician–engineer collaboration, Gilmour says. Finistere’s New Zealand fund is due to close soon and he says a number of opportunities are being considered. But while New Zealand has all the components needed to build a medical devices cluster—good clinicians and surgeons, good engineers, the methods to do clinical trials and companies like Enztec with international certification for manufacturing—the cultural chasm frustrates Gilmour.

While New Zealand Trade and Enterprise’s Rachael McGuckian is quick to point out that ‘devices’ is rather a dated term (the industry now likes to use the broader umbrella of ‘medical technologies’ for lumping together all the diagnostic, surgical and procedural-based stuff: the non-pharmaceutical bits and pieces that come into contact with humans during the delivery of healthcare), she agrees with Gilmour.

“Our health system does not operate in a culture that captures solutions in a formalised manner. For example, if a surgeon has a piece of equipment that he or she would like tweaked, chances are they’ll go to an engineer in the hospital who will find a fix for the problem. Currently, there’s no mechanism to encourage either of those people to take the idea beyond that one transaction.”

But it does seem—whether there’s a mechanism or not—that New Zealand could be a major player in this space. After all, we’ve got all those things Gilmour says we need and we take a hefty pride in being innovative.

Though her name presumably has little to do with NZTE’s decision to hire McGuckian for the newly-created position of medical technologies sector manager, it’s a fun name to say. It’s fitting for the spiky-haired, quick-witted woman who NZTE snagged from the grasp of international corporates. She’s worked for Baxter, Smith & Nephew and Cardinal Health, and is only three months into her new career when Idealog visits her Auckland office. She’s still getting used to the switch from corporate to government, but McGuckian’s job was established when the agency saw a cross-sector approach would better suit the growing number of medical technology companies than isolating them in silos of IT, specialised manufacturing or human sciences. One of her first challenges is to kick-start an industry group and get the players together. While these companies typically create sophisticated and highly-engineered products, many of them are unaware of how to build an export business.

And that, device junkies, is the only way the sector will succeed.

“New Zealand represents less than one percent of the total health consumable market,” says McGuckian. “So if you’re going to produce anything here, you have to sell it offshore.”

Fisher & Paykel Healthcare developed a humidifier for ventilated patients, and then expanded their range to include new products like an infant warmer. 2006 sales approached $300 million

Auckland-based Brainz Instruments demonstrates the convergence of specialties typical of medical technologies—engineering, specialty manufacturing, health sciences and IT—but it also illustrates the value of international connections. Established in 2001, Brainz produces equipment that provides continuous, bedside monitoring of brain injury and seizures in newborns. The technology behind the products was developed by Auckland University and the Liggins Institute, and the company was originally a subsidiary of Neuronz. Brainz was acquired by Tru-Test Ltd in September 2002 and issued an IPO in December 2005. Former chief executive Justin Vaughan expects it to be profitable by the end of 2008.

A trained medical doctor, Vaughan joined Brainz in 2003 and left in June this year to become chief executive of New Zealand Cricket (he’s a former Black Cap). He’s optimistic about the sector. “New Zealanders are good at engineering and we have a lot of exciting software companies. I think the crossover of healthcare, engineering and software is a real area of opportunity.”

Brainz sells its products direct in New Zealand, Australia and South Africa, but has a distribution agreement with medical equipment supplier GE Healthcare for the US, UK, Canada, and major markets in continental Europe, the Middle East and North Africa. Although Brainz’s products barely register a blip on the giant GE’s balance sheets, the grunt of an international sales and training force has been imperative for global recognition. In fact, late last year, Brainz was given special dispensation on an EU research grant. The neonatal project involves scientists in France, the Netherlands, Germany and Italy who requested approval to use a non-EU partner for a simple reason: no other company can do what Brainz does.

Brainz monitors fit on some mighty small heads but the market for new and innovative medical technologies is huge. Worldwide, the sector was worth US$159 billion in 2000; by 2005 that figure was US$239 billion and is estimated to balloon to US$350 billion by 2010.

Back down in Christchurch, the size of the market isn’t lost on Enztec. “Our customers are global,” says O’Neill. “The people we deal with are from big companies. They know we produce world-class stuff and that’s exciting. What many don’t know,” he laughs, “is how little we are. And we don’t need to tell them.”