Industry Analysis : Health Care Products, specifically Medical Devices
and Surgical Supplies
The primary SIC codes for the medial device and supplies industry falls under 38,
Instruments and Related Products. This analysis will focus on Surgical and Medial
Instruments and Apparatus (3841), Orthopedic, Prosthetic, and Surgical Appliances and
Supplies (3842), and Electrotherapeutic and Electromedical Apparatus (3845). The
corresponding NAICS codes are Surgical and Medical Instrument Manufacturing
(339112), Surgical Appliance and Supplies Manufacturing (339113), as well as
Electromedical and Electrotherapeutic Apparatus Manufacturing (334510) (U.S. Census,
The health care product industry is most often described as the medical device sector
(Standard and Poor’s, Dun & Bradstreet, Plunkett’s). It seems most wise to do this since
health care products with respect to medicines and botanicals often drift into the
pharmaceuticals industry. With this in mind, this analysis will cover the medical device
and supplies industry ensuring that the scope remains focused and relevant.
The medical device and supplies industry is comprised of several manufactured products.
This includes cardiac catheters and stents, inhaled drug delivery systems, spinal implants,
orthopedic devices, prosthetic appliances, surgical dressings and sutures along with other
basic hospital supplies, and elecromedical/elecrotherapeutic apparatus (Value Line, 177;
Freedonia, 3; S&P Industry Survey, 6; Euromonitor, 1).
Over the past few years, this industry has seen remarkable growth, and it is likely that this
trend will continue. This will be a result of the growth of the aging population in the U.S.,
as well as an increasing demand for medical services. This demand for medical services
and equipment is expected to grow 8% per year until 2006, where the total demand will
reach $105 billion (Freedonia, 1). The markets for electromedical/electrotherapeutic
apparatus and surgical stents are expected to represent the fastest growing areas of the
medical and surgical device industry. Electromedical/electrotherapeutic apparatus include
defibrillators and positron emission tomography apparatus, and the rapid growth of this
segment can be attributed to technological innovation and research efforts. It has been
estimated that the implantable cardioverter defibrillator market grew at a rate of roughly
25% during the first quarter of 2002 and 35% during the second quarter. Both Guidant
and Medtronic introduced products (Contack CD and InSynch ICD, respectively) aimed
toward the treatment of congestive heart failure. Both of these products combine a
pacemaker and a defibrillator, offering the patient the benefit of a traditional pacing
device along with a backup device which shocks the heart should an arrhythmia take
place (Freedonia, 4; S&P Industry Survey, 2). With respect to cardiovascular stents,
technological innovation and demographic changes should drive revenue growth in this
particular market sector. The U.S. market for interventional cardiology devices was $2.1
billion in 1998, and is expected to grow to $3.1 billion by 2003. This indicates an 8.1%
growth rate (Medical and Healthcare Marketplace Guide, I-1396).
Other products designed to improve patient health include disposable medical supplies
(syringes, gloves, kits, trays, gowns, wound treatment materials) as well as more
technologically sophisticated equipment. Revenues for the syringe and catheter market in
the U.S. are expected to be around $880 million and $2390 million, respectively. Again,
the growth of older adult population in the developed world will create increases in
demand for these disposable products. Furthermore, this kind of “conventional hospital
supply market is a mature business…characterized by low margins and high volume”
(S&P Industry Survey, 6). Though the higher technology products will represent the most
profitable markets in the health care product industry, they face a greater risk of
In the mid 1800s, several doctors contributed to the advancement of surgery by perfecting
the use of ether and nitrous oxide anesthetics. Surgical techniques, tools, and apparatus
continued to advance throughout the nineteenth century, and became particularly more
sophisticated during the postwar period. Between the 1960s and 1980, the health care
product and medical instrument industry experienced incredible growth, due to an
increase in U.S. health care expenditures and an overall increase in demand for health
care. In fact, during this period, U.S. expenditures on health care changed from 6% of the
GDP to more than 15% (Encyclopedia of American Industries, 1238).
Product innovation and regulations imposed by the U.S. Food and Drug Administration
have certainly shaped the history of this industry. As companies in the industry began
spending more and more on R&D (research and development), a variety of new products
began appearing on the market. Those companies which introduced products which
served to fill medical need voids were particularly successful and enjoyed rapid growth.
Johnson & Johnson, is a particularly good example of this, as it is the top company in the
industry as a result of introducing innovative health care products in a variety of sectors
(orthopedics, cardiac stents, wound closure products). More about this industry leader
will be discussed later.
Government funding via agencies such as the National Institutes of Health (NIH) has
aided R&D endeavors in the industry. This government contribution has served to aid
medical device and surgical supply makers, in that they have and continue to use the
knowledge generated by research in order to invest in new medical technology.
However, these R&D fueled technological innovations have had to be assessed in order
to protect the public from unsafe products. The U.S. Food and Drug Administration is
primarily responsible for providing safeguards, and several regulatory acts over the years
illustrate this. In 1938, the Federal Food, Drug, and Cosmetic Act was passed. This
enabled the FDA to prosecute individuals responsible for misbranding devices involved
in interstate commerce. Nevertheless, manufacturers still were not required to obtain
FDA approval before putting products on the commercial market. This changed after the
Medical Device Amendments of 1976 passed. According to this piece of legislation,
medical devices must be evaluated by the FDA based on safety and effectiveness before
market approval is granted. The Safe Medical Device Act of 1990 requires hospitals and
other device users to report adverse effects associated with the manufactured products. In
1997, the FDA Modernization Act was introduced which served to streamline the FDA
approval process. Certainly, this legislation passed by Congress benefited many
companies in the industry. This being said, those who seek FDA approval are still
required to provide evidence indicating that the product is safe and effective. This
documentation is represented by three filings: 501(k), Premarket application (PMA),
Investigational Device Exemption (IDE).
In an effort to protect the interests of the industry, and as a response to FDA regulations,
the Medical Device Manufacturers Association (MDMA) was formed in 1992. Four years
later in 1996, U.S. companies no longer needed FDA approval for products exclusively
intended for export. As a result Europe became the primary testing ground for U.S.
companies. Currently, the medical device and surgical supplies sector is one of America’s
leading export industries, totaling nearly $14.4 billion in export sales.
Another aspect relevant to the history of this particular industry involves Medicare and
Medicaid. These two federally sponsored programs are important customers for medical
devices. Moreover, they indirectly fund large segments of the markets in the industry.
The Balanced Budget Act of 1999 caused a rebound in Medicare and Medicaid spending:
$224 billion in 2000. Most recently, in July 2002 the Centers for Medicare and Medicaid
Services announced that it had created two new diagnosis related groups for drug-coated
coronary stents. According to the guidelines, the government will increase its payments
by 17%. This is expected to be incredibly beneficial for companies in the industry who
are striving to bring these new products onto the market.
(S&P Industry Survey, 19; Freedonia, 6; Encyclopedia of American Industries, 1237).
Johnson & Johnson
2001 sales: $33,004,000,000
# of employees: 101,800
(Hoover’s Company Capsules, online)
The leader in the industry, Johnson & Johnson is an incredibly diversified health care
product manufacturer. It manufactures in three areas: consumer products, medical devices
and diagnostics, and pharmaceuticals. Traditionally, the company has achieved this
diversification by acquiring or partnering with smaller firms that develop new
technologies. This has been a successful approach to business, as evidenced by a 13.3%
increase in net revenue between 2000 and 2001. Though the company dabbles in wound
management products, orthopedics, spinal implants, and various trauma products, the
most notable development involving this company has been drug-coated coronary stents.
J&J is racing to commercialize this new product, and is competing against other industry
leaders to do so (Business and Company Resource Center, online).
2001 sales: $7,663,000,000
# of employees: 48,000
This company is the world’s largest manufacturer and distributor of hospital supplies, and
certainly a leader in medical specialty products. Baxter participates in two major industry
segments: medical specialties and medical/laboratory products and distribution. Most
notably, the company produces dialysis systems, cardiovascular devices, laboratory and
surgical equipment, and intravenous and diagnostic systems. Several of Baxter’s
acquisitions have been quite successful: American Hospital Supply Company in 1985
which served to increase competition in a crowded market. In 1987, Baxter acquired
Caremark, Inc., and initially this was a beneficial move. However, Baxter’s traditional
hospital customers viewed Caremark as a threat to their own home health care programs,
as the newly acquired company specialized in alternative site health care. This began to
create a sullied reputation for the company, and in the early 90’s the company attempted
to restructure. Despite efforts to improve the situation, the company faced several
lawsuits, involving the sale of Travenol Laboratories in Israel, which was a violation
against laws regarding the Arab League’s boycott of Israel. The company paid $6.5
million in fines. During that same year, the company faced a lawsuit brought by
hemophiliacs infected by HIV-tainted clotting agents. Despite such controversies, the
company has managed to keep its head above water, and has remained a strong
competitor in the industry. The company is currently active in more than 100 countries
worldwide (Hoover’s Company Profiles, Business & Company Resource Center).
Tyco Healthcare Group
2001 sales: $7,100,000,000
# of employees: 40,000
Tyco owns four leading medical products firms. United States Surgical produces surgical
sutures and laparoscopic devices. Valleylab makes generators and other products for
electrosurgery. Kendall makes wound dressings, needles and syringes, adult diapers,
electrodes and vascular therapy products. Finally, the Mallinckrodt division manufactures
ventilators, asthma management products, and various pharmaceuticals. In April 2000,
Tyco, along with other leaders in the industry, formed Global Healthcare Exchange
(GHX), an internet-based system aimed at facilitating the exchange of information related
to the buying, selling, and distribution of medical equipment, devices and healthcare
services (Hoover’s Company Capsules, Business & Company Resource Center).
2001 sales: $6,410,800,000
# of employees: 26,050
Medtronic specializes in cardiovascular products, spinal implant devices, autotransfusion
equipment, disposable devices for handling and monitoring blood during surgery, as well
as services designed to control neurological pain, tremor, spasticity. The company is
divided into subsidiary divisions: Sofamor Danek, Medtronic Vascular, and Cardiac
Surgery Technologies. The company conducts business in over 120 countries worldwide.
The most promising product manufactured by the company is the In-Synch ICD System
which combines a standard pacemaker with a defibrillator. Guidant is the strongest
competitor with respect to this cardiovascular product (Business & Company Resource
Becton, Dickinson & Co.
2001 sales: $3,754,000,000
# of employees: 24,800
This company is one of the top manufacturers of hypodermic needles and syringes in the
world. Becton, Dickinson & Co. also produces infusion therapy devices, pre-fillable drug
delivery systems, and surgical blades. All of these products are manufactured through its
Medical Systems segment. The company also operates with two other segments: Clinical
Laboratory Solutions and Biosciences. Expanding an overseas market has become a
greater priority since the company reorganized into three areas. Beginning in 1997, the
company began changing its image by acquiring several other companies.
MicroProbe/Epoch Pharmaceuticals, PharMingen, and Difco Laboratories were among
these acquisitions. In doing this, Becton, Dickinson & Co. managed to broaden their
product lines. In 2000, the company arranged to cut its workforce by 1,000 (4%) in a
cost-cutting effort. Most recently, in 2001, the company launched the shortest insulin
needle ever in the U.S. (S&P, 6; Hoover’s Company Profiles, online)
2001 sales: $2,707,600,000
# of employees: 10,000
This Indianapolis-based company manufactures vascular intervention products,
pacemakers and defibrillators, and minimally invasive surgical devices and systems
designed to reduce patient recovery time. Like J&J, Guidant strives to produce diverse
products, as illustrated by their wide range of cardiovascular products. The production of
stents is still a top priority. Guidant purchased Cook Group in order to acquire Achieve, a
Paclitaxel-coated coronary stent. Ultimately, this move was an effort to rival J&J’s coated
stent that was already available in Europe. However, Boston Scientific took Guidant to
court, claiming that a distributorship pact signed by Guidant and Cook violated a 1997
agreement between Cook and Boston Science. A judge ruled Boston Science’s favor, and
now it is possible that Guidant/Cook will be blocked from using clinical trial results
obtained during their agreement. The outcome of this complicated situation should have a
huge impact on the future of Guidant (Value Line, 177; Hoover’s Company Profiles,
In comparing the medical device and surgical supplies industry to the U.S. economy,
2001 statistics were considered. The Gross Domestic Product for this particular industry
was $61.7 billion, compared with $10,082.2 billion-the National GDP (Bureau of
Economic Analysis, online). More generally, Value Line points out that since the Medical
Supplies industry continues to do well, it appears as though there is a low correlation
between the financial performance of the industry and the strength of the overall
*Number of companies operating in the industry in the U.S. in 1999 : 31,470
(Statistical Abstract, Table 972).
*Number of people employed in 1999: 734,000
(Statistical Abstract, 972).
*Outputs or shipments in 1999 (production annually): $108,238,000,000
Value of Shipments: $ 50,371,000,000
(Statistical Abstract, 974, 976)
*GDP relationship (2001 data):
U.S. GDP: $10,082,200,000,000
All manufacturing GDP: $1,423,000,000,000 (14.11% of U.S.)
Industry GDP: $61,700,000,000 (.6% of U.S.)
(Bureau of Economic Analysis, online)
Significant Ratios to the Industry:
• National Healthcare Expenditures (total):
2002 projection: $1,542,000,000,000
(2001 Statistical Abstract of the United States, Health and Nutrition:
• Medicare spending:
overall in 2001: $241 billion
Inpatient hospital: $93 billion (39%)
Supplies, independent labs: $16 billion (7%)
# of Medicare enrollees: 40.4 million in 2002
(Centers for Medicare and Medicaid Services, online)
• Medicaid spending:
overall in 2001: roughly $202 billion
This represents nearly 15.5% of total healthcare expenditures.
(S&P Industry Survey, 22).
• Consumer price index:
Compiled by the Bureau of Labor Statistics, the CPI follows price inflation in key
areas of the economy. With respect to the health/medical care, the costs associated
with the industry have continued to “outpace overall inflation at the consumer
level” (S&P Industry Survey, 23). The October 2002 CPI for Medical Care Prices
was 289.2 (Bureau of Labor Statistics, online). S&P estimates that the overall CPI
will increase by 3.2% in 2003.
• R&D (Research and Development) as a percentage of sales:
Since the innovation of products is paramount to the success of the industry and
the companies which comprise it, this ratio is an important statistic. According to
S&P, most companies in the medical device industry devote 8-10% of sales to
research and development. For example, Johnson & Johnson, the leading
company in the industry, spends 10.9% of it’s sales on R&D. (FIS Company Data
• Foreign currency exchange rates
In this industry, foreign customers represent roughly half of sales. Therefore,
fluctuations in the strength of the dollar relative to other currencies is likely to
affect sales and earnings. Interestingly, as the dollar gets stronger, sales drop and
U.S. goods become more costly abroad and foreign-manufactured products
become more competitive. Recently, the value of the dollar (particularly against
the Euro) has weakened, thereby making it easier to export goods to Europe (The
• Interest Rates
The changes the Fed makes in interest rates affects companies’ cost of capital
expansion projects, acquisitions, stock repurchases, and dividends (S&P, 23).
Over the past year, interest rates have been cut three times, and are now much
lower at 1.75%, compared with their 3% low in the 1990s. Many analysts estimate
that the rates are unlikely to rise above the current rate any time in the near future
(National Post, FP1).
Current Events, News, Regulations
As mentioned earlier in the analysis, current news involving the weakening of the
American dollar and low interest rates are relevant to the success of the medical device
and supplies industry.
With respect to FDA regulations, the following acts have affected the industry: Federal
Food, Drug, and Cosmetic Act of 1938, Medical Device Amendments of 1976, The Safe
Medical Device Act of 1990, The FDA Modernization Act of 1997. All of these acts have
already been covered in detail in the History section.
In recent news, rumors began stirring that Medtronic was developing a product that
would repress a rare form of severe nausea. Of course, the interest of the public grew, but
according to FDA prohibitions, a company cannot talk about products until the FDA
approves them. Now the FDA is considering revamping it’s rules, thereby enabling the
agency to focus on fighting “real” abuses rather than less significant details (Business
Week Online, Nov 14, 2002).
Current news and events surrounding Medicare and Medicaid affects this particular
industry. The aging baby boom generation continues to contribute to the growing need
for health services and medical devices. As this population demographic grows, the total
number of Medicare beneficiaries is expected to double by 2030. This will directly affect
the medical device and supplies industry. For instance, roughly 61% of implantable
cardioverter defibrillators are used in Medicare patients. As the number of Medicare
patients increases, so will the demand for medical devices (CMS, online).
Recent news has also illustrated how the growth of one industry can have an effect on
another. As a result of the increase in use of endoscopic instruments in the operating
room, U.S. hospitals are spending more on sterilization equipment and supplies. In this
case, it appears that one sector can fuel the success of another within the same industry.
Analysts predict that spending for this sterilization equipment will reach $900 million, up
from $647 million in 2001. As technology continues to advance, the need for sterilization
of these innovative products will increase (Hospital Materials Management, 5).
Other noteworthy news involves the advent of online trading floors for buyers and sellers
of medical equipment and suppliers. Web sites such as medibuy.com, Neoforma.com and
medpool.com are the first examples of this health care delivery method. Group
purchasing organizations, particularly those which are well established (Premier and
Novation) are struggling to respond. Some are setting up e-commerce versions in an
effort to remain competitive. Time will certainly tell whether this new mode of trading
will ultimately be successful (Health Forum Journal, 18-21).
Forecasts and Trends
Value Line predicts that the companies included in their Medical Supplies industry
analysis (Guidant, J&J) will continue to do well. Lifestyle-oriented concerns will play a
part in this, as consumers of products such as breast implants compensated for losses
after September 11, 2001.
Product introductions in cardiology, orthopedics, oncology, and specialized surgical
markets are likely to benefit the industry. Additionally, the state of foreign currency rates
and the weakened U.S. dollar should boost revenues. Specifically, analysts estimate that
sales growth will average about 15% in 2002. Future FDA approvals could impact the
industry as well, particularly in the areas of coronary stents, as revenue increases in 2003
are expected if approvals occur. Looking ahead, a doubling of the coronary stent market
could occur by late 2004.
In addition to Research and Development and FDA approvals, rising Medicare
reimbursements are favorable for the medical device and surgical supplies industry.
Ultimately, the growing aging population will continue to stimulate the industry,
representing a long-term benefit (S&P Monthly Investment Review, 38). Individuals over
65 years of age currently total roughly 35 million. This number is expected to increase to
55 million by 2020. S&P sees this population demanding products in the areas of
cardiology, urology, orthopedics, diagnostic imaging, and neurology (S&P Industry
The home health care market is expected to achieve significant profits as a result of the
U.S. Congress’s passage of the North American Free Trade Agreement. This market is
comprised of kidney dialysis items, implantable infusion pumps, and nutritional therapy
products. Ultimately, the agreement will provide inroads for globalization and industry
growth (Encyclopedia of American Industries, 1244).
Organizations and Trade Associations
Advanced Medical Technology Association
1200 G Street NW, Suite 400
Washington, D.C. 20005
American Medical Association (AMA)
515 N. State St.
Chicago, IL 60610
American Orthopedic and Prosthetic Association (AOPA)
330 John Carlyle Street, Ste. 200
Alexandria, VA 22314
Association for the Advancement of Wound Care (AAWC)
950 West Valley Rd., Ste. 2800
Wayne, PA 19087
Association of Medical Diagnostic Manufacturers (AMDM)
555 18th St. NW, Ste 7W-404
Washington, DC 20004
Medical Device Manufacturers Association
1900 K St. NW, Ste. 300
Washington, DC 20006
(Encyclopedia of Associations, S&P Industry Survey, 30)
Centers for Medicare and Medicaid Services
Healthcare Intelligence Network
Health News Daily. “The Grey Sheet”
National Center for Health Statistics
U.S. Department of Health and Human Services: Food and Drug Administration
Wall Street Journal Online
“America’s Economy is Weakening but Remains on Course to Grow at Twice the Rate of
the Crisis-Ridden Euro Zone this Year as a Whole.” The Business. November 17,
Bureau of Economic Analysis, NIPA Data: Gross Domestic Product by Industry.
Washington: U.S. Department of Commerce, 2002. www.bea.gov
Bureau of Labor Statistics: Consumer Price Index Home Page. Washington: U.S.
Department of Labor, 2002. www.bls.gov/cpi/home.htm#tables
Business and Company Resource Center. Detroit: Gale, 2002. Accessed via UNC-CH
Centers for Medicare and Medicaid Services: 2002 Data Compendium. Baltimore: CMS,
Dunn & Bradstreet/Gale Group Industry Handbook: Insurance and Health & Medical
Services. Detroit: Gale, 2000.
Encyclopedia of American Industries. 3rd ed. Detroit: Gale, 2001.
Encyclopedia of Associations. 39th ed. Detroit: Gale, 2003.
FIS Company Data Reports. New York: Mergent, 2002. Accessed via UNC-CH
Freedonia Focus on Medical Equipment. Cleveland: Freedonia Group, September
Health Care Industry Market Update: Medical Devices and Supplies. Baltimore: CMS,
October 10, 2002. www.cms.hhs.gov.
Hoover’s Company Capsules. Ebsco Publishing, 2002. Accessed via UNC-CH Electronic
Hoover’s Company Profiles. Ebsco Publishing, 2002. Accessed via UNC-CH Electronic
“It was a mild recession but so is the recovery: Massive stimulus package: 'Fed's
footwork was pretty fancy and quite appropriate'.” National Post. September 9,
Medical and Healthcare Marketplace Guide. 17th ed. Miami, Fla., International Bio-
medical Information Service, 2001.
1997 NAICS and 1987 SIC Correspondence Tables. Department of Commerce. U.S.
Census Bureau, 2002. www.census.gov.
Plunkett, Jack W. Plunkett’s Health Care Industry Almanac 2001-2002. Houston:
Plunkett Research Ltd., 2000.
“Popularity of Endoscopic Instruments Leads to Growing Sterilization Spending.”
Hospital Materials Management. November, 2002.
Standard & Poor’s Industry Surveys: Healthcare: Products & Supplies. New York:
Standard & Poor’s Corporation, September 12, 2002.
Standard & Poor’s Industry Surveys: Monthly Investment Review. New York: Standard
& Poor’s Corporation, November 2002.
Statistical Abstract of the United States. Washington: U.S. Dept. of Commerce, Social
and Economic Statistics Administration, Bureau of the Census, 2001.
Surgical Appliances and Supplies in the USA. Chicago: Euromonitor Intl, 2002. Accessed
via OneSource Information Services.
“The Battle to Control Online Purchasing.” Health Forum Journal. Jan/Feb, 2000.
“The FDA’s Big…Free-Speech Challenge?” Business Week Online. November 14, 2002.
Value Line Investment Survey. LVIII: 1. New York: Value Line Publishing, September