On 12/15/2011, it was reported by Bloomberg that 760 companies were hit by Chinese-based hackers, including device maker Boston Scientific. No surprise here, since I have been writing about the dangers of Chinese IP theft for the past 3 years . According to Representative Mike Rogers, chairman of the Permanent Select Committee on Intelligence, “They are stealing everything that isn’t bolted down, and it’s getting exponentially worse.” Adds Scott Borg, an economist and director of the US Cyber Consequences Unit, “We’re talking about stealing entire industries. This may be the biggest transfer of wealth in a short period of time that the world has ever seen.”

China’s most recent 5-year economic plan (approved by the National People’s Congress in March) prioritizes a number of key industries. According to KPMG International (the auditing firm), the 5-year plan focuses on clean energy, information technology…and medical devices.

Time to bolt down your IP…that is, if you haven’t already handed it over by submitting to SFDA testing protocols.

Given this latest indictment, US device makers should think long and hard before sending their advanced IP to China.

“On the one hand, SFDA has extensive requirements for product testing and technical file review. On the other hand, there are state-sponsored programs, such as the so-called ’863 Program’ that are devoted to the acquisition of certain high-tech IP for the benefit of the domestic Chinese industry. Can you briefly describe the firewalls that exist between SFDA and the other state agencies to protect medical device IP?”

After a long, pregnant pause, the delegation merely referred to the Chinese office for intellectual property rights – saying that SFDA had no hand in addressing device IP. Of course, this is ridiculous – SFDA is in the busines of accumulating a vast amount of information for every device that enters the country. They are the conduit for US IP and their silence on the safeguards for that IP speaks volumes.

See my previous posts on Chinese Super-Competitors and IP theft.

I’ve also written in this blog about the dangers to the device industry of Chinese IP theft. Now, an avionics joint venture between GE and a Chinese firm is raising many of the same  questions for US avionics/aerospace technology…and it also highlights concerns for US medical device technology. If aerospace joint venture technology, with all it’s required firewalls, is potentially at risk, how much more device technology? Especially when SFDA technical file examination + scrutiny from 3 seperate Chinese testing houses is taken into consideration. This may be a the reason why GE recently transferred their entire imaging business to China…a simple acknowledgment of an impending reality.

To begin, Citi analysts cut their 2012/2013 sales estimates for Smith & Nephew. While this alone is not particularly earth-shattering, what came next in the downgrade report was: Citi’s view is that Hip & Knee markets won’t recover in the short term and emerging markets aren’t expected to grow until 2014. 

Don’t expect much from developed markets, either. A recent Financial Times article documents how the Greek government has fallen dramatically behind in payments to device companies. According to the article, Roche has cut staff and is operating on a cash-only basis…BD and Covidien have shuttered their Greek operations and transferred them to local distributors. Many haven’t been paid in over a year.

With device payments grinding to a halt, device deliveries aren’t far behind…and this is now having a direct affect on patients. One retired school teacher who was interviewed for the FT article reported, “My consultant sent me to colleagues at three different hospitals to try to arrange the [hip replacement] operation but I haven’t managed to get a place on the list for surgery”. No need to look further for a cause behind the lack of growth in the hip market.

Let’s hope the Europeans can get their act together soon. Most large device manufacturers have well over 50% of their sales overseas – with a large portion coming from Europe. Another financial crisis – driven by sovereign debt issues in Greece, Portugal, Italy, or Spain will not have a sanguine affect on device industry growth prospects – despite the ageing of worldwide markets. Doubtless, the result would be the pervasive under-serving of an at-risk, at-need, growing poplulation of elderly people. Tragedy, indeed.

Lack of calibration or maintenance of in-house sterilizers, lack of validated processes, lack of sterilization verification testing, no DMR/DHF, lack of sterilization batch information, and openly destroying legally required production records rather then permit FDA review (!) – the full text 483 is here.

The situation that set up the for-cause FDA inspection was particularly alarming. As stated in the letter, several infants in a neonate ICU (NICU) cultured positive for Pseudomonas (potentially lethal for immuno-compromised individuals, like premature infants!). The hospital’s investigation led to culturing the company’s ultrasound 8 oz bottles and 5 liter gel which tested positive for the Pseudomonas organism. You can see a company video touting their latest product, designed for (you guessed it)  infants is here.

Apart from the seeming lack of quality system rigor that seriously jeopardized some of the most vulnerable patients imaginable – it was especially alarming to see that this company was registered to ISO 13485…by Orion Registrar.

In fact, I’ve written before about the importance of ensuring that your suppliers are certified by a reputable registrar (e.g. DEKRA, BSI, etc) – and doing your own audit verification. For translation suppliers, this means examining Management Reports, CAPA records, project records, and other systems documentation to ensure that hazards are identified and mitigated.

Either that, or risk having a company like Pharmaceutical Innovations on your Approved Supplier List.

Having lived in Boston for some 29 years, I feel a certain affinity to the place – though not a native, Boston feels like home in many respects. One of the things that I’ve always liked about Boston are the distinct neighborhoods. As if, when immigrants disembarked their ships in the 1700′s and 1800′s, they kept a hope of return and established ethnic enclaves to remind themselves of home.

A unifying aspect to the varied and successive waves of English, Scots, Irish, Italians, Portuguese, Greeks is the distinctive Boston Accent. Often illustrated by a pithy suggestion to “Pahk the Cah in Hahvad Yahd”, a Boston accent (in my opinion), is best when peppered with New England regionalisms – wicked pissah, right? My undergraduate work in Celtic Studies and graduate studies in Scotland gave me with a real appreciation for regional accents and dialect. Robert Burns, the national poet of Scotland, wrote in a broad, lowland Scots dialect – and regionalisms represent some of the richest areas to mine for linguistic curiosities and unexpected connections to history.

I always enjoy hosting clients in our Boston offices because I get to play tourguide to the many interesting and historically significant places. For everyone who visits us in the future – I plan to use this book and web article as background for the rich and curious dialect, too.

According to industry resource MassDevice, Medtronic plans to double the number of employees in China over the next 4 years – already China is the leading market for Medtronic overseas sales and is growing at 20% per year. Likewise, Boston Scientific announced plans to invest $150 million in the Chinese market over the next 5 years and GE Healthcare took the unusual step of moving its entire x-ray business to China. Together, these substantial industry growth iniatives are laying the groundwork for short-term financial returns, but also long-term problems on a massive scale.

I’ve written before about the long-term threat to US device manufacturers posed by China: including reverse engineered products, government-sponsored IP theft, lessons learned by Cisco and concerns from the US automotive industry. Given the current rate of Chinese investment by US manufactuers, it’s not hard to see that while the short term rewards are tantilizing, the long-term risks of creating Chinese super-competitors are immense.

“The [economic] slowdown has had a severe impact on some kinds of Cisco gear—particularly the switching equipment that is the company’s biggest product line—at the same time that competitors are stepping up their attack on Cisco with low-priced products.”

I picked up on this because, on a recent trip to Hong Kong, I sat next to a supplier to HuaWei Technologies, a major telecom producer based in China. Starting out in 1988 as an importer of PBX phone systems, HuaWei (he informed me) had all but replaced Cisco in Asia. You can read about it here.

You might think that this doesn’t apply to the medical device industry…but you would be wrong. A case study on HuaWei provides a useful illustration of the growth of Chinese competition and its implications for US manufacturers across a broad range of industries – including medical device.

In the current era of slow economic growth, Chinese manufacturers are moving up the value chain and producing more and more sophisticated products. Earlier this year, I cited a WSJ article that described how Chinese manufacturers had reverse-engineered a soviet fighter jet and were selling it at a huge discount…if the Chinese can do this with jet fighters, they can certainly do it with medical devices. In fact, China has a state-sponsored program devoted to “accumulating” IP in targeted sectors like military, communications…and advance medical technology.

Device manufacturers who only look at the revenue upside of the Chinese market may be forgetting one important fact: products sold into China today will most certainly be back (at substantially lower cost) – produced by Chinese companies and displacing revenue of US device manufacturers.