Wieffering: Medical parts maker recasts itself as device developer

The pall over Minnesota's medical device industry seems notably absent in the Chaska offices of Lake Region Medical.

Instead, you get the distinct sense that executives believe the company's best days lie ahead.

That's saying a lot, given that Lake Region has experienced some pretty good days during the last 50 years as a contract manufacturer riding the coattails of customers like Medtronic and St. Jude Medical.

But many of those customers are now struggling with slower growth and diminished expectations. Multiple product recalls and disclosures about improper payments to doctors have battered the industry's image, and led to a slowdown in new product approvals. Minnesota exports of medical devices have been sliding since 2009. Medtronic slashed 1,700 jobs worldwide this year, including 268 in the Twin Cities. Boston Scientific has announced plans to cut 1,400 jobs worldwide, with an undisclosed number to come from Minnesota.

Things only look to get worse in the near term. Venture financing of new companies has shriveled, and device makers face increasing pressure to show that their products improve outcomes or lower health care costs. In 2013, the industry gets hit with a 2.3 percent tax on sales -- not profits -- to help pay for the new health care reform act. An industry trade group says the tax could cost companies up to $4 billion and mean the loss of more than 10 percent, or 2,700, medical device jobs in Minnesota alone.

Lake Region hasn't been immune from these forces. The family-owned company, which has annual revenue of about $200 million, acknowledges that its business has slowed this year along with its customers. "It's been a tough year, and we're feeling it," said CEO Joe Fleischhacker.

The prudent thing might be to be prudent. Instead, Lake Region is showing that innovation and risk-taking in the medical device industry isn't dead. It's just shifting or being distributed to less obvious sources.

In Lake Region's case, that means pushing ahead with a plan to transform itself from a parts supplier to a developer and manufacturer of technologically advanced medical devices. It may be another two years before those investments begin to pay off, but Fleischhacker believes the company had no choice but to set off on a riskier course.

"We wanted to be at the forefront of some of these technologies, and our customers needed us to be," he said.

Lake Region is laying its biggest bet on "smart" guidewires used to install, access or retrieve devices in a patient's body. Spending on research and development has more than doubled to 6 percent of sales in the current year, and Lake Region insists it may go as high as 10 percent in the future. It has established three different physician advisory boards -- a company first -- to help identify customer needs and provide continuous feedback on new products as they are developed and taken through testing and various stages of regulatory approval.

Lake Region gets less than 5 percent of its revenue from new products. By 2015, it wants 30 percent of sales to come from products introduced in the previous few years.

Not that Lake Region-branded products will be sold directly to doctors or hospitals anytime soon. That would expose Lake Region to the new sales tax and put it in direct competition with its current customers -- two things it wants to avoid. In fact, some of those customers are negotiating exclusivity agreements with Lake Region that provide them first rights to the products being developed.

"We want them to see us as a full development partner," said Jim Mellor, Lake Region's vice president of marketing and sales. "At some point, before the design freeze, they would have the opportunity to review and iterate it for their particular needs."

Lake Region is also making a bigger push to sell its development capabilities -- not just its manufacturing capacity -- to start-up device companies.

This new approach is opportunistic in that it recognizes that device makers, facing slower growth and a new tax, are looking for ways to trim costs. That's likely to mean focusing their own R&D spending on core device technology, and less on peripheral products, such as coils or guidewires.

But as a parts supplier, Lake Region faces the same, longer-term squeeze that all contract manufacturers of commodity components do when their customers are under extreme pressure to cut costs.

Boosting its intellectual property portfolio may be great offense, but it's also smart defense against those pressures.

"It's really about creating a higher-value proposition for us with our customers," Mellor said.

Lake Region will showcase some of its smart guidewire technology, which include sophisticated sensors and cameras, at a big industry trade show in San Francisco next month. The company expects to get some of the wires in clinical trials next year, and bring them to market in 2013.

ericw@startribune.com • 612-673-1736