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Nowhere is customer service more important than in the medical equipment market. No hospital wants to wait around for days while an expensive X-ray machine is immobilized for lack of a spare part.
Philips Medical Systems knows that very well. Based in the Netherlands, it is one of the world's top three providers of diagnostic imaging systems, including radiography, fluoroscopy, magnetic resonance and ultrasound.
The company also provides a wide range of value-added services, including customer training, aid in translating diagnostic images, advice to hospitals on systems acquisitions and equipment maintenance. The company has 9,000 employees who sell and service customers in more than 60 countries.
|Most medical-supply companies are small, depending on large wholesalers to get their products to the end user.|
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|Having a unique product doesn't mean you can afford to ignore the logistics of getting it to market.|
Cyberonics Inc. has virtually no rivals in its field - the production and distribution of a groundbreaking medical device that controls epilepsy. The critical nature and high value of this product, however, makes 100 percent delivery reliability a must. In many cases, the device is ordered to coincide with a scheduled surgery, and because of the value - $9,000 to $10,000 each - it is not an item hospitals care to keep in stock.
On its face, the Cyberonics supply chain is relatively straightforward. The company's sole product is manufactured in one place, near corporate headquarters in Houston, Texas. Shipments weigh less than half a kilogram and always are handled by express carriers, primarily DHL. Orders are small, often for a single unit.
Because of differences in national laws, however, the young company was not able to keep its small operations centered in Texas. In fact, its first sales occurred in 1994 in Europe, where government officials were quicker to approve the device than was the always cautious U.S. Food & Drug Administration.
Developers of new medical technology often find this to be the case. The wait for U.S. certification takes an average of six years, versus three to four in Europe, according to the Holland International Distribution Council. As a result, new medical products often are launched there.
It took Cyberonics 10 years and seven separate clinical trials to win the green light from American regulators for its patented product, the NeuroCybernetic Prosthesis (NCP) System. The first new treatment for epilepsy in more than a century, it is designed for the 20 percent of epileptics whose condition cannot be treated by drugs or brain surgery. (Some 50 million people suffer from epilepsy worldwide.)
The NCP consists of a metallic generator that is roughly the size and shape of a pocket watch. Implanted in the patient's chest, it attaches to a wire that wraps around the vagus nerve in the neck. The system sends electrical impulses to the brain, in 30-second bursts every five minutes. The purpose is to block epileptic seizures - a sort of pacemaker for the brain. Patients may further stimulate the device from a wristband if they feel seizures coming on.
Since winning U.S. approval for its device in July 1997, Cyberonics has seen demand for the NCP rise steadily. It has since shipped more than 3,000 units and expects that number to climb to 7,000 this year. Sales could jump from $16m in fiscal 1998 (ending June 30) to nearly $50m in fiscal 1999.
While waiting for the U.S. nod of approval, however, Cyberonics' only income came from its fledgling European operation, according to Joel Heirman, an Ernst & Young manager who serves as the company's finance manager in Brussels.
A small suite of offices in Zaventem, Belgium, just outside Brussels, serves as Cyberonics' European headquarters. From there, the company ships to most of the world, except for the Americas, which are serviced out of Texas.
Cyberonics sells directly to hospitals in the United Kingdom, France, Germany, Switzerland, Austria and Belgium. For other locations, it works through 25 to 30 medical distributors, whose ranks are growing each month. They provide the global sales force that a company of Cyberonics' size cannot field by itself, said Carine Vangenechten, administration and operations supervisor. Local distributors also help it to overcome differing business practices in various markets.
DHL handles all shipments for the Belgian office, keeping parts in its bonded warehouse just minutes away at the Brussels airport.
Cyberonics has considered storing the goods at its own facility and saving the cost of DHL's transfer services, said Ingrid Seymus, marketing communications manager. Such an option might prove especially attractive as sales grow. But it also would shoulder Cyberonics with a host of new concerns, including security and inventory control systems. The company likely will make a decision at the end of the current fiscal year, when it determines whether to move out of the Zaventem office into larger quarters.
It won't be moving far. Belgium provides the ideal location for distribution of the NCP throughout Europe and beyond, Heirman said. Maximum transit time to anywhere in Europe is 24 hours, and to Asia, three days. Cyberonics likes the multilingual culture of Belgium, the productivity of its labor, and its proximity to the major population centers of Europe. The Netherlands offers similar inducements, but office space is cheaper in Belgium, and the Brussels airport is less congested than Amsterdam's Schiphol International, said Heirman.
The European headquarters of Cyberonics actually started out in Switzerland, which was responsible for all sales in the continent except for those to Belgium. It moved to Brussels because that was the regional headquarters of St. Jude Medical Inc., the St. Louis-based maker of cardiovascular devices. St. Jude had come through with a big infusion of cash and marketing support at a critical moment in Cyberonics' early years, and for a time was considering buying the company outright. When it opted not to, restricting itself to a minority ownership share, Cyberonics stayed put in Brussels and closed the office in Switzerland.
Belgium's Tax Advantages
On the basis of local sales, Belgium ranks relatively low in importance. France is a far more important market for the NCP, said Heirman, but tax regulations there are less advantageous, especially for a company that has yet to break into the black. In Belgium, he said, losses can be carried forward on balance sheets indefinitely; in France the limit is five years. The European Union currently is discussing harmonization of this rule, but no action is likely in the immediate future.
Belgium has the additional advantage of being a member of the EU, Heirman said. Shipments from Switzerland into EU countries are subject to import taxes, including nonrefundable duties. Moreover, the debut of the euro as the EU's common currency should greatly simplify Cyberonics' accounting.
In any case, the company feels right at home in Brussels, which plays host to virtually all of the major cardiovascular companies in Europe. "It's a very small world," Seymus said. Cyberonics also is close to many leading authorities on epilepsy, whose support is crucial to wider acceptance of the NCP by hospitals and neurosurgeons.
The education process on the NCP extends to customs officials, many of whom aren't familiar with the new technology. The NCP doesn't always fit neatly into the listings of general medical codes used by customs agencies in monitoring imports, Vangenechten said.
The novelty of the NCP may actually have helped it to surmount bureaucratic restrictions against crossing European borders. Devices based on new technology are not subject to decades of local regulation and legislation, said Richard Greene, senior manager of Ernst & Young in Utrecht, the Netherlands. As a result, they are automatically eligible for uniform treatment by the 15 members of the EU. Older products - including highly regulated medical devices - must await the painstaking process of harmonization, which is far from complete.
For Cyberonics, Europe remains a small operation, albeit one with substantial promise. Although the company first received government approval in Europe, it was held back from exploiting the event by a lack of cash and the need to focus on winning FDA approval in the United States. Once those hurdles were overcome, the company began turning its attention to marketing and winning endorsements from insurers. Implantations are on the rise, but the scale of European activities is dwarfed by those in the U.S., where the company has a 40-person sales and marketing organization.
U.S. sales of the NCP should continue to blossom now that major health plans have agreed to reimburse costs. Currently they are running in excess of $1m a month, said Vangenechten, but the potential is for much more. In North America, Europe and Japan, there are an estimated 600,000 patients - a $5bn market - suitable for the NCP implant. The U.S. market alone is valued at $1.8bn.
Sales to Asia are just getting off the ground. For now, said Seymus, Cyberonics can easily supply Asian hospitals from its European location. As the numbers increase, it will consider the establishment of additional distribution points closer to buyers.
Still a one-product company, Cyberonics doesn't plan to branch out widely into other areas of medical research. It does hope to develop new therapies related to vagus nerve stimulation for sufferers of Parkinson's disease, trauma, pain and depression. The goal is to remain a highly specialized niche player - but one with global scope and the leanest possible distribution network.
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