Offshoring and Neuromodulation Life Cycles

by Victor Pikov, contributing editor

Economists often describe a product’s life cycle as a transition through four stages: introduction, growth, maturity, and decline. When a product approaches the decline stage, offshoring of manufacturing has been a common approach for cutting labor costs. Let’s examine whether the active implantable device industry is nearing its decline.

We’ll start our evaluation with cardiac rhythm management devices (pacemakers and implantable cardioverter defibrillators), which represent the largest segment of active implantable devices. The CRM industry reached the maturity stage in the mid-1990s, when manufacturers gained their highest profits due to declining costs of manufacturing and marketing.

As the number of CRMs sold in the U.S. reached 100,000 by 1993 and then 200,000 by 2000, most manufacturers underwent expansion of their fabrication capacity, while their R&D efforts ramped up as well due to incorporation of microprocessors—the last wave of innovation in the CRM field. Around that time, key CRM customers—U.S. hospitals and group purchasing organizations—underwent a wave of consolidation and became more assertive in price negotiation. By late 1990s, sales and profit margins began to plateau, while competition among CRM manufacturers reached its highest level.

Arguably, the decline stage of the CRM industry started in 2000s, fueled by market saturation, low prices, and rising regulatory expenses driven by tighter regulatory scrutiny from the FDA. As a response, many CRM manufacturers started offshoring their production. In 2001, Medtronic opened a manufacturing facility in Tijuana, Mexico, followed by Greatbatch Medical (now Integer) in 2005. In 2009-2010, Boston Scientific and St. Jude Medical (acquired by Abbott in 2017) opened their manufacturing facilities in Costa Rica.

What about the life cycle of neuromodulation devices? While the first SCS device was approved by the FDA in 1984, the neuromodulation industry fully emerged only after a trio of approvals for DBS, VNS, and SNS in 1997. Explosive growth followed in the 2000s, with about 20 U.S.-based neuromodulation startups creating novel therapies based on the platform IPG provided by the Centro de Construcción de Cardioestimuladores del Uruguay (see our 24/03 article about CCC).

As the neuromodulation industry reached maturity, Integer acquired CCC in 2014, including its 170 employees working at the R&D and manufacturing facility in Montevideo, Uruguay. In the 2020s, some large neuromodulation manufacturers arguably are approaching the decline stage. For example, the SCS manufacturer Nevro has been using an existing Integer manufacturing facility in Tijuana (initially built for CRM devices), but in 2023 it decided to open its own manufacturing facility in Costa Rica. The VNS manufacturer Cyberonics (now Livanova) also opened a manufacturing facility in Costa Rica; however it was short-lived operating only from 2015 to 2017.

Among large independent manufacturers of CRM and neuromodulation leads, Oscor Inc (acquired in 2021 by Integer) has operated two manufacturing facilities in the Dominican Republic since 2004 and has expanded them over time.

In our analysis, we have assumed that offshoring is a good predictor of the product life cycle approaching its decline stage. While this has been the case across the board until the 2010s, recent data shows that manufacturing employment in the U.S. is no longer in decline and has stabilized at around 13 million people. Therefore, offshoring no longer plays an important role in the U.S. economy as a whole, while its most advanced sectors, such as semiconductors, remain mostly offshored perhaps due to scarcity and the high cost of trained manufacturing workers.

So, we are left with these open questions: does it make economic sense for the U.S. to reshore its CRM and neuromodulation industries and, if so, would a tight labor market in the U.S. allow that to happen?