This is the transcript of the interview with Richard Kuntz, the CEO of Generic Medical Devices—a start up making, well, generic medical devices. The audio is here

Matthew Holt:  This is Matthew Holt with the Health Care Blog, and this morning I’m back with another podcast and I’m talking to Richard Kuntz. Richard is the CEO of GMD, Generic Medical Devices, which is a company which is, as the name suggests, developing generic versions of medical devices. That’s a pretty interesting approach, and I don’t think it’s been done before.There’s actually a pretty big generic drug industry, which has a pretty interesting place in the panoply of pharmaceuticals, but we don’t know much about generic medical devices. And to find out a bit more, I’ve got Richard on board for a podcast this morning. So, Richard, how are you?

Richard Kuntz:  Excellent. Yourself, Matt?

Matthew:  I’m doing okay so far. As I told you just now, we’re testing out this new device. Hopefully it’ll work and we’ll have an error-free podcast! [laughs]So let’s start at the beginning. We know that medical devices come in different flavors, but probably the ones that have caused most controversy in recent years, in the press and elsewhere, have been medical devices, the expensive ones that are used in surgeries and procedures. We’re talking about stents and artificial hips and that kind of stuff, and there’s been a lot of controversy about both how those are solved and also the margins that are made on those devices. And some of these, there have been a lot of controversy around that.But just give us an overall view of this. You decided to go into this business with the goal of looking at medical devices and creating, presumably, an equally high quality but lower cost version. But what kind of medical devices have you looked at, where is the market that you think is the opportunity, and what is your approach to the market?

Richard:  Certainly the pacemakers, ICs, orthopedic hips, stents, are probably the four items that receive most of the press and discussion in general public, but there are literally thousands of other products that go into the hospitals as far as other implants, surgical instrumentation, and supplies.We’re focusing as the first company to begin developing products that are off-patent, that have proven safety and efficacy, that have existing reimbursement to reduce health care costs and help save Medicare. Every time we pick up the newspaper they’re talking about the impending bankruptcy of Medicare, and we intend to remove cost from those devices in the $120 billion device marketplace.There are literally thousands of products that the large companies have enjoyed a long run on, where the patents have expired; yet the prices continue to ratchet up each and every year. So we’re focusing on those products that do have patents that have expired, and truly, the only thing generic about our products is the price.

Matthew:  Well, let’s talk a bit about the general, before we
get into the specifics about what you guys are doing. Most people know
that in the drug world, drugs have, what is it, a 17-year patent. And
they all seek, in the drug world, to try to extend that by changing the
nature and the flavor, like an extended release package, of the drug.
But you get a big drug like a Zocor, or go back a few years to Zantac
or Tagamet, and at some point the patent expires. At that point it’s
pretty easy for a generic drug company to manufacture a chemically
equivalent product, stick it straight into the market. And you’ll see,
usually, the original version goes OTC and the generic version will
cause essentially the collapse of the market for that drug, and the
generic one will probably come on to the market at a tenth of the price
or something like that.That’s pretty much understood to be the
game in the patent branded pharmaceutical business, is that you have
that amount of time before your generic competitors come onboard to
make the big bucks. Tell me a bit about patent protection for medical
devices, and why that hasn’t been the case to this point in medical
devices.

Richard:  Well, the devices do have the same patent
protection for a period of 17 years. And in many cases there are no
other products in the pipeline replacing them with technology. We’re
focused on those devices that are the gold standard, the standard of
care, whose patents have expired and there are no other replacements
from a technological improvement in the pipeline to replace them.The
first three products that we’re launching–the first that we got FDA
approval on and CE marking was the circumcision clamp. And we focused
there because we’d been in contact with the UN and World Health
Organization concerning the study in South Africa that would stop
[inaudible] for humanitarian purposes just a couple months ago, with
conclusive evidence that’s now been peer-reviewed published, that
circumcision in these South African countries can prevent the spread of
AIDS by 70%. But it’s also a standard of care throughout the world in
hospitals, in clinics, everyday.

Our
second product is a general surgical mesh, mesh that’s used in the
projected one million hernia operations, the hundreds of thousands of
rotator-cuff repairs, and overall general surgery. So, with the
exception of the circumcision clamp, which we did for specific reasons,
most of all our products will be focused into the Baby Boomer. These
are products that are increasing and will increase for the next 12
years as the Baby Boomer population is receiving and requiring more
medical attention.

Matthew:  So for the mesh product, or one of the other
products you’re introducing, give me a sense of, if you’d like, how
long the technology has been around–like you said, there’s been no new
technology innovation on the these things–how long they’ve been off
patent, and how much the current price from the current vendors is
compared to what it was when the thing was still patent protected, and
where you’re going to come into the market, where your price
differential’s going to be.

Richard:  Most all of our products are going to be
introduced at approximately 65% of the existing market, of the lowest
market price. And with the first three products, which have a market
size of about a billion dollars, we anticipate that our first three
products will save the health care industry about 350 million dollars.
Now that doesn’t mean we have to sell all those, but when we introduce
the price, it’ll have to come down to our level, or they will abandon
the market. We intend to take market dominance in all the products that
we launch.

Matthew:  And you didn’t mention actually the third
product. There’s the circumcision clamp, the surgical mesh, and the
third product is…?

Richard:  It’s a urinary incontinence sling. It’s focused
on female incontinence, which is a major problem in the aging, in the
US as well as worldwide.

Matthew:  These seem like veteran products — I’m assume
the circumcision clamp has been around for several thousand years. What
prices are the current manufacturers charging compared to when these
products were patent protected? Do you think they are charging the same
price they already were and it should be fairly easy to come in and
undercut them? Do you think they are marginally close to not being able
to compete if they have to come down in price?

Richard:  Well, with a lot of the major corporations–I
worked for a Fortune 500 company–understanding the overhead that is
associated with those products, I’ve had excruciating budgeting
meetings where we are talking about a device that is fairly
inexpensive, but the overhead is hundreds of dollars. We are going to
take that overhead out of the picture, and with that, be able to price
our products much lower. Just as in the generic pharmaceutical industry
or any of the over-the-counter drugs, like one of my favorites,
Sudafed. Sudafed is made by J&J. At one time, while the patent was
in existence, they had a 100% share. Today they keep the price high,
but they have that 10% brand loyalty, where the other 90% is a generic
at significant savings to the general public.

Matthew:  Right. So, given that, tell me what you think.
Obviously it’s the early days of your organization at the moment, and
you picked three that obviously you think have attractive market entry
points, big enough markets, but not perhaps top of the mind for the
bigger device manufacturers, although I guess that remains to be seen.
But where do you think you are going to end up going? How robust do you
think this market could be for generic products? I guess buried in that
is the question, how many of the devices that we talked about at the
start–the pacemakers and the hips and those kinds of things–how many
of those are likely to stay technologically stable enough that there
could be a generic market developing for those?

Richard:  First of all, most of my adult life I have
spent dealing in what’s called Class III Active Implantables, which are
the pacemaker neuro-stimulation type devices. We have no plan on
pursuing any active implantables. However, for example, our surgical
mesh is a nonactive implantable with years of proven safety and
efficacy. We are pursuing those products as well as the general
instrumentation that surround them. There are literally thousands of
potential products that we can pursue without being involved in the
cardiac pacemaker type of active implantables.

Matthew:  My assumption from the outside is that,
although there have been a lot of issues of course with certain active
implantables in recent years, that there is a lot of development and
changing going on day to day, and probably new patents for the new
types of active implantables and for some of the new drug eluting
stents and those kinds of things. So you are probably never going to
get into that realm, whereas something like a surgical mesh is a more
stable product set. But is there some sort of a halfway house? Can you
imagine –and I’m just making this up– that some of the original bare
metal stents are now coming off patent and maybe that is a place you
could start going to, or something like that?

Richard:  Well, that is certainly a non-active
implantable. Although we have no immediate focus in that specific
product line, I certainly would not see it as off-limits at this point.

Matthew:  So, what is your sense for how big an impact
the generic medical device market can make on the overall medical
device market? You mentioned 120 billion dollars, is that the total
medical device market that you were aiming at at the moment? That
sounds about right to me as a size. What is your sense of how much of
that is "up for grabs" for the generic side of the house?

Richard:  We have yet to determine the total impact. For
example, the generic pharmaceutical industry last year took out 10
billion dollars of the cost for the Medicare and the healthcare cost in
the US. It is billions and billions of dollars.We are the first
company to focus on taking the medical device industry generic. We are
a leader. We are going to launch a number of products on a regular
basis and quarter by quarter continue to grow our company and take
market dominance by reducing cost of the products that we launch and
introduce in a generic fashion.

Matthew:  So, let us talk a bit about your company. You
are pretty new; you started last year. You obviously have a great
background in the devices. You have been looking at this for a while
and seeing an opportunity. Give me a sense of two things. First off,
what do you have to do? This is not just like Joe’s Tool &
Die knocking off a new surgical mesh, there are obviously a lot of FDA
approvals, good manufacturing compliance and so on that you have to go
through to get this approval so that this can legitimately come to the
market. What kind of background setup do you have do for that?And
then, what have you done in regards to setting up the standard business
arrangements? Where did you get your funding? What size are you at the
moment? Give me a sense of where you are in your corporate progression. Give me two answers to that: how do you get into the market technically and regulatory, and where are you as a company?

Richard:  Well, we opened our doors last August 1st. In
midyear we had an ISO 13-485 certification bestowed upon us by our
certifying body, which allows us to CE mark our product worldwide. We
started working on that early last year, putting our quality systems in
place. We are an FDA registered facility. Some of our core competencies
are in the engineering, regulatory, and supply chain areas, as well as
the sales, marketing, and distribution.

Matthew:  And is that a case of just hiring a bunch of
smart people who understand that world and who can figure out how to
set things up, or did you have to go through setting up production
lines? How onerous is that process?

Richard:  It is very onerous. I hired a group of
professionals–the all-star team. Some of them refer to themselves as
mercenaries. We have on staff over 200 years of medical device
experience, and that is going up on a regular basis as we add our new
hires. We are based out of Gig Harbor, Washington. We have our
warehouse worldwide distribution center established in a tax-free zone
in Fife, Washington on Indian tribal land. Our sales office is also in
Gig Harbor. Last week we just launched our European office in Brussels,
Belgium, where we have a staff of people that each have over 20 years
of international worldwide distribution experience.

Matthew:  Do you have manufacturing, or are you
contracting that out? Is that happening worldwide? Do you have to get
that certified as well? How does that all work?

Richard:  Absolutely. We deal with a supply chain that is
worldwide–finding the highest quality, the best price–and the final
is done at our Fife, Washington facility.

Matthew:  So you are sourcing this from other parts of
the world. Is this like one of these things where they are made in the
same plant as some of the branded manufacturers are making them and you
are getting a different version? Or is it not quite like that?

Richard:  In some cases, that is true. All of our
suppliers are FDA registered and ISO certified, so we are dealing with
the best of the best. And that is one of our core competencies with our
background and experience–locating those suppliers that are of the
best quality.

Matthew:  That is very interesting. What kind of
financial backing did you get when you started this up? How many
employees do you have? Did you get some venture capital money? What is
your financial backing?

Richard:  We started the company, and basically myself
trying to understand the market, I went around to ambulatory surgical
centers, clinics, and hospitals. I started talking to hospital
administrators, doctors, surgeons, to see how we would be received. In
Europe we also talked to ministries of health, seeing how they would
receive the generic concept of high quality, lower-priced materials.
And we immediately started getting calls from people, after thinking
about why nobody is taking the device industry generic, people wanting
to invest in us. Initially, right away we had a million dollars in
funds; we ended up with about 1.5 million. We put our business plan
together, and we achieved many milestones: FDA approval on our first
product, the e-marketing on our first product. We then hired a group
out of Seattle, Washington–Broadmark Capital–to represent us, and it
was able to attract many investment firms that wanted to invest in our
company in an equity standpoint. So we secured substantial capital to
launch our products, commercialize our products, and go to market.
Subsequently, as I have just said, we’ve recently opened our European
office. We have hired our regional sales directors across the US; we
are signing up our distributors and independent sales reps to rep our
products worldwide.

Matthew:  Do you have an announced number of how much you have raised so far?

Richard:  We have not. We are a private company. We do
talk about the initial seed money, which was a million and a half, and
we subsequently have substantial equity investment in our firm that
insures we have adequate funding

Matthew:  OK. It’s all right. If you don’t want to tell
me, you don’t have to tell me. How many employees do you currently
have? It sounds like you are growing pretty fast.

Richard:  We currently have about 20 employees, and we are hiring another 12 over the next six weeks.

Matthew:  Sounds like quite a challenge! And then give me
a sense…you now have these three products which are already on the
market, is that right?

Richard:  We have two on the market, and our third is in full regulatory submission.

Matthew:  And if I talk to you next year, how many do you think you will have on the market?

Richard:  Well, we would like to do two per quarter. Two
or more; it depends upon the complexity of the product. We will
continue to fill our basket of products. We are literally fielding
dozens of product ideas from our sales organizations, from our
distributors, from our medical advisory board, and from our customers,
to figure out which product meets our business plan and which one to
move on next.

Matthew:  Right. And if I come back in a couple of years
and talk to you, give me a sense of what would be a revenue number for
your company that would make you and your investors happy?

Richard:  Well, the sky is the limit. And as I said, we
do plan on taking market dominance in the products that we go after.
Literally, the sky is the limit. It will be hundreds of millions of
dollars, if not a billion plus, in sales.

Matthew:  And I guess the key question for the health
care market, if we go back to the issue of saving costs it kind of gets
buried in there, but there is understanding that some of the margins in
some medical devices at the moment are in the way above 50% range.
Maybe not for some of the ones you are going after, but there are
certainly some very, very high margins in this. What’s your
sense of, if you were to compare to the pharmaceutical business where
the branded products run at a 60% to 70% margins and the generics run
at much lower margins but still decent margins, do you think that is
going to be a comparable change in the margins for generics? Or do you
think that because of the price matching you will see lower margins? Or
do you think you will see slightly higher margins on the generic side
than the generic drugs?

Richard:  I think the pattern that the generic
pharmaceutical industry has is a comparable future for the generic
medical device industry. Our key to success that will allow us to
return a reasonable shareholder value is to maintain a low overhead,
maintain a clean organization that is nimble, that is able to move
quickly into various product areas to develop those products, to bring
about the regulatory certification, and sell them at a cost point that
will allow us to take market dominance and still allow us to remain
attractive in price and remain attractive to shareholders. And that is
by maintaining the lowest cost possible and passing that on to our
customers.

Matthew:  Well, that sounds like a pretty good motto to
live by for a company that is in the medical care business of any kind!
I am not sure that many others follow it. So with that, we’ll wrap. I
have been talking to Richard Kuntz, who is the CEO of Generic Medical
Devices, a new company that is entering the medical device field, and
as the name suggests, is creating these devices generically. It is
looking to take some market share and dollars out of the medical device
business. Richard, it has been a pleasure talking to you. Good luck
with your endeavors!

Richard:  Thank you very much.