Strategy 4: sell a service or be a user, not a product producer. This strategy is sometimes risky, but sometimes it can work. FDA’s jurisdiction is very clear: the agency regulates products. In the very first article, I discussed the need for a physical product that is the subject of FDA regulation. FDA does not regulate services, nor do they regulate the practice of medicine.
That circumstance has led some professions to be able to do things that product manufacturers and sellers cannot. For example, clinical laboratories routinely develop their own clinical tests that they use with their own customers. For decades, FDA has taken a nearly hands-off approach to that practice, saying that clinical labs are sufficiently regulated under a different piece of legislation, the Clinical Laboratory Improvement Amendments of 1988. Likewise, pharmacists who are regulated under state pharmacy laws have a certain latitude to compound drugs. In these cases, FDA has decided that these are professional service businesses rather (already regulated by others) than the sellers of devices or drugs.
Conceptually, it may be possible to position certain healthcare services as services, rather than the sale of products. But be mindful that this is not simply converting outright sales to rentals. That makes no difference to FDA. Further, as you might guess, if a particular operation starts to look too much like manufacturing, FDA will regulate it. My only point is that healthcare professionals have a certain latitude to provide services to their patients without FDA intrusion. The sixth article in this series will discuss this latitude specifically.
The Trade Offs
As Milton Freidman observed, there ain’t no such thing as a free lunch. Each of these strategies involves trade-offs, and I’ve tried to depict those at a high-level in Diagram 2.
As with some of my other diagrams, this one reflects subjective judgments concerning the magnitude of the benefits and burdens associated with a few of the strategies. I’ve used blue stars to depict features where more is better, and I’ve used black stars to indicate attributes where less is better.
So, if we look in the column for FDA regulated articles (#8 for class III), we see my assessment that the potential profit margins are the greatest and the product life cycle length is the longest and barriers to entry are the greatest, but on the negative side internal overhead costs are the greatest. I chose to characterize product lifecycle length as good simply because it means the company has a longer time in which to recoup its investment. I realize some IT companies like the short product lifecycles because they consider speedy new product innovation to be a competitive advantage for the firm.
On the other end of the spectrum, I indicate that unregulated articles normally have much lower profit margins and shorter product lifecycles and fewer barriers to entry, but lower overhead costs. However, I’m sure everyone can think of examples where that’s not true. In some cases companies are able to develop patent protection around truly novel technologies and earn tremendous profit margins over the full length of the patent life. Further, the development of those innovative products might be a tremendously high cost. But I’m treating those as the exception, not the rule. Perhaps I’m wrong, but in the consumer electronics area, it seems as though competition is fierce and technologies quickly become commoditized despite whatever patent protections might be available.
In the middle you find compromises between those two extremes. In scenario 5 where the company simply contracts out certain difficult tasks, the profit margins go down correspondingly as the costs of contracting go up, but the company still benefits from some barriers to entry and earns a comparatively better profit margin than the far right side of that table. Likewise, component suppliers often enjoy fewer barriers to entry and have comparably lower profit margins to the finished medical device manufacturers, but they also face a lower cost structure.
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