Q Justin: One of the things that we keep talking about is, what's the best use case for our clients when it comes to medical devices? Is it disposable, is it reusable? One of the questions that I keep asking you and we continue to touch on is, when is disposable best for use case?

A Benjamin: Yes, that's a great question. We have spent quite a bit of time talking about what it means to have a disposable or a single-use device. We've talked about some advantages and disadvantages, but it's a different question to ask, when does it make sense or going through the process of determining if it makes sense. I've really been able to boil this down into three primary categories.

The first and foremost is when it's a health benefit to the patient. Secondarily, it can also be a method for introducing either new technologies or new procedures, or otherwise elevating the standard of care that maybe wouldn't be available otherwise, that has to do with some of the cost structure. Finally, there are certainly some economical factors for both hospitals as well as manufacturers when we look at using medical devices. It's a relatively complex arrangement, but I think it's something that we can at least touch upon at a high level and try to introduce some of the topics.

Q: I think that is one of my favorite things that happens. When we start these different topics of discussion is when we can actually break them out and dissect them one by one. You just did a great job of identifying three things that are really important factors, so let's tackle the first one. When you say that health is a major issue or major concern, what do you mean? Let's break that down a little bit further. What does that mean to you?

A: Recently in the last few years there have been several widely reported and well-documented cases of cross-infection, where one patient may get an infection from a previous patient that also had the same device used on them. The typical scenario for a lot of devices and really we're specifically talking about endoscopic devices here, although this does apply to medical devices in general. When a device is reusable, typically it gets used, cleaned, disinfected, generally sterilized and then it goes back into the circulation, used on another patient and it continues that flow.

Anytime that happens there's a potential that during that cleaning, disinfection and sterilization cycle, that it doesn't go exactly as intended. Perhaps it didn't get fully sterilized and the result can be that patient B may get infections from patient A that was before them. In some cases, recently, it's even led to some documented deaths. Certainly, the medical device community is paying very close attention to this as well as hospitals, and trying to make sure that we can provide a level of care that is good for patients, good for the environment and also good for business models.

If we look at just the health side of things, there's clearly an advantage in a disposable device that it's never been used on a person before when it's being used on somebody. Every time you would be operated on as a patient, you're having a new, fresh, clean, device that has no chance for contamination from a previous patient.

Q: You make a couple of really good points there. How much responsibility is that of the medical device manufacturer, versus the caregiver?

A: That's a very complicated question, but over the last few years we've seen that. The specific example is that Olympus has been liable for some infections and illnesses that have come across to patients. Partly because their documentation on how to clean a device was determined to not be adequate. Finally, a particular device may be very difficult to clean because of all the nooks and crannies and crevices that may be in it.

It is the responsibility of the medical device manufacturer to identify the proper methods for cleaning and sterilization. That typically is done through a validation exercise, where the manufacturer has shown that, "Yes, if you clean it like this, It will always be sterile." When those routines get very complex or perhaps they're not identified in great detail, or the device itself is very complicated to clean. The actual methods of cleaning in the hospital sometimes fall short of being able to hit that expectation.

There is a shared liability. Certainly, if a medical device manufacturer has blatantly not followed protocol or has not done their due diligence in defining sterilization, then they can be held liable. Likewise, a hospital if they are not following procedure and protocol they can as well. What we find is that hospitals certainly like the idea of limiting liability through single-use devices that don't have the chance of cross-contamination. It's not possible in every situation, but there is a very attractive benefit there for the single-use device.

Q: I guess that goes right into the next question or the second part of what you just broke down, which is the new standards of care that come out and technology that can be available. Maybe it's not infiltrated the market as a whole, so not everybody has proper tools to actually implement a device into a surgery, right? The whole idea of it being disposable allows them potentially less capital investment in the front end.

A: Yes, absolutely. What we see is that costs tend to be distributed over time and overuse for single-use devices more than a capital device. Just as an example, if a hospital or a doctor's group were looking to buy a new in endoscopic tower, they could easily spend $100,000, $200,000 on an entire tower that really just gives them the ability to visualize through endoscopes that doesn't include really the therapeutic side of things. As opposed to a device that perhaps is not necessarily disposable, but a device that has been a little more tailored to a specific need.

Typically those capital costs are much, much lower. Now, there is an ongoing cost, because if there is a single use component associated with that device every time you use it, you have to purchase new parts. The goal, the target is to always make those costs balance out so that the cost per use over the long term is equivalent to or less than a capital reusable device.

Q: Right. Those go into budgets because like you said, it can be elongated over a pretty lengthy period of time, and so that could potentially help leadership as they focus on where to put their money as well as offer the best standards of care.

A: There's actually an example that I think all of us are familiar with at least here in the US, and that is the mobile phone industry. Where many of the phones that we carry around in our pockets, if you were to buy it outright, it would cost somewhere between $500 and $1,000. Well, not many of us are going to go out and spend that kind of money on a phone up front, so instead what we do is we pay for it monthly through our plan and it becomes drawn out over time, becomes a little more palatable.

The same is true with purchasing groups for hospitals and doctors, and surgeons. That the ability to spend the money ongoing can be more palatable than spending a bunch of money up front on equipment.

Q: That makes a lot of sense. That's all part of the third piece, which is the economic factors that go into all of this. If you elongated it over a period of time or you're able

to use it on a per case basis, may be smaller facilities then obviously it does become more palatable.

A: In an area we see a lot of activity in single-use devices or devices that at least have parts that are single-use tends to be in areas that we call high value or high reimbursement procedures. These are procedures where the hospital or the surgeon's group or the doctor's group are able to get better insurance reimbursement for this type of procedure versus maybe something that's done very routinely and the reimbursement is very low. This allows there to be a little bit more of a budget for using a device that has a per-use cost.

In conjunction with some technologies that are enabling high-value procedure or new procedures, really kind of stacks up in favor of a single-use device. In particular if a new technology comes along and is able to be therapeutic and it shows great benefits both from effectiveness and cost perspective, if there's not a capital expenditure associated with that technology, with that procedure, it's much easier for it to be adopted as opposed to if it costs a hospital let's say $500,000 to adopt a new procedure unless there's a very strong economic case for it maybe months, years, decades, before that procedure actually gets into the mainstream to become standard of care.

Q: Can you break it down? We're talking about a couple of different things here but obviously the health benefits, the standards of care, economic factors that go into making these decisions. Can you give us an example of projects that you've been a part of that you can talk about? What are some examples of projects that you can potentially speak to?With as busy as you guys are, sometimes that's tough, I know you jump from project to project and help so many clients not just take their napkin drawings to concept and to actual prototype and production but also in manufacturing. I feel like that's something that doesn't get recognized enough is a full breadth of services that they provide to help clients navigate these difficult waters of medical device development.

A: That's right. I do have an example here that I think is pertinent and I'm not going to talk about the actual device itself, but I'll talk about the application. We have a device that is used for arthroscopy and specifically for sports medicine. Generally or historically, arthroscopy has been done using the traditional systems that are reusable. This works fine if you're looking at an orthopedic application hospital or surgery, but there's a real challenge when it starts being used in sports medicine. Often times, sports medicine doesn't have the budget for large capital equipment.

Over the years, there have been several different companies trying to implement lower cost or what I would call office use arthroscopy systems but there hasn't really been great adoption partly because the cost just didn't make sense and partly because their performance wasn't great. We have a device now that has disposable elements and it's a largely reusable device but the very business end of the endoscope, if you will, is disposable so the portion that comes into contact with the patient is new and clean every time it gets used.

What's novel about this product is the use of injection molded optics that are from a material cost much lower than traditional glass arts. This allows the economics to make sense that you can capture the cost of that throwaway part in the budget for a procedure because it's just not that valuable and it's also pretty low in terms of mass so the recyclability of the disposal of it becomes acceptable both from a cost perspective as well as environmental perspective.

Q: That seems to hit all three of the check boxes that you guys look for; going back to the health and the standards of care, making sure that it also ticks the economic factors, that's all really important. How does a revenue stream work into this?

A: This becomes important largely for the manufacture because now that you're providing generally a reusable device that has disposable or single-use components to it, it opens up the business model you can either sell the reusable portion, you can lease it or loan it, but what you're really trying to do is sell the disposable or the single-use component.

It's called classic razor, razor blade type approach where if we can check those earlier boxes of improved health benefits and outcomes to patients and there is an economical advantage to hospitals and doctors and patients as well, then we can start looking at from a manufacturing perspective does it also make sense. Something really attractive to manufacturers to have continual sales of a device because it's really predictable and it takes some of the risk out of the market cycles and it can be a nice revenue stream that's dependable and you can count on it month over month.