Wednesday, October 2, 2013

Olympus, the Medical Company

Most laypeople know Olympus as the champion of Micro Four Thirds, but those in the know are familiar with the fact that Olympus is actually a better medical device company than it is a camera company. In a stark dichotomy of fortunes, Olympus has been struggling to earn profits in the competitive digital camera landscape, but has remained the long-time market leader in endoscopes and endoscopic-related surgery equipment. In its 2012 fiscal year, Olympus reported a loss of $235 million USD for its camera division while producing net earnings of $890 million USD in medical related sales.  Remember, this was in a "renaissance" year for the camera division, while it was riding the success of the OM-D E-M5 and Sony imaging sensors were breathing new life into their products.

In the wake of the accounting scandal of early 2012 many thought that Olympus would have spun off their camera division to preserve the profitable medical division, and were it not for a helping hand from Sony this might have been the case. Yet, despite all of this, Olympus still maintains a reputation as a "camera" company in the general public's mind. The fact is, most of the major Japanese camera companies have medical divisions, with the exception of Nikon, which at one time did serve the ophthalmic community, but no more. As you would expect, Olympus' commercial activities in the medical field revolve around optics and scopes, but extend far greater than that. Even more off the beaten-path, there are fewer still who are familiar with Olympus the medical company being involved in orthopaedics, which is another step removed from cameras and optics.

What's also surprising to the uninitiated is that Olympus, despite its reputation in optics, is not a "medical imaging" company: it's a full-blown surgical services supplier. When you think of imaging devices like X-rays, CT scanners and MRI machines, the actual dynamics of the market change and you're in the territory of companies like Siemens and GE. However, when you look at the most frequently performed surgical procedures such as colonoscopies and laproscopic hernia repair, Olympus is often the company supplying the tools used in the diagnosis and treatment. Olympus is also something of a model for other Japanese camera companies. As the world market for digital cameras continues to weaken, other companies are looking enviously at Olympus' continued performance in the medical sector.

Updated June 2014

Olympus the Medical Company 

via Olympus America
Though it is now better known as a consumer camera maker, Olympus began its corporate life as a producer of microscopes and thermometers, serving the medical community from the very beginning of its existence. The first flexible endoscope was manufactured by Olympus, with the first prototype emerging in 1950. Previous to this, early internal scopes were built with a rigid tube, which limited their practicality and comfort. It wasn't until 1964 that the first device using glass fibre (as we know it today) to transmit images was produced. Throughout the years, improvements such digital cameras and electronic recording were added. (In case you are wondering, even though it isn't that much of a stretch to attach a modern digital camera body like an OM-D to an endoscope, there are practical reasons of why this doesn't occur, not the least of which is the rigorous FDA approval process for electronic devices used in an operating room.)

Today, Olympus controls almost 70% of the global business for endoscopic related medical devices, which is valued between $7 billion-$25 billion globally, depending on what is counted as part of the market and who does the counting. The actual endoscopic camera systems make up only a portion of their total revenues, as they provide the accompanying surgical tools and equipment. To understand the commercial importance of this market, consider that traditional open surgery has long been on the decline across the world. In its place, doctors have taken on more minimally-invasive procedures that require smaller incisions and allow for quicker patient recovery. However, the instrumentation for operating in such narrow confines is highly specialized, so Olympus, like the rest of the endoscopy companies, provides a full range of equipment.

Apart from surgical equipment, Olympus also supplies complete integrated operating room packages, which is increasingly the trend across the U.S. Rather then buying equipment piecemeal from a number of different suppliers, hospitals are increasingly purchasing all of their equipment from one supplier... cameras, displays, video storage etc. In this field, Olympus is a credible competitor, but not the market leader.

Stranger Still: Olympus the Fledgling Orthopedic Company

However, endoscopy is a mature market in the medical devices sector. Nearly every major medical conglomerate is looking towards the field of regenerative medicine, which is colloquially known as "biologics" in the industry. Here, the therapeutic potential is great, as is the commercial potential. Olympus Biomaterial Corp. was founded in 2004 as a subsidiary of the main Olympus conglomeration. It's first commercial product was OSferion, a formulation of β-TCP (beta-tricalcium phosphate). This product falls into a category of medical devices known as bone graft substitutes, which are used extensively in dental surgery and spinal reconstruction. Before the invention of commercial substitutes, bone voids and damage were repaired by grafting healthy bone from a different part of the patient's body into the affected area. As bone is a living tissue, the graft would would  result in new bone growth in the implantation site, and the donor site would eventually heal on its own.

Grafting bone from a patient's body ("auto-grafting") is surgically time-consuming and requires additionally recovery time for the donor site. Synthetic substitutes reduce (and sometimes, but not always eliminate) the need for autologous bone by substituting a it with a synthetic mineral substitute. β-TCP is a calcium compound that is compatible with the structure of bone and is used as a mineral "scaffold" for the body's own bone-growing cells (osteoblasts) to grow onto. At the end of the recovery period, the synthetic material is completely incorporated into the new bone growth. Ideally, that is...

The problem with synthetic substitutes is that they are inorganic, whereas the human skeleton is not, at least not completely. Natural bone not only contains living cells, but proteins and growth factors that are important to the construction of the skeleton. In fact, protein is one of the most important important constituents of bone; in natural bone growth, the mineral portion of the bone does not "crystallize" into existence, but is laid down on an initial collagen framework.

Why Olympus was originally involved in orthopaedic biomaterials in its home country of Japan has also to do with the restrictive nature of the Japanese medical device market. Government regulation makes it very difficult to bring medical devices that were developed in other countries into Japan, leading to the rise of many home grown competitors. Because of the interwoven natural of Japanese corporations, brands and subsidiaries of brands end up in areas that are not available to them in other parts of the world. For example, the Kyocera group, which is known for manufacturing ceramics for electrical components, also applies their knowledge of ceramics to the manufacturing of hip and dental implants. Or take Fujifilm; as the market for traditional photographic film died, the company re-directed their knowledge of manufacturing collagen for film emulsions into creating skin injections for the medical cosmetics industry. However, in considering the restrictive nature of the Japanese regulatory system, favored products elsewhere in the world do not necessarily take hold in Japan.

In 2007, Olympus, the company known the world over for cameras, created a new biomaterial entity with Terumo Medical, a company primarily known for cardiology devices. Thus was born Olympus Terumo Biomaterials as it is known today. This was a synergistic partnership, as Olympus's bone graft technology was entirely inorganic, where as Terumo had the facilities to manufacture collagen, an important building block in bone creation. Together, the two sides of the company were not only able to serve the orthopaedic community, but also the skin graft substitute (burns) market as well. However, the factors behind Olympus's participation in Japanese medical biomaterials is partly cultural as well. Synthetic substitutes are not the only options for filling bone voids. Another method is with bone morphogenic proteins (BMP), which are growth factors (sort of like localized hormones) that signal existing bone tissue to begin new cellular growth. As a quirk of U.S. FDA regulation, BMP's are classified as medical devices but are classified as pharmaceuticals elsewhere in the world. Most countries have not been as enthusiastic to adopt BMP's because of the potential side effects, and because of the cost of these products which can range from $1000-$5000 USD per dose. (Hence, the great interest in regenerative medicine. The medical field is just as commercially driven as any other market, probably more so because of the pools of third-party payer money in the form of health-insurance and public healthcare systems.) Olympus Biotech entered this field by acquiring a BMP product (OP-1) from Stryker Corp; however this product had a troubled history under its previous ownership, and was never approved for use in the U.S. by the FDA beyond a limited run as humanitarian device exemption.

Update: Spring 2014 
(As of February 2014, Olympus was seeking to exit the U.S. Biotechnology field OP-1 never achieved full regulatory approval and as with its previous owners, produced mixed to disappointing clinical results. Though Olympus does not specifically cite this as a reason for pulling out of the U.S. market, the fledgling biotechnology division did not have any meaningful prior history in this field. Though it was regulated like a medical device, OP-1 (and other BMP's) are essentially pharmaceuticals, and consequentially, the development process depends on finding that one specific hit product.) 

There is another alternative, and that is to use human bone from a third-party donor. The medical term for this is "allograft," meaning a graft from one who is different from yourself. This is known as tissue donation; it differs from organ donation in that the material is procured from a wider range of deceased individuals. In organ donation, a donated heart or lung is only suitable under a strict set of criteria, usually requiring that the patient pass away in the confines of a hospital with brain death. Tissue donation is not as rigorous, as the material, usually bone, skin and tendon, are procured from the donor body and chemically processed so that they can be implanted in any patient without the fear or rejection. That is, with tissue-donation, there isn't a need to find a precise donor match because the material is cleansed of the organic bio-markers that would trigger an immune response in the recipient body. If this seems a bit ghoulish, it would would understandable. Tissue donation is not consistently practiced across the world, though it is well established in the U.S. and Europe. However, in Japan, rates of tissue donation are especially low. There is a greater barrier to its use than the typical ick factor, and that is the Shinto religion. Actually, religion is a bit of a misnomer... cultural influence is a more accurate term, as most Japanese are not religious in the Western understanding of the word. (There's an old Joke that the Japanese are born Shinto, marry as Christians, and die as Buddhists.) As is befitting a nation that is known for it's obsession with cleanliness and order, the Shinto philosophy is very much concerned with aspects of purity and completeness. The barrier with using donated material from a dead donor is a) It would be viewed as something impure being put into the recipient and b) It would leave the donor's body "incomplete" and be an interference with their final resting state.

Because of these reasons, the use of BMP's and allograft bone is restricted in Japan, meaning that Japanese doctors use a higher proportion of synthetic bone graft substitutes than almost any other industrialized nation. Olympus is the market leader in this field. Number two? Another company known for cameras, Pentax.

Stepping Out and Stepping Up

Coming back to the issue of camera companies looking to the medical sector for added business, one feels that we are seeing a bit of a repeat of the "Be Like Apple" syndrome that plagued so many American businesses in the wake of Steve Job's passing. Apple does indeed have a successful business model, but that is no guarantee that all companies could, or even should, follow in their footsteps. Too often, modern business is simplified to "having the right" strategy or "having good execution", without regard for the history and groundwork behind why companies succeed. 

If you look at Nikon's current situation, they have an additional hurdle to scale in that they were already medical device suppliers to the ophthalmic community, but had withdrawn from that market. Nikon maintains a presence in the instruments market (microscopes and scientific equipment), but this is a very small space compared to the one for clinical applications. Were Nikon to re-enter the medical field, returning to their old field would not be viable as the type of instruments that they produced are being superseded by newer technology. Looking at other fields, one assumes that surgical cameras would be a natural fit for Nikon, but the problem is that Sony is there already. Not only does Sony have an ownership stake in Olympus now, they are also one of the most predominant component suppliers for video equipment in the medical field. (Most of the technology is first developed for Sony's broadcasting business, and then adapted to medical.) Nikon does have imaging technologies that could be applied in novel areas and methods for diagnostics, but the problem with this is the regulatory process, which takes years and an enormous amount of expense in order to validate a product for medical usage. 

Nikon NRK-8000 Auto Refractor Keratometer (via EMS)

The larger issue for Nikon (and other companies) is that moving into the medical devices field is like jumping from the proverbial fire into the frying pan. The medical devices sector, while having consistent revenues, has an unexciting growth outlook on its own. Most, if not all, of the major industrialized nations are experiencing budgetary problems in funding healthcare, which has dampened growth on the devices sector, especially in the wake of the 2008 credit crisis. This isn't a field where the newest shiny object gets the most attention; if anything, healthcare systems are increasingly going back to old and boring because that is what costs less and that is what is known to work. The difference for Nikon is that their old and boring ophthalmic equipment is already made very well by the companies that still supply such devices.

Which brings us back to Olympus. The key for them has been consistency, maintaining a steady reputation in the medical devices field and culturing a dedicated and motivated direct-sales force. The surgeon-rep relationship is king in the medical field, and that is something that doesn't grow overnight. Olympus might have a lock on endoscopy, but it is still taking minuscule baby steps in the field of orthopedics (partnering, going after small bite-sized chunks of the market first), as it does not yet have the groundwork laid by other medical suppliers. It's not even clear if Olympus has long-term intentions to be a credible competitor in the mainline orthopedic field, but as with anything, being known for something means knowing how to do it first... and that takes time for any company... in any field.


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