Manufacturers’ policies that are threatening the health of the cosmetic industry built around energy-based devices

Manufacturers of cosmetic laser, IPL, RF and other energy-based devices have achieved great technological advances that can improve people’s lives and support thriving medical practices in service to patients.  In some cases, the manufacturers are themselves the greatest obstacle to further advances in these markets.  This article identifies these manufacturers’ policies that are threatening the health of the cosmetic industry built around energy-based devices.  Each of these policies is, at the least, a risk to the growth and development of the industry; several of the policies are actually fatal threats to the industry’s future, and several are potentially vulnerable to actions for damages and injunctive relief.  Where appropriate, we will suggest alternative policies that are more likely to support the growth of the industry while respecting the limits of the law, and when necessary, we will suggest where legal scrutiny by public officials or private plaintiffs is in order.

In our view, the policies of greatest concern are:

Variable Pricing

Manufacturers have an MSRP on every product they sell, similar to the manufacturers of cars.  They also have an Average Selling Price that most customers pay.  And they have a floor price that a sales rep generally cannot go below without getting special permission.  A piece of aesthetic equipment may have an MSRP of $150,000 and a floor of $75,000.  Customer A could buy on Monday morning for $140,000 believing a $10,000 discount was a great deal.  Customer B could buy the exact same device on Monday afternoon for $75,000 believing they were getting the best price.

There is no unbiased party in the marketplace to disclose Average Selling Price (or “ASP”). The trade associations need the manufacturers to buy booth space. The journals need the manufacturers for their advertising revenues. The distributors and representatives need the product line. The luminaries need the manufacturers to provide them with discounted or free devices.

There is no independent pricing database or entity to educate the new buyer.  The result is arbitrary and often anti-competitive pricing power, resulting in discriminatory pricing schemes that, depending on the particulars of the transaction and the market, might run afoul of state and federal antitrust laws.

The discriminatory pricing takes many forms.

Why are there so many demo units for sale? Manufacturers designate new devices as “demos” to give the appearance of a deal to consumers.   Manufactures can create a discounted demo “used at a tradeshow” to entice a price sensitive customer.  Generally, these units are sold at a higher price than the floor price but give the false appearance that everyone wins.

Why do sales reps push purchasers so hard at the end of each calendar quarter? Sales reps must meet expectations or find new employment.  In the same way, publically traded companies have quarterly expectations they must fulfill to make their shareholders happy.

These factors (among many others) create a marketplace that lacks pricing knowledge, transparency, and consistency – and in many instances, might lack basic legality.

Overselling the Technology

Have you ever met a sales rep that claims to have the second-best device? All buyers are guarded when being sold a device.

Given that the energy-based device industry is around 20 years old (and therefore still in its infancy), buyers still have a lot to learn. In fact, the buyers themselves are in a type of infancy when it comes to their knowledge of product and technology. They are ill-equipped to handle the barrage of claims made by the sales rep when detailing a product. When this overselling is combined with the use of the FDA’s approval process for predicate devices (see the section below on Predicate Devices), the sales rep might say anything to close the deal.

The best way for buyers to protect themselves from these claims is simply to wait before buying. Time is your ally. There seems to be a direct correlation between the time a device is on the market and the decrease in positive reviews on unbiased websites (like LinkedIn or RealSelf.com). On RealSelf.com, good devices seem to hover in the 65-70% approval range once their newness and wow factor wears off.  Before that wow factor wears off, too many devices automatically receive almost universally favorable reviews, many of which later prove un-deserved.

Infrequent Recalls and Exchanges

Back in 2006, one major manufacturer’s supplier of a touch screen filed for bankruptcy. The manufacturer was forced to scramble to locate a new supplier mid-year. This supplier’s particular touch screen was part of an integrated computer. Due to the swift change, there were subsequent problems with the screen fading, failing to calibrate, and ultimately failing. The issue continues to plague the stability of this system today, nine years later. In addition to the usage issues, this product could result in patients being injured. In spite of all of this, the product was never recalled. Instead, the manufacturer buried the issue and hid it from their buying public.

There is potential liability in this practice, whether suit is brought by an injured patient or a disappointed purchaser of the equipment – or both.  More importantly, there is a lack of integrity that retards the development of a healthy market, and this is but one illustrative example of a wider, troubling practice.

Rep Turnover

Very few energy-based device reps stay with the same manufacturer for more than a few years. While no study has been conducted to clarify why sales reps turn over at a higher frequency than in other capital equipment sectors, we can point to a few such reasons.

Once a clinic buys a device, it is hard for a rep to sell another device from the same manufacturer to that clinic any time soon. Considering that each manufacturer only has one or two flagship products, once a rep has sold and installed devices in a critical mass in his market, there is little additional market share that he can obtain. Manufacturers claim that energy-based devices are changing rapidly, but they aren’t. The static technology causes reps to jump from one dying market to another in order to catch the next wave.

Your rep is your contact to the company.  Once gone, you are often left with no Champion to address your issues.   This can easily be corrected by compensation structure changes.  Pay sales bonuses based on ratings from buyers that would be collected 1 year after the sale.  In this way, give the reps a longer term and more customer-focused horizon.   Or use DOTmed Certified to leave online feedback for sales reps.  http://www.dotmed.com/certified/

Predicate Devices: Is a New Device Really Offering New Technology?   

This is, admittedly, an oversimplification of the FDA clearance (“FDA Approved”) process, but it provides a general understanding of how a medical manufacturer can market and sell a device in the US.

If a laser, IPL, RF, or other energy-based device has already been cleared by the FDA for sale in the US markets, all a second manufacturer has to do is claim to have the substantial equivalent of that previously approved device. There are a small number of wavelengths of light that can be generated in the visible and invisible spectrums. The same holds true for radio frequencies (RF). Manufacturers cannot change (much) of this scientific reality. If a cosmetic device with a 560 nm IPL wavelength has already been cleared by the FDA for marketing and sale in the US, another manufacturer with a currently un-cleared 560 nm IPL simply has to state that the un-cleared 560 nm IPL submitted for clearance has a “predicate” by way of a similar 560 nm IPL already on the market with FDA approval. The clearance process is simple, quick, and inexpensive when compared to the avenues for seeking approval for a truly new technology.

What is the point of buying the latest technology if at its core, the device is the same as one cleared by the FDA several years earlier? If light is light, what can be changed? Generally, the power, speed, and depth of the energy get manipulated. Or, the quality of the components that are used to build the device.  However, the filtered light, wavelength, or RF is the same that nature allows at its core.

No Support of Secondary Market Parts and Service

In the US, most – if not all – energy-based device manufacturers will not sell parts to end users. Furthermore, they do not sell parts to independent service techs and they will not allow independent organizations to service devices. There is one significant loophole here: The manufacturers do sell parts to independent distributors and service organizations in small to mid-sized international markets where the customer base or market share is not large enough for direct manufacturer distribution and support.

If manufacturers sell parts and offer training to independent distributors and their technicians in these markets, why don’t they do the same in yours? The arguments range from “the FDA forbids it” to “it’s a safety issue” to “these complicated devices require skilled technicians.” None of these arguments can detract from one ultimate, glaring conclusion: Manufacturers want to create a monopoly in any marketplace where it can be financially justified. But even if a practice is financially justified from the perspective of the manufacturer – indeed, especially if it is so justified – it might be unhealthy to the competitive market as a whole, and depending on the specifics of the case, subject to regulatory or private actions for injunction and damages.

Expensive Recertification Fees ($35,000)

In most cases, when you buy a new device, you are “prepaying” the recertification fee of up to $35,000. Why should the initial buyer prepay a recertification fee for a brand new device? What, exactly, is the point of a recertification fee? Keep in mind that the device with a $35,000 recertification fee most likely did not cost $35,000 to manufacture, and this fee becomes even more confusing.

The goal is to stop the initial owner from selling the device. By charging inequitable recertification fees, manufacturers can prevent the device from being resold into the secondary market. For example: An energy-based device that has an Actual Sales Price (ASP) of $80,000 might depreciate 30% (according to standard capital medical equipment depreciation), rendering a one- to two-year-old device worth $24,000 less. (Actual depreciation of an energy-based device is much higher, of course.)

It gets worse. Often, once the manufacturer gets wind of the potential sale (though a new buyer looking to verify the manufacturer’s recertification advantages), the manufacturer will lower the ASP by offering a “demo device” in order to win the sale. In the end, the initial buyer either pays the fee through a lower resale price or holds on to the device until all value is lost.

Ironically, the FDA created a regulation that states that anyone can and should be provided with (at the manufacturer’s cost) instructions for calibrating a laser and any safety procedures necessary for the calibration. (See 1040.10(h)(2)(ii), (h) Informal requirements, 2) Purchasing and servicing information. Manufacturers of laser products shall provide or cause to be provided.) Given this, it makes no sense that a $35,000 fee is passed on to the buyer.

These recertification fees reek of legal issues under antitrust and similar laws, and also under the contracts by which the purchasers thought they were obtaining a complete basket of ownership rights, including the right to re-sell the device without active interference from their own, well-compensated vendor.

The Sales Representative Becomes Your Enemy

Often when you go to sell a unit the sales representative you bought it from becomes your enemy and will attempt to convince your buyer that they are better off buying new unit.   Once the sales representative gets wind of a pre-owned system being offered, they will offer a direct from manufacture system at fire-sale prices, give free extended warranties, extra disposables, more training, etc.  Worse, they can attack the pre-owned system’s integrity saying it is a lemon, has service issues, was not upgraded, etc.  Ultimately, many sales representatives do not care if they lose you as a customer leading to sales representative turnover cited above.

 

High-Priced Service Contracts

In most markets (including the US), manufacturers have created predatory barriers when it comes to servicing options for a cosmetic laser, IPL, RF, or other energy-based device. Also, finding specialized, ex-manufacturer technicians is very challenging. Thus, a monopoly is born, raising a host of technological and business problems for the owners of these machines, and potentially significant legal exposure for the manufacturers themselves.

After the warranty period – which is often limited to one year – the device owner is forced to use the manufacturer’s outrageously high-priced service contracts.  And when you consider the price of the actual equipment and then the on going price of $10,000 to $20,000 for warranty per year depending on the system, it’s no surprise consumers simply can’t make money on the technology they purchased.

The Fine (or Hidden) Print

Be wary of what is stated (or not stated) within manufacturers’ agreements, literature, or websites. For example, many manufacturers have policies that deny secondary owners the standard extensions for “updates and service opportunities.”From a legal perspective, a manufacturer’s undisclosed policy of punishing buyers who want to re-sell their lasers, can be seen as a breach of the duty to deliver the value for which the buyers bargained, or as tortious interference with re-sale transactions, arising from the undisclosed, extra-contractual policies.  Either way, the damages are in the greatly reduced resale value.

The FDA also has rules (Title 21 compliance) that should allow a buyer to receive software updates for free and/or for reasonable prices – and without a recertification fee.

Consumables

Consumables are generally a business decision for the manufacturer.  It’s a business model designed to help manufacturers increase revenue, but the model is a bad bet for clinicians who now must add this future cost to the sunk cost of purchasing equipment, putting a yearly warranty on the equipment, and then adding in the cost of the consumables per treatment.  In fact, a clinic can actually lose money per treatment if they don’t factor in these hard costs.

Some devices legitimately require a consumable, like new needle-based technology firing RF or IPL in concert. If priced appropriately, consumables are not a barrier to a clinician’s success. However, most consumables are priced at the moment a device is launched, when the market is excited by the promise of new technology. Once the newness and faddishness wears off and the price of the actual procedure drops, consumables become a problem. Their cost either remains the same or goes up, and the manufacturer frequently discontinues support of the device. Some consumables cost thousands of dollars and only last through a few procedures. Often, they lock up before they expire.   As the declining per treatment margin intersects with the fixed per treatment consumable cost many clinicians end up feeling they work for the manufacturer, not themselves.

There Are Better Potential Policies

These manufacturers’ practices make no business sense, and a change would result in endless benefits for both them and their buyers. Their justifications are that it’s always been done this way, and that market fragmentation gives them an advantage over buyers to behave monolithically. Unless the manufacturers change, the future looks bleak for cosmetic clinics using laser, IPL, RF, and other energy-based devices.

If the behavior of manufacturers of laser, IPL, RF, and other energy-based devices became comparable to other highly regarded brands (like Lexus, for example), the clinician would embrace -- rather than eventually begrudge -- the manufacturer’s brand. Also, the brand benefits driving gross revenues higher should be a far second in consideration to patient safety.

Any person who purchased an automobile would want the right to resell it at a later date. And any person in the market to buy an automobile would try to buy something that maintains its value over time. The issue here is not only what the purchasers would “want,” it is what they actually bargained for, and are later cheated out of, and that is the right to use and dispose of the that they fairly purchased.

Equipment that can be resold in the market will be easier to lease and easier to finance, and at a lower rate of interest.  As the market matures and as demand diminishes then some manufacturers will modify their position to make their units more competitive in the market.

 

This is a common trend. Whether it's aviation, automobiles, expensive medical imaging equipment, or even laboratory equipment, manufacturers have

learned that a robust aftermarket creates sockets that can be filled with new equipment as pre-owned buyers become more successful. Furthermore, a policy allowing customers to resell their assets and buy new equipment rewards loyal customers rather than punishing them.

 

In spite of the predatory tactics, a few manufacturers are changing some of these policies.  Also, a new breed of certified pre-owned resellers is thriving by:

  • Advising their customers to spend less, not more
  • Taking the time to understand your market and competition
  • Understanding the risks of devices with consumables
  • Accepting Escrow.com and Credit Cards for the full amount of the purchase price
  • Installing and training on the devices they sell
  • Acting as more than a “broker” (spray with Windex and pray that is works.)
  • Selling you the right solution, which is not always what you inquired about
  • Becoming DOTmed Certified, BBB Listed, Google Mapped, etc.
  • Understanding the Pros and Cons of Multi-Parameter systems
  • Having their own Full-Time Biomedical Technicians on site
  • Carrying Product Liability Insurance
  • Owning their inventory and not consigning or drop shipping direct from the sellers’ locations
  • Servicing what they sell with their own full-time technicians
  • Understanding the difference between refurbishing and remanufacturing so they deliver products per the rules of FDA

 

Changes in the outdated practices outlined above are not only necessary from a market and longevity standpoint, but potentially from a legal standpoint, as well. Clinics need to find channels of communication without manufacturer influence and to join together to wield their untapped, cumulative power.

If you would like to learn more about these issues, and about your rights and potential claims as a current or past owner, a reseller, service or parts provider, or you are a potential purchaser of these devices, please contact the authors at;

Aesthetic and Cosmetic Business Association (ACBA)

Representing the interests of Clinicians and their non-OEM Providers.

About the authors:

David Engelhardt is an attorney from Washington, DC, who was trained in one of the country's foremost business litigation firms. He has devoted his career to taking on the world's largest manufacturers of capital equipment, to protect the reasonable expectations of their customers and the operation of the free market.

Scott Patrick Carson is managing partner of Healthcare Investment Advisors. HIA buys, invests in, and develops growth businesses, partnering with world-class management teams to build value for its investors through operational improvements, growth initiatives, and strategic acquisitions. Carson has 30+ years of marketing, business development, sales and management experience primarily in healthcare transactional platforms.

David L. Engelhardt, Esq.
Themis, PLLC

2305 Calvert Street, NW
Washington, DC 20008

[email protected]
202-412-7078

 

Scott Patrick Carson

Partner

Healthcare Investment Advisors

[email protected]

(435) 200-5378