Implantable defibrillators or implantable cardio-inverter defibrillators (ICD) as they are termed in the industry are considered the epitome of “application” specific when it comes to passive components. To that end, this MarketEye Installment looks specifically at those product markets that generate their primary revenue base directly from the ICD market. These would include aluminum and tantalum flash capacitors, ceramic feedthrough capacitors, and thin film resistors. 

2005 developments in the high power ICD market included:

• Overall Market Growth in High Power ICDs +20% Organically
• Rapid Acceptance of Advanced CRT ICD Designs
• Medtronic Recall and Rebuild of 20,000 ICDs
• Guidant Recall and Rebuild of an estimated 50,000 ICDs
• Boston Scientifics’ Purchase of Guidant for $27 billion (45 Times After Tax Profit)
• The Destruction of the Spectrum Control Plant in Louisiana
• ICD Vendor Movement to Broaden the Flash Capacitor Market to Tantalum Wet Slug

The Cardiac Rhythm Management Market: 2002-2005; 2006-2010

We note, from the following table, that the cardiac rhythm management segment of the application-specific medical device market grew by more than $3 billion (USD) in value between 2002 and 2005 (from $6 billion to $9.3 billion) which is outstanding market  performance. Remember, during this time period, the overwhelming majority of high-tech electronics (consumer, computer, and auto) were all reporting disappointing growth rates and passive component vendors who catered to these markets were equally and adversely affected. However, while other markets were down, this market in medical CRM was growing dramatically, which means it is insulated from the adverse affects of the global high-tech economy. This is one primary reason why this makes this market extremely attractive to passive component manufacturers. Another reason is the forecasted growth in this segment.

Summary Table:

Source: Paumanok Publications, Inc. Based Upon Company Data

Paumanok expects the market for CRM devices (both low and high power) to grow by $6 billion in value between 2005 and 2010 (from $9.3 billion to $14.9 billion) in market value. This market includes pacemakers and ICDs. Paumanok believes that from $5 to $6 billion in market growth over the next five years (90 to 100%) will be in high power ICDs because high power ICDs will be used more frequently instead of low power pacemakers in the future. Thus, a patient that would have received a pacemaker will now receive an ICD instead. In fact, many new ICD installments will most probably be advanced designs that offer CHT for congestive heart failure. These devices are much more advanced and about 20% higher in cost than traditional high power ICDs. Thus the design cycle is changing.

Low Power Versus High Power CRM Markets: 1999-2005, 2005-2010

As we have noted, low power CRM markets are in fact pacemakers, which is believed by many to be a mature market because of high penetration rates by population in the USA, and Europe. However, in Japan and Asia only 18% of the available patients have pacemakers installed, while in the United States the penetration rate is 98%, and 80% in Europe. 

A conventional ICD Design

Between 2005 and 2010 the low power ICD market will decline or remain stagnant, while the high power ICD market will grow dramatically, by an additional $6 billion (USD). Vendors that have traditionally catered to the pacemaker market, with emphasis upon AVX, are now aligning themselves with ICD markets because they too recognize the rapid growth occurring in this segment.

High Power ICD Markets: 1999-2005, 2005-2010

Vendors of flash capacitors, feedthrough capacitors and thin film resistors should recognize that the high power ICD market is now fragmenting into two high growth segments; however, the more advanced designs with CRT capabilities will grow the fastest.

ICD-CRT: The latest high power ICD designs include cardiac resynchronization therapy (CRT), which is biventricular pacing. Biventricular pacing is the stimulation of both ventricles as opposed to the stimulation of a single ventricle, which is what conventional ICD products do. These devices are also referred to as CRT-D in the high power ICD segment. The Advanced CRT ICD designs are the fastest growth portion of the entire cardiac rhythm management market segment in medical electronics.

Conventional ICDs include the following features and functionality that would come standard on advanced CRT-D models include:

• The basic function of an implantable defibrillator is to monitor the beat of the heart and to use minor electrical pulses to assist and stabilize irregular paces in the heart through short flash burst of capacitance. 

• The secondary function of the ICD is to apply a reboot of the heart in case of massive heart failure. ICDs can detect the fibrillation of the ventricle and deliver an automatic 700 VDC 200 µF pulse to restart the heart.

• Anti-tachycardia pacing is low-energy impulses that stimulate the heart to beat at a rate to help it return to normal beating rates.

• Anti-bradycardia pacing stimulates the heart to speed up if the patient’s heartbeat is too slow.

• Advanced memory recording of heart-related events during any given period of time which can be accessed, downloaded and studied by physicians.

In 2005 the high power ICD market was worth about $4.7 billion (USD) worldwide, with about 50% of the market offering conventional features and the new CRT-D products offering added functionality. The chart shows conventional designs remaining relatively stable, but with massive growth forecasted in the high power ICD segment with CRT capabilities (a more expensive device at $29,000 USD).
 

Summary Graph:

Growth Forecasts for Advanced CRT ICD Products versus Conventional ICD products between 2006 and 2010.
(In Millions of USD)

Source: Paumanok Estimates

Summary Table

High Power & Low Power Medical Implant Markets: 2004-2005; 2006-2010
(In Millions of USD)

High Power CRT Market	2004	2005	2006F	2007F	2008F	2009F	2010F
Conventional Designs	$2,800	$2,850	$2,800	$2,700	$2,500	$2,300	$2,100
Advance CRT Devices	$1,850	$2,800	$4,100	$5,480	$6,950	$8,380	$9,910
Total High Power Market	$4,650	$5,650	$6,900	$8,180	$9,450	$10,680	$12,010
Pacemaker	$3,764	$3,666	$3,590	$3,440	$3,200	$3,000	$2,900
Total CRM Market	$8,414	$9,316	$10,490	$11,620	$12,650	$13,680	$14,910

Source: Paumanok Group Consensus

Market Shares in ICD Markets: Conventional Versus Advanced CRT Devices: 2005

Summary Table

Global Market Shares In Conventional Versus Advanced CRT Type ICDs: 2005 (In Millions of USD)

Source: Multiple Sources

Passive Components Consumed in High Power ICDs

The primary passive components consumed in high power ICDs include flash aluminum electrolytic capacitors, ceramic feedthrough filters, thin film resistors and networks and other various components for inductance and circuit protection. The tantalum wet slug capacitor has also been adopted by the industry and will be used in advanced CRT ICD designs in the future. Passive components are used in ICDs for pulsing and flashing; EMI/RFI suppression, resistance, capacitance, inductance and circuit protection. Major passive component vendors supplying this market segment include the following companies:

• Rubycon (Aluminum Flash)
• Wilson Greatbatch (Ceramic Feedthrough)
• AVX Advanced Products: (HV Ceramic, Ultra Small Tantalum, Wet Slug Tantalum)
• Vishay-EFI, Dale, Sprague (Wet Slug Tantalum, Thin Film Resistors)
• Maven Capacitor (St. Jude Medical) (Aluminum Flash)
• Spectrum Control (Ceramic Feed thru Capacitors)
• KEMET (Tantalum)
• Arcotronics Italia SpA (Tantalum Wet Slug)
• Tusonix (Ceramic Feedthrough)
• TT Electronics/IRC (Thin Film Resistors/Networks)

2005 - A Difficult Year for this Segment:

2005 Recalls of High Power ICDs

In 2005 both Medtronic, the market leader with 50% share, and Guidant Corporation announced recalls of their ICDs due to potential for failure.

Medtronic replaced about 20,000 units in 2005 due to an issue of the battery depleting prematurely. Wall Street Analysis viewed Medtronic’s handling of the recall skillfully to prevent brand damage. Guidant’s recall was more dire for the company because they were accused of selling the faulty ICD after they knew it was defective and not informing physicians of faulty stock that was eventually installed in patients.

Spectrum Control Feedthrough Plant Destroyed By Hurricane Katrina

Spectrum Control capacitor operations were destroyed in Louisiana by Hurricane Katrina in 2005. Spectrum has since moved the operations to Pennsylvania and rebuilt. This damaged facility, at the time of the recall, set off a heated search for additional ceramic feedthrough capacitor vendors worldwide.

Medical ICD Manufacturer Analysis:

Medtronic:

Future direction is the introduction of the Entrust Family of ICDs and the Concerto CRT-Ds. This should ensure Medtronic's lead in the high power ICD market and keep their share at 50% between 2005 and 2010.

Medtronic currently controls 50% of the high power ICD market and is well positioned in the conventional CRT market and the advanced high power CRT- designs.

Medtronic’s data stream is reliable because they have 50% share so we should listen closely to the data points they offer the marketplace for future growth. According to Medtronic the results of medical trials published in New England Journal of Medicine showed ICDs can reduce the risk of death by 23% in certain heart failure patients (SCD-HeFT Trials). This expanded the current available market to 1.6 million patients and will generate a sustainable market of about 400,000 units per year in the United States alone over the next five years.

Medtronic also notes that penetration rates by population remain extremely low for high power ICD and therefore suggest a 20% average annual growth rate for ICDs between 2005 and 2010.

Paumanok is amazed by Medtronic’s skyrocketing growth rate. Paumanok had the opportunity to visit Medtronic in 1995 when their sales were $1.7 billion (USD). In 2005, almost 10 years to the date, Medtronic recorded revenues of $10 billion (USD), of which $4.6 billion came from the key CRM group.

CRM is Medtronic’s largest division at 46% of revenues ($4.6 billion in sales). In 2005 the CRM market was broken down as follows:

Medtronic CRM Business: 2005

Medtronic experienced 25% average annual growth rate in revenues for high power defibrillation between 2000 and 2005 and revenues are expected to grow by 19% on an average annual basis over the next five years.

Guidant:

Paumanok notes that Guidant’s income after taxes dropped dramatically between Q2 and Q3 2005 down to 13.6% of total sales (which is still better than any passive component manufacturer) and we believe this decline continued to about 10% of sales in Q4.

The Guidant recall during that time period devastated the company on the revenue side, with revenues declining from $974 million to $795 million in Q3. Excess sales obviously went to the recall.

According to primary sources, the company has been pouring money into the ICD business, updating and evaluating every aspect of the business. This has caused some turmoil in the capacitor business because of the sudden increase in demand for components from Guidant to replace product for the recall.

The company is also extremely active in the emerging, high power CHT segment of the ICD market. Thus, BSX justified the purchase because they believe that over time, the company can recover because of the quality product they are known to have produced for years.

Paumanok believes that BSX paying 45 times the value of Guidant’s income after taxes, which is unusually high, that BSX is expecting a very long-term return on investment. Guidant will not recover very soon from such a brand beating in the public market any time soon. It is true that 99% of the customer base would be very well read on ICD’s well before a final decision was made with their doctor. So, perhaps this was more about flexing muscle between Johnson and Johnson (J&J) and BSX which has happened before, where companies lost sight of the value and perceived the entire strategy as more than an acquisition but a blocking move, by defining the value of the market for future acquisitions.

Now it would not be surprising if J&J would turn to St. Jude Medical and make an offer of 45 times their income after taxes and perhaps that was J&J’s target all along. Paumanok believes that Medtronic and St. Jude will continue to grow at Guidant’s expense for at least 24 months if not longer.

St. Jude Medical:

This company employed approximately 8,000 worldwide in 2005 and had approximately $2,905 million in revenues. The company was founded in 1976 and has grown to one of the top global suppliers of implantable defibrillators, competing directly against Medtronic and Guidant in this rapid growth market segment. This is amazing growth over 2004 revenues of $2,295 million USD, and $1,933 million (USD) in 2003.

The business is divided into three primary groups and a new, fourth group developed in Q4 2005.

The three primary groups are Cardiac Rhythm Management (CRM); Cardiology; Cardiac Surgery and Atrial Fibrillation; and the new group- Advanced Neouromodulation.

The revenues of each group were as follows with forecasts:
(In Millions of USD)

Segment	2003	2004	2005	2006F	2007F	2008F
Cardiac Rhythm Management	1.366	1.475	1.936	2.300	2.500	2.900
Cardiology	.296	0.388	0.434	0.470	0.500	0.550
Cardiac Surgery	0.270	0.280	0.270	0.280	0.270	0.275
Atrial Fibrillation	0.000	0.156	0.248	0.300	0.350	0.410
Advanced Neuro	0.000	0.000	0.013	0.180	0.220	0.250
Total	1.933	2.295	2.905	3.530	3.840	4.385

St. Jude Medical’s Cardiac Rhythm Management Group accounted for 66% of total company revenues in 2005, growing from $1.366 billion in 2003 to $1.936 billion in 2005, an increase of $600 million in revenues in two years. The company has successfully grown into other markets outside of CRM through acquisition, but using cash generated from its successful CRM business to buy other businesses.

CRM Devices are used to manage and treat abnormal electrical heart rhythms and arrhythmias using electronic pacing or defibrillation.

There are two main types of arrhythmias: tachycardia, which is a fast heartbeat (greater than 100 beats per minute); and bradycardia, which is a heartbeat that is too slow (less than 60 beats per minute).

Low Power CRM Devices: This includes pacemakers which is a mature market with an estimated 95% penetration rate in the affected population.

High Power CRM Devices: This includes implantable defibrillators, one of the fastest growth markets in the world, and one of the most advanced technology devices ever developed. The high power CRM devices have been used successfully since 1985.

The ICD (Implantable Cardioverter Defibrillators) market is the focus of this report and is part of the high power segment of the market. These devices reduce the risk of cardiac arrest by continuously monitoring and pulsing the heart with precisely calibrated electrical bursts of energy delivered by two capacitors.