Statement of Douglas Kohrs, President and Chief Executive Officer,
American Medical Systems, Minnetonka, Minnesota

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Field Hearing in Bloomington, Minnesota, on the
Benefits of Trade to the Medical Technology and Agriculture Sectors

May 14, 2001

Chairman Crane, Congressman Ramstad and Members of the Committee, thank you very much for the opportunity to testify today on the benefits of trade for the medical technology industry, the many workers in the medical technology-related fields and the Minnesota economy.

My name is Douglas Kohrs and I am the President and CEO of American Medical Systems. AMS is a publicly held medical device company headquartered in Minnetonka, Minnesota. We are recognized as an industry and technology leader in the area of urology. Our products treat patients suffering from Male and Female Incontinence, Prostate Diseases and Erectile Dysfunction. In the year 2000 alone, we treated over 40,000 patients around the world.

AMS employs over 500 people around the world, with a significant employment base here in Minnesota. We manufacture virtually all our products at our facility in Minnetonka. It is at this facility that we employ approximately 350 people directly related to the development and manufacture of our products.

Importance of the Medical Technology Industry

The focus of today's hearing is to discuss the benefits of trade to the medical technology sector, but I would first like to comment on the benefits of the medical technology sector itself.

The 2000 report by the Lewin Group described our industry best when it said that,

"the industry has great potential to synthesize advances in the sciences, bioengineering, biomaterials, genomics, computing and telecommunications to develop innovative technologies that will extend the capacity of the health care system to prevent, diagnose and treat disease, and to enhance health status and quality of life."

Just as American Medical Systems is recognized as the leader for medical devices that treat urological disorders, the U.S. medical device industry is the global leader in medical device innovation. With a technological edge over our foreign competitors, the U.S. is the largest producer and exporter of medical devices in the world. Our industry makes substantial contributions to the nation through high-paying employment and a consistent trade surplus.

We are a high-wage, high-skill, high-productivity industry in Minnesota. There are about 800 registered medical device firms in the state, according to 1997 data, we employ over 20,000 people in the manufacturing of medical technologies and supplies. Between 1988 and 1996, our industry added the largest number of new employees to the state - over 7,400 jobs. I might add that through my last 2 publicly traded companies, I am personally responsible for adding 550 of those jobs during this time period.

The medical technology sector attracts millions of dollars in venture capital investments to Minnesota ($34 million in 1997). Many other jobs are supported by these investment dollars in research and development - such as the scientists, physicians and medical experts at teaching hospitals and clinics (U of M and Mayo Clinic) that work with us and the NIH to help develop our innovations and conduct our clinical trials.

AMS works with many physicians within the State of Minnesota, and across the U.S. to develop and bring to market new and innovative technologies. These new technologies bring benefits to patients around the world and new jobs to our facility in Minnetonka.

Benefits of Trade for the Medical Technology Industry

Some 96% of the world's population lives outside the U.S. That means there are a lot of people beyond our borders that can benefit from medical innovations!

As well, the demographics of an aging population and how this supports the growth of AMS are enormous. We estimate that there are 160 million men and women around the world who are symptomatic of the diseases for which American Medical Systems offers a solution. As I mentioned earlier, in 2000 we treated approximately 40,000 patients around the world. But only 8,000, or 20% of those patients were from outside the United States.

For the same reason our fifty states embraced interstate commerce long ago, the U.S. medical device industry looks to international trade to expand market opportunities, cultivate our businesses, increase the number of jobs we can create here in the U.S., grow our economy and ultimately help patients across the globe.

Given Minnesota's economic specialization in medical devices and the growth in foreign markets, it is not surprising that foreign exports play an increasingly larger role for our industry and our state. In Minnesota, foreign exports of medical technologies alone account for over 21% of the industry's value of shipments.

In 2000, AMS' total revenues were $100 million. Only $18 million of our sales came from outside the U.S. One of the most important aspects of AMS' future growth is International Expansion. It is our goal that international revenues will soon represent up to 40% of our total business. The impact that this type of international growth would have on our employment base in Minnetonka cannot be over-emphasized. We have a state-of-the-art facility, with world-class employees, in Minnetonka. It is not part of our long-term growth strategy to move our production capabilities away from our current facility. On the contrary, we are looking to continue to leverage the investment we have made in the both our facility and our employees.

The U.S. medical device industry exports life-saving and life-enhancing innovations that extend and improve the quality of life, regardless of national borders. And with the discovery of the human genome, the industry's ability to develop tests and devices that prevent, detect and treat illnesses earlier will only continue to grow exponentially.

As our industry continues to refine and improve existing products, as well as develop new, breakthrough technologies, our reliance upon an aggressive and effective U.S. trade policy will only continue to grow. The situation with AMS is no different. We are confident that our technologies are the best in the world. In fact, in some cases, our products are so specialized that AMS is the only source for treatment anywhere in the world. We are equally confident that physicians and patients around the world will continue to look for our products.

Current U.S. policy has yielded an over $7 billion trade surplus in the medical device sector with our trading partners. The medical device industry is one of the few industry sectors with a consistent, positive trade balance with Japan ($1.1 billion in 2000) and Europe ($3 billion in 2000) - and rigorous oversight and further trade negotiations is imperative for maintaining this positive trend.

The Role of U.S. Trade Policy for the Medical Device Industry

U.S. trade policy is a vital component of this industry's continued export growth. At American Medical Systems, we will continue to make the best products in the world. Products that people all over the world will continue to ask for and to seek out, but without the help of our government to ensure our access to those people and those markets, it will at some point not make sense for us to continue to invest monies and continually encounter roadblocks.

Japan, our industry's top foreign market, is a good example. Prior to the 1986 MOSS trade agreements, the U.S. had a $100 million medical technology trade deficit with Japan. Thanks to the negotiation and rigorous enforcement of trade agreements with Japan, with $2.75 billion exports to Japan, we now enjoy a $1.1 billion surplus in our sector. That's an increase of 500%, with the help of the U.S. trade team.

Let me relate to you the issues that AMS has experienced in Japan. I first want to draw some parallels between U.S. and Japan demographics. As I mentioned early in my talk, AMS' business is very closely linked to population demographics, and specifically to population aging and the diseases that come with aging.

Approximately 5% of the U.S. population are age 65 or over. In Japan, the percentage is even greater. I mentioned earlier that in 2000 AMS products were used to treat over 40,000 patients around the world. Over 30,000 of those patients were in the U.S. Yet in Japan, our estimate is that we treat less than 300 patients per year. Japan has roughly 50% of the US population, and yet AMS products were used to treat 1% as many patients.

AMS developed, manufactures and distributes the "Gold Standard" for treating men with urinary incontinence. Our artificial urinary sphincter has been recognized as the Gold Standard for treatment of this disease since the early 1980's. Last year alone in the U.S., we treated 3,500 men who suffer from this disease. We estimate that in Japan more men suffer from urinary incontinence than in the U.S. Yet, in Japan last year, AMS treated fewer than 10 men who suffer from this disease. The reimbursement hurdles in Japan with this product have been significant. Since the early 1990's, the AUS has been in the reimbursement approval process within Japan. Since 1996 alone, AMS has implanted this device in over 17,000 men in the U.S. AMS has had regulatory approval and reimbursement in the U.S. for current version of the device since 1983. There is no other product like the AMS device in the market in Japan today. Therefore, until our device is approved in Japan, there are thousands of men in Japan who are needlessly suffering from this disease.

The AMS story with our erectile dysfunction device is similar. We have 65+% of the market around the world, with devices that are again the "Gold Standard" for men suffering from Erectile Dysfunction. We continue to add new technological advances to this product, and in the U.S. last year we treated over 10,000 men who suffer from ED. We estimate that over 6 million men in Japan suffer from Erectile Dysfunction, and yet we treated less than 10 patients last year in Japan.

This year alone, AMS is bringing to market 2 new products that can significantly improve the lives of women suffering from female incontinence and men suffering from BPH (non-cancerous swelling of the prostate gland). We estimate that 9 million men and over 6 million women suffer from these diseases in Japan alone. We are anxious to bring these new technologies to Japanese patients as quickly as possible, but we cannot do this alone.

Today, Japan is the largest foreign market for U.S. medical devices. To keep it that way, we have had to be steadfast in our oversight of Japan's treatment of medical technologies, and enlist the continued assistance of the U.S. government. In 1999, our industry was prepared to file a 301 against Japan, until the U.S. government was able to negotiate an agreement with Japan to allow for the more timely adoption and integration of new medical technologies into their healthcare market.

When Japan failed to meet its pledge last year, the U.S. stepped in once again and reached another agreement. Sadly, Mr. Chairman, here we are again this year asking that Japan be held accountable to its unmet promises. Japanese government policies and initiatives continue to threaten and undermine U.S. industry access to, and our presence in, the Japanese market.

Japan has failed to fulfill some of these important trade agreement commitments to reform its rules for new technology reimbursement and regulation. Rather, the government of Japan has used arbitrary means to reduce technology prices and has slowed the introduction of new products as a means to contain overall expenditures.

In addition, there is an immediate, discriminatory threat in the Japanese government plan to introduce "foreign reference pricing" in the price-setting process. This onerous plan to base prices in Japan on prices in other markets egregiously fails to capture the significant and unique costs of doing business in Japan.

Unfortunately, Japan does not realize that these policies are not only problematic for U.S. manufacturers, but also detrimental to their own health care system. Japan has an average hospital length-of-stay being 30 days (compared to 6 in the U.S.) Fully utilizing new medical technology can actually improve the financial health and productivity of their system - especially given their rapidly aging and shrinking population.

Just as in the past, U.S. trade leadership can help address these problems. Enforcement of previous trade agreements can require Japan to take certain agreed upon steps in an expeditious manner, including:

• Reducing the two-plus year delay in access to brand-new technologies by establishing a process and timeframe for granting provisional coverage and pricing, as well as a method for establishing "final" reimbursement listing.

• Establishing clear-cut criteria and processes for creating new reimbursement categories and "final" pricing for next generation products.

• Abiding by the required government-industry consultations process established in the 1986 MOSS trade agreement when proposing major changes to either the reimbursement or regulatory processes.

Our industry looks to Congress and the Administration to enforce Japanese compliance with current US-Japanese trade agreements and to reduce the delays in the introduction and integration of new technologies in the Japanese health system.

Earlier I spoke about the impact international growth could have on the business and employment base of AMS. Let me emphasize that regulatory and reimbursement approvals in Japan alone that were both quicker and fairer would have a huge impact on AMS' business and employment base in Minnetonka.

Likewise, U.S. trade policy can benefit the industry's ability to compete in Europe - the second largest foreign market for medical technologies, to which our industry exports some $8 billion products, for a $3 billion trade surplus.

As the Member States of the European Union continue address the needs of an aging population and financially challenged health care programs, new health technology assessment processes, as well as new reimbursement and payment systems, must be transparent and capable of adopting new technologies in a timely manner. Adequate funding for and timely patient access to new technologies can both improve the quality of their health systems and allow them to reap the enormous clinical and economic benefits of innovative medical technologies.

The US-EU Mutual Recognition Agreement (MRA), if implemented accordingly, will greatly benefit both small and large US medical technology firms as it streamlines regulatory and inspection processes for certain technologies while protecting public health. U.S. oversight must help ensure it is fully implemented by December 2001, when the current three-year transitional period ends.

Europe is a critical market AMS as well. In Europe, AMS is a major player in the area of urology. We employ people all across the European continent through our wholly owned AMS subsidiaries. Europe today represents over 60% of our international business, and will continue to be a significant aspect of our business going forward.

U.S. trade policy can also benefit the medical device industry by encouraging the European Commission to continue its efforts to preserve the uniform regulatory regime for medical technologies throughout the European Union. A patchwork of regulatory policies throughout Europe would not only frustrate the medical technology innovation process and extend the time it takes to bring innovative technologies to the market, but it would undermine the intent of the European Medical Devices Directives and the "Single Market" concept espoused by the European Union.

The Importance of U.S. Leadership in Global Trade Initiatives

US medical technology firms would benefit enormously from the introduction and enforcement of new bilateral and multilateral trade agreements with other countries and regions. The U.S. government should utilize such agreements to help make regulatory regimes conform to internationally established principles and practices, and to adopt reimbursement processes that are more streamlined, transparent, and predictable.

To aid in this effort, our industry encourages Congress to grant the President "trade promotion authority" (TPA), which is critical to pursuing bilateral trade agreements in the medical technology sector with our major trading partners

TPA is also needed for further development on regional and global trade negotiations, including the Free Trade Area of the Americas (FTAA), the World Trade Organization (WTO), and the Asia-Pacific Economic Cooperation (APEC) forum. These, along with the Transatlantic Business Dialogue (TABD), are important vehicles for the medical technology sector to ensure that global markets remain open to our products by reducing restrictive tariff and non-tariff barriers and by encouraging the adoption of sound health care policies.

Significant strides have been made toward reducing tariffs for medical technologies in important developed and emerging markets through APEC. However, more progress can and should be made, and Congress and the Administration should work to ensure that APEC's tariff and non-tariff barrier reduction initiatives come to fruition within the APEC context or even more broadly within the WTO.

The US medical technology sector continues to support TABD activities, through which further progress can be made on important issues related to technology assessment, reimbursement policies, and regulatory policies, particularly vis-à-vis the acceding European Union countries like Hungary, Poland, and the Czech Republic.

Conclusion

The medical technology industry is a vital contributor to the Minnesota and national economy. It has benefited from, and will continue to rely upon, international markets for its continued growth and vitality. We face significant challenges in accessing these foreign markets, and look to partner with the U.S. Congress and the Administration to ensure our industry remains the world leader in innovation and exports.

I look forward to any questions you may have. Thank you for this opportunity to speak before the Committee.