Startups Seize Opportunities Through Vetted Distribution

A shifting healthcare landscape in the U.S. is presenting immense opportunity for early-stage companies. Max Painter, Senior Director, Market Development at NuVasive Specialized Orthopedics, has a long track record of launching new products for large multinationals and startups in domestic and international markets. He points out that “startups have become the industry’s main source of innovation; today’s startups are driving the golden age of healthcare and funding is available and accessible to those early-stage startups that demonstrate innovation.”

Early-stage companies should focus on setting up proper marketing and distribution channels early on. According to Painter, distributors have become more open to new concepts and cutting-edge technology. And picking the right distribution partner, one that has the local market know-how, a tight network of surgeons and gatekeepers, as well as the sales skills, is critical. “It’s never too early to start speaking to partners and building your sales and distribution channels,” says Painter. Much of a startup’s success will be based on tight relationships forged with industry counterparts, as well as building the necessary network, market by market, from the ground up.

Ben Johnson, Global Product & Business Development Manager at Nordson MEDICAL, notes that his company has a two-pronged approach working through two primary channels: OEMs and distributors. The company private labels its products and custom solutions to OEMs and works with distributors who have strong relationships with surgeons and physicians.

With the move to value-based healthcare in the U.S., and given that joint replacements have become largely commoditized, Nordson MEDICAL has like other orthopaedic companies shifted its focus to treating conditions and disease earlier and more often. (Nordson MEDICAL’S products and procedures, like injections and small grafting procedures, are less invasive and provide patients with care much earlier than what would have resulted in joint replacement later on.)

Johnson explained that an advantage of working with distributors is that a company can get more market insights and knowledge through feedback and information-sharing, and thus can get a better handle on its end-customers and understands doctors’ and surgeons’ needs and requirements.

For new product launches, distribution is a critical aspect of getting to market quickly and efficiently, albeit an aspect of the supply chain that may be misunderstood. Companies need to align themselves by shifting their focus to meeting requirements of value-based buying decisions. According to Bill Spath, Vice President of Sales for Golden State Orthopaedics, buyers are more concerned with value-based outcomes for patients such as shorter length of stay, improved patient experience and lower treatment costs. They are also adamant about seeing sufficient data, documentation and clinical studies at the start of the buying process.

Early stage companies seeking to launch products and ramp up successfully are well advised to seek out distributors. But how can they assess whether there is a good fit? Spath, who distributes joint reconstruction products for DePuy Synthes and is also distributor principal for OrthoScan Imaging and Arthrosurface, suggests a few points to think about when vetting potential distributorships:

1. Does the distributor have a wide regional reach or deep access to a niche customer base? Think about your criteria and your end goal.
2. Does the distributor have tenured sales reps who have a strong network and can make a bigger impact from the get-go? Additionally, will your company be leveraging the distributor’s existing call pattern? Or will reps need to establish a new call pattern, which can slow down the sales cycle?
3. What is the geographical coverage you seek? Are there potential overlaps with other distributors, which can be problematic down the road?
4. What is the make up of a distributor’s current product portfolio? Are there potential conflicts of interest now or in the future?
5. What are the distributor’s current sales? How many lines does it carry? What is the appetite for a new line; do reps have the bandwidth to focus on a new launch?
6. Assess which model is right for you. Will inventory be purchased on consignment (traditional model), or does the distributor have capital to invest in inventory?
7. What are your reporting requirements? Will the distributor be able to provide sufficient feedback on an ongoing basis?
8. Do your homework! Ask for customer referrals and get a read on the distributor’s reputation.

Aside from partnering up with the right distribution team, Spath also emphasizes the need to focus on negotiating and managing contracting. Hospital and systems purchasing is driven by contracts, and this can lead to a long buy-in cycle – time that most early-stage companies don’t have much of. “Spend time on contracts before you hit the ground running. Have someone on your team fully dedicated to negotiating and managing contracts. Don’t rely on external resources to negotiate on your behalf, and make sure contracts are streamlined so that the approval process isn’t longer than it needs to be.”

Furthermore, Spath stresses, be transparent with your distribution partner and make sure your interests are aligned. If you’re planning an exit through an IPO, merger or acquisition, share that vision with your partner. As long as the distributor is compensated with incentives like stock options, higher commission rates or a longer pay out period, the distributor will be willing and motivated to take on the added risk. “Everyone knows there’s an end game; make sure to communicate it and keep everyone working towards the same goal.” Similarly, set expectations with regards to inventory levels. Make sure you have enough inventory on hand to support demand. If inventory is going to be an issue, be transparent about it from the onset.

Finally, dedicating time, capital and effort to your distribution relationships will pay off in the long term. “Treat your distributor like you would a customer,” says Spath. “Invest in training and sales support to make sure reps are comfortable selling the product and believe in its benefits.” He strongly recommends placing an in-house sales manager to manage territories (at least one manager for every 50 to 100 reps). Encourage ongoing communications with your salesforce. Make sure that all internal and external teams, be those sales, marketing or contracting, are working in tandem.

Bottom line: Take Spath’s expert advice and avoid these five common mistakes:

1. Bigger is not always better- Assess a distributor’s resources, dedication and call pattern.
2. Check with customers and get references.
3. Handle contracts yourself.
4. Stay on top of your game. Manage your salesforce and don’t let your guard down.
5. Not seeing short-term results? Don’t go into panic mode and start jumping from one distributor to the next (but at the same time, don’t be lax and judge performance). Align expectations and understand that it’s a process.