About 10 years ago, there were a number of notable trends and market forces which began to, once again, change how the medical device manufacturing sector brought its products to market. They’re still shaping the market we have today.
Andrew Potter, Bonifacio Consulting Services, and Christopher DelportePerhaps the true measure of a forward-thinking industry is its ability to evolve to meet new market challenges, demands and opportunities. The medical device industry — and certainly the contract manufacturing sector that has grown over the last two decades into an integral part of medtech’s success story — not only has adeptly changed to meet new clinical demands, but also has, as part of that process, reshaped its manufacturing models to better respond to shifting economic realities.
The pace of evolution means that industry-watchers are constantly charting trends, trying to stay out in front of the wave. And if you enjoy trendspotting, the medical device manufacturing space doesn’t disappoint. There are plenty of industry-altering forces from which to choose: the expanding role of additive manufacturing (in fact, the FDA recently issued a first-of-its-kind guidance for 3-D printing of medical devices), cloud computing, increased supply chain efficiencies — and the list goes on.
Over the course of a few blogs, we’re going examine some of the variables currently (or soon to be) in play that we predict will shape the medical device contract manufacturing sector in the year(s) to come. We’ll also discuss how companies can best position themselves for success. Prior to looking forward, however, this article will take a brief look back at a few of the manufacturing, clinical and financial trends in the last 10 years that have led the contract manufacturing space to where we are at the start of 2018.
A historical look at medical device manufacturing trends
In the early 1990s, computer and other industrial outsourcing grew rapidly as companies such as Flextronics International Inc. (now Flex Ltd.), Jabil Inc. and Celestica Inc. quickly were acquiring their customer’s manufacturing operations and growing in areas such as consumer electronics. Despite the expansion, outsourcing in the medical device sector lagged in market share due to the regulatory nature of the business as well as the inherent risks associated with medical products. There were only a few major players, and a lot smaller highly specialized process-based shops providing unique skills. But, slowly, a more robust medical device outsourcing market and supply chain began to emerge. About 10 years ago, there were a number of notable trends and market forces which began to, once again, change how the medical device manufacturing sector brought its products to market. They’re still shaping the market we have today.
Among those changes were:
1. Major consolidation
Companies merging, combining complementary skills in order to secure greater market share, has been one of the major trends in medtech outsourcing in the last decade. Accellent kicked off one of the largest consolidations in medical device manufacturing. Given how many major companies have merged in the last decade, it’s safe to say that the Accellent model was probably before its time. They assembled a group of companies that initially weren’t well integrated but provided an array of skills. KKR & Co., the global investment firm that owned Accellent, loaded the company with debt and it took more than 10 years for Accellent to evolve into what became Integer in 2016 (following the acquisition of Lake Region Medical in 2014, which in turn was purchased by Greatbatch in 2015), forming a medical device manufacturing juggernaut with sales of more than $1.5 billion.
Other major consolidations included Jabil’s acquisition of Nypro, the Flextronics purchase of Avail in 2007, and the Molex buyout of Phillips-Medisize in 2016. Combined, these manufacturing conglomerates account for nearly $3 billion in medical manufacturing revenue a year. Also in recent years, MedPlast appears to be striving to reach the $1 billion revenue mark based on all the acquisitions they’ve made the last few years, such as Vention and Coastal Life.
2. New entrants
Another defining characteristic of the medical device manufacturing space over the last decade has been companies entering the sector without much prior experience in medical technology, but eager to create a healthcare niche within their business. Molex is an interesting example of this trend. The company, which is owned by the Koch brothers, didn’t have much of a history in medical device manufacturing. It focused mostly on consumer electronics, information technology, automotive and other industries. Other large industrials that have moved into medtech manufacturing in the recent past include Freudenberg, Trelleborg, Nordson, Lubrizol and TE Connectivity. Many other global and broadly diversified manufacturers have been active in medtech mergers and acquisitions but so far have come up short in their bids to assemble market-leading medical device manufacturing portfolios.
Medical technology distributors have moved from being simply hospital suppliers to creating a niche as supply chain and healthcare solutions providers. For example, MedLine Industries has been an active manufacturer in the distributor world for a long time (and with many private-label commodity products, many made in Asia with contract manufacturers). However, two of their competitors have made recent moves to significantly add to their own manufacturing capabilities and product portfolios. Cardinal Health acquired Cordis from Johnson & Johnson and Covidien’s Medical Products Division from Medtronic. Just recently, Owens & Minor purchased a large chunk of the surgical supply business from Halyard Health (formerly Kimberly Clark Health Care).
4. Minimally invasive
Depending on whose research you use, the global market for minimally invasive medical technology will be worth $50 billion by the end of this decade. With the move to more catheter-based and laparoscopic procedures and the miniaturization of technology in general, the potential of this market will continue for some time to come. For contract manufacturers, it has emerged as a particularly desirable segment to target and attempt to provide a full range of outsourcing capabilities. Companies such as TE Connectivity (with its purchase of Creganna, AdvancedCath), Nordson (though the acquisitions of Vesta and Vention Medical Advanced Components), and Freudenberg (with its MedVenture Technology Corp. buyout), clearly demonstrate that companies are willing to invest to meet the minimally invasive sector’s needs and create a one-stop-shop solution for their OEM customers.
5. Contract manufacturing sophistication
As medical device OEMs have looked to decrease their brick-and-mortar operations and turn manufacturing over to one-stop shops, they’ve demanded more from their suppliers. This demand significantly has changed the complexity of the work for contract manufacturers over the last 10 years. Not long ago, most contract manufacturers were told what products to manufacture and how. The last 10 years have seen that relationship dynamic shift. Contract manufacturers have created value propositions in being able to provide services from product concept and development, to highly specialized manufacturing and even supply chain management and delivery to the end customer. Medical device manufacturing probably will never look like the tiered system used in the automotive industry, but some aspects are similar. For example, top suppliers are looked upon as true valued partners that are tightly integrated into the supply chains of the OEM. Top suppliers also are called on to manage other smaller and non-strategic suppliers on behalf of the OEM. Supply chain management for top contract manufacturers can be a competitive advantage and a sought-after capability for a large medical OEM.
OEM consolidation has, in turn, forced consolidation within the contract manufacturing space. As OEMs buy other OEMs, this encourages contract manufacturers to expand their capabilities and act as strategic partners to OEMs. Furthermore, as OEMs supply chains get larger through acquisition there is a risk that smaller, less-strategic contract manufacturers will be removed from approved supplier lists. As a result contract manufacturers turn to mergers and acquisitions to grow, quickly and, ideally, to position themselves as a trusted partner.
6. Private equity
Over the last five to seven years, private equity investment has had a deep impact on medical device contract manufacturing. Private equity investment has brought liquidity, mergers and acquisition knowledge and professional management to what largely has been an industry consisting of smaller owner/operators. Examples include: Golden Gate Capital purchasing Phillips-Medisize (now owned by Molex) from Kohlberg & Co. (another private-equity firm); the RoundTable Healthcare Partners purchase of Vesta (and its subsequent sale to Lubrizol); Permira’s purchase of Creganna (which later was sold to TE Connectivity); Inverness Grahams’s ownership of AdvancedCath (which also was sold to TE Connectivity); Ampersand Capital Partners’ purchase of MedVenture Technology (which later was bought by Freudenberg Medical), and many others.
7. OEM landscape
The landscape for medical device company has changed rapidly as well, and those changes have fueled much of the contract manufacturing space’s evolution, as OEMs look to reduce manufacturing footprints and turn to trusted partners to provide technical and production services. Research and development budgets and timelines are under pressure. OEMs are looking to outsource partners to navigate their competitive and (more global than ever) markets. The compression of the supply chain has also had an impact. Above we briefly discussed the trend of distributors buying commodity products companies. While a traditional OEM may see this business as not desirable with only 20-percent margins, a distributor that is struggling to stay in the high single digits of margin, views the market as an opportunity, with the ability to control more of the cost and provide “private label” products where they can. We believe this will continue and companies such as McKesson, Cardinal, and Owens & Minor will look to pick up additional product assets in the upcoming years.
Now that we’ve teed up a few of the trends that have helped to shape the current medical device contract manufacturing landscape over the last 10 years, we look forward to exploring how some of these may change but continue to impact the sector going forward—and how new factors will influence the market. Check back soon for our next installment.
Andrew Potter joined Bonifacio Consulting Services, (BCS) in 2012 and leads the company’s strategic planning and M&A engagements. He has more than 20 years of global manufacturing experience and helps corporate and financial groups maximize the value of their companies for long-term growth and competitive advantage, or for the best possible exit.
Christopher Delporte is a journalist, messaging leader and content strategist with more than 20 years of experience. He is an award-winning editor, storyteller and multiplatform communicator, with expertise in Capitol Hill coverage of Congress and federal regulatory agencies, as well as investigative journalism.