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Analyst: Long-term upside for contract manufacturers despite near-term challenges

March 15, 2016 By Fink Densford

S&P Ratings ServicesWhile U.S. medical device contract manufacturers may be facing choppy waters right now, there’s smooth sailing ahead in the long term, according to a new report from Standard & Poor’s Ratings Services.

A key factor holding back industry growth, S&P reports, are the industry-wide cost-containment efforts associated with health care reform. Health care spending growth last year in the U.S. was more than 5%, but still substantially below historical levels, S&P reports.

S&P said it expects large rated CMO’s growth rate to continue to rise gradually over the coming years at a rate that will outpace industry growth rates. The expected shift is due to a continued focus by OEMs on consolidating suppliers in favor of large CMOs that can provide a broad range of products and services, S&P said.

The primary competition for CMOs are the OEMs themselves, which manufacture most of their supplies in house, and to compete many CMOs have begun offering increased preproduction services to improve relationships with customer’s new-product programs, S&P said.

Increased pricing pressure, as well as a drop in orders and new-product launches has stifled performance for CMOs in recent quarters, S&P said.

The firm said it believes that OEM customers who’ve recently consolidated to increase scale are leveraging that scale to negotiation CMOs for lower prices.

But the trouble won’t last, S&P said.

“We believe this turbulence is a period of digestion following a wave of OEM consolidation and that inventory reduction initiatives are finite and likely to be complete soon. We expect CMO industry growth to resume the low- to mid-single-digit growth rate we expect for the medical device industry,” report authors said.

S&P said it expects revenues for the CMOs it rates, as well as the broader CMO industry, to grow in the low to mid-single-digits in the next 2-3 years, in line with the firm’s expectations for the broader med device industry.

Larger players in CMO, including the S&P rated firms Greatbatch, Phillips-Medisize and Tecomet, are expected to outpace the growth of broader CMO and medical device industries and take a larger share of the pie from the smaller players in the field.

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  • Home
  • Medical Device Business
    • Mergers & Acquisitions
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  • Applications
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    • Devices
    • Imaging
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    • Orthopedic
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