1. Consolidation and a developing tier system
One of the trends industry-watchers undoubtedly will recognize is consolidation — not just at the OEM level, but in the outsourcing sector, too.Medical device companies are looking for ways to simplify their supply chains, which helps to cut costs and reduce complexity. This is particularly the case following some of the mega-mergers we’ve seen in recent years: Think Medtronic and Covidien, Zimmer and Biomet, BD and Bard, and Abbott and St. Jude Medical. But whether it’s a $50 billion deal or the acquisition of a venture-backed startup with one novel product, consolidation usually means increased pricing pressure, overlapping or duplicative supplier lists, and the need to streamline processes and boost efficiencies at every level.
To meet these needs, OEMs have turned to contract manufacturers that offer the greatest breadth of capabilities in-house. Contract manufacturers now need to offer as much as possible under one supplier umbrella, from design and prototyping to large-scale manufacturing and packaging and often with a global manufacturing footprint. These traits enable the OEM to deliver products to healthcare professionals and, ultimately, to patients more quickly, efficiently and inexpensively.
How have contract manufacturers accomplished this one-stop-shop offering? You guessed it: consolidation.
As contract manufacturers have merged, a tier system of suppliers has developed, similar — although certainly not identical — to the one used in automotive and aerospace manufacturing. The medical device sector traditionally has lagged behind other industries such as automotive in its use of (and increased dependence upon) contract manufacturing, but it makes sense that as the relationship has evolved during the last 10–15 years, the medical device model would start to mirror (in some ways, at least) the tiered supplier system used in other high-tech, highly regulated industries.
In the automotive model, for example, Tier 1 companies offer the most advanced and comprehensive processes in the supply chain, eliminating the middleman for the OEM and overseeing the most complex pieces of design, prototyping and production. Tier 2 companies, in turn, supply Tier 1 outfits with the products they need — often involving a more highly specialized process or a specific type of manufacturing — to provide the OEM with its final product. Tier 3 suppliers are raw material suppliers (plastics, metals).
This is, of course, an oversimplification. But it’s a helpful way to think about how the medical device supply chain is evolving.
In the medical device market, large contract manufacturers with sales in the billions of dollars a year such as Integer (which was a recent consolidation of two of the largest medtech contract manufacturers: Lake Region Medical and Greatbatch), Jabil (which bought Nypro in 2013) and Flex (which has grown through a number of strategic acquisitions in the medtech space over the last 10 years) provide a broad range of capabilities for OEMs. These companies offer scale, expansive capabilities and global footprints.
Medium-sized companies (in the $500 million annual sales range) are busy consolidating their positions in particular market segments or with specialization of capabilities. For example, companies such as Phillips-Medisize (a division of Molex) and MedPlast (which recently purchased Vention and Coastal Life) are highly specialized in molding. TE Connectivity (which purchased the Ireland-based contract manufacturer Creganna Medical Group in 2016) has focused much of its expertise on the market for minimally invasive devices. West Pharmaceutical Services specializes in the packaging and drug delivery markets. Though highly-specialized, many of the companies in this group also are continuously looking to expand their capabilities and service offerings.
But, similar to the role that Tier 1 suppliers play in the automotive tier system, these large and medium-sized players in the medical device manufacturing model must be the supply chain “experts,” managing the materials, vendors and services that at one time primarily were managed by the device OEM. In the not-so-distant past, only OEMs had the supply-chain expertise and sophistication to manage this process. This now is beginning to change as medtech suppliers’ own tier systems develop.
Smaller companies often are focused on a niche product or capability and doing it extremely well: for example, firms specializing in liquid silicone rubber, micromolding, quick-turn and smaller production runs, or product development and lower-volume sophisticated products. In addition, many lower-volume projects don’t require the complexity (and expense) of the larger contract manufacturers. And because proximity is still important, many smaller companies continue to serve local OEM locations. For example, Injectronics (now Phillips-Medisize) successfully served local Massachusetts-based startup Cytyc as it developed medical devices focused on women’s health. Cytyc later was acquired by another Bay State–based firm, Hologic.