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Sunday, 18 January 2015 22:00

Finding Maturity: Evolution of contract medical device manufacturers mirror mature industries

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Participants in the medical device roundtable were (l-r) Tom O’Mara (Autocam Medical), John Woodhouse (MedBio Inc.), Steve Dufon (Motion Dynamics Corp.), John Berchulc (Kent Manufacturing Co.), Michael Wooldridge (Varnum LLP), Louis Weijers (GR Current) and Tim Mroz (The Right Place Inc.). Participants in the medical device roundtable were (l-r) Tom O’Mara (Autocam Medical), John Woodhouse (MedBio Inc.), Steve Dufon (Motion Dynamics Corp.), John Berchulc (Kent Manufacturing Co.), Michael Wooldridge (Varnum LLP), Louis Weijers (GR Current) and Tim Mroz (The Right Place Inc.). PHOTO: JEFF HAGE

West Michigan’s medical device manufacturing industry is relatively young by national standards, but the sector has evolved rapidly over the years.

Now the nascent local industry has begun to see growth trends mirroring those of the automotive sector two decades ago. Their customers — the medical device OEMs — are consolidating and pushing the contract manufacturers to scale up and offer more capabilities in-house.

That’s according to a group of industry leaders that gathered for a recent MiBiz roundtable discussion. They say a combination of increasingly sophisticated manufacturing practices, collaboration and supplier consolidation will drive the industry forward amid increasing regulations by the U.S. Food and Drug Administration (FDA).

As a result, the two-dozen member MiDevice industry group that’s facilitated by The Right Place Inc. aims to move from collaborative marketing to more peer networking and driving awareness of what’s available in West Michigan.

  • Participating in the roundtable discussion with this reporter and Managing Editor Joe Boomgaard were:
  • John Berchulc, market development manager of medical, Kent Manufacturing Co.
  • Steve Dufon, vice president sales and marketing, Motion Dynamics Corp.
  • Tom O’Mara, executive vice president, Autocam Medical
  • Tim Mroz, vice president of marketing and communication, The Right Place Inc.
  • Louis Weijers, startup mentor, GR Current
  • John Woodhouse, sales and marketing manager, MedBio Inc.
  • Michael Wooldridge, corporate practice attorney, Varnum LLP

Here are some highlights from the discussion:

There’s always been a lot of talk of collaboration among the manufacturers in the medical device industry in West Michigan. Has that changed at all as the companies have matured?

Woodhouse: I would say from MedBio’s standpoint that there’s still a great deal of collaboration and work with startups. … I’d say that there’s more collaboration between us in West Michigan than there has been in the past — and that it’s growing.

Dufon: If there’s a subassembly that has plastic involved, MedBio are the first guys I call because of our relationship we’ve built through MiDevice. If I didn’t know about them, I might head out of the region because of past experiences.

Berchulc: There’s a lot of talking that’s going on (inside the MiDevice group) and that’s a good place to start. You can’t do anything until you have discussions about what you need and can assist with.

O'Mara: For us, the beauty of having collaborative relationships with companies in the same area code is speed. (It’s) one of the most important factors of success in the medical device space. World-class lead times are three or four weeks. … Also, (it’s key for) quality assurance control. It’s a lot easier to do that if our supplier is in Kentwood or Grand Rapids than it is for us to control someone in Alabama. That’s where I see the real win.

It seems like the local contract manufacturing sector has had a quick evolution in terms of how far it’s advanced compared to other industries. Have you seen that?

O'Mara: It depends on the market. … There’s a much better opportunity for improvement in the sophistication of what we do and what the supply chain does. Machine tools are much better now that the thought leaders are there and looking at new manufacturing and reducing variation — all things that made companies successful in the auto industry.

Woodhouse: There are winners and losers and hopefully the (customers) you get in bed with are the winners most of the time. We deal with startups, and you have to help them because they might have the next great product right now. We got lucky and had two great winners and they’re taking off like gangbusters. But there are some other startups we’ve gotten involved with and it’s been four years and we’ve made 5,000 pieces.

Weijers: I think it’s important for contract manufacturing companies to have a balance between big and small (customers). If the small companies do succeed and are being picked up by a larger OEM that you don’t have in your customer base, nice work — you just got into a new OEM.

When customers have issues, what does that mean for contract manufacturers supplying them?

Dufon: You look back two years ago and renal denervation was the hottest thing going. Medtronic has one bad result in a study that shuts it down, now there’s a cascading effect on other companies that were on that development. … But that’s spawning innovation. The entrepreneurs are the ones that are willing to figure out what the problem is.

In the realm of entrepreneurship, is there enough capital in the region — including private equity and angel investors — to get these startup companies over the finish line?

Weijers: It’s hard for investors because you have to find the right investment group. I think there are plenty of investors in West Michigan. But the challenge is at what point in time is an investor comfortable with investing in your device? Is it after FDA approval or before, when there’s still a lot of unknowns? Typically, that’s when investment is needed. Once you have FDA approval, it’s finding the right manufacturing partners to get it to market. You have to do a lot of research and evaluations before you put a device in the market to convince an investor.

Wooldridge: I think it’s impacting some of the private equity firms I represent. When they deploy capital, they want to see a rapid return and don’t want to wait three years to go to the FDA. Obviously, a lot of projects get pulled and they sell the company because they don’t have the time to see if it’s feasible.

Do contract manufacturers look to become more of a one-stop shop for customers?

O'Mara: We are seeing a supply base consolidation going on. This is the same thing that’s happened in the mid-80s and 90s in the automotive industry — (both) OEMs and the supply base were consolidating. You need that scale or something unique where you can be a part of their supply pyramid. We believe that we need to be listening to what they have to say and we’re going to react that way. It doesn’t mean we’re going to leave West Michigan, we’re actually going to grow here. That’s part of the strategy that we’ll have to support our global customer base.

Does that mean we can expect more M&A activity in the industry? Stryker has certainly been active in acquiring companies in recent years.

Weijers: When a company is as big as Medtronic or Stryker, the FDA asks more so the flexibility and time to bring products to market goes down. To be responsible to their shareholders, you see more mergers and acquisitions, and I think it’s going to happen more and more.

O'Mara: You see the OEMs grabbing a product or company but in our contract manufacturing space, it’s going on as well. Our customers (are) looking to deal with fewer suppliers. It’s just less complicated. With the regulatory environment that we’re living in, there has to be more controls all the way down to the sub-tier heat-treat supplier. As we see this consolidation, it just cascades down.

Woodhouse: We bought a tool shop in February. You have to stay ahead of the curve at all times. It’s hard to say what’s next. If the right family-owned medical molder came along in Minneapolis, I’m sure we’d jump at it.

Dufon: You have to be aware of what’s going on in the landscape, who’s acquiring who, but also what capabilities we need to build internally to stay competitive with some of the other companies that are starting to consolidate.

What other factors are driving consolidation?

Weijers: The OEMs are narrowing the supply base down to suppliers that have full capabilities. The challenge for contract manufacturers is that it’s not easy to be added to part of an approved supplier list as part of the quality system. So by making acquisitions of other contract manufacturing companies to supplement their capabilities, it will automatically add them to that approved supplier list.

O'Mara: That’s an excellent point because one of the motivating factors for our recent acquisition was more of a merger in our capabilities. We were able to gain access to target customers that had already made the decision not to expand their (supplier) base. We had targeted these customers but we couldn’t get past the gatekeeper. By making that acquisition, we get (access to the acquired company’s customers that Autocam had been targeting). … We were really able to build a bigger customer base.

Are you seeing OEMs push suppliers to follow them overseas, similar to the auto industry?

Woodhouse: Not for MedBio, but again our products are small and lightweight. Transportation typically isn’t an issue. (Customers) want the right solution at the right price and timing is important.

Dufon: I think when you look at what we do with wire, it’s very specialized — making coils down to less than four thousandths of an inch in diameter. You don’t just pick that up and move it somewhere and co-locate all of a sudden. There’s years of experience and you have to develop the talent to do that.

Weijers: From a regulatory standpoint, it’s hard for an OEM to switch suppliers when it comes to Class II devices. Class I, the FDA doesn’t have as many controls. But typically with the Class II devices, the supplier becomes part of the certification for the devices. So it’s hard, painful and costly once that decision has been made to move away from that supplier to someone else.

O'Mara: It’s more (like) customers looking for local suppliers. We have some large medical device OEMs that are in China and would prefer to have the U.S. company that supplies them here supply the same quality and product in China. We’re following our customers. To become a top-tier supplier, you have to go with them. That’s how we ended up as an international company to begin with.

Is the strong U.S. dollar a concern for export sales?

O'Mara: We’re going into an unknown. The euro is at its nine-year weakest point versus the dollar. If I were planning on building our business on exports right now, I’d be worried. That’s why having local manufacturing in a foreign country gives you the advantage. It’s like a natural currency hedge.

Dufon: That’s where we have to learn our markets and the pricing. For us, the key is getting feedback from companies and asking where we ended up in pricing. If we find out we’re two times the cost, then we’re going to have to make adjustments if we want to work in that region in order to be competitive.

Are there any missing parts or bottlenecks in the local supply chain that, if solved, could help grow this industry in West Michigan?

Woodhouse: As a contract manufacturer, when we get involved with more assembly or over-molding, the OEM may point us to who they want us to have the part machined by. There is a lot of supply chain (decisions) dictated by the OEMs.

Dufon: They can even dictate down to who you get your raw material from.

Woodhouse: When you’re involved with startups, we can help with that, but when you’re working with the mid to big (customers), they’re going to dictate it — and they’re very risk averse right now.

O'Mara: Speed and reliability are big issues. There are very few (companies) that are validated, and the OEMs are using the same suppliers so we have to get in line. We’ve decided to take a lot of our stuff in-house. In our business, we had a huge bottleneck with gun drilling. We became very frustrated and bought a gun drill machine and now we have two. We removed the bottleneck but also improved our quality and speed.

Do your companies feel any pressure from customers regarding the federal medical device tax?

Dufon: I don’t know if we do directly. We’re typically a tier or two down, but I’m sure there’s something there. OEMs have to cover it.

O'Mara: It certainly affects the smaller OEMs that are competing for market share more than it does the larger ones. The larger OEMs are just passing it on. You’re paying for it when you go in to get your broken arm fixed. There are smaller companies that it’s preventing them from investing in R&D because it’s a sales tax based on what they sell. If you’re an entrepreneur and sell a million dollars but don’t make a nickel on it, you’re still paying that tax.

What concerns are keeping you up at night?

O'Mara: We believe that some of the control that is being driven through the FDA down through the supply chain is actually a good thing. It takes the hacks out of the business. You can’t just put a machine in your garage and start making medical device parts. (It) adds costs but those companies that can prepare for it and run their businesses with that level of control are going to succeed.

Weijers: I’m afraid that regulations are going to demand more and more (regulations). Everything is about risk management. The (FDA) is going to go down the tiers of risk levels and try to address the lower risks, which then becomes very expensive for manufacturing companies. I would hope that at some point in time someone will say, ‘Stop.’ We are already addressing all of our highest risk levels and have consistent quality output — we don’t need more regulation. I’m afraid it will keep going.

Dufon: You have doctors in the operating room and they have the idea for what would make their job better. They go to work with a small (manufacturer) and do their presentation with the FDA. Then here comes the questions that put them into eight months of work. For a big company, that’s no problem, but do the smaller companies have the funding to wait that long?

Regardless of the industry they’re in, the manufacturers we talk to all cite talent as a significant concern. How is that shaping up among contract manufacturers?

Dufon: Going forward, developing that talent is probably going to be one of the large challenges. … It’s difficult to find people who understand medical device manufacturing from a quality standpoint. Fortunately, we’re not associated with the FDA, but if it got to that point, who understands that world in the area that can help you navigate it?

O'Mara: I think the talent side of things is really the need for technical people. We’re taking the lead and we’ve been active with Talent 2025 and the (Advanced Manufacturing Partnership) program to create a talent pool for the younger folks in West Michigan. We need these young people to get interested in engineering and manufacturing, whether it’s plastics, metal-forming or whatever. Manufacturing is what turns the crank here in West Michigan and hopefully always will. 

Read 4203 times Last modified on Saturday, 17 January 2015 22:11

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