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Sunday, 01 February 2015 22:00

Autocam Medical bullish on contract medical device industry

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MADE IN MICHIGAN: A combination of regionalization and supply chain consolidation similar to what the automotive industry experienced decades ago has Kentwood-based Autocam Medical Devices LLC bullish on the medical device sector. The company, led by CEO John Kennedy, expects revenues to grow to $100 million this year by developing its product portfolio with existing customers. Autocam Medical also actively seeks acquisitions that would give it access to new customers. MADE IN MICHIGAN: A combination of regionalization and supply chain consolidation similar to what the automotive industry experienced decades ago has Kentwood-based Autocam Medical Devices LLC bullish on the medical device sector. The company, led by CEO John Kennedy, expects revenues to grow to $100 million this year by developing its product portfolio with existing customers. Autocam Medical also actively seeks acquisitions that would give it access to new customers. COURTESY PHOTO

The contract medical device manufacturing industry in West Michigan would do well to pay attention to what’s happened in the automotive supply chain over the last two decades.

That’s according to Autocam Medical Devices LLC CEO John Kennedy, a veteran executive who’s had extensive experience in both industries.

While he sold off Autocam Corp. to fellow auto supplier NN Inc. of Tennessee last July, Kennedy has shifted his focus to growing Kentwood-based Autocam Medical Devices, the contract manufacturing company that spun out of Autocam and has been operated separately since 2009.

While Kennedy remains on the board of directors for the newly branded NN Autocam, he said his focus remains on growing Autocam Medical Devices as a contract manufacturer.

“The reason we’re so bullish on contract manufacturing in the medical device space is it reminds me of the automotive business when I first started Autocam,” Kennedy said. “All of the same things we dealt with in the auto industry are really in their infancy in the contract manufacturing medical device space.”

Both the consolidation of OEMs and suppliers and the globalization of the medical device supply chain — reminiscent of what occurred in the automotive industry in the 1980s and 1990s — have opened up opportunities for companies in West Michigan’s nascent industry, industry watchers said.

In particular, OEMs have continued to ramp up their acquisitions to develop full-service medical device companies. Within the region, the largest example of that trend is Kalamazoo-based Stryker Corp. (NYSE: SYK), which has closed on seven deals since 2013 to wrap in domestic and international companies at a combined value of more than $3.3 billion.

With the consolidation of OEMs, there’s less room for existing suppliers to win contracts for new customers. At the same time, regulatory requirements are forcing OEMs to carefully pick their suppliers because they’re often integral to their quality certification process. As a result, OEMs have been hesitant to entertain new suppliers, as MiBiz previously reported.

To fill that gap, contract manufacturers such as Autocam Medical have increasingly turned their strategy to include M&A as a means to break into the bidding process and grow their customer base.

In November 2014, Autocam Medical acquired fellow contract manufacturer Southeastern Technology Inc. (SET) of Murfreesboro, Tenn. in an all-cash deal. The acquisition gave Autocam Medical access to new customers in spinal and orthopedic care, “filling out the (company’s) portfolio,” Kennedy said.

The terms of the deal were not disclosed.

AVOIDING OVER-EXTENSION

While Autocam Medical is actively scouting for additional deals that could open doors to supplying new OEMs, the company is hesitant to over-extend itself with acquisitions, Kennedy said. If the company does make another acquisition, it will be for a business that fits into Autocam Medical’s framework and that can easily be absorbed into the existing operations, he said.

“This is one thing that some of our competitors have not done a good job of,” Kennedy said.

Other medical device manufacturers have over extended themselves with M&A by not taking the time to fully integrate the new companies into their operations, which ultimately leads to fragmentation that is bad for business, Kennedy said.

“The customer can’t really treat it as one supplier with multiple facilities if it doesn’t look like one supplier,” he said.

After the recent acquisition, Autocam Medical expects to reach $100 million in revenue in 2015 and to grow approximately 25 percent per year organically, Kennedy said. The company currently employs 300 people across its operations and plans to hire up to 50 additional workers in the next year.

To meet those targets, Autocam Medical will focus on wrapping in complementary products and expanding into new product lines within its base of existing customers, Kennedy said.

“It’s exactly what we did in the automotive business,” he said. “We really didn’t have that many customers, but generally we were the largest supplier with those five customers.”

LONG-TERM DRIVERS

With the aging of the baby boomer generation, the company’s primary growth market thus far has been in orthopedic and ophthalmic components, Kennedy said.

That seems to echo the medical needs of an increasingly aging population in the U.S. Forty percent of the total population who are diagnosed with some form of arthritis or heart disease are over the age of 65, according to a recent IBISWorld Industry Report on the medical device industry, which cites data from the Centers for Disease Control and Prevention.

The report also notes that from 2009 to 2014, the number of people in the 65 and older age group has grown 3.1 percent per year and now numbers 46.2 million people.

That growth is going to lead to substantial opportunity for the region’s contract medical device manufacturers, said Eric Icard, business development manager at The Right Place Inc. and the facilitator for MiDevice, a West Michigan-based medical device industry group.

“Being in the medical device and particularly the implant field is a good place to be right now,” Icard said. “There will be continued demands with baby boomers and I think it’s only going to get stronger.”

Regionally, the medical device industry has grown 50.2 percent since 2004 to more than 6,500 jobs — a rate nearly double the national average, according to data provided by The Right Place.

Importantly, the industry’s growth isn’t limited to customers in the North American market. Much like the automotive industry, OEMs are expanding their production overseas and encouraging their supply chain partners to support them on a regional level in foreign markets. It’s a trend that’s been felt by Autocam Medical, which plans to open a small manufacturing operation in China within the next two quarters to service its customers with large Asian footprints, Kennedy said.

The company also has a small manufacturing presence in Brazil.

“Companies are looking for American manufacturers to locate their same manufacturing capability in China,” Kennedy said. “We’ve done that in the auto business and know exactly how to do it, so it makes us unique among the contract manufacturers.”

TAXING INNOVATION?

With the industry on the rise and more startup manufacturers joining the mix, the medical device sector will likely drive substantial innovation into the health care field, Kennedy said. However, Kennedy worries that the Federal excise tax levvied on medical devices could hamper that innovation in the future.

The excise tax that went into effect as part of the Affordable Care Act requires OEMs to pay a 2.3 percent sales tax on all devices registered by the U.S. Food and Drug Administration. In particular, Kennedy said he sees the tax pushing some medical device companies to consider moving their headquarters overseas via corporate inversions, which could result in the potential for new technology to be developed and manufactured there instead of in the United States.

“It’s not a particularly onerous tax, but I don’t think we should be taxing innovation and the growth of businesses in the med device space in North America,” Kennedy said.

Despite these concerns, Kennedy remains confident about the developing industry adapting to the challenges ahead. The sector may be trending along the same trajectory of the automotive industry, but its growth is unlikely to be plagued by the same cyclical patterns, Kennedy said.

“There’s no real limit to the amount of work of metal machining in the orthopedic space,” Kennedy said. “The business is billions of dollars of sales potential.”

Read 4514 times Last modified on Sunday, 01 February 2015 22:52
John Wiegand

Staff writer

jwiegand@mibiz.com

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