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Sunday, 12 November 2017 15:42

West Michigan med device suppliers navigate consolidation, pricing pressures, talent constraints

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Joining MiBiz for a roundtable on medical devices were (top row from left) Rob Ball of Genesis Innovation Group LLC, Eric Icard of The Right Place Inc. and Jim Medsker of Keystone Solutions Group; (bottom row from left) Tom O’Mara of Autocam Medical Devices LLC and Chris Witham of Motion Dynamics Corp. Joining MiBiz for a roundtable on medical devices were (top row from left) Rob Ball of Genesis Innovation Group LLC, Eric Icard of The Right Place Inc. and Jim Medsker of Keystone Solutions Group; (bottom row from left) Tom O’Mara of Autocam Medical Devices LLC and Chris Witham of Motion Dynamics Corp. Photos by Katy Batdorff

Many executives at companies in West Michigan’s medical device supply chain came out of the automotive industry only to find they’re facing all-too-familiar challenges in their current roles. 

The global medical device industry continues on its pace of rapid consolidation, driven by the cost of commercializing innovations in a highly regulated market. That’s likewise consolidated power among fewer, larger customers, who’ve increasingly targeted the supply chain for annual pricing concessions common in the automotive industry. 

That’s one dynamic reshaping how suppliers approach their business and creating opportunities for well-managed companies like the ones in West Michigan, according to executives who joined MiBiz in a recent medical device industry roundtable discussion.

The roundtable, which was sponsored by Holland-based JR Automation, included:

  • Rob Ball, CEO of Genesis Innovation Group LLC, a Holland-based portfolio of medical innovation companies whose backers proposed a $10 million venture capital fund to invest in the industry
  • Eric Icard, senior business development manager at The Right Place Inc. and facilitator of MiDevice, a West Michigan-based medical device industry consortium
  • Jim Medsker, president of Keystone Solutions Group, a Kalamazoo-based product development and contract manufacturing firm 
  • Tom O’Mara, executive vice president of Autocam Medical Devices LLC, a Kentwood-based global contract manufacturer of orthopedic implants, spinal implants, orthopedic cutting tools and other medical device components
  • Chris Witham, president of Fruitport-based Motion Dynamics Corp., a manufacturer of small metal components and sub-assemblies used in disposable medical devices
  • Here are some highlights of the discussion. 

From the 30,000-foot view, what’s happened in the med device industry in West Michigan in the last couple of years? What’s your outlook?

Icard: What I’ve seen in West Michigan visiting 30 to 40 companies in the last year, for the most part, it’s substantial growth. I think I can name in the last 24 months at least a half dozen companies that have added on facility wise and certainly employment wise. I think overall it’s been good for the West Michigan economy to grow in the med device sector. Within the existing businesses we’re seeing a lot of expansion. On the attraction side we’re seeing a lot more interest from outside of the area. I’m responding to a lot more requests for information in the med device arena. 

Medsker: At Keystone, we’re at the early stage. We work with a lot of startups and smaller companies, usually on the leading edge. Even with larger clients, we’re working on the product development arena first and then in the manufacturing. We see the same thing, the referrals and leads and growth is pretty strong. 

O’Mara: From the manufacturing side, consolidation is definitely a big deal. The OEMs that we target — which would be the largest OEMs — definitely have a process for thinning the supply base. 

Witham: The past couple of years, I would say there’s been an accelerated number of acquisitions under the supply base umbrella. I personally think that has created an opportunity for us because a previous competitor for us now becomes a competitor to the big OEMs as far as components go. I think it’s created opportunities for us over the past couple of years. 

Does that consolidation have any side effects for suppliers? 

Witham: I think that that is moving the medical device arena closer to what automotive has been over the past 20 years as far as pricing goes. We’ve probably experienced more pricing pressure over the past six to nine months than I have in 17 years previously. I think they’re looking for cost savings when they go do that. They have to figure out a way to get some money back. … I have price concessions, and at the end of the day that never happened before (with medical device customers). 

O’Mara: We’re hoping that the consolidation activity rewards the right behavior and it’s not just a lever for price. It does cost more to have a global enterprise and you need to continue to reinvest in R&D and new equipment and that type of thing. For example, we have a new program that’s just now launching that we had to make the commitment on the capital two years ago. We’re now launching that product where the pricing is set and we have to get going now and make that happen. It’s expensive to do that, and you can’t do that if you’re being compared to some guy out of nowhere because he’s cheap. 

Is the supply base concerned these OEM pricing pressures could go too far and hurt suppliers? 

Witham: I don’t think so, I’m hopeful that it doesn’t. 

O’Mara: The weaker companies will lose, they’ll be destroyed. The reason being they will not understand their true cost and they will be more focused on top line or sales volume than they would be on survival — the return on investment. We think there certainly could be a culling of the herd coming. You have to be very disciplined, you have to understand your customer, you have to understand what your capabilities are and your costs. There’s no understanding for people who aren’t very smart. I don’t mean to be curt, but if you’re a stupid competitor you could really get in trouble. As companies, we just have to be very disciplined and learn when to say no. You have to know when to walk away and say, ‘I just can’t do that.’

What do you think is driving the pricing pressure? 

O’Mara: Most companies are public companies. Private companies you don’t get it.

Medsker: That and billing codes and reimbursement are getting squeezed too.

Witham: The guys who are on the  Dow or publicly traded, they’ve got to find ways to improve their profitability.

Ball: We have a number of portfolio companies that sell directly into hospitals. Pricing is a conversation like it never has been before, at least for devices at the hospital level. There’s no question that the level of sophistication at the hospital level from a purchasing perspective has grown a lot in the last five to 10 years. 

How’s that reimbursement environment in health care affecting R&D and innovation for med device companies? 

Ball: From our perspective, what I do has definitely shifted from ‘can I present you a new widget that provides the new bells and whistles’ to ‘can I present you a new widget that dramatically lowers cost for the overall health care chain.’ That’s 100 percent my focus. I either have to convince you that by using my device or my new widget you’re going to save costs in the long term, reduce further operations at a later date or whatever that may be. Or it’s just plain less costly today.

Witham: That’s interesting because we’re exactly 180 degrees from that. All of our work that we do is smaller — do something that can’t be currently done today. All of our work is that way, not a cheaper replacement for an existing part.

Ball: Don’t get me wrong, it’s very innovative work but the innovation is centered around lowering the overall cost of health care. It may be a completely unimagined device. It might be a different procedure altogether. Instead of that device being $5,000 into a $15,000 procedure, we need to provide a $500 device into a $5,000 procedure even though the margins to the device company are perhaps even improved. That’s what we’re after at least from a product development standpoint.

Medsker: The tricky part is these cost savings have to be significant enough to afford the risk of change. You can’t go into a 5 percent savings or 10 percent or 15 percent. You’ve really got to be almost disruptive on your pricing to get that new thing in there. It costs them so much to change and then there’s the risk too.

O’Mara: The robotics business is booming. Stryker bought Mako (Surgical Corp, a maker of surgical robotics). They spent a large sum of money to buy a company that was barely in the marketplace. They’re betting huge sums of money on the success of the robot and the ability to do more surgeries in the same amount of time. It’s the efficiency and the accuracy. (The surgeries) get done faster but also if the outcome is better, with bundled payments, the hospital gets to keep more of the money. That’s the approach here. Whether or not it’s successful, whether or not the surgeons are adapting the technology is yet to be seen. 

TALENT

Given that we’re almost at full employment in the region, what talent constraints are your companies facing?

Witham: We have about 137 employees. Right now, we have about 20 openings. I’d hire 20 more people right now if we could find the right ones. It’s going to get to the point where you can’t cover what the customer wants. You can’t do it in the lead times that they want if you don’t have the people. Overtime only gets you so far.

Medsker: It’s challenging. It’s a tight, tight market for us in mechanical and electrical engineering.

O’Mara: With our business, we’re much more manufacturing focused on a bigger scale. It’s a real problem. In fact, it’s to the point where if we have a lead time issue, it could be because we don’t have enough skilled people to run the machines that we have. They’re not simple. 

Witham: We’re so tight that six weeks ago I offered to all of our employees that if you recommend somebody to Motion, we hire them and they stay 90 days, we’ll give you $500. If they stay six months, we’ll give you another $500. We’re just trying to get more in the pipeline. 

Why is it currently an important inflection point for the industry from a talent perspective? 

O’Mara: Around 3.5 million manufacturing people retire each year now, as the baby boomers get a little older. We’ve had to prime the pump, if you will, and we’re having some success doing that. … We provide a really nice work environment, a great benefit package, the opportunity to work in a really cool industry. Once we get people in, we can retain them on the manufacturing side. … We’ve got to be very aggressive and we’re not alone here in this area. We have customers all over the country, and every last customer has the same issue with respect to manufacturing.

Does being aggressive translate into focusing on wages? Are people leaving for better pay at the plant down the road?

O’Mara: I don’t think we see that turnover for a buck or two. If you provide a good work environment for people and an opportunity to grow and expand and achieve success, then we can be competitive. We’re not going to get into these pricing wars. I think we’ve been lucky in that regard. 

Witham: I think the next step is going to be, ‘Hey, wait a second: If I start raising (wages), I’m still going to contribute to the bottom line.’ I think we’re going to see an increase in wage increases moving forward, just because of the type of market.

Icard: It’s starting already. Overall, the pace of increases — it’s going up right now.

In the economic downturn, the narrative went that the med device industry would be able to capitalize on the auto industry’s misfortunes and hire away engineering talent. Did that happen? 

Medsker: A lot of them ended up not in Michigan.

O’Mara: As far as the talent shift, I didn’t see it. … It’s a different industry at the engineering level, particularly biomedical versus designing a car chassis. 

Ball: I was in the automotive industry and made the transition to this industry. For me, it was ‘I’ll do whatever I can do, I’ll take any job I can take to get that transition made.’ I suspect the opportunity at 2007, 2008, 2009 … just wasn’t here. It wasn’t like medical device companies were thirsty for engineers, so they grabbed all of the automotive engineers. 

Medsker: I think the transfer, if you will, from automotive engineering or technical skills to medical is more on the quality side. I know some large OEMs gobbled up as many automotive-centric quality people as they could. There are a lot of disciplines in automotive, quite frankly, that are more rigorous than medical. Some of the large OEMs got all the quality folks.

INNOVATION

In terms of the innovation, what are the OEMs and care providers wanting today? What problems are they asking you to solve?

Ball: It’s about value. The value is the theme. We need to deliver a greater outcome for a lower cost.

Witham: Ours is newer, smaller widgets that don’t exist today. Our biggest program that we had last year is a device that goes up in your head in a stroke victim and retrieves the blood clot versus using blood thinners and hoping that the blood clot dissolves. This is a device that goes up, literally grabs it, and pulls it out of your head. These are the types of things that we work on, things like heart valve replacement that’s done without opening you up. That’s what most of our energies are focused on — something that doesn’t exist today. 

O’Mara: A minimally invasive service market is what we see. Everything’s going through tubes and is cannulated now, so keeping up with that and having the right technology. (Companies need to have) the presence of mind to say, ‘OK, this is where we’re at today and this is how everybody else is approaching that. What’s our leapfrog technology that we’re going to introduce to get ahead of the competition and win that segment?’ We’re really focused on trying to figure out where that next shift is coming and then applying the new technology or something that exists maybe in automotive that we’re bringing into business. … Being aware of the next great thing is really smart. You don’t want to jump off too fast. 

Is the regulatory environment getting better or changing at all?

Ball: I think the FDA has a good assessment of risk. Do I like everything, do I always think it’s logical? No, but there’s a really talented, intelligent group of professionals trying to protect the public from a lot of innovation that’s going on and to make sure it’s going in the right direction. To put it in perspective, what’s happening in Europe is horrible. … It’s changed a lot and it’s changing a lot more over the next three years. It’s going to make it much more difficult outside of the United States. The United States from a regulatory environment is becoming much more competitive.

What can the FDA do to make a better pathway to market for med device companies?

Ball: My experience with the FDA is very healthy. One of the things that they have done that has made it easier is made themselves easier to talk to. The most difficult thing for me to deal with is ambiguity. (When) I ask them a question, (and) they say, ‘Maybe,’ that’s a really difficult response. If I ask the question (and I) get a yes or no answer, I can find an investor to deal with that. 

Medsker: There are other avenues like pre-submission meetings. It’s early-on dialogue. You actually get to meet with the people that are going to be dealing with your file and understand they’re real humans. It knocks down that intimidation and you get a lot of useful feedback early on instead of after two years.

ACCESS TO CAPITAL

A year ago, the trade association AvaMed published a report that said innovation in the medtech sector has been on the decline for about 30 years and the number of startups is down, which is driving down capital investments. Does your experience bear that out?

Witham: At least where I play, I don’t believe that at all. What it takes to get through the FDA is probably the biggest hurdle to innovation, I would say, and there’s just the huge price tag of what it takes to do that. I think that is the most difficult thing we see. 

Medsker: We work with a lot of startups and early-stage companies. Therefore because of the role we play in helping these startups, we work with a lot of VCs, private equity, angel funds and so forth. Literally, word for word, what I’m hearing is we have more money than we have deals to point it at right now. That doesn’t mean the due diligence isn’t still very strict and in-depth and that sort of thing. We see a fair amount of money available out there if the deals are strong. They have to be good, they have to be worthy.

Icard: At The Right Place, we’re typically (focused on) second stage or later. When I do get a new project, a new entrepreneur — which happens quite regularly, I can tell you that one of my first calls is typically to Jim Medsker to say, ‘With your expertise, what do you think of this and do you want to talk?’ Those calls are becoming more and more frequent.

Medsker: That’s how I gauge innovation and so forth, with the number of leads and referrals, and not only from The Right Place — thank you very much — but other economic development groups and other industry groups. The same thing is happening, the phone is ringing quite steadily.

Building on that, how is access to capital for the medical device industry?

Ball: We’ve been successful raising capital, but my personal experience has not been that our region is flush with capital for the health care space. I think our region has a growing level of dynamic activity as it relates to startups and specifically in the health care space. I think it has come down several notches in terms of its attractiveness to early-stage capital. That’s my perspective after raising capital for several startups in the health care space, successfully closing the rounds that we want to close. It was more difficult than I had anticipated.

Is West Michigan too risk averse in terms of investing in medical technologies? 

O’Mara: West Michigan is built by entrepreneurs and risk takers — two guys in a garage with soap. I think it’s not the risk aversion, it’s the calculation of the risk and understanding the return on capital. Investors I believe in West Michigan are looking for that horizon where they can see a return, because there’s other places they can put their money. I think there’s an interest here, but I think the investors are more risk tolerant in other areas than they are here.

Ball: I think for sure, early-stage investing has transitioned for much more capital available in the later stages than at the pre-seed, seed level. That capital I think has become more difficult to arrive at. Health care is a horrible spot to be in for pre-seed and seed-level deals because that’s when regulatory risk is maximum. Once you get to a series A level — we have a company with product on the market that’s regulatory cleared, we’ve demonstrated commercial success — our phone begins to ring on an inbound basis as opposed to an outbound basis. As you get to the later stages, you can find more capital. But at that early, early stage, it is more challenging because of the regulatory (environment). 

Spectrum Health recently formed a venture capital fund to try to bring innovations to market. Does that kind of investment help drive your industry?

Witham: Probably 50 percent of our revenue goes to companies that are based out of California. It’s all because of the capital that’s available for startups and the educational facilities that they have out there. The combination of those two things I think drives a lot of those startups. So I think this is going to be a good thing; if it replicates what happens in California it will be wonderful. 

Medsker: For Keystone, it’s great. The more funds, the more entrepreneurial activity, bring it on.

Ball: Spectrum Health is not nothing. Spectrum Health is also special in one sense in that they are payer and payee. They have a really interesting view on the market place that not every health care organization in the country has. Mayo or Cleveland Clinic to my knowledge don’t have the same perspective that they do. That probably is something that is under leveraged, if you will. 

LOCAL PERSPECTIVE

Looking at the sector purely from a West Michigan perspective, what does the med device industry in this region have going for it? What are its strengths? 

Ball: I think Southwest Michigan is an awesome place to live and raise a family. I’ve lived in California, I’ve lived in Europe, I’ve lived in other places in the States. We’re back here because we want to raise our family here. The lakeshore and the environment in Southwest Michigan is great. On some level, it seems like it’s somewhat unknown. When people think about places to live they don’t think about Southwest Michigan, which is too bad I suppose.

Witham: Two parts — our overall cost of living, I think it’s a very good place to be. In the Muskegon area where we’re at, even though we struggle with finding people, just the history of manufacturing being in the area, I think that really passes generation to generation. I think there’s a really good talent pool to pick from.

Icard: I’ll echo that. You have all that experience of people making high-value components of the tightest of tolerances right here. It’s been going from generation to generation.

Medsker: We can get just about anything made here — that’s how I feel. The manufacturing base is awesome.

Let’s flip the question around: What does the industry in this region lack? What are the gaps?

Witham: Visibility. We’re an unknown. I don’t think people across the country recognize the skills and abilities and cost structure that we have here. You look at what you can have for an overall lifestyle here, it’s unbelievable compared to other places in the country. I just don’t think people know.

O’Mara: We need to increase the skill base of the kids coming out of high school. We’re not building manufacturing talent or engineering talent or technical talent. It’s our future. The machines of tomorrow are artificial intelligence and automation, (but) we’re not reaching down to the young people that are the smartest kids in the class to get them involved in technology. We really need to reach those kids who are really good with their hands, really smart, but don’t want to go to college.

Witham: The view today, if you talk to an average person, is if a kid doesn’t go to college, he or she is viewed as a failure. The testing for schools is set up that way and we’re killing ourselves for developing the next group of skilled tradespeople. We’re destroying our future of manufacturing. 

Do Grand Rapids and West Michigan have the momentum to create a hub for medical technologies like other cities and regions have done?

Witham: In my opinion, I think it can happen. If DeVos or Van Andel or whoever wants to contribute to the Medical Mile and just bring in the brain power, I think it will happen. But it’s going to take a long time.

Medsker: I agree. I believe the vision is there, it’s forming. One of our (goals) for the MiDevice consortium is to be the next hub.

Icard: Look what we’ve done in 20 years. We would love to ultimately see another OEM in West Michigan. That’s been a driving factor since long before I came back to West Michigan. 

Why is it important to have more OEMs in the area? 

O’Mara: It can be really good if they’re manufacturing here and we can cut that distance down, being 35, 45, 50 miles away from your biggest customer. There’s nothing like being next door. It is a huge advantage. Particularly a big company that has multiple locations, you can build that brand and you can follow them around the globe. 

How does West Michigan attract another OEM besides Stryker? Are we just going to have to grow our own, in a sense?

Icard: That’s one way certainly. If you keep growing that supply chain and growing that concentration, I think eventually (they will emerge). 

O’Mara: It’s the business climate. The government has to be business friendly. Our government in Grand Rapids I think is, and the state of Michigan has done a huge, huge thing in getting Right to Work and lowering taxes and making it business-friendly. The environment is very important. Having great public schools and having a good education system is probably the tie-breaker. If you’re going to bring companies in with highly educated people, you’ve got to have great education systems for their children. I think that’s another thing that we can continue to improve upon.

What would be better, one large OEM or several smaller ones? 

Medsker: I think 10 or 20 mid-sized businesses is better to me than one big Goliath.

Witham: And it’s more stable. Absolutely. (Luring in an OEM) sounds great, but it’s painful when they leave. … I think it’s going to be a lot more stable because when they lose a product line or something, you’re going to swing a lot. And I don’t want to compete with those big guys for people. I’d rather have the 10 mid-sized companies. 

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Joe Boomgaard

Managing Editor

jboomgaard@mibiz.com

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