As the medical device industry continues to expand globally, the sector has entered a period of mass consolidation.
Both large medical device OEMs and their suppliers are scooping up other companies and new technology to better position themselves in the evolving market.
That’s had several impacts on manufacturers in West Michigan’s nascent medical device sector. On one hand, the consolidating industry has pushed suppliers into emerging markets as they rush to follow their customers. At the same time, experts say that as large medical device manufacturers increasingly turn to mergers and acquisitions to grow their businesses, they’re focusing less on internal research and design, which puts the onus for new technology development on startups and early-stage companies.
Contract manufacturers such as Kalamazoo-based Keystone Solutions Group have capitalized on the market dynamics. President Jim Medsker said that 90 percent of the startup and early-stage medical device companies his organization works with are eventually acquired by large OEMs or have their technology licensed by those organizations.
Keystone focuses approximately 50 percent of its business on engineering and manufacturing medical device products for those startup and early-stage companies, Medsker said.
“Contrary to popular belief, it’s hard to walk into an OEM with a sketch on a napkin and expect to get a check for it,” Medsker said. “What these large OEMs would rather acquire are companies who have proven they have at least one to two years of sales and they’ve gone through all the development, regulatory and quality hurdles already. What they don’t want is a headache.”
When customers do get acquired by a large OEM, Keystone is “still in the game most of the time” since the buyers often continue to use the company as a contract manufacturer for the products, Medsker said.
That trend, on top of the growth of the medical device sector in general, has contributed to a 200-percent increase in annual revenues for Keystone in 2015 compared to the previous year. The company currently generates approximately $10 million in annual sales and plans to at least double that by the end of 2016.
“We’re actually pulling in the reins on the growth to focus on operational excellence,” Medsker said. “If I shut my phone off today and execute the work we have on our plate, we will still be close to 100 percent (growth) over last year.”
To keep up with increased demand, Keystone is currently in the middle of an approximately 17,000-square-foot expansion of its production facility. When the project is completed, Medsker estimates the company will have invested upwards of $500,000 in the expansion.
A consolidating medical device industry also has pushed contract manufacturers to open production facilities abroad to supply those OEMs in emerging countries such as China and Brazil.
“There’s no doubt that the Strykers of the world are out there and seeing a lot of growth in emerging markets, especially the BRIC (Brazil, Russia, India and China) countries,” said Stephen Rapundalo, president and CEO of Ann Arbor-based MichBio, a trade group. “It’s different than what they’re developing here for the U.S. and European markets, (but) it’s a big growth area for the large multinationals and OEMs.”
For example, 55 percent of executives responding to the Global Medical Device Industry Outlook 2016 report published by the Austin, Texas-based medical device consultancy Emergo Group believe that Asia has a high growth potential, up from 47 percent last year.
For companies like Kentwood-based Autocam Medical Devices LLC, that’s led to establishing manufacturing facilities in China to capitalize on the growing international market. After identifying a location in mid-2015, the company is currently going through the registration process to become an accredited medical device manufacturer in China, said Tom O’Mara, executive vice president at Autocam Medical.
Localizing production with OEMs as they move to international markets is integral to keeping contracts with Autocam Medical’s larger customers, similar to how automotive OEMs and Tier 1 suppliers are continually pushing their supply base to go global, O’Mara said.
“The global footprint is a prime example of accepting our role as a consolidator,” O’Mara said. “You can’t go to an OEM and say, ‘We want to be there when you consolidate but we only want to supply you from Michigan or South America.’”
Autocam Medical also is working to establish business connections for its facility in Brazil. The company originally set up the plant as an automotive facility before it split off from Autocam Corp., which was acquired by auto supplier NN Inc. in 2014, O’Mara said.
A SHRINKING PLAYING FIELD
Industry insiders note a continual trend of consolidation as one of the primary factors fueling growth in the medical device sector.
For one, large OEMs have consistently encouraged consolidation among their suppliers to better navigate regulatory hurdles and streamline their operations, Rapundalo said.
“The Strykers of the world have tightened up their supply chain,” he said. “Where they had 100 suppliers, they now have 30 because of stricter regulations with the FDA. They put the onus on their supply chain to trim down and make it easier to manage and oversee.”
To accommodate their customers’ requirements for a streamlined supply base, Autocam Medical has focused its merger and acquisition strategy on the integration process. The company is currently working to integrate the operations from its 2014 acquisition of Southeastern Technology Inc., a Murfreesboro, Tenn.-based contract manufacturer of precision components and assemblies for the medical device, aerospace and automotive industries.
Instead of acquiring numerous companies and keeping separate names and entities, Autocam Medical focuses on integrating all its acquisitions under one corporate flag, O’Mara said.
“Some of the larger competitors we have are looking at a roll-up strategy,” he said. “They’re buying a bunch of companies and bolting them on to their company to achieve this wide range of capabilities. We agree, but our strategy has centered around presenting ourselves to the customers with one voice.”
O’Mara said that OEMs increasingly are expecting a consistent quality system from their suppliers, in particular because of changes at the federal level to the medical device payment schedule, which has affected the way hospitals do business with the manufacturers.
Autocam Medical is looking at several additional acquisition opportunities that would alleviate bottlenecks in its operation, but O’Mara declined to provide any more detail on potential targets.
‘MORE TAILWINDS THAN HEADWINDS’
While medical device suppliers are consolidating, large OEMs are also busy adding to their own portfolios.
For example, Kalamazoo-based Stryker Corp., a manufacturer of implants, surgical equipment and other devices, has acquired nine companies since 2013. The company began 2016 with two acquisitions totalling more than $4 billion.
In early February, Stryker acquired Illinois-based Sage Products LLC, a manufacturer of disposable products aimed at preventing hospital acquired infections, for $2.77 billion. Later in the month, Stryker acquired Washington-based emergency treatment equipment manufacturer Physio-Control International Inc. for $1.28 billion.
Industry experts predict the medical device industry will continue to experience strong growth, given the aging populations in developing countries and as emerging countries gain access to more technically advanced health care.
The global medical device industry is expected to grow 4.4 percent a year after reaching a projected $384 billion in worldwide sales in 2015, according to a report from EvaluateMedTech.
In Michigan, the medical device industry has grown 20 percent over the last decade, according to MichBio’s recent Michigan Bio-Industry report.
Overall, executives remain positive about the direction of the medical device industry, both in Michigan and globally.
“I see more tailwinds than headwinds,” said Keystone’s Medsker. “Things are going well, especially in West Michigan. There are a lot of good capabilities and infrastructure being built here that will help us grow in the medical device market.”