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    Editorial

    The Continued Promise of Medtech Outsourcing

    ...

    Christopher Delporte, Editorial Director02.06.15
    As we begin 2015, MPO’s 12th year as a matter of fact, it would be nice—just as it would be upon stepping into any of life’s unknowns—to have even just a small glimpse into what’s to come so we can best prepare for our 365-day journey. Well, for better or worse, that’s not how the world works. And so, we take comfort in the things we can depend on because they strengthen us for dealing with what’s unknown or out of our control. My crystal ball might be broken (I stopped using it anyway  after the iPhone app came out), but as far as the medical device sector goes, there are reasons to be bullish.

    There’s a renewed push to repeal the medical device tax. With Republicans in control of both houses of Congress, there might be a better shot to send the unpopular levy packing (see Washington Roundup). The financial markets also seem to be warming back up to the medtech sector. This issue’s installment of Financial News reports that 2015 could be a healthy year for private medical device firms looking to cash in by going public.

    What about the contract manufacturing sector? According to a recent study by San Francisco, Calif.-based Grand View Research, increased pricing pressure on medical device OEMs means good things for medtech outsourcing. And, if more firms are going public, that also bodes well for contract manufacturers and service suppliers because it means more companies looking to produce without large investments in brick-and-mortar footprints.

    Analysts with Grand View predict that spending cutbacks by major healthcare establishments are the primary reasons for the rise in pricing pressure. In addition, with a more complicated reimbursement framework, and with payers and patients focusing on the value of money, medical device manufacturers are expected to adopt outsourcing as a viable sustainability tool,  analysts noted.

    “Implementation of stringent government initiatives such as the imposition of an additional excise duty of 2.3 percent on medical devices is also expected to drive market growth by encouraging manufacturers to curb costs through outsourcing,” analysts wrote. “The global medical device outsourcing market was valued at $23.6 billion [in 2013] and is expected to grow at a CAGR (compound annual growth rate) of 11.5 percent during the forecast period.” The forecast period is until the year 2020.

    The changing dynamics of the healthcare industry have heightened the importance of practitioners and patients in buying decisions. The oligopolistic nature of most medical device markets, coupled with increasing buyer awareness levels has forced manufacturers to adhere to business strategies involving constant research and development investments and new product innovations, according to the report (see the Jan/Feb issue's R&D feature). Such endeavors significantly increase expenditures and medical device OEMs are, therefore, rapidly adhering to outsourcing as an effective cost-curbing tool, Grand View analysts wrote. Statistics suggest that medical device outsourcing helps OEMs reduce the cost of production by roughly 15 percent.

    Regulatory consulting, product design and development, testing, implementation, as well as upgrade and maintenance services are the major service segments analyzed in the study. Product design and development was the largest segment in 2013 and is the most capital-intensive manufacturing phase and, therefore, claims the highest rates of medical device outsourcing. Product implementation emerged as the fastest-growing services segment and is expected to grow at a CAGR of more than 13 percent through 2020. Growing adoption of processes overlapping as a profitable option and the simultaneous execution of product design and implementation processes are some factors accounting for its rapid growth, according to analysts.

    Class II medical devices (moderate risk) were the leading application segment of the outsourcing market in 2013. Class II devices encompass relatively simpler technologies (as compared to Class III medical devices) and therefore, are the most outsourced ones. Class III medical devices were the second most revenue-generating segment in 2013. A growing number of initiatives aimed at minimizing product recall instances and the need for external expertise is expected to positively reinforce the growth of the Class III medical device outsourcing market. North America was the largest medtech outsourcing market in 2013 (no shock there), while Asia-Pacific is the fastest-growing region of the medical device outsourcing sector (also no surprise), according to the report.

    All of these factoids may not, when combined, exactly create a turn-by-turn set of directions for the coming year. They do, however, shed a little light where dark shadows have been over the last few years. What’s clear is that outsourcing still has an increasing role to play in the medtech market—not just as a contracted outlet for manufacturing, but as a problem-solving partner with an important stake in the industry’s complex recipe for continued success. 

    Christopher Delporte
    Editorial Director
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