Sean Fenske, Editor05.06.16
Developing a medical device, manufacturing it efficiently, navigating the regulatory environment, and bringing that product to market is an incredibly complex challenge. For many years, this was primarily undertaken by the medtech OEM alone. Fearing its IP may leak out to competitors or, worse yet, counterfeiters, companies avoided collaborating with third-party service providers. Others were concerned with whether an outsourcing company could achieve or even recognize the level of quality required when developing technology for use in healthcare. Still others preferred to have direct control over all processes involved with manufacturing; these OEMs thought the only solution to ensure this was to keep these functions under one roof. The fact that many of the outsourcing firms were experts in supplementing capabilities for the specialized, highly regulated industry was not yet fully recognized by most medical device manufacturers. In many instances, these fears were unfounded (especially as they pertain to U.S.-based service providers). Fortunately, many of those insecurities have since evaporated and relationships between medical device manufacturers and outsourcing companies have blossomed to form the community we have today.
In fact, according to an analysis report from Grand View Research1, in 2014, the global medical device outsourcing market was valued at $26.26 billion. Further, the firm predicted that the industry would increase at a rate of 11.5 percent through 2022. The report cited several contributing factors as being responsible for driving the growth, including competition among manufacturers requiring lower costs, growing complexities in product engineering, a rising geriatric population, and a need for more regulatory expertise.
The findings from this analysis report with regard to the factors driving growth in the outsourcing sector are not surprising to anyone intimately involved in the medical device manufacturing industry. Cost constraints, aging populations, regulatory challenges, and increasing complex device designs are all concerns heard often from both medtech OEMs and their supporting CMO service providers. Consider additional factors, such as the recently suspended device tax, uncertainty with regard to the reimbursement of new innovations, and non-traditional competitors entering the marketplace from the technology and consumer sectors, and it’s easy to see why medical device OEMs are seeking all the help they can get from these specialized service providers and outsourcing partners.
In the Grand View Research report summary, an Analyst Perspective was provided. A particularly interesting (and relevant to this topic) portion explained the growth potential for outsourcing within the medtech industry. “The oligopolistic nature of most medical device markets coupled with growing awareness levels has forced manufacturers to adhere to business tactics involving rising R&D and innovations. The rising level of R&D and product innovation endeavors are expected to significantly amplify the production cost of device’s Original Equipment Manufacturers (OEMs). As a way out, an increase in outsourcing of services related to manufacturing may be anticipated over the forecast period.”
Additionally, the medtech industry is seeing consolidation of both OEMs and outsourcing service providers. These types of changes can create significant disruption with regard to the relationship between a manufacturer and its service providers. A report2 from Capstone Partners—an investment banking advisory firm—provided insight as to the motivation for the consolidation on the outsourcing firm side of the equation. “Many of the industry’s transactions continue to be motivated by contract manufacturers seeking to add specific competencies to their offerings, with the goal of building a turnkey solution offering engineering, product development, regulatory, quality assurance and other services as well as a range of manufacturing and assembly capabilities. We have also noted increased interest by private equity firms who are attracted to the sector’s long-term growth opportunities and fragmented structure, as well as the chance to play an important role in supporting a company’s expansion efforts during periods of growth and scale-building.”
MPO reached out to a number of industry leaders who provide services and support to medical device manufacturers to get their opinions and hear their thoughts on a number of pressing topics with regard to the OEM and outsourcing provider relationship. The ongoing dynamic of M&A within the industry, cost pressure considerations, device tax suspension, drivers of the outsourcing trend, innovation, time to market, quality concerns, and a number of other issues were addressed in this roundtable-style discussion. Following is a brief description of each participant in this feature, with the actual Q&A portion after that.
Donald Adams is the IT and supply chain manager for Nordson Medical’s Avalon Laboratories, a vertically integrated medical device manufacturer headquartered in Rancho Dominguez, Calif.
Robert Bodor is vice president and general manager, Americas, at Maple Plain, Minn.-based Proto Labs, an online and technology-enabled quick-turn manufacturer of custom parts for prototyping and low-volume production.
Ben Do is the quality manager at Avalon Laboratories.
Bill Ellerkamp has enjoyed a 30-year career as a medical device industry executive, having served on leadership teams of public and private, venture capital, and private equity-backed small to large companies. He maintains extensive knowledge and understanding of the medical device contract manufacturing industry.
An 18-year veteran of the medical device industry, Ben Harren serves as vice president of global sales and marketing at Donatelle, an U.S. Food and Drug Administration (FDA)-registered, ISO-9001 and 13485 certified medical device manufacturer based in New Brighton, Minn.
Andrew Schombs is senior manager, advanced product and process engineering at Avalon Laboratories.
James Schultz is executive vice president of ECA Medical Instruments, headquartered in Thousand Oaks, Calif. The company specializes in disposable torque-limiting instruments and turnkey sterile-packed procedural implant fixation kits for medical device OEMs.
Tom Williams is senior vice president of marketing and strategy for Fall River, Mass.-based Millstone Medical Outsourcing, a provider of medical packaging outsourcing solutions to the medical device industry.
With over 20 years of experience in the medical device industry, Joe Zuzula serves as vice president of sales and marketing for Orchid, a medical device outsourcing services provider with an emphasis on the orthopedic sector. The company is headquartered in Holt, Mich.
Sean Fenske: What’s the relationship between the OEM and CMO in the medtech industry today, and how has this dynamic changed from just a few years ago?
Robert Bodor: Collaboration between the OEM (original equipment manufacturer) and CMO (contract manufacturing organization) is becoming more common, especially earlier in the product development cycle. This is very prevalent with smaller OEMs as they are less likely to have all of the core competencies in-house to bring their products to full-scale production. Leveraging the expertise of the CMO early on helps to mitigate potential schedule delays and reduce production costs by influencing the design.
Bill Ellerkamp: The OEM expects the CMO to support Design for Manufacture and Assembly (DFMA) and Lean Manufacturing initiatives to drive manufacturing efficiencies and cost effectiveness and to engage in cost-sharing. Increasingly, the CMO is expected to be able to offer production in a low-cost manufacturing location—Mexico, Costa Rica, Dominican Republic, China—if not initially, then certainly as the product lifecycle ages. This also often requires the CMO to have a sophisticated product transfer process and controls. Further, the CMO is increasingly expected to be vertically integrated in some component manufacturing to minimize Tier 2 supply chain costs/risks.
Ben Harren: Partnerships between the OEM and CMO continue to gain importance. Increasingly, the interdependence between the two partners drives innovation and efficiency. We’ve seen OEMs engaging earlier in their development process in order to take advantage of the CMO’s ability to add value to an overall design.
James Schultz: The supply chain dynamic between OEM and supplier is evolving as the downstream end-user market gets more price-sensitive and competitive. The implant OEMs want a vibrant supply chain but one that can provide sustained value. In many cases, OEMs are engaging with other OEMs that have a core competency that makes them unique to the implant firm.
At ECA, for example, we are an OEM who is a specialist in the design and development of disposable and sterile-packed surgical torque-limiting instruments, general fixation instruments such as ratchets and power driven torque products, and complete procedural kits for implant fixation. We have capabilities and a systems design approach to disposable instrumentation that took 37 years to build. The design know how, collaboration-type thinking, and product development approach is part of our corporate DNA. It becomes a buy-make decision for the OEM. Do they go and create their own in-house disposable product division or create a strategic alliance with an established industry expert like ECA? In almost every case, they opt to focus on developing implants and partner with ECA in order to gain a competitive advantage.
Tom Williams: The relationship between OEM and CMO is a strong one. In the past few years, OEMs have tried to focus on their core competencies, which has led to the outsourcing of non-core functions. Given this, the CMO plays an increasingly important role in the OEM’s overall strategy, which fosters a different relationship than the historical tactically oriented buyer-vendor relationship.
Joe Zuzula: The changes in the relationship have been driven by consolidation, new regulations, product development engagement, and geography.
OEMs are going through a reduction of the number of suppliers that they are dealing with. They want to put more work into fewer full-service suppliers with the right systems in place to reduce risk and cost. This consolidation is mainly driven by cost pressures the OEMs are feeling.
The supply base used to be more complicated as OEMs used more suppliers with single capabilities. Product would travel in and out of the OEM facility as the products moved along the value stream. CMOs with the broadest capabilities stand to benefit the most as they can provide the same services at a lower overall landed cost.
Also, in the past, the FDA did not regulate contract manufacturers. We were controlled by the OEMs, and there was no consistency in how we were audited. Now that we are registered with the FDA, we have quality management systems (QMS) and regulatory systems that are the same or better than our customers. There is much more engagement now with the quality groups on systems and products due to these more sophisticated regulations.
Related to cost and resources, OEMs are more open to using contract services for design, development, and regulatory. CMOs are involved much earlier in the process, even as early as concept development, and manufacturing is involved at every stage in the design process.
OEMs are bringing contract manufacturers into the process earlier than they used to. They consult on the manufacturability and technologies while they are developing products before they freeze the design.
Our customers sell in markets around the world. They prefer to manufacture in those markets, and they would like their supply base to be located in those markets as well. Business partnerships in local markets helps to drive cost down.
Fenske: What’s changed in recent years that is driving medical device OEMs to use CMOs more today than in the past?
Bodor: Two large drivers to use CMOs is to increase the pace of innovation and develop more complex products. Both of these make it more costly and risky for an OEM to invest in the range of capital equipment needed to do all its own manufacturing in house, not to mention developing the expertise in the many processes. CMOs can bring this expertise, and also mitigate the investment and technology risk. Another dynamic tied to the pace of innovation is that the OEM may need to leverage speed in its supply chain partners in areas where it is not intrinsically fast within the company.
Ellerkamp: This is a relative phenomenon, which ebbs and flows according to a number of factors, including OEM plant capacity and location, OEM M&A activity, OEM margin pressures, OEM product lifecycles, technology trends (i.e., smart devices, wearables, etc.), CMO plant capacity, and location. While it is generally trending upwards, it seems to have slowed somewhat in the last few years. I think it will pick up again in the future, but it is not a straight line outsourcing growth curve.
As VC [venture capital] funding of medtech startups is slowing down, and the option of “acquired” R&D for OEMs becomes more difficult and expensive, we may see OEMs increasing their internal R&D expenditures significantly, and reducing internal resource allocation to manufacturing.
Harren: The pace of development has increased dramatically. As such, OEMs are looking to CMOs to be an extension of their development resources. Those CMOs that are vertically integrated to provide a broader offering in development support through manufacturing are often looked at as an efficient mechanism for outsourcing.
Andrew Schombs: There are many sustaining engineers within the OEMs that are looking for better functionality of the product design or reducing costs through different manufacturing processes. There is also some movement for manufacturing transfers of mature product lines opening capacity and reducing in-house management of multiple parts.
Specialization in certain types of processes is a key driver. It is costly to bring in a lot of capital in new technology assets, as well as skilled engineers and technicians to run and maintain them. If an OEM can outsource a component or assembly that is hard to do in house, they can leverage that company’s education and experience without internalizing it within the OEM itself.
Schultz: Competition and price pressures. Many of the great implants that improve patient health have been created over the past two decades. Innovation will now come from differentiation created by brand building at the patient level, ease of implant installation, surgical outcomes, implant efficacy, product availability, upfront and lifecycle cost, and reimbursement. CMs [contract manufacturers] need to get bigger and have broader capabilities and potentially global facilities or retreat to niche segments where their specialized work can command a premium and present barriers to competition. Hence, the CM industry is tightening and becoming more competitive and cost conscious. The industry is approaching commoditization in some segments, requiring CMs to absorb costs and achieve margins across both high volume, low mix, and oftentimes, lower margin business balanced against the more complex or customized lower volume, higher mix, and potentially higher margin business. Contribution margin mix remains very important for CMs.
Williams: Focus. OEMs are intently aware of what they are really good at, and are more willing to use outside resources for the things that cause them challenges.
Zuzula: Some companies recognize that they can’t be good at all things. They are focusing on design and development and bringing products to market. Sometimes, bringing all processes in-house is not the easiest or cheapest. OEMs don’t have the benefit of leveraging multiple customers in their manufacturing, while CMOs can maximize utilization.
Fenske: What tasks or projects are CMOs being used to accomplish today that weren’t being outsourced in recent years?
Donald Adams: Many companies are working with supply chain management of CMOs to schedule six months to a year of inventory. This allows both the OEM to have acceptable receipt dates for inventory and it simplifies planning and scheduling for manufacturing of parts.
Bodor: There is a growing trend around CMOs being a full-service provider. Much of this value goes beyond the single point of contact for developing a manufacturing system and simplification of logistics, and resides with design for manufacturing (DFM) analysis and impute at the part and assembly level.
Harren: Everything from development of novel approaches to solving clinical challenges to greater management of the overall supply chain are being outsourced. The environment is such that OEMs continue to understand—and appreciate—the value in outsourcing. Especially in medtech, CMOs that have robust quality systems leveraged throughout development and production are being asked to manage more of the design and validation activities, as well as dock-to-stock certified supplier inventory management.
Schultz: OEMs want to drive costs out of their companies from end to end. This includes design and development to operations and maintenance, as well as lifecycle management costs. They are seeking more turnkey solutions from one-stop-shop CMs, which includes more product design work and even holding of 510(k)s and design history files. OEMs want price concessions but they also want a stronger supply chain overall as they outsource more and more of what they traditionally developed in-house.
Williams: Supply chain management is undoubtedly one that OEMs are outsourcing. Supply chains can be extremely chaotic within the medical device industry, given the breadth of suppliers, the different risk profile that each supplier presents, etc. Outsourcing the management of it to an organization that specializes in it makes sense.
Zuzula: Product design and development, regulatory services, quick-turn prototyping, and sterile packaging.
Fenske: Does working with a CMO enhance innovation that may be realized in early development that may not have been achieved in-house by the OEM?
Bodor: Hands down, value can be added by partnering with a CMO. CMOs are likely selected through a rigorous series of events strongly driven by their core competencies. CMOs can apply this knowledge as a form of checks and balances against the creative solutions that arise early in development. This allows for a greater focus from the OEM on its innovation expertise and understanding of the market needs. Some CMOs provide early design for manufacturability feedback that helps make critical design adjustments before any actual production is started, saving time and money.
Ellerkamp: Often, a CMO can help the OEM avoid costly mistakes and/or delays in product approval/launch by having a better grasp of critical component design constraints and performance, and by anticipating how design choices will translate into the manufacturing process.
Harren: There are many benefits in working with a CMO, including enhancing innovation. Leveraging the manufacturing expertise for early-stage design innovation creates meaningful products with improved ability to be manufactured. Additionally, CMOs with expertise in specific areas are able to draw upon lessons learned in working on similar products to identify potential pitfalls to avoid.
Schombs: Avalon’s polymer solution casting technology provides unique development options so our engineers work closely with OEM engineers on design early on. Our engineers may offer solutions to technical challenges based on a deeper understanding of our manufacturing processes. We also provide material science expertise for both product development and performance needs.
Schultz: CMs are not particularly good at the design of new products. They’re structured and have a culture with a build-to- print focus. CMs that want to make this shift will need to employ people with extensive design and development and risk-taking experience. This is a culture shift and doesn’t happen overnight. Traditional CMs employ a sell-design-build model and product design inherently has more risk, typically employing a design-build-sell approach. Innovation is realized when you make the shift and find new customers in existing markets or new customers in new markets. Sometimes you get both.
Zuzula: An OEM can enhance innovation by outsourcing to a vendor with unique expertise in a capability. OEMs can innovate when they involve us in new technologies (e.g., additive manufacturing, titanium plasma spray coating on PEEK and UHMWPE, surface treatments, and special coatings). CMOs have more varied experience and OEMs can leverage that when developing new products through DFM and new technology engagement.
Fenske: How are CMOs aiding OEMs in getting medical devices to market faster?
Bodor: DFM analysis early and often provides feedback to ensure a product will make an impact in the market and still provide a return to the OEM.
Harren: Being able to outsource aspects of development that would otherwise have to be completed serially, OEMs are seeing significant improvements in their time-to-market. With bandwidth that may be able to react faster, CMOs are well-positioned to help. Those focused solely on medical devices bring a unique combination of engineering expertise and manufacturing competencies necessary to optimize critical designs and thus, can bring the best system design to market faster.
Schultz: Shortening time to market for new products is not always easy. Product design verifications and validations are required and, sometimes, there is no expediting the process or a short cut. Contemporary product development and testing tools and instrumentation helps pull in schedules including CAD/CAM and FEA software, 3D printing of functional prototypes, and others.
Williams: CMOs can be a powerful ally in increasing speed to market. Process validations for packaging, leveraging pre-validated platforms, etc., can significantly decrease the time it takes to launch, as well as having defined capacity for the OEM to be able to get launch quantities through the process.
Zuzula: Customer-focused CMOs have accountability to hold projects to a timeline. Part of the services we offer are good quality parts, on time, at a competitive cost. In the OEMs, there may not be the same pressure to meet the same requirements as an outsourced vendor.
Fenske: In what other aspects are CMOs significantly enhancing the capabilities of an OEM?
Williams: The rise of additive manufacturing would be one. OEMs can tap into CMO capabilities without the capital investments required to do it in house.
Fenske: What recommendations do you have for OEMs seeking new CMO suppliers?
Bodor: Search for a CMO that has strengths that complement your own. This seems obvious, but human nature often migrates us to areas we are familiar with. But also search for reliability. Often, this also requires scale. Can the CMO be responsive to your requests, even the small ones? Can you be certain that it can provide this lead-time responsiveness all the time? If so, it can truly be a reliable partner in your design-to-market cycle. If not, then you have to keep multiple CMOs for each core manufacturing process, and use the ones that can meet your timelines on each given project. This introduces uncertainty and risk.
Ellerkamp: Be clear in your expectations—business and product. Conduct an open audit of the qualifications and fit of the CMO with your needs; price is not the only parameter. Be transparent; don’t shy away from the tough issues and discussions up front. These conversations will make for a stronger relationship. Finally, commit resources to supporting the CMO in the initiation phase.
Harren: Spend time exploring CMOs and building relationships before projects begin. Knowing which CMOs are capable of delivering necessary support throughout the value stream is important such that the right CMO is chosen from the onset. Leverage the value CMOs can provide through vertical integration and focus on medical devices. Work to find a CMO that can engage early in the project as well. The continuity provided by a CMO capable of product design, prototyping, and commercial production will ensure all the early learning will not be lost when production starts.
Williams: The biggest recommendation is to take your time. Build a relationship and understand how the CMO interacts with your organization on multiple levels prior to making commitments. Visit their facilities and audit their processes, and talk to industry contacts about their experience.
Zuzula: Important items to look for include business continuity planning, savvy with regulatory requirements, and a breadth of capabilities that expand the full value stream of the products. You should partner with companies that reduce risk and look, act, and feel just like you. It helps for CMOs to be in the geographies that you are in and have experience in the market.
Fenske: What advice do you have for OEMs who want to move toward a true partner relationship with their CMOs?
Bodor: Understanding that the full supply chain will add an extra level of confidence while developing a partnership. Knowing the depth of resources and quality of the network the CMO lives in will help to reduce future risks. This includes transparency of internal versus external capabilities.
Ellerkamp: Appoint a supplier relationship manager (e.g., supplier quality engineer, project manager, etc.) and adopt a transparent stance with respect to project attributes—clinical performance objectives, engineering performance objectives, quality, timeline, and cost targets. The supplier relationship manager at the OEM should ensure that the CMO project team fully understands the requirements and which critical-to-quality attributes are the biggest priorities. This will enable the CMO, together with the OEM, to suggest trade-offs that will optimize the results for the OEM.
Have regular project review meetings [i.e., quarterly business reviews (QBR)].
Also, have a scorecard, or a set of metrics that clearly show what is expected and how the CMO is performing. Both parties should complete this regularly to ensure that they are aligned in their perceptions of mutual performance.
Further, enter into multi-year supply agreements, which provide confidence and continuity for the CMO and stability for the OEM.
Finally, do not run “bidding” processes for current products to pit potential vendors against one another. Rather, use the supply agreement, QBRs, and scorecard to ensure that the CMO is always clear on current and future expectations, and if those are not being met, then have a clear—and fair—process for a “managed exit” from the relationship.
Harren: Understand the true cost of a program from infancy to commercialization, and how CMOs that are able to leverage their structure to provide engineering, quality, and manufacturing expertise will provide financial, timeline, and communication efficiencies. Committing to each other early opens dialogue and improves the overall process such that both organizations can leverage the others’ knowledge.
Williams: Bring value. The value that you bring will always be defined by the OEM, and thus listening and understanding the pain points/opportunities and where you can bring value is extremely important.
Zuzula: OEMs should find a partner willing to work with them to provide good quality products, in the shortest amount of time, and with the least potential for risk.
Partner with CMOs to remove waste in the value stream of bringing products to market. The focus should be on total cost, rather than piece price. We should be asking how we can innovate and remove waste.
Fenske: As OEMs shrink their supply chain in terms of number of vendors, what attributes should they value most in the CMOs they are looking to retain?
Adams: Quality of the products, timeliness of receipt of inventory, and when there are any concerns with inventory, providing the information quickly to the customer. We have regular conference calls with many of our larger customers to maintain a positive relationship and to set realistic goals for both parties along with agreement of management of ongoing projects.
Bodor: Areas of expertise, core competencies, breadth of offering, ability to scale up quickly to respond to market demand, internal versus external capabilities and associated risks, plus support across the entire product lifecycle, from prototyping to end-of-life management.
Ellerkamp: Strong businesses with smart people (not only capable manufacturers), who demonstrate an understanding of medical devices and are biased to continuous improvement. Also, creative, collaborative, and proactive problem solvers.
Harren: Quality is absolutely critical. With less duplicity comes the need for partnering with CMOs that have a structure that supports—and a track record of providing—impeccable quality. Vertical integration and supply chain management capabilities will be necessary to ease the burden on the OEM’s internal resources. Finally, commitment to medical devices is key as it eliminates distractions and ensures the CMO’s entire organization is culturally aligned with the OEM.
Williams: Trust. OEMs should trust that their CMOs are looking out for their quality, their reputation, their end customer, and their bottom line. The CMOs that are retained should be the ones that are an extension of the OEM, and view themselves very much that way.
Fenske: With quality being of paramount importance in medtech, what are you doing to ensure this for your customers?
Bodor: One of our goals is to create an environment conducive for medical devices to reach the submission-ready phase in as short of a development cycle as possible without sacrificing quality. We are in a unique position to support both the OEM and CMO with real-world lessons learned from early phase parts. Testing multiple variations of a component in parallel can supply parts for user acceptance testing and durability testing. Early collaboration defines an environment where the best product goes to market that can be consistently and efficiently mass produced.
Ben Do: Our quality management department has expertise and experience within the OEM business for a better understanding of needs. Our staff is encouraged to continue seeking education and certifications such as Six Sigma Black Belt and other certified quality auditor certifications.
Harren: Quality is built in through every step of the development and manufacturing process. That is why, for nearly 50 years, Donatelle has built a culture focused on quality. It involves the right combination of quality-dedicated team members and investing significantly in the equipment necessary to be a market leader in quality and on-time delivery. Understanding the nuances within the various levels of medical device manufacturing allows CMOs to better align to the expectations of medtech OEMs. Solid historical quality and a commitment to continually strive for improvements are strong indicators for future success.
We have implemented best practices in inspection techniques and methodologies incorporating technology such as vision systems in processes where needed. We have also performed capability studies and Gage R&R to ensure that our processes are in control. In addition, we maintain supplier controls such as qualification, monitoring, and continuous improvement initiatives to ensure that quality product is received from our suppliers.
Schultz: At ECA, we are an OEM partner with our implant OEM customers. As a result, we take on a lot of responsibility for product design, development, testing, and quality, including the DHF [design history file] and, in some cases, customer complaints as the manufacturer of record. We are the turnkey dock-to-stock designer and manufacturer. This provides huge value, both short and long term, to OEMs as we become their one-stop shop for developing, testing, and supporting the single-use instrumentation. Moreover, with single-use instruments and kits, we save them over $1,000 per procedure and provide potential for millions of dollars in annuity revenue. This is a huge swing on the P&L and on the balance sheet. Traditional CM models and reusable tools can’t offer these options and sustained value.
Williams: Continuous internal auditing of our processes, monitoring of our process validations, and driving every issue to true root cause evaluation are some ways. More than that, however, quality is part of our make-up; it’s not simply something we talk about, it is who we are. As a CMO, we have an obligation to our OEM partners to fulfill their obligation to the patient, which is to deliver a perfect product every time.
Zuzula: We conduct mock FDA audits at all of our facilities by partnering with a consultant and former FDA auditor. We also partner with our customers and collaborate on training to integrate with their QMS and Q&R (quality and regulatory) requirements.
Fenske: What impact is M&A activity among OEMs having on the CMO relationship?
Bodor: Whenever there is a change in the supply chain, there is always potential challenges because expectations may be different. This is most likely to occur when startups are acquired by larger, more established OEMs. It is common that the startup has had a different set of expectations for the supporting CMOs.
Ellerkamp: It is increasing customer concentration, and therefore risk, for many CMOs.
Harren: Consolidation among OEMs is creating opportunities for CMOs who are positioned to provide value across the new entity. Vertical integration plays a key role in a CMO’s ability to support a diversifying OEM, as does experience working with all classes of medical devices. As OEMs direct greater focus to critical research and development as well as sales and marketing activities, they rely on CMOs to offer a greater range of manufacturing capabilities. Donatelle has been able to support growing OEMs through capability expansion projects that leverage our expertise across many aspects of contract manufacturing to quickly meet the needs of the combined organizations.
During times of M&A, both the OEM and CMO will need to be diligent so as not to reduce quality or commitment for the increased opportunity. What has made relationships successful prior to acquisitions should be a catalyst for future success but not at the expense of commoditizing critical products.
Schombs: Some larger organizations are looking to reduce their supplier agreements. With merger and acquisition activity, it offers the opportunity to potentially earn more business within the acquired company.
Williams: As acquiring companies look to gain synergies, CMOs play an important role in allowing the OEM to map out efficient supply chain strategies. Strategic CMOs allow OEMs to make impactful decisions both prior to and post-acquisition.
Zuzula: It has been driving our relationship with our customers deeper. Because we are a larger company, we have more touch points and more projects.
In general for all suppliers, performance is key. They should be performing in quality, delivery, and price in order to keep their place with their customers.
Fenske: How are you helping to ensure more efficient/faster FDA reviews of a device with which you are involved?
Bodor: Our focus is accelerating product development. We do this through automated design for manufacturing feedback and cost effectively suppling prototypes and low-volume part runs in production materials and processes.
Do: As a contract manufacturer, Avalon can assist with testing requirements and documentation with our engineering and quality expertise. As with many organizations, we create processes and documentation with FDA and CE approvals in mind. Avalon has an experienced regulatory department that can assist with product approvals including FDA 510(k)s and technical files for CE marking. We work closely in conjunction with our OEM’s regulatory department to submit regulatory changes using the appropriate regulatory pathway.
Zuzula: By being responsive to our customers’ needs.
Fenske: Has the suspension of the medical device tax had any impact on CMOs?
Bodor: We anticipate this to have a very positive impact on CMOs. Some of the OEMs that we have long-standing relationships with have directly stated that they cut internal R&D spending to help soften the blow from the medical device tax.
Harren: I believe it is still too early to determine how the suspension of the medical device tax will impact CMOs. As OEMs determine how to manage the change internally, there will, undoubtedly, be an impact externally. Considering some of the initial statements about increased development due to the change, I would expect the trend to outsource additional support to continue at an increased rate. Leveraging CMOs for increased speed-to-market will be necessary to utilize the medical device tax changes as a competitive advantage.
Williams: As of yet, we have not seen an impact.
Zuzula: It’s not being talked about anymore as a cost to pass down. We haven’t really seen a benefit on our end. If the OEMs use the money to innovate, we may get more opportunities.
Fenske: In what ways will the CMO/OEM relationship in the medtech industry change in the next five to ten years?
Bodor: Collaboration throughout the supply chain will continue to grow in importance in an effort to reduce time from concept to revenue.
Harren: Though this will vary based on the OEM, I am confident that the relationship between OEM and CMO will continue to become that of a true and open partnership. As OEMs realize the value in partnering early, and CMOs are able to provide value at that time, benefits will be realized for both entities. Everything from leveraging the CMO’s expertise for a given process or technology to using knowledge gained through developing and prototyping together for more efficient long-term production, partnerships will help reduce time-to-market and overall program cost.
Williams: The relationship will continue to develop much as it has in the past five years. CMOs will become closer with the OEMs and we see an increase in information/knowledge sharing that deepens the bond between the two and provides even more efficiencies to the relationship.
Zuzula: I think consolidation will continue, both for OEMs and CMOs. I think the lines between the two types of companies will blur and there will be more collaboration (e.g., joint ventures, business planning, product development collaboration).
Fenske: Do you have any additional comments you’d like to share on the CMO/OEM relationship within the medtech space?
Williams: Being a CMO to the medtech industry today is a fun place to be. With so many moving parts, so much M&A activity, it is exciting to be part of a changing dynamic where we are valued partners to the OEMs rather than simply a vendor at the end of a purchase order.
References
In fact, according to an analysis report from Grand View Research1, in 2014, the global medical device outsourcing market was valued at $26.26 billion. Further, the firm predicted that the industry would increase at a rate of 11.5 percent through 2022. The report cited several contributing factors as being responsible for driving the growth, including competition among manufacturers requiring lower costs, growing complexities in product engineering, a rising geriatric population, and a need for more regulatory expertise.
The findings from this analysis report with regard to the factors driving growth in the outsourcing sector are not surprising to anyone intimately involved in the medical device manufacturing industry. Cost constraints, aging populations, regulatory challenges, and increasing complex device designs are all concerns heard often from both medtech OEMs and their supporting CMO service providers. Consider additional factors, such as the recently suspended device tax, uncertainty with regard to the reimbursement of new innovations, and non-traditional competitors entering the marketplace from the technology and consumer sectors, and it’s easy to see why medical device OEMs are seeking all the help they can get from these specialized service providers and outsourcing partners.
In the Grand View Research report summary, an Analyst Perspective was provided. A particularly interesting (and relevant to this topic) portion explained the growth potential for outsourcing within the medtech industry. “The oligopolistic nature of most medical device markets coupled with growing awareness levels has forced manufacturers to adhere to business tactics involving rising R&D and innovations. The rising level of R&D and product innovation endeavors are expected to significantly amplify the production cost of device’s Original Equipment Manufacturers (OEMs). As a way out, an increase in outsourcing of services related to manufacturing may be anticipated over the forecast period.”
Additionally, the medtech industry is seeing consolidation of both OEMs and outsourcing service providers. These types of changes can create significant disruption with regard to the relationship between a manufacturer and its service providers. A report2 from Capstone Partners—an investment banking advisory firm—provided insight as to the motivation for the consolidation on the outsourcing firm side of the equation. “Many of the industry’s transactions continue to be motivated by contract manufacturers seeking to add specific competencies to their offerings, with the goal of building a turnkey solution offering engineering, product development, regulatory, quality assurance and other services as well as a range of manufacturing and assembly capabilities. We have also noted increased interest by private equity firms who are attracted to the sector’s long-term growth opportunities and fragmented structure, as well as the chance to play an important role in supporting a company’s expansion efforts during periods of growth and scale-building.”
MPO reached out to a number of industry leaders who provide services and support to medical device manufacturers to get their opinions and hear their thoughts on a number of pressing topics with regard to the OEM and outsourcing provider relationship. The ongoing dynamic of M&A within the industry, cost pressure considerations, device tax suspension, drivers of the outsourcing trend, innovation, time to market, quality concerns, and a number of other issues were addressed in this roundtable-style discussion. Following is a brief description of each participant in this feature, with the actual Q&A portion after that.
Donald Adams is the IT and supply chain manager for Nordson Medical’s Avalon Laboratories, a vertically integrated medical device manufacturer headquartered in Rancho Dominguez, Calif.
Robert Bodor is vice president and general manager, Americas, at Maple Plain, Minn.-based Proto Labs, an online and technology-enabled quick-turn manufacturer of custom parts for prototyping and low-volume production.
Ben Do is the quality manager at Avalon Laboratories.
Bill Ellerkamp has enjoyed a 30-year career as a medical device industry executive, having served on leadership teams of public and private, venture capital, and private equity-backed small to large companies. He maintains extensive knowledge and understanding of the medical device contract manufacturing industry.
An 18-year veteran of the medical device industry, Ben Harren serves as vice president of global sales and marketing at Donatelle, an U.S. Food and Drug Administration (FDA)-registered, ISO-9001 and 13485 certified medical device manufacturer based in New Brighton, Minn.
Andrew Schombs is senior manager, advanced product and process engineering at Avalon Laboratories.
James Schultz is executive vice president of ECA Medical Instruments, headquartered in Thousand Oaks, Calif. The company specializes in disposable torque-limiting instruments and turnkey sterile-packed procedural implant fixation kits for medical device OEMs.
Tom Williams is senior vice president of marketing and strategy for Fall River, Mass.-based Millstone Medical Outsourcing, a provider of medical packaging outsourcing solutions to the medical device industry.
With over 20 years of experience in the medical device industry, Joe Zuzula serves as vice president of sales and marketing for Orchid, a medical device outsourcing services provider with an emphasis on the orthopedic sector. The company is headquartered in Holt, Mich.
Sean Fenske: What’s the relationship between the OEM and CMO in the medtech industry today, and how has this dynamic changed from just a few years ago?
Robert Bodor: Collaboration between the OEM (original equipment manufacturer) and CMO (contract manufacturing organization) is becoming more common, especially earlier in the product development cycle. This is very prevalent with smaller OEMs as they are less likely to have all of the core competencies in-house to bring their products to full-scale production. Leveraging the expertise of the CMO early on helps to mitigate potential schedule delays and reduce production costs by influencing the design.
Bill Ellerkamp: The OEM expects the CMO to support Design for Manufacture and Assembly (DFMA) and Lean Manufacturing initiatives to drive manufacturing efficiencies and cost effectiveness and to engage in cost-sharing. Increasingly, the CMO is expected to be able to offer production in a low-cost manufacturing location—Mexico, Costa Rica, Dominican Republic, China—if not initially, then certainly as the product lifecycle ages. This also often requires the CMO to have a sophisticated product transfer process and controls. Further, the CMO is increasingly expected to be vertically integrated in some component manufacturing to minimize Tier 2 supply chain costs/risks.
Ben Harren: Partnerships between the OEM and CMO continue to gain importance. Increasingly, the interdependence between the two partners drives innovation and efficiency. We’ve seen OEMs engaging earlier in their development process in order to take advantage of the CMO’s ability to add value to an overall design.
James Schultz: The supply chain dynamic between OEM and supplier is evolving as the downstream end-user market gets more price-sensitive and competitive. The implant OEMs want a vibrant supply chain but one that can provide sustained value. In many cases, OEMs are engaging with other OEMs that have a core competency that makes them unique to the implant firm.
At ECA, for example, we are an OEM who is a specialist in the design and development of disposable and sterile-packed surgical torque-limiting instruments, general fixation instruments such as ratchets and power driven torque products, and complete procedural kits for implant fixation. We have capabilities and a systems design approach to disposable instrumentation that took 37 years to build. The design know how, collaboration-type thinking, and product development approach is part of our corporate DNA. It becomes a buy-make decision for the OEM. Do they go and create their own in-house disposable product division or create a strategic alliance with an established industry expert like ECA? In almost every case, they opt to focus on developing implants and partner with ECA in order to gain a competitive advantage.
Tom Williams: The relationship between OEM and CMO is a strong one. In the past few years, OEMs have tried to focus on their core competencies, which has led to the outsourcing of non-core functions. Given this, the CMO plays an increasingly important role in the OEM’s overall strategy, which fosters a different relationship than the historical tactically oriented buyer-vendor relationship.
Joe Zuzula: The changes in the relationship have been driven by consolidation, new regulations, product development engagement, and geography.
OEMs are going through a reduction of the number of suppliers that they are dealing with. They want to put more work into fewer full-service suppliers with the right systems in place to reduce risk and cost. This consolidation is mainly driven by cost pressures the OEMs are feeling.
The supply base used to be more complicated as OEMs used more suppliers with single capabilities. Product would travel in and out of the OEM facility as the products moved along the value stream. CMOs with the broadest capabilities stand to benefit the most as they can provide the same services at a lower overall landed cost.
Also, in the past, the FDA did not regulate contract manufacturers. We were controlled by the OEMs, and there was no consistency in how we were audited. Now that we are registered with the FDA, we have quality management systems (QMS) and regulatory systems that are the same or better than our customers. There is much more engagement now with the quality groups on systems and products due to these more sophisticated regulations.
Related to cost and resources, OEMs are more open to using contract services for design, development, and regulatory. CMOs are involved much earlier in the process, even as early as concept development, and manufacturing is involved at every stage in the design process.
OEMs are bringing contract manufacturers into the process earlier than they used to. They consult on the manufacturability and technologies while they are developing products before they freeze the design.
Our customers sell in markets around the world. They prefer to manufacture in those markets, and they would like their supply base to be located in those markets as well. Business partnerships in local markets helps to drive cost down.
Fenske: What’s changed in recent years that is driving medical device OEMs to use CMOs more today than in the past?
Bodor: Two large drivers to use CMOs is to increase the pace of innovation and develop more complex products. Both of these make it more costly and risky for an OEM to invest in the range of capital equipment needed to do all its own manufacturing in house, not to mention developing the expertise in the many processes. CMOs can bring this expertise, and also mitigate the investment and technology risk. Another dynamic tied to the pace of innovation is that the OEM may need to leverage speed in its supply chain partners in areas where it is not intrinsically fast within the company.
Ellerkamp: This is a relative phenomenon, which ebbs and flows according to a number of factors, including OEM plant capacity and location, OEM M&A activity, OEM margin pressures, OEM product lifecycles, technology trends (i.e., smart devices, wearables, etc.), CMO plant capacity, and location. While it is generally trending upwards, it seems to have slowed somewhat in the last few years. I think it will pick up again in the future, but it is not a straight line outsourcing growth curve.
As VC [venture capital] funding of medtech startups is slowing down, and the option of “acquired” R&D for OEMs becomes more difficult and expensive, we may see OEMs increasing their internal R&D expenditures significantly, and reducing internal resource allocation to manufacturing.
Harren: The pace of development has increased dramatically. As such, OEMs are looking to CMOs to be an extension of their development resources. Those CMOs that are vertically integrated to provide a broader offering in development support through manufacturing are often looked at as an efficient mechanism for outsourcing.
Andrew Schombs: There are many sustaining engineers within the OEMs that are looking for better functionality of the product design or reducing costs through different manufacturing processes. There is also some movement for manufacturing transfers of mature product lines opening capacity and reducing in-house management of multiple parts.
Specialization in certain types of processes is a key driver. It is costly to bring in a lot of capital in new technology assets, as well as skilled engineers and technicians to run and maintain them. If an OEM can outsource a component or assembly that is hard to do in house, they can leverage that company’s education and experience without internalizing it within the OEM itself.
Schultz: Competition and price pressures. Many of the great implants that improve patient health have been created over the past two decades. Innovation will now come from differentiation created by brand building at the patient level, ease of implant installation, surgical outcomes, implant efficacy, product availability, upfront and lifecycle cost, and reimbursement. CMs [contract manufacturers] need to get bigger and have broader capabilities and potentially global facilities or retreat to niche segments where their specialized work can command a premium and present barriers to competition. Hence, the CM industry is tightening and becoming more competitive and cost conscious. The industry is approaching commoditization in some segments, requiring CMs to absorb costs and achieve margins across both high volume, low mix, and oftentimes, lower margin business balanced against the more complex or customized lower volume, higher mix, and potentially higher margin business. Contribution margin mix remains very important for CMs.
Williams: Focus. OEMs are intently aware of what they are really good at, and are more willing to use outside resources for the things that cause them challenges.
Zuzula: Some companies recognize that they can’t be good at all things. They are focusing on design and development and bringing products to market. Sometimes, bringing all processes in-house is not the easiest or cheapest. OEMs don’t have the benefit of leveraging multiple customers in their manufacturing, while CMOs can maximize utilization.
Fenske: What tasks or projects are CMOs being used to accomplish today that weren’t being outsourced in recent years?
Donald Adams: Many companies are working with supply chain management of CMOs to schedule six months to a year of inventory. This allows both the OEM to have acceptable receipt dates for inventory and it simplifies planning and scheduling for manufacturing of parts.
Bodor: There is a growing trend around CMOs being a full-service provider. Much of this value goes beyond the single point of contact for developing a manufacturing system and simplification of logistics, and resides with design for manufacturing (DFM) analysis and impute at the part and assembly level.
Harren: Everything from development of novel approaches to solving clinical challenges to greater management of the overall supply chain are being outsourced. The environment is such that OEMs continue to understand—and appreciate—the value in outsourcing. Especially in medtech, CMOs that have robust quality systems leveraged throughout development and production are being asked to manage more of the design and validation activities, as well as dock-to-stock certified supplier inventory management.
Schultz: OEMs want to drive costs out of their companies from end to end. This includes design and development to operations and maintenance, as well as lifecycle management costs. They are seeking more turnkey solutions from one-stop-shop CMs, which includes more product design work and even holding of 510(k)s and design history files. OEMs want price concessions but they also want a stronger supply chain overall as they outsource more and more of what they traditionally developed in-house.
Williams: Supply chain management is undoubtedly one that OEMs are outsourcing. Supply chains can be extremely chaotic within the medical device industry, given the breadth of suppliers, the different risk profile that each supplier presents, etc. Outsourcing the management of it to an organization that specializes in it makes sense.
Zuzula: Product design and development, regulatory services, quick-turn prototyping, and sterile packaging.
Fenske: Does working with a CMO enhance innovation that may be realized in early development that may not have been achieved in-house by the OEM?
Bodor: Hands down, value can be added by partnering with a CMO. CMOs are likely selected through a rigorous series of events strongly driven by their core competencies. CMOs can apply this knowledge as a form of checks and balances against the creative solutions that arise early in development. This allows for a greater focus from the OEM on its innovation expertise and understanding of the market needs. Some CMOs provide early design for manufacturability feedback that helps make critical design adjustments before any actual production is started, saving time and money.
Ellerkamp: Often, a CMO can help the OEM avoid costly mistakes and/or delays in product approval/launch by having a better grasp of critical component design constraints and performance, and by anticipating how design choices will translate into the manufacturing process.
Harren: There are many benefits in working with a CMO, including enhancing innovation. Leveraging the manufacturing expertise for early-stage design innovation creates meaningful products with improved ability to be manufactured. Additionally, CMOs with expertise in specific areas are able to draw upon lessons learned in working on similar products to identify potential pitfalls to avoid.
Schombs: Avalon’s polymer solution casting technology provides unique development options so our engineers work closely with OEM engineers on design early on. Our engineers may offer solutions to technical challenges based on a deeper understanding of our manufacturing processes. We also provide material science expertise for both product development and performance needs.
Schultz: CMs are not particularly good at the design of new products. They’re structured and have a culture with a build-to- print focus. CMs that want to make this shift will need to employ people with extensive design and development and risk-taking experience. This is a culture shift and doesn’t happen overnight. Traditional CMs employ a sell-design-build model and product design inherently has more risk, typically employing a design-build-sell approach. Innovation is realized when you make the shift and find new customers in existing markets or new customers in new markets. Sometimes you get both.
Zuzula: An OEM can enhance innovation by outsourcing to a vendor with unique expertise in a capability. OEMs can innovate when they involve us in new technologies (e.g., additive manufacturing, titanium plasma spray coating on PEEK and UHMWPE, surface treatments, and special coatings). CMOs have more varied experience and OEMs can leverage that when developing new products through DFM and new technology engagement.
Fenske: How are CMOs aiding OEMs in getting medical devices to market faster?
Bodor: DFM analysis early and often provides feedback to ensure a product will make an impact in the market and still provide a return to the OEM.
Harren: Being able to outsource aspects of development that would otherwise have to be completed serially, OEMs are seeing significant improvements in their time-to-market. With bandwidth that may be able to react faster, CMOs are well-positioned to help. Those focused solely on medical devices bring a unique combination of engineering expertise and manufacturing competencies necessary to optimize critical designs and thus, can bring the best system design to market faster.
Schultz: Shortening time to market for new products is not always easy. Product design verifications and validations are required and, sometimes, there is no expediting the process or a short cut. Contemporary product development and testing tools and instrumentation helps pull in schedules including CAD/CAM and FEA software, 3D printing of functional prototypes, and others.
Williams: CMOs can be a powerful ally in increasing speed to market. Process validations for packaging, leveraging pre-validated platforms, etc., can significantly decrease the time it takes to launch, as well as having defined capacity for the OEM to be able to get launch quantities through the process.
Zuzula: Customer-focused CMOs have accountability to hold projects to a timeline. Part of the services we offer are good quality parts, on time, at a competitive cost. In the OEMs, there may not be the same pressure to meet the same requirements as an outsourced vendor.
Fenske: In what other aspects are CMOs significantly enhancing the capabilities of an OEM?
Williams: The rise of additive manufacturing would be one. OEMs can tap into CMO capabilities without the capital investments required to do it in house.
Fenske: What recommendations do you have for OEMs seeking new CMO suppliers?
Bodor: Search for a CMO that has strengths that complement your own. This seems obvious, but human nature often migrates us to areas we are familiar with. But also search for reliability. Often, this also requires scale. Can the CMO be responsive to your requests, even the small ones? Can you be certain that it can provide this lead-time responsiveness all the time? If so, it can truly be a reliable partner in your design-to-market cycle. If not, then you have to keep multiple CMOs for each core manufacturing process, and use the ones that can meet your timelines on each given project. This introduces uncertainty and risk.
Ellerkamp: Be clear in your expectations—business and product. Conduct an open audit of the qualifications and fit of the CMO with your needs; price is not the only parameter. Be transparent; don’t shy away from the tough issues and discussions up front. These conversations will make for a stronger relationship. Finally, commit resources to supporting the CMO in the initiation phase.
Harren: Spend time exploring CMOs and building relationships before projects begin. Knowing which CMOs are capable of delivering necessary support throughout the value stream is important such that the right CMO is chosen from the onset. Leverage the value CMOs can provide through vertical integration and focus on medical devices. Work to find a CMO that can engage early in the project as well. The continuity provided by a CMO capable of product design, prototyping, and commercial production will ensure all the early learning will not be lost when production starts.
Williams: The biggest recommendation is to take your time. Build a relationship and understand how the CMO interacts with your organization on multiple levels prior to making commitments. Visit their facilities and audit their processes, and talk to industry contacts about their experience.
Zuzula: Important items to look for include business continuity planning, savvy with regulatory requirements, and a breadth of capabilities that expand the full value stream of the products. You should partner with companies that reduce risk and look, act, and feel just like you. It helps for CMOs to be in the geographies that you are in and have experience in the market.
Fenske: What advice do you have for OEMs who want to move toward a true partner relationship with their CMOs?
Bodor: Understanding that the full supply chain will add an extra level of confidence while developing a partnership. Knowing the depth of resources and quality of the network the CMO lives in will help to reduce future risks. This includes transparency of internal versus external capabilities.
Ellerkamp: Appoint a supplier relationship manager (e.g., supplier quality engineer, project manager, etc.) and adopt a transparent stance with respect to project attributes—clinical performance objectives, engineering performance objectives, quality, timeline, and cost targets. The supplier relationship manager at the OEM should ensure that the CMO project team fully understands the requirements and which critical-to-quality attributes are the biggest priorities. This will enable the CMO, together with the OEM, to suggest trade-offs that will optimize the results for the OEM.
Have regular project review meetings [i.e., quarterly business reviews (QBR)].
Also, have a scorecard, or a set of metrics that clearly show what is expected and how the CMO is performing. Both parties should complete this regularly to ensure that they are aligned in their perceptions of mutual performance.
Further, enter into multi-year supply agreements, which provide confidence and continuity for the CMO and stability for the OEM.
Finally, do not run “bidding” processes for current products to pit potential vendors against one another. Rather, use the supply agreement, QBRs, and scorecard to ensure that the CMO is always clear on current and future expectations, and if those are not being met, then have a clear—and fair—process for a “managed exit” from the relationship.
Harren: Understand the true cost of a program from infancy to commercialization, and how CMOs that are able to leverage their structure to provide engineering, quality, and manufacturing expertise will provide financial, timeline, and communication efficiencies. Committing to each other early opens dialogue and improves the overall process such that both organizations can leverage the others’ knowledge.
Williams: Bring value. The value that you bring will always be defined by the OEM, and thus listening and understanding the pain points/opportunities and where you can bring value is extremely important.
Zuzula: OEMs should find a partner willing to work with them to provide good quality products, in the shortest amount of time, and with the least potential for risk.
Partner with CMOs to remove waste in the value stream of bringing products to market. The focus should be on total cost, rather than piece price. We should be asking how we can innovate and remove waste.
Fenske: As OEMs shrink their supply chain in terms of number of vendors, what attributes should they value most in the CMOs they are looking to retain?
Adams: Quality of the products, timeliness of receipt of inventory, and when there are any concerns with inventory, providing the information quickly to the customer. We have regular conference calls with many of our larger customers to maintain a positive relationship and to set realistic goals for both parties along with agreement of management of ongoing projects.
Bodor: Areas of expertise, core competencies, breadth of offering, ability to scale up quickly to respond to market demand, internal versus external capabilities and associated risks, plus support across the entire product lifecycle, from prototyping to end-of-life management.
Ellerkamp: Strong businesses with smart people (not only capable manufacturers), who demonstrate an understanding of medical devices and are biased to continuous improvement. Also, creative, collaborative, and proactive problem solvers.
Harren: Quality is absolutely critical. With less duplicity comes the need for partnering with CMOs that have a structure that supports—and a track record of providing—impeccable quality. Vertical integration and supply chain management capabilities will be necessary to ease the burden on the OEM’s internal resources. Finally, commitment to medical devices is key as it eliminates distractions and ensures the CMO’s entire organization is culturally aligned with the OEM.
Williams: Trust. OEMs should trust that their CMOs are looking out for their quality, their reputation, their end customer, and their bottom line. The CMOs that are retained should be the ones that are an extension of the OEM, and view themselves very much that way.
Fenske: With quality being of paramount importance in medtech, what are you doing to ensure this for your customers?
Bodor: One of our goals is to create an environment conducive for medical devices to reach the submission-ready phase in as short of a development cycle as possible without sacrificing quality. We are in a unique position to support both the OEM and CMO with real-world lessons learned from early phase parts. Testing multiple variations of a component in parallel can supply parts for user acceptance testing and durability testing. Early collaboration defines an environment where the best product goes to market that can be consistently and efficiently mass produced.
Ben Do: Our quality management department has expertise and experience within the OEM business for a better understanding of needs. Our staff is encouraged to continue seeking education and certifications such as Six Sigma Black Belt and other certified quality auditor certifications.
Harren: Quality is built in through every step of the development and manufacturing process. That is why, for nearly 50 years, Donatelle has built a culture focused on quality. It involves the right combination of quality-dedicated team members and investing significantly in the equipment necessary to be a market leader in quality and on-time delivery. Understanding the nuances within the various levels of medical device manufacturing allows CMOs to better align to the expectations of medtech OEMs. Solid historical quality and a commitment to continually strive for improvements are strong indicators for future success.
We have implemented best practices in inspection techniques and methodologies incorporating technology such as vision systems in processes where needed. We have also performed capability studies and Gage R&R to ensure that our processes are in control. In addition, we maintain supplier controls such as qualification, monitoring, and continuous improvement initiatives to ensure that quality product is received from our suppliers.
Schultz: At ECA, we are an OEM partner with our implant OEM customers. As a result, we take on a lot of responsibility for product design, development, testing, and quality, including the DHF [design history file] and, in some cases, customer complaints as the manufacturer of record. We are the turnkey dock-to-stock designer and manufacturer. This provides huge value, both short and long term, to OEMs as we become their one-stop shop for developing, testing, and supporting the single-use instrumentation. Moreover, with single-use instruments and kits, we save them over $1,000 per procedure and provide potential for millions of dollars in annuity revenue. This is a huge swing on the P&L and on the balance sheet. Traditional CM models and reusable tools can’t offer these options and sustained value.
Williams: Continuous internal auditing of our processes, monitoring of our process validations, and driving every issue to true root cause evaluation are some ways. More than that, however, quality is part of our make-up; it’s not simply something we talk about, it is who we are. As a CMO, we have an obligation to our OEM partners to fulfill their obligation to the patient, which is to deliver a perfect product every time.
Zuzula: We conduct mock FDA audits at all of our facilities by partnering with a consultant and former FDA auditor. We also partner with our customers and collaborate on training to integrate with their QMS and Q&R (quality and regulatory) requirements.
Fenske: What impact is M&A activity among OEMs having on the CMO relationship?
Bodor: Whenever there is a change in the supply chain, there is always potential challenges because expectations may be different. This is most likely to occur when startups are acquired by larger, more established OEMs. It is common that the startup has had a different set of expectations for the supporting CMOs.
Ellerkamp: It is increasing customer concentration, and therefore risk, for many CMOs.
Harren: Consolidation among OEMs is creating opportunities for CMOs who are positioned to provide value across the new entity. Vertical integration plays a key role in a CMO’s ability to support a diversifying OEM, as does experience working with all classes of medical devices. As OEMs direct greater focus to critical research and development as well as sales and marketing activities, they rely on CMOs to offer a greater range of manufacturing capabilities. Donatelle has been able to support growing OEMs through capability expansion projects that leverage our expertise across many aspects of contract manufacturing to quickly meet the needs of the combined organizations.
During times of M&A, both the OEM and CMO will need to be diligent so as not to reduce quality or commitment for the increased opportunity. What has made relationships successful prior to acquisitions should be a catalyst for future success but not at the expense of commoditizing critical products.
Schombs: Some larger organizations are looking to reduce their supplier agreements. With merger and acquisition activity, it offers the opportunity to potentially earn more business within the acquired company.
Williams: As acquiring companies look to gain synergies, CMOs play an important role in allowing the OEM to map out efficient supply chain strategies. Strategic CMOs allow OEMs to make impactful decisions both prior to and post-acquisition.
Zuzula: It has been driving our relationship with our customers deeper. Because we are a larger company, we have more touch points and more projects.
In general for all suppliers, performance is key. They should be performing in quality, delivery, and price in order to keep their place with their customers.
Fenske: How are you helping to ensure more efficient/faster FDA reviews of a device with which you are involved?
Bodor: Our focus is accelerating product development. We do this through automated design for manufacturing feedback and cost effectively suppling prototypes and low-volume part runs in production materials and processes.
Do: As a contract manufacturer, Avalon can assist with testing requirements and documentation with our engineering and quality expertise. As with many organizations, we create processes and documentation with FDA and CE approvals in mind. Avalon has an experienced regulatory department that can assist with product approvals including FDA 510(k)s and technical files for CE marking. We work closely in conjunction with our OEM’s regulatory department to submit regulatory changes using the appropriate regulatory pathway.
Zuzula: By being responsive to our customers’ needs.
Fenske: Has the suspension of the medical device tax had any impact on CMOs?
Bodor: We anticipate this to have a very positive impact on CMOs. Some of the OEMs that we have long-standing relationships with have directly stated that they cut internal R&D spending to help soften the blow from the medical device tax.
Harren: I believe it is still too early to determine how the suspension of the medical device tax will impact CMOs. As OEMs determine how to manage the change internally, there will, undoubtedly, be an impact externally. Considering some of the initial statements about increased development due to the change, I would expect the trend to outsource additional support to continue at an increased rate. Leveraging CMOs for increased speed-to-market will be necessary to utilize the medical device tax changes as a competitive advantage.
Williams: As of yet, we have not seen an impact.
Zuzula: It’s not being talked about anymore as a cost to pass down. We haven’t really seen a benefit on our end. If the OEMs use the money to innovate, we may get more opportunities.
Fenske: In what ways will the CMO/OEM relationship in the medtech industry change in the next five to ten years?
Bodor: Collaboration throughout the supply chain will continue to grow in importance in an effort to reduce time from concept to revenue.
Harren: Though this will vary based on the OEM, I am confident that the relationship between OEM and CMO will continue to become that of a true and open partnership. As OEMs realize the value in partnering early, and CMOs are able to provide value at that time, benefits will be realized for both entities. Everything from leveraging the CMO’s expertise for a given process or technology to using knowledge gained through developing and prototyping together for more efficient long-term production, partnerships will help reduce time-to-market and overall program cost.
Williams: The relationship will continue to develop much as it has in the past five years. CMOs will become closer with the OEMs and we see an increase in information/knowledge sharing that deepens the bond between the two and provides even more efficiencies to the relationship.
Zuzula: I think consolidation will continue, both for OEMs and CMOs. I think the lines between the two types of companies will blur and there will be more collaboration (e.g., joint ventures, business planning, product development collaboration).
Fenske: Do you have any additional comments you’d like to share on the CMO/OEM relationship within the medtech space?
Williams: Being a CMO to the medtech industry today is a fun place to be. With so many moving parts, so much M&A activity, it is exciting to be part of a changing dynamic where we are valued partners to the OEMs rather than simply a vendor at the end of a purchase order.
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