Tony Freeman, President, A.S. Freeman Advisors LLC06.04.18
With Medical Product Outsourcing marking its 15th anniversary, I thought it would be appropriate to reflect upon the growth of the medical device industry and supply chain since 2003. Although a blizzard of financial statistics does not make for the best anniversary gift, the news nevertheless is uniformly good.
A Rapidly Growing Industry
The medical device industry has grown at a faster rate than the economy as a whole over the last 15 years. The members of MPO’s first Top (30) Companies list in 2003 had combined revenues of $105 billion. Though the data from that era is a bit thin, the entire device industry was likely worth just over $150 billion. In 2017, the Top 30 generated $257 billion in revenues, inferring a total medtech market of approximately $368 billion; proceeds more than doubled during that period and overall growth averaged 6.2 percent annually. Since 2003, the device market has markedly outperformed both U.S. and global growth rates as measured by gross domestic product (GDP). U.S. GDP growth averaged 3.7 percent in the last 15 years while global GDP generally expanded at 4.9 percent. Pundits who predicted over-market growth for the medtech industry when MPO premiered should be congratulated for their remarkable foresight.
Supply Chain Outpaced OEMs
The global medical device market has certainly experienced a healthy expansion since the early 2000s, but that surge pales in comparison to the double-digit growth posted by the OEMs’ supply chain partners. In 2003, medical device outsourcing was a $3.5 to $4 billion business spread across a few large players and thousands of small suppliers; that value had skyrocketed to roughly $38 billion by early 2018. On a percentage basis, supply chain revenues have swelled an average 17 percent annually for the last 15 years—an impressive statistic.
Three market forces appear to have influenced the medtech supply chain’s mushrooming revenues. The first is the overall medical device market growth noted previously. The second is the consolidation of outsourced work into fewer hands. Where the supply chain of 2003 was spread across 15,000 firms, many with modest medical exposure, today’s supply chain is dominated by medical contract manufacturing specialists. About one-third of the $38 billion supply chain market ($13 billion) is controlled by the 20 major contract manufacturers (CMs), with most of the remaining $25 billion dominated by the next 100 largest CMs. Smaller suppliers have fueled much of this growth, passing revenues on to bigger companies by either ceding work to their larger peers or through acquisition. A good example of consolidation is Integer, a contract manufacturing firm that has changed identities nearly half a dozen times over the last 15 years—first as Medical Device Manufacturing Inc., then UTI, MedSource, Accellent, and Lake Region Medical, before assuming its present designation in 2015. The company’s revenue has grown eight-fold over the last 15 years—from $174 million in 2003 to $1.4 billion at the end of 2017.
The third market force driving supply chain revenue growth is the customer. In 2003, medical device OEMs outsourced between 7 and 8 percent of their manufacturing to suppliers as measured in cost of goods sold (COGS). By 2017, however, the COGS ratio had nearly quadrupled to 31 percent—a clear indication that outsourcing has proven more successful than the industry had envisioned at the time of MPO’s birth.
Future Trends
The trends shaping medtech and its supply chain will undoubtedly change over the next 15 years. Device OEMs are likely to benefit from three major forces driving growth but simultaneously face potential setbacks as well. On the growth side, OEMs will probably experience continued consolidation, though the number of remaining hookups among Top 30 contenders in the next five years will be considerably limited. Consolidation will be fueled by the desire to conquer niche markets and aided by modest interest rates. Perhaps more compelling will be OEMs’ transformations from pure-play device companies into diversified players with a full complement of service offerings. Managed facilities with hospitals and clinics, IT integrations, and data analytics will attract customers to these new OEMs and their expanded options. The third growth area will continue to be aging populations in developed countries and the expansion of healthcare into developing nations. OEMs are likely to see more consumers across the global demographic spectrum.
OEMs will face their greatest challenge in North America. The United States remains the world’s largest buyer of medical devices, often at the highest prices. As U.S. healthcare reaches 18 percent of GDP—a staggering 25 to 33 percent more than other developed countries—the ability of private insurers and the federal government to fund healthcare becomes highly unlikely in the long term. Traditionally, OEMs have used the lucrative American market to fund product development and global device sales. With the U.S. reimbursement model at its limits, though, OEMs will have to overcome new pricing pressures to secure profits. The rise of value-based reimbursement, which rewards providers for better (and cheaper) health outcomes, will force OEMs to negotiate more, but also give them a shot at market dominance through re-designed, clinically proven product offerings that enhance patient health.
The supply chain will benefit from all of these trends. Suppliers will assume the bulk of manufacturing duties in the future as OEMs recast themselves as health providers. Since the last 15 years have indubitably proven that outsourcing can successfully help lower product development costs, the practice will continue to flourish over the next decade and a half, driving the growth of contract manufacturers capable of handling every aspect of building both a single medical device and a complete product platform. OEMs will continue to welcome the rise of large CMs as a means of freeing up capital for research, marketing, sales, and distribution.
Two questions come to mind regarding the supply chain of 2033. First, will OEMs find it necessary to continue to manufacture products? Certainly, executives at major OEMs will argue for tight risk management of internal manufacturing capabilities but financial officials at those same companies might define risk in a broader sense and attempt to pass it on to reliable supply chain partners.
The second involves the role of smaller suppliers. Will small companies be able to compete with huge CMs that can source and produce high-quality devices around the world? In the absence of a specialized design or manufacturing skill, it could prove difficult for smaller companies to chart their own paths. Time will tell.
Tony Freeman is president of A.S. Freeman Advisors LLC, an M&A advisor to the precision manufacturing and specialty materials industries. Freeman also heads mdmX, an industry association for medical device contract manufacturers. He can be reached at tfreeman@asfreeman.com.
A Rapidly Growing Industry
The medical device industry has grown at a faster rate than the economy as a whole over the last 15 years. The members of MPO’s first Top (30) Companies list in 2003 had combined revenues of $105 billion. Though the data from that era is a bit thin, the entire device industry was likely worth just over $150 billion. In 2017, the Top 30 generated $257 billion in revenues, inferring a total medtech market of approximately $368 billion; proceeds more than doubled during that period and overall growth averaged 6.2 percent annually. Since 2003, the device market has markedly outperformed both U.S. and global growth rates as measured by gross domestic product (GDP). U.S. GDP growth averaged 3.7 percent in the last 15 years while global GDP generally expanded at 4.9 percent. Pundits who predicted over-market growth for the medtech industry when MPO premiered should be congratulated for their remarkable foresight.
Supply Chain Outpaced OEMs
The global medical device market has certainly experienced a healthy expansion since the early 2000s, but that surge pales in comparison to the double-digit growth posted by the OEMs’ supply chain partners. In 2003, medical device outsourcing was a $3.5 to $4 billion business spread across a few large players and thousands of small suppliers; that value had skyrocketed to roughly $38 billion by early 2018. On a percentage basis, supply chain revenues have swelled an average 17 percent annually for the last 15 years—an impressive statistic.
Three market forces appear to have influenced the medtech supply chain’s mushrooming revenues. The first is the overall medical device market growth noted previously. The second is the consolidation of outsourced work into fewer hands. Where the supply chain of 2003 was spread across 15,000 firms, many with modest medical exposure, today’s supply chain is dominated by medical contract manufacturing specialists. About one-third of the $38 billion supply chain market ($13 billion) is controlled by the 20 major contract manufacturers (CMs), with most of the remaining $25 billion dominated by the next 100 largest CMs. Smaller suppliers have fueled much of this growth, passing revenues on to bigger companies by either ceding work to their larger peers or through acquisition. A good example of consolidation is Integer, a contract manufacturing firm that has changed identities nearly half a dozen times over the last 15 years—first as Medical Device Manufacturing Inc., then UTI, MedSource, Accellent, and Lake Region Medical, before assuming its present designation in 2015. The company’s revenue has grown eight-fold over the last 15 years—from $174 million in 2003 to $1.4 billion at the end of 2017.
The third market force driving supply chain revenue growth is the customer. In 2003, medical device OEMs outsourced between 7 and 8 percent of their manufacturing to suppliers as measured in cost of goods sold (COGS). By 2017, however, the COGS ratio had nearly quadrupled to 31 percent—a clear indication that outsourcing has proven more successful than the industry had envisioned at the time of MPO’s birth.
Future Trends
The trends shaping medtech and its supply chain will undoubtedly change over the next 15 years. Device OEMs are likely to benefit from three major forces driving growth but simultaneously face potential setbacks as well. On the growth side, OEMs will probably experience continued consolidation, though the number of remaining hookups among Top 30 contenders in the next five years will be considerably limited. Consolidation will be fueled by the desire to conquer niche markets and aided by modest interest rates. Perhaps more compelling will be OEMs’ transformations from pure-play device companies into diversified players with a full complement of service offerings. Managed facilities with hospitals and clinics, IT integrations, and data analytics will attract customers to these new OEMs and their expanded options. The third growth area will continue to be aging populations in developed countries and the expansion of healthcare into developing nations. OEMs are likely to see more consumers across the global demographic spectrum.
OEMs will face their greatest challenge in North America. The United States remains the world’s largest buyer of medical devices, often at the highest prices. As U.S. healthcare reaches 18 percent of GDP—a staggering 25 to 33 percent more than other developed countries—the ability of private insurers and the federal government to fund healthcare becomes highly unlikely in the long term. Traditionally, OEMs have used the lucrative American market to fund product development and global device sales. With the U.S. reimbursement model at its limits, though, OEMs will have to overcome new pricing pressures to secure profits. The rise of value-based reimbursement, which rewards providers for better (and cheaper) health outcomes, will force OEMs to negotiate more, but also give them a shot at market dominance through re-designed, clinically proven product offerings that enhance patient health.
The supply chain will benefit from all of these trends. Suppliers will assume the bulk of manufacturing duties in the future as OEMs recast themselves as health providers. Since the last 15 years have indubitably proven that outsourcing can successfully help lower product development costs, the practice will continue to flourish over the next decade and a half, driving the growth of contract manufacturers capable of handling every aspect of building both a single medical device and a complete product platform. OEMs will continue to welcome the rise of large CMs as a means of freeing up capital for research, marketing, sales, and distribution.
Two questions come to mind regarding the supply chain of 2033. First, will OEMs find it necessary to continue to manufacture products? Certainly, executives at major OEMs will argue for tight risk management of internal manufacturing capabilities but financial officials at those same companies might define risk in a broader sense and attempt to pass it on to reliable supply chain partners.
The second involves the role of smaller suppliers. Will small companies be able to compete with huge CMs that can source and produce high-quality devices around the world? In the absence of a specialized design or manufacturing skill, it could prove difficult for smaller companies to chart their own paths. Time will tell.
Tony Freeman is president of A.S. Freeman Advisors LLC, an M&A advisor to the precision manufacturing and specialty materials industries. Freeman also heads mdmX, an industry association for medical device contract manufacturers. He can be reached at tfreeman@asfreeman.com.
