Medical-device manufacturers expect another year of high single-digit or low double-digit growth accompanied by strong profits in 2008. But continued pressures loom over original equipment manufacturers to hold or reduce costs at a time when raw material and logistics prices are rising sharply.
In addition, the mergers and acquisitions activity that heated up in 2007 is expected to continue as medical molders seek to round out product lines, look for new avenues of growth and scale up to meet OEM demands of wanting companies that can supply them globally.
``OEMs will be under a great deal of pressure to hold or reduce prices in 2008, because of an economy that might be slowing down and because of the political climate,'' said George Blank, president and chief executive officer of MedTech Group Inc., a medical-device manufacturer in South Plainfield, N.J. ``It is an election year and there will be a lot of focus on health-care costs.''
As a result, the issue for many contract manufacturers, Blank said, is this: ``How can we lower our costs elsewhere and absorb the inflationary effects coming without increasing the costs to our customers?''
One medical molder said its material costs rose 7-10 percent in 2007 and more increases are expected in 2008 - all this, on top of higher freight expenses.
Those cost challenges aren't dampening growth expectations, though.
``Commodity costs are certainly a challenge and our customers are having a hard time passing those costs to their customers,'' said Matt Langton, vice president of sales and marketing for United Plastics Group Inc., an injection molder in Oak Brook, Ill.
``But we are very well-positioned to capitalize on the industry trends,'' Langton said.
The company expects to benefit from that in 2008 with double-digit growth in the medical-device market, which represents 22-23 percent of the firm's sales. More than half of UPG's overall sales came from overseas in 2007, for the first time in the company history, he said.
Similarly, Nypro Inc. in Clinton, Mass., increased its percentage of business that comes from medical, from 24-25 percent in 2006, to 27-28 percent in 2007, and it expects a similar boost in 2008.
``Our health-care growth in 2007 was over 25 percent and exceeded our corporate growth,'' said Steve Glorioso, vice president of health care. ``The medical- device industry is expected to grow 7-8 percent in 2008 and we plan to double that growth. We'd like to get the percentage of our business from medical to 35-40 percent'' over the next few years.
Blank said he anticipates ``a pretty good year,'' and sees U.S. and international markets growing very well.
``Not withstanding some crosscurrents, we anticipate another year of double-digit growth,'' he said. ``There are some indications that the economy is softening and that could have some effect. But I don't anticipate any deterioration for the first six months of 2008.''
The industry's healthy profit margins and sustained strong growth will continue to trigger more consolidation, as medical- device manufacturers look to expand in a market or become more vertically integrated.
In addition, Glorioso said, ``contract manufacturers are getting tired of the poor margins in electronics and are enamored with the potential for profitability, growth and diversification by moving into health care.''
Cost pressures will be another driver of mergers and acquisitions.
``There will be continued acquisition activity in the contract manufacturing market because those companies are subject to pricing and material issues and feel cost pressures because freight and resin costs continue to rise,'' said Matt Dolan, senior research analyst for medical devices at Roth Capital Partners LLC in Newport Beach, Calif.
``Only those companies with enough scale and distribution will be able to survive,'' Dolan said. ``The ability of a company making a product for a single niche market to be profitable will be severely constrained.''
The acquisition trend also is being pushed by strong market conditions: expanding economies overseas, aging demographics, more innovative drug-delivery systems designed to shorten hospital stays and more office and home diagnostic tests.
In pounds of resin sold, world medical plastics demand was estimated at 8 billion pounds in 2007 and projected to be more than 8.8 billion pounds in 2010, according to Global Industry Analysts Inc. in San Jose, Calif. North America represents almost 48 percent of the market, GIA said.
In its most recent report, research firm Frost & Sullivan Inc. of Mountain View, Calif., projected the market will reach $139.9 billion in 2011 - more than double what it was in 2004 at $63.8 billion.
``The growing use of unique medical products and supplies and the shift toward disposable devices is expected to dramatically change the market dynamics and structure,'' GIA stated in an e-mail. ``The medical plastics market is projected to grow rapidly in the near future, particularly in developing countries in Asia Pacific and Latin America.''
Another shift driving growth is the way insurance companies are encouraging innovations that lower costs. They also are pushing more self-testing and diagnostic devices that can detect warning signs to prevent more serious illnesses and lengthy hospital stays.
``The insurance industry is trying to push more care into individual homes with drug-delivery devices and through self-testing in doctor's offices and homes for quicker actions,'' said Dan L'Ecuyer, market development director for health care at Nypro.
``Insurance companies will pay for a technology that is innovative because it will shorten the time in the hospital,'' said Roland Beck, president of injection molder Tessy Plastics Corp. in Elbridge, N.Y., which now derives more than 50 percent of its sales from the medical industry.
``Diagnostics such as meters and tests will grow faster than anything else because they enable doctors to prescribe treatment earlier and lower costs in the long run,'' said Len Czuba, president of product development firm Czuba Enterprises Inc. in Lombard, Ill. ``They allow doctors to see what is happening in tissue degeneration and in the population'' before a major health problem occurs.
At the same time, ``a lot of drug-delivery devices are being developed that are more intuitive and easier for patients to use,'' said Mike Treadaway, vice president and general manager of Tech Group Inc. in Scottsdale, Ariz. ``There is a lot of growth in that area with specific delivery systems for specific applications. You have a lot of single-dose systems.''
That shift means that there could be a slight drop in the growth rate for intravenous bags, tubes, gloves, bed pans and trays used in hospitals, said Czuba. ``They are still growing at a rapid pace, but it is slowing down a bit and part of it is because of increases in diagnostics and detection devices.''
As growth opportunities increase overseas, molders are set to capitalize, yet keeping an eye on economic conditions in the U.S.
``Exports will continue to be very vigorous,'' said Blank. ``The dollar is down vs. other currencies, making medical products'' from U.S. companies more price-attractive.
``Europe is doing well and Japan is doing well for the first time in a long time,'' Blank said. ``Indonesia, Singapore, India and China are economies with an increasing number of upwardly mobile people who can afford health care.''
In addition, in China and India, ``people are moving to big cities and there is growth in gross domestic product,'' L'Ecuyer said. ``So there is growth in terms of health-care needs and growth in the base number of devices driven by the growth of GDP.''
Although health care tends to be recession-proof, there is concern that investment capital could become tight, holding back the innovations that drive the industry growth.
``Our business counts on our customers developing new products and getting them into the market,'' said Langton. ``If companies start cutting back on capital spending, we may not see as many products hit the marketplace.''
Marc Cohen, director of health care sales for Tech Group, has the same concern.
``We are in the throws of a slowing economy,'' he said. ``That means our customers will have less capital to invest in equipment and that start-up companies that often spur innovation may have difficulty getting investment dollars.''