Undaunted by economic turmoil, medical-device manufacturers expect another year of double-digit growth in 2009, and several are looking to expand capacity.
But at the same time, manufacturers are placing a greater emphasis on efficiency, and some mergers and acquisitions activity may be put on hold.
``The U.S. appears to be more cautious than Europe, but we still have high expectations of growth,'' said Kevin Andrews, president and chief executive officer of Moll Industries Inc. in Dallas. Last year Moll expanded clean room capabilities at its medical components plant in Seagrove, N.C., and added a third clean room at its plant in Empalme, Mexico.
``I don't see a significant slowdown in the medical business,'' Andrews said. ``Much of what we do is in fluid delivery and that business has been steady. Six months ago, we were projecting 11 percent growth with confidence. Today, we are still targeting 11 percent growth in 2009, but with caution.
``We have the investments in place to support that. There are some inventory adjustments as companies try to manage their capital, but the adjustments are far less'' in medical devices than other industrial sectors.
The outlook and approach are similar at injection molder United Plastics Group Inc., a contract manufacturer in Oakbrook, Ill., that grew its medical business from $18 million to $25 million in 2008, and expects medical sales of $35 million in 2009. During that same time frame, medical has grown from 11 percent of UPG's total sales to a projected 27 percent for 2009.
``We are cautious and watching business closely,'' said Matt Langton, vice president of sales and marketing, as customers are cautious about capital spending.
``But we expect our medical business will grow in double digits again, around 15 percent, based on business we have already won,'' he said.
``We haven't seen a huge impact from the economic downturn because whether the economy is good or the economy is poor, there is a need for medical care.''
With that in mind, UPG is adding a clean room that it will have up and running this quarter at its Minneapolis plant; doubling the size of its Suzhou, China, operations after adding a clean room at UPG EPZ Co. Ltd in Suzhou last quarter; and making upgrades to its clean room in Fremont, Calif.
``We stepped up our sales effort at the end of 2008, and have as much activity now as we did at the beginning of 2008,'' he said. ``One of the keys for us is to find ways to grow customer business and markets.''
Global injection molder and contract manufacturer Nypro Inc. also foresees double-digit gains in its health-care business in 2009, and plans to grow its health-care footprint 20 percent with expansions that are likely to be announced by the end of the first quarter. ``The expansion will include bricks-and-mortar, people, infrastructure and plant and equipment,'' said Brian Payson, vice president of business development at Nypro Healthcare in Clinton, Mass.
``We are projecting growth in the coming year, and our projections are to maintain margins through operational improvements and leverage of existing assets,'' Payson said.
That includes building on the strength of its drug-delivery products, he noted.
``We are expecting mid-double-digit growth between 15 and 18 percent in Pan-Asia, 6-8 percent in Europe and 9-11 percent in the Americas.
``But we are looking at tightening our belts across the board, and operational efficiency will be a core focus because health care is not immune to cost pressures,'' Payson said. ``We are hedging that the economic downturn is not at the bottom yet and [are] forecasting that way. We are doing more than a lot of companies are doing to assume things could get worse.''
Despite projections of some medical-device manufacturers for strong double-digit growth, market analyst Venkat Rajan at Frost & Sullivan Inc. of San Antonio is less optimistic.
``There might be some lower margins, and companies might not be able to grow as much as they have in the past,'' said Rajan, who manages the medical-device industry team.
There are also divided views on how the economy will affect mergers and acquisitions activity.
``The current climate is an opportunity for us to be more aggressive because of the solid financial health of the company,'' said Nypro's Payson. ``I absolutely believe this is going to weed out the weaker players.''
UPG's Langton agreed: ``If you have the money, it is definitely a buyer's market. But over the first half of the year, I wouldn't expect to see a lot of merger and acquisitions. You are more likely to see more companies get into [financial] trouble.''
Matt Dolan, senior research analyst for the medical-device market at Roth Capital Partners LLC in Newport Beach, Calif., said some would-be acquirers are concerned that revenue generated at companies of interest in 2008 might not be the same in 2009.
``The intense acquirers are putting things on hold because there is so much uncertainty,'' Dolan said. ``That raises the question of how much do you pay'' for an acquisition. ``So some people are finding it prudent to see how the first half of the year plays out.''
On the other hand, ``some valuations are so discounted that it becomes compelling'' for firms with the financial wherewithal to make the acquisitions ``and tuck them away,'' hoping the economy will turn around shortly.
In particular, the valuation of companies in the cosmetic portion of the medical-device business have been hard-hit, making the risk-reward proposition tempting, he said.
Both Dolan and Rajan expect significant activity in the cardiovascular, spine and orthopedic segments as companies look toward mergers to gain market leverage and increase growth prospects. But Rajan is less sure about the pace of M&A activity in the overall medical-device market.
``There are a lot of bargains out there,'' Rajan said. ``But the market is not sure about mergers and acquisitions and a lot of companies don't have the cash reserves to make acquisitions. For certain, buyers are less likely to take a risk on a company with a new product unless it is further along, past its first trial or with a clear path to market.''
It is also likely, said Dolan, that ``smaller companies will have their backs against the wall,'' given the economic uncertainty. ``Right now, it is who can survive and be more profitable. I think we will see growth, but at lower levels,'' as hospitals trim their budgets by 15-20 percent.
Those lower hospital budgets could have a long-term adverse effect, Rajan said.
``Traditionally, the health-care industry is a safe haven for investors,'' said Rajan. ``But because the requirements for loans are more stringent, that could affect building of new surgical rooms, or wings or infrastructure at hospitals which could affect companies that develop high-end radiation or oncology equipment and robotic systems. Short term, those manufacturers are OK. But long term is where you will have more issues.''
Disposables for surgical procedures could suffer as hospitals reduce inventories, and small or emerging firms might have a difficult time convincing group purchasing organizations to add a new product that costs more.
Products for elective procedures such as cosmetic surgery and laser eye surgery also could take a hit, he suggested.
Conversely, products and medical devices with a direct impact on quality of life — such as diagnostics, cardiovascular, orthopedics, cancer treatment — ``aren't likely to be cut,'' according to Rajan.