Giant electronics contract manufacturer Jabil Circuit Inc. is taking aim at the single-use medical-device market and expects to snare $100 million of business within a year and build sales in that market to between $500 million and $1 billion within five years.
Its entry into the medical disposables market, announced Feb. 10 at Medical Design & Manufacturing West in Anaheim, comes less than two weeks after the $13 billion company said it would be reducing its global work force to 82,000 from 85,000 to compensate for a slowdown in global demand.
Jabil said the realignment will save $55 million annually but result in an estimated $65 million in pre-tax restructuring and impairment costs in fiscal 2009 and 2010. The St. Petersburg, Fla.-based company operates 55 plants in 22 countries, with 80 percent of its business outside North America.
“The medical-device market is a huge opportunity with enormous potential,” Gaet Tyranski, Jabil's medical business unit director, said at the show. Jabil said the medical disposables market Jabil is targeting is a $100 billion global market — but currently only 11 percent, or $11 billion, of that work is outsourced.
“We see the underlying growth in that market to be 8 percent annually and see the outsourcing portion of that market growing to 15 percent in the next two to three years,” he said.
Tyranski said Jabil expects to make its initial inroads in drug-delivery devices, catheters and laboratory and diagnostic disposables — everything from inhalers to syringes to surgical gowns.
Jabil has already hit the ground running, as it spent the past year “getting certified, getting the capabilities in place, bringing the right people on board and conducting training,” Tyranski said. The company already has ISO 13485 certification.
The foray isn't the first into the medical business for Jabil. Its current medical business — focused mostly on diagnostic equipment, digital imaging products, X-ray equipment, test and measurement products and patient monitoring systems — has grown from a near-zero base five years ago to $800 million. It is part of the company's $2.3 billion industrial, instrumentation and medical segment that has experienced a compounded annual growth rate of more than 50 percent since 2002.
Jabil said it will manufacture medical products in its existing facilities with clean rooms, most likely in Uzhgorod, Ukraine, and Guadalajara, Mexico, and use a combination of new and existing equipment, typically presses of 450 tons or less. “We will have dedicated work forces for medical within our plants with different uniforms and different pay scales,” said Tony Allan, vice president of global business units for instrumentation and medical.
In fiscal 2008, ended Aug. 31, Jabil had profit of $133.8 million on $12.8 billion in sales, compared with profit of $73.2 million on $12.3 billion in sales the previous year. But its 2008 profit was still substantially below the $203.9 million Jabil posted in fiscal 2005.
In addition, a preliminary goodwill impairment charge of $317.7 million turned a $46.2 million first-quarter profit into a $275.9 million loss in its first quarter of 2009, ended Nov. 30, said Jabil. The company said the charge adjusts its fair value resulting from a decline in market capitalization below its carrying value, the fall of the overall economic environment, customer demand declines and the credit crunch.
Allan said the timing was right to move into medical disposables.
“As economic circumstances become more challenging, vertical to virtual will be the trend in medical devices,” he said. “Companies will be looking to focus on research and development, and sales and marketing and less on manufacturing — which is our core competency.”
Allan said Jabil expects to be able to leverage several capabilities to become a major player in the market.
“We have vast experience with different and unique resins that you sometimes see in the medical industry, and our purchasing spent in resins — about $500 million — gives us leverage in that area as well,” he said.
In addition, Allan pointed to the company's logistics expertise, plastics molding capabilities, assembly skills and an ability to manufacture on a both a large and small scale to meet needs of large global companies as well as the many medical companies that manufacture in lot sizes of 50 or less.
“There is a shortfall in the existing supply chain and very few global players,” Allan said. “We have a large global footprint, a diversified portfolio and are able to bring scale to the market. We have the ability to take on large programs on a global scale.”
Allan also said the company plans to bring to the medical market the highly decorative plastic imaging capabilities of cell phone case manufacturer Taiwan Green Point Enterprises Co. Ltd., which it acquired in 2007 for nearly $900 million.
“We can offer low-cost solutions and transfer knowledge from our automotive and consumer businesses into medical operations,” added Tyranski. “We can manufacture from a lean perspective and involve the design team to look at cost-reduction opportunities.”
Allan said Jabil expects growth of 25-35 percent in its industrial, medical and instrumentation segment — lower than in the past, “but still growing faster than any other market.” He also said the company “might acquire on a selective basis some existing facilities,” but it will approach mergers and acquisitions cautiously.
“We are focused on acquiring management capabilities and complementary capabilities,” said Allan. “It has to be the right opportunity with the right terms and conditions. We haven't changed anything when it comes to due diligence because of the economy. But we spend a lot more time with the customers of a potential acquisition target because we want to make sure we understand their needs and we want to ensure that the businesses we acquire are a steady business.”