Some two months after they gazed into their crystal ball to look ahead to 2009, medical device contract manufacturers remain optimistic about how the year will turn out, and a number are even embarking on expansions.
But the economic climate has ratcheted up cost pressures and triggered an unexpected, but not unwelcome, scrutiny of their financial books by their customers.
“We are still looking for double-digit growth of about 10 percent for the Americas, in excess of 15 percent for Asia and single-digit growth of 6-8 percent in Europe,” Paul LaFond, sales director at Nypro America Healthcare, a unit of Nypro Inc., said in an interview at the Medical Design & Manufacturing West show. The event was held Feb. 10-12 in Anaheim.
But, at the same time, LaFond said, “We also are seeing a lot of cost pressures, which is something that we always have had in our general medical business, but not in drug delivery and diagnostics.”
“[Original equipment manufacturers] are creatively shifting more risk to contract manufacturers,” he said. “It started with the major firms and now we are starting to see additional players jump on the same strategy.”
Matt Langton, vice president of sales and marketing for United Plastics Group Inc. in Oakbrook, Ill., sees a different kind of cost pressure.
“We see big suppliers constricting terms as tight as they can and customers trying to stretch things out,” he said. “Compared to where we were eight weeks ago, there is still a lot of uncertainty. But we feel good about where we will be in six to nine months. We expect our medical business will grow about 15 percent based on business we have already won.”
Indeed, UPG has an abundance of product launches scheduled to get under way in the second half of the year, said Chief Executive Officer Larry Wilton. “We have gained traction like crazy,” he said. “Our yearly run rate in the last half of the year will be one-third of the company's sales.”
Those still-strong growth rates don't mean that people aren't worried about how the economic downturn might change things.
“People are scared, very nervous,” Wilton said. “They want to know if you are financially strong. When you meet with a company in Europe, the first question they ask you is if you are going to still be in business.”
Nypro's LaFond agreed. “There is a lot more due diligence” from a financial standpoint, he said. “Companies we have been doing business with for years are asking for more than just the annual report numbers we usually give them. Health-care companies want to mitigate their risks.”
“More and more customers want to look at your books to see if you are financially stable,” said Roland Beck, president and CEO of Tessy Plastics Corp. in Elbridge, N.Y. “They want to make sure you will be around.”
But none of that is deterring companies from expansion plans.
By April, UPG should have completed a clean room expansion in Minnesota that will add 10 machines, ranging in size from 50-200 tons, to make products for the large medical-device manufacturers in that area.
UPG also is doubling the size of its clean rooms in Fremont, Calif., and Suzhou, China. “We have good traction with hospital-type products such as respiratory and intravenous devices, infusion devices and in the diagnostic area,” said Langton.
“But we are growing more in China and Mexico where we do value-added work than in the U.S.,” he said. UPG's operations in Monterrey, which recently doubled in size, are at full capacity and its facility in China will be three-quarters full by the end of the year.
What's more, most companies are looking to make medical devices an even greater part of their business.
Mack Molding Co. in Arlington, Vt., which entered the medical market in 2002, has increased medical to 35 percent of its $300 million in annual sales from 25 percent two years ago. The company is on schedule to derive 50 percent of its sales from medical by the summer of 2010, said Jeff Somple, president of Mack Molding's Northern division.
Likewise, medical will soon represent 55 percent of the $150 million in sales at Tessy, according to Beck.
UPG and Nypro also are increasing the percentage of their sales from medical.
“It would not bother me at all if we were 100 percent medical,” said Wilton of UPG, which has reduced its automotive business to less than 20 percent of its business, and, which, by the end, of 2009, will have nearly 30 percent of its sales from medical. “The entry barriers are higher and people come to you because you have expertise. If we hadn't changed, it is quite debatable as to whether we would even be around.”
“We are in excess of 25 percent medical,” said LaFond of Nypro, a $1.2 billion company based in Clinton, Mass. “Medical will be approaching 30 percent of our business shortly. Our goal is to be in excess of 35 percent in medical.”
In addition to internal growth, LaFond said Nypro acquisitions in the health-care arena also are a possibility. “That may be another benefit of the economic downturn,” he said. “That may open up a few more possibilities” at companies that might be encountering financial problems, or who have a small pipeline of products and see a need to join forces with another organization.
“What we are looking for is a good fit that would allow us to increase the footprint in the strategic direction we want to go,” he said. “We look for companies with good execution and look at what [customer] accounts they have. That is one of the measuring sticks.”
The expansions and ambitious plans for growth coincide with increasing demands from OEMs on both contract manufacturers and material suppliers.
“The demands are more for complete assembly,” said Beck. “Our customers want products that are designed, assembled, inspected and shipped.”
David Mabie, vice president of business development for Atek Medical Manufacturing in Grand Rapids, Mich., also sees interest from OEMs in partnerships that push more projects down to contract manufacturers and design companies.
“More and more of the medical-device OEMs are looking for us to be manufacturing partners, because they are all being pinched to reduce costs and to reduce the costs of their [research and development], and we expect that trend to intensify,” said Mabie. “If you look at all the design companies, they are swamped and buried with work just in the past year because of how the OEMs are cutting back on R&D.”
“There are a lot of pressures to optimize material and systems solutions for our customers,” said Scott Hanson, global industry leader for the medical market segment of of Eastman Chemical Co. The specialty plastics business is based in Kingsport, Tenn. “Companies want us to get involved early in the process to facilitate mold and part design and optimize the production process.”
There also is a greater need to understand the customer's problems and the issues that could affect them, said Thomas O'Brien, industry manager for health care for Sabic Innovative Plastics US LLC in Pittsfield, Mass.
“We need to understand what is coming down the pike whether it is regulatory or the home health care piece to solve problems for our customers,” said O'Brien. “Our customers want us to continue to develop more functionality with our resins and to improve their performance by taking out cost and weight. We need to be able to work with molders and OEMs. Application developers are pushing their customers to get more involved.”
Larry Johnson, marketing director of health care for PolyOne Corp. in Avon Lake, Ohio, agreed.
“We are working more and more with customers on new regulations that they must meet. Our customers have problems wading through all their regulations and it makes them time to market longer” unless they get some help, he said.
Johnson said PolyOne has put together a product stewardship group to working on regulations from the Food and Drug Administration, the Consumer Product Safety Commission and several European initiatives, including the EU's Restriction of Hazardous Substance directive.