Rosy forecasts for growth rates of 15 percent in 2009 turned out to be a little too optimistic. But medical-device manufacturers and contract manufacturers, while still cautious, are forecasting that 2010 will bring them the double-digit growth that evaded many of them last year.
2009 was just a hard year and everybody knows it. If you didn't add new business, you were in trouble, said Larry Wilton, CEO of UPG International Inc. in Oak Brook, Ill. We had small, single-digit-volume growth. But this year we will have double-digit growth again.
Similarly, Nypro Inc. in Clinton, Mass.; GW Plastics Inc. in Bethel, Vt.; and Mack Molding Co. in Arlington, Vt., are also projecting high-single-digit or double-digit growth for 2010 in their medical businesses, along with Len Czuba, president of design and development firm Czuba Enterprises Inc. in Lombard, Ill.
Companies who supply molded products were swamped with orders in the fourth quarter of 2009, Czuba said. I think we are poised for significant growth this coming year maybe high-single-digit growth.
The industry will be growing at double-digit rates again, and we will be growing a bit faster than that, said Brenan Riehl, president and CEO of GW Plastics. We grew in lock step with the marketplace in 2009.
Likewise, Nypro is looking at low-double-digit growth in 2010, after the company exceeded its targeted 6 percent growth rate for 2009 with a growth rate of 9.2 percent, said Brian Payson, vice president of Nypro Healthcare.
Payson said the company's medical business received a boost from products used to treat the H1N1 virus and two new insulin-delivery devices that had higher market acceptance than anticipated. We didn't see any significant impact on our business from the economy other than a couple of development programs that were shelved as customers were requiring higher return rates on their investments.
Mack Molding also foresees strong growth in its medical business in 2010.
After a flat 2009, we are looking at a pretty strong 2010 with an overall growth rate of 10-15 percent in our medical sector, said Jeff Somple, president of the company's northern division. We see strong growth in orthopedics, disposables, instruments for surgeries and diagnostic devices. We are very bullish for the next four to five years.
But 2010 will also have its challenges, including limited capital availability, a still-shaky economy and uncertainty over what impact federal health-care reform might have.
Access to capital will be one of the most critical issues for medical molders and device makers, said Riehl, Czuba and Matt Langton, vice president of sales and marketing for UPG.
Similarly, Mack Molding, which self-finances all of its investment projects, said making sure the company is in position to make capital investments is a top priority.
Molders need to make investments in their equipment and operations before any of the revenue from new products starts to come in, said Somple. You have to be financially strong to be able to carry that out. Our biggest challenge will be to be able to grow intelligently and invest in a way to allow us to grow at a nice, steady pace.
Langton said one of the most difficult issues in 2010 will be access to financing, and the interest rates for capital financing. Lenders are looking for companies that have a solid business plan, good profitability and a business that is under control, not risky.
Riehl of GW Plastics agreed.
There will be limited access to capital because of the ongoing economic climate, so the cost of capital and access to capital will again be a challenge in 2010, with lenders having a preference for companies with continuity of ownership and leadership at the top, Riehl said.
That access to capital is critical to molders, he said, because of long product-development cycles that necessitate that molders have equipment in place before they begin actual production.
As a company, you have to have a strong balance sheet so you can have access to capital and can grow with leading health-care partners as they expand on a global basis, he said.
Czuba worries whether companies will place that money into new product development even if capital is available.
When there is a challenging economy and dollars are limited, companies focus on keeping existing products going, he said. That is consuming a larger portion of their dollars, along with the costs to be compliant with Food and Drug Administration compliance requirements. So you see new product development squeezed. Smaller companies continue to innovate because they know that they have to innovate to succeed, but innovation suffers at larger companies.
In addition, the specter of federal health-care reform looms large over the industry.
There are obviously a lot of worries and issues within the industry, said Venkat Rajan, industry manager for the medical-device team at research and consulting firm Frost & Sullivan of Mountain View, Calif. If device companies have to pay a tax, there will be less capital for them to spend, less money to invest and spend on R&D, and they will have less money to acquire new companies.
But at the same time, if Congress passes a federal health-care reform bill, it could also expand coverage, add more insured patients, reduce the number of uninsured treatments and give a boost to well-care products and procedures, which could be a safety net when economic downturns hit, Rajan said.
Another concern related to reform is reimbursement stagnation and whether insurance companies and providers could pass on the concessions they would be required to make and the new costs they might have to incur to the medical-device industry, Rajan said.
That could lead to pricing pressures and could almost be like a double tax to medical-device manufacturers, Rajan said.
We are just not sure of what the impact will be so we are being cautious, said Payson of Nypro. We have some fears that it will compress margins. The other question is how insurance companies will react.
Despite that uncertainty, Rajan is projecting a compounded annual growth rate of 9-11 percent between 2010 and 2016 for the $20 billion orthopedic market, and a CAGR of 10-12 percent for the $14 billion cardiology market.
He projects even higher CAGRs of 18-20 percent for the $4 billion neurology/neurovascular market and 14-15 percent for the $3 billion plastic surgery market.
The best growth areas for medical will most likely continue to be diagnostics, drug-delivery devices, orthopedic products and products for home health care that are easier for consumers to use.
Orthopedics will be a large area of growth because of the aging and active population, said Somple.
He also said the trend toward use of disposable instruments in surgeries will be a boon to contract manufacturers. A lot of products that have typically been reusable are going disposable because of the threat of infection and the sense that it will reduce costs overall because it will eliminate expensive sterilization costs, Somple said.
That trend opens up opportunities for molders to use a whole new world of materials, Somple said.
Our material options are pretty exciting because as the market shifts to disposables, materials can be evaluated for how they perform for a one-time use, not for 150 uses.
Medical-device manufacturers and contract manufacturers continue to be concerned with the slow pace of economic recovery.
The economy is not that great and I don't see the economy getting great anytime soon, Somple said.
Langton agreed. We are going to proceed very cautiously with the way we lay out capital. I don't trust the economy. So you have to consider that before you make a large move.
What's more, many molders expect that outsourcing by device manufacturers and increasing demands on contract manufacturers will continue in 2010, and that there will be continued pressure to reduce costs, as there was in 2009.
We continue to see outsourcing by device manufacturers of everything from product development to complete manufacturing, said Riehl. In fact, we are seeing an acceleration of this trend.
Larry Bell, vice president of business development and marketing at GW Plastics, agreed. Original equipment manufacturers don't have enough people to develop and bring to market advanced technologies, so they have to lean on key suppliers and are coming to us earlier than in the past. They want us to do more assembly, more supply-chain management and more contract sterilization work.
Payson also agreed. Our customers are asking us to do more and provide broader services.
Molders also expect more competition as more injection molders, faced with declines in other markets, turn to medical because of its stability and greater growth opportunities.
There will be increased competition as more and more companies try to bolster their business by broadening their portfolio, Payson said. We need to continue to focus on program management and operational excellence.
Cost pressures on the industry are expected not only to continue, but increase in intensity.
We are going to continue to see more cost pressures in 2010, Riehl said. We are spending a great deal of time in lean manufacturing and standardizing our operation.
But those pressures also bring with them opportunities for companies to develop new products that address market trends, Somple said.
The hot button will be products that reduce overall costs or products that reduce the time patients spend in hospitals or in surgery, he said.
There will also be opportunities for companies that can deliver products to emerging markets and manufacture devices consumers can use for patient-administered therapies, Payson said.
Czuba said he sees opportunities for the development of minimally invasive devices designed to be used at a specific site or for a specific surgery, and for items such as bioabsorbable stents.
In addition, he sees companies focusing on new materials to replace materials such as PVC and bisphenol A, which have been controversial because of potential safety concerns. Companies also will work to incorporate electronics and sensors into products to support things such as remote surgeries and better diagnostics.
I believe there will be a lot of improvement in diagnostics to test for early onset of infection, said Czuba. Anything that offers improved diagnostics or better outcomes with less-invasive surgical techniques is going to be in demand because governments and insurance companies are pushing companies to be more cost-effective with their devices and products.
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