The overall number of mergers and acquisitions in the medical sector declined in 2011, but it's a different story in the contract manufacturing sector.
Increasing cost pressures and the continued push by medical OEMs to consolidate their supply base and have their contract manufacturers nearby have triggered a number of deals in that segment, and more are likely.
“We are going to continue to see a lot of merger and acquisition activity, particularly in the contract manufacturing business,” said Mark Bonifacio, president of Natick, Mass.-based Bonifacio Consulting Services LLC, which recently opened a West Coast office in Huntington Beach, Calif. “U.S. firms are looking to get offshore capacity, and foreign companies are looking to add capacity in the U.S.”
Last year, for example, Hudson, Wis.-based Phillips Plastics Corp. purchased medical injection molder Medisize Corp. of Vantaa, Finland, creating a $500 million company that has since been renamed Phillips-Medisize Corp.
Similarly, privately owned Vention Medical has transformed itself from a midsized medical-device contract manufacturer into one of the industry's largest with four acquisitions in the last three years — two of them in the last seven months, including its acquisition in November of Atek Medical Group, which comprises both Atek Medical and Atek Plastics.
Those acquisitions give Vention five plants in Costa Rica that have a total of 175,000 square feet of manufacturing space, a plant in Ireland and six plants in the U.S.
And talks persist that even more mergers are in the works among contract manufacturers.
“The merger and acquisition activity will continue at least through 2012,” said Bonifacio in an interview at the Medical Design & Manufacturing West show, held Feb. 14-16 in Anaheim.
“The two biggest drivers are that big OEMs are asking contract manufacturers to be closer to their own manufacturing locations, and that OEMs are looking to reduce their suppliers and also want suppliers that are more vertically integrated.”
He said, “I think we will see contract manufacturing organizations emerge that have more scale and that have sales of several hundred million dollars” annually.
“There is still room for more players” to get into that realm, he said. “You have to remember that the medical contract manufacturing industry is still very young. We are essentially seeing the rollups of Tier 2 and Tier 3 companies into Tier 1 companies.”
Jason Durkin, global director of finished product assembly and packaging for Nypro Healthcare, based in Clinton, Mass., agreed that changes are under way in the industry.
“Companies are becoming more dynamic, making acquisitions and growing fast, and Nypro needs to do the same,” he said. “Some of our competitors are buying capabilities, whether it be molding or design. We have to evaluate the dynamics and make the strategic decisions we need to optimize our service offerings.”
That consolidation, however, will present challenges for both the merged companies and the medical contract manufacturers that choose to remain independent. “Those that don't have that size or who don't attain that size will have to have a technology niche to survive and be able to compete on those capabilities,” Bonifacio said.
And the merged companies will need to make sure they properly rationalize their capabilities and integrate both their operations and their culture.
“I see rough waters ahead of all these guys” who are merging, said Tim Reis, vice president of health-care business development for precision molder and contract manufacturer GW Plastics Inc. of Bethel, Vt. “You need to integrate all those entities into a cohesive group and sometimes you also start to lose approachability” in a larger organization.
“We're focused. We're a lean organization. Our ownership is strong and financially stable,” Reis said. “I see it as an opportunity for us with all these rollups and mergers that are occurring.”
“It is really important to have the leadership at the top to help with the integration and to make sure the incentives are aligned with the integration,” added John Thomas, who handles the West Coast operations of Bonifacio Consulting. “You have to change the incentive side to foster that collaboration” among the different parts of the merged company.
Companies also need to address the “soft side” and corporate culture issues, added Bonifacio. “You have to integrate that properly and it's something that you can't put into a spreadsheet” to get done.
In addition to more mergers and acquisitions, Bonifacio sees a number of other trends in the medical market:
* Growth in the minimally invasive surgery market as physicians seek ways to do those types of surgeries by entering through natural orifices such as the ear, nose and throat.
* More products in a category Bonifacio calls tele-medicine, where a mobile-phone device, for example, can monitor your blood pressure. “That is going to be huge,” he said.
* Mini-components, mini-implant devices and mini-electronics, such as cameras the size of a pinhead.
* The use of laser three-dimensional technology to measure things.
* Advances in tooling as companies continue to innovate, said Bonifacio, to see “how tiny they can make a die.”
* More technology transfers across borders as growth accelerates in lesser-developed countries.
Location-wise, Bonifacio said the trend to site plants in Costa Rica and the Far East will continue.
“You had OEMs go into Costa Rica and all the contract manufacturers have followed,” he said.
“People are also going to the Far East, but not just to have low-cost manufacturing products that they can sell elsewhere,” he said. “Companies want to build plants there to sell products on the ground as the markets develop” in countries like China.
“I can't emphasize the global thing enough,” said Bonifacio. “Those who aspire to good growth need to be in other countries and need to understand what the markets need in different geographies.”