Wednesday, July 05, 2017
Interesting investment might cause upheaval among medical device contract manufacturers
Previously, I have received feedback with suggestions to write more about investments in the medical device field. I didn't want to mirror the usual press releases that suggest X invested Y in Z. I was on the look out for something really interesting and noteworthy that can be reviewed, and today landed on one such exact item! 3i, an investment company is investing $136mn in Cirtec Medical, already a leader among medical device contract manufacturers.
Contract Manufacturing in Medical Devices is highly competitive, with many small and large firms competing for customers ranging from the ideation stage to really large device manufacturers such as Johnson and Johnson, Medtronic and Boston Scientific. At the outset, it might appear that there is plenty of room for everyone, and while this is somewhat true, there are several issues that confront contract manufacturers and their customers. I'll lay out a few here:
1. This is a regulated industry. Which means, any old shop cannot start manufacturing medical devices. They'll need a Quality System, regulatory compliance, GMP and other Good Practice adherence, etc.
2. Capabilities can be limited for many organizations. Some may excel at capital equipment, some on disposables, and so on, making their specialties hard to choose from, and many times a product will have to be manufactured with two or three different entities, and the customer has to audit, select and manage them, as long as their products stay on the market.
3. Margins can be really low, even when the potential rewards could be high. This can cause contract manufacturers to be forced to select projects, which is not something they'd prefer.
4. The Medical Devices Industry is fraught with high failure rates, especially among start ups. Contract Manufacturers will have to put up with losses from such failures, including loss of scaled efforts, investments and so other financial pains.
5. Aware of all this, investment banks may not be ready to extend or increase lines of credit, which can sometimes become a positive feedback issue.
Of course, customers, especially large ones work with their contract manufacturers to help scale and succeed. However, as I laid out above, competition, margins and other issues make this a tough subsection of the medical devices industry.
As I mentioned before, Cirtec is already fairly large and successful, with three locations, a full range of services and the ability to design and manufacture a device from start to finish. This is why I believe the investment is a nifty shot in the arm for the organization. With such a large cash infusion, they can examine their capabilities end-to-end and fill gaps. While they expand and grow, they can also compete against others in the field from many different angles, including costs and capabilities.
And now, if you are a competitor, you have to go find your own investor, or another alternate technique to fend off Cirtec. This is where I think things can get really interesting. Another investor or two, that props up one or two competitors, say, for instance Creganna, which already saw an investment years ago, deep in the recession.
Another possibility would be the merger/acquisition among a few competitors. These are just some of the possibilities.
When one or more organizations in a field get disproportionately big, it does reduce competitiveness, limiting choices to customers. The chances that this might come to pass are low in the medical devices industry, but not negligible.
With the emergence of newer high technology such as Bluetooth, SDN, etc., on one end and constant innovations in 3D Printing, and in the future, 4D Printing, as well as in materials and manufacturing methods, newer, more nimble organizations can carve out sections of the market to themselves.
In addition, when organizations get to a certain size, they can't always stay as nimble as they once did. Larger organizations will also seize or seek customers of a certain size. So, smaller organizations can exploit such gaps and succeed.
All in all, with an investment like this, 3i is now going to induce all alert contract manufacturers to come up with competitive strategies. Competition for cost, quality and timely deliveries, should in the meanwhile, make for some happy customers. This is the kind of breakthrough that can actually help the medical devices industry go through innovative growth.
1. The investment announcement: https://www.pehub.com/2017/07/3i-to-invest-136-mln-to-cirtec/
2. Image, Courtesy Pexels: https://www.pexels.com/photo/black-calculator-near-ballpoint-pen-on-white-printed-paper-53621/