Medical Device Link.

Originally Published MX May/June 2004

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

With an ever-expanding menu of services, full-service outsourcing firms are reshaping medtech's vendor community.

Steve Halasey and Courtney Harris

As cost pressures on the healthcare system have mounted over the past decade, an increasing number of medtech manufacturers of all sizes have been forced to take a long look at the cost-efficiency of their operations. And many such companies have come to the same conclusion: outsourcing is the way to go.

Meanwhile, the companies that have traditionally provided goods and services to medical device manufacturers have been anything but idle. This article looks at eight such companies that are redefining the nature of outsourcing for the medical device industry (see Table I). By offering an ever-increasing array of services, these companies have begun to distance themselves from more-traditional contract services firms. And along the way, they are also raising the competition in medtech's vendor community to new heights.

Where's Your Biz?

Figure 1. Domestic and international presence of full-service medtech outsourcing firms. (click to enlarge)

Making the right decisions about where to manufacture its products can help a company take advantage of reduced labor and distribution costs, while also creating a foundation for future market expansion. In keeping with the needs of their customers, full-service outsourcing firms maintain facilities with differing capabilities in a wide range of locations (see Figure 1).

Domestic Facilities. Most full-service outsourcing companies maintain a strong presence near their major customers, which are inevitably based in the United States.

"It is increasingly important for outsourcing firms to be near their medtech customers," says Randy Bormann, general manager of the design center at UTI Corp. (Collegeville, PA). "Proximity and hands-on involvement are especially important during the development cycle. But as the process moves toward the production side, it's not as important."

In today's marketplace, however, proximity may not mean the same thing as it did a decade ago. "As a service provider and exporter located in a geographically distant location, we have benefited enormously from the advent of the Internet," says Paul Wright, CEO of Invetech Pty Ltd. (Mount Waverley, Victoria, Australia). Nevertheless, Invetech has recently opened an office in San Francisco to serve its North American clients, and the company maintains "a robust international exhibition schedule," says Wright.

"Location and logistics have generally become less critical to the success of a manufacturing outsourcing partnership," says William Ellerkamp, vice president for market development at MedSource Technologies Inc. (Minneapolis). "This is because manufacturing systems have benefited from lean manufacturing, better integrated forecasting and planning systems, very sophisticated regional distribution centers, and logistics services companies with extended reach and efficiency."

Offshore Outsourcing. Although the domestic presence of full-service outsourcing firms remains a dominant force, such firms are also prepared to seek out the savings that can be provided by low-cost labor in other markets.

Mexico is a favored site for such facilities, with most outsourcing companies selecting sites near the U.S. border. Both UTI and Plexus Corp. (Neenah, WI), maintain plants in Juarez, Mexico. Avail Medical Products (Ft. Worth, TX) has recently opened a new 30,000-sq-ft manufacturing facility in Tijuana, Mexico, bringing the company's total number of facilities in that city to six. Farther south—and away from the U.S. border—MedSource Technologies maintains a facility in Navojoa, Sonora, Mexico.

A number of full-service outsourcing firms have opened offices or full-scale manufacturing facilities in Europe. Avail maintains a European headquarters in Luxembourg and a distribution site in The Netherlands; Plexus has two plants in Scotland and another in England; TriVirix (Durham, NC) has a manufacturing facility in Northern Ireland; and UTI has facilities in Germany, Ireland, and England.

For sheer number of European facilities, however, B. Braun OEM/Industrial (Bethlehem, PA), a subsidiary of Germany-based B. Braun Medical Inc., is the runaway leader. Not counting the company's facilities for pharmaceutical manufacturing, B. Braun maintains medtech outsourcing operations at 11 facilities positioned throughout the continent.

In Asia, full-service outsourcing firms are just beginning to get a toehold. Plexus maintains facilities in Penang, Malaysia, and in Xiamen, China. It recently approved a $12 million project to create a 164,000-sq-ft expansion facility in Penang, which will also house the company's Asian design center.

As in Europe, B. Braun OEM/ Industrial is also the biggest full-service outsourcing player in Asia, with facilities in Goa, India; Hanoi, Vietnam; Penang, Malaysia; Shenyang, China; and Tochigi, Japan.

What Can You Do for Me?

Among the areas of specialty listed by full-service firms are nearly all of the high-volume types of medical devices—from intravenous administration systems to handheld surgical devices—as well as high-end implantable devices and instrumentation systems. Depending on the expertise required to develop and manufacture a particular device, medtech companies may be able to select from among several full-service firms with immediately relevant experience (see Table II).

Design Services. With more and more medtech companies focusing their attention—and their funding—on core areas in research and development, outsourcing firms are being called upon to play on an ever-greater role in final product design.

"Medtech companies are spending enormous amounts of money on research," says UTI's Bormann. "But they're allocating internal human resources differently and looking to outsourcing companies to supplement or, in some cases, become an extended part of their team to accomplish their mission."

One factor that has contributed to the willingness of medtech companies to turn over product design functions is the complexity of meeting FDA design control requirements.

"The changes in design control requirements have narrowed the playing field, especially for Class II and Class III devices," says Josh Rose, director of marketing at TriVirix. "While in the past medical device OEMs could turn to a generalist contract manufacturer for product development services, today they are far better off partnering with a contract manufacturer that is exclusively focused on the medical device industry. Contract manufacturers with a medical-only focus are not only well versed in the regulatory requirements, but also have the systems, procedures, and policies to ensure that compliance and controls are built-in."

Engineering Capabilities. The complexity of today's medical devices often means that medtech companies are starved for the engineering talent they need to develop their products.

In today's economy, it can be difficult for a medical device company to justify hiring full-time staff in noncore areas of R&D, says Chris Rozewski, director of customer development at Plexus. "Not only are full-time staff often underutilized at an OEM, but the carrying cost of tools, support, and training doesn't make sense if there is a lack of active projects over which to allocate these costs."

UTI's Bormann concurs. "Demand is such that there is a need for full-time outsourcing engineers to support their customers," he says. "Today, companies have fewer employees, and small companies in particular might not have a full complement of human resources. To get themselves up to speed, companies are shifting their outsourcing to companies that can hit the ground running and not tie-up their resources."

"Today, a full-service contract manufacturer is expected to be able to offer the basic repertoire of engineering disciplines such as mechanical, electrical, software, and materials engineering," adds TriVirix's Rose. "But there is an increasing demand to augment these with additional engineering services.

Even so, there are still certain types of engineering that companies typically consider a core competency and prefer to keep in-house.

"Medical device OEMs will always be in a better position to evaluate marketplace and end-user needs. Often, areas of the product that interface directly with the patient or caregiver make the most sense to retain as core to the OEM," says Rozewski.

Manufacturing. Nowadays, companies of all sizes are about equally likely to turn over all of their manufacturing functions to an outsourcing firm. "It really comes down to what the companies think their core competencies are," says Bob Kronser, executive vice president and chief technology and strategy officer at Plexus.

"Several years ago, outsourcing was viewed as a mechanism to reduce the cost of specific components or subassemblies," says TriVirix's Rose. "Today it's more of a strategic decision, often made at the highest levels within the medical device organization."

"Investors are increasingly influencing the outsourcing decision by expecting higher return on invested capital (ROIC) from the publicly traded large and midsize medtech companies," says MedSource's Ellerkamp. "And they are also influencing start-ups by encouraging them to focus on exit strategies—acquisition specifically—which place a fairly low premium on manufacturing assets."

Fortunately, full-service outsourcing firms offer an array of manufacturing services that can complement any device company's in-house activities. Many full-service firms offer plastics molding, extrusion, and fabrication services. Most firms also offer various kinds of metalworking capabilities.

The increase of medical products that incorporate electronics is also supported by the full-service outsourcing community. A number of firms offer assembly of electronic and electromechanical devices, starting at the level of the printed circuit board and advancing through complete device assembly.

What Else Ya Got?

Providing services in the traditional fields of design, engineering, and manufacturing may be the bread-and-butter for most supply firms, but they're hardly enough for those on the full-service edge.

"Companies are expecting their outsourcing partners to play an ever-expanding role in getting the product to market, including direct fulfillment, installation, and service," says Plexus's Kronser.

Supply-chain management is among the most common menu expansions being offered by full-service outsourcing firms. According to supply-chain experts, medtech companies can benefit from working with an outsourcing partner that knows how to maximize its purchasing power with suppliers.

Frequently, outsourcing firms that can manage the front end of the manufacturing supply chain also offer fulfillment and logistics services at the back end of the process.

Other offerings that are beginning to crop up more frequently among full-service outsourcing firms include assistance in developing an R&D strategy, support for clinical trials, and project-risk analysis.

Somewhat more exceptional are the offerings of Invetech, which provides market research, business and financial analysis, technology evaluation and selection, technology valuation, and commercialization planning services.

Conclusion

Full-service outsourcing firms already have a lot to offer medtech companies—and they're looking to offer more. Fortunately, finding customers to support their plans for business growth does not appear to be an obstacle for such companies.

"This is a growing part of our business that has always been a priority in the United States," says Tom Black, vice president for OEM sales and marketing at B. Braun OEM/Industrial. "It is also gradually becoming more important internationally, as medical product companies are learning the value of outsourcing for their global strategy."

"Yes, there are more competing full-service firms," admits UTI's Bormann. "But that just indicates how many medtech companies want to align with competent outsourcing firms that can offer a multitude of services, rather than absorbing the cost and management challenges of handling multiple resources."

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