Trends in Global Medical Device OEM Strategies and Issues for the Medical Device Supply Chain
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Trends in Global OEM Strategy mdmX Conference February 11, 2013 Anaheim, California Manning Advisors LLC Merger and Acquisition, Advisory, and Financial Services
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Presented at the February, 2013 mdmX Conference, Manning Advisors' Tony Freeman reviews issues facing the largest medical device manufacturers and implications for their supply chain.
Transcript of Trends in Global Medical Device OEM Strategies and Issues for the Medical Device Supply Chain
Trends in Global OEM Strategy
mdmX Conference
February 11, 2013
Anaheim, California
Manning Advisors LLC
Merger and Acquisition, Advisory, and Financial Services
Overview
o
The Question, Sources, and the Challenge for OEMs
o
The Strategies
o
Companies of Note
o
Issues For the Supply Chain
Presenter
Presentation Notes
How the leaders of these companies speak to the financial community Going from 50,000 feet down to the weeds – grand issues to specifics
Manning Advisors
o
Merger and acquisition advisor to middle-market specialty materials and precision engineering companies
o
Strategic planning and value development services
o
Market analysis and market entry planning
o
Approximately 50% of our assignments are in the medical device supply chain
•
Buy-side•
Sell-side
o
Based in New York City
o
www.manningadvisors.com
The Question –
Looking ahead, what are the key issues facing medical
device and diagnostic device OEMs?
Presenter
Presentation Notes
In other words, what are your customers doing? What is keeping them up at 3AM?
The Sources –
A Different Perspective
•
CEOs, CFOs, and SBU heads of the largest medical OEMs
•
Analyst/Investor Conferences
•
Capital Market Days
•
All events held in the last two years, most in the last 90 days
Presenter
Presentation Notes
Looked at how they speak not to you, their suppliers but to their investors
Who Are The Global OEMs?
o
The Manning 30 •
30 largest publicly traded/reported global device and diagnostic
equipment companies•
All have sales over $2 billion •
74% of 2012 medical device and capital diagnostic equipment market
$221.4 Billion
$78.5 Billion
2012 Global Medical Device/Diagnostic Equipment Market
Presenter
Presentation Notes
Focused on the 30 largest device/diagnostic equipment OEMs. They represent almost ¾’s of the global market by revenue
A Common Theme –
The Changing Nature of Growth
o
Revenue growth has slowed from 2008
o
Their key focus is reviving growth
o
Revival is not based on a stronger economy•
New markets•
New products
Has Their Growth Slowed? Yes
-5%
0%
5%
10%
15%
20%
2009 2010 2011 2012E
Year
Perc
enta
ge (%
) Δ
M30 Revenue % Δ M30 Op. Inc. % Δ Industry Organic Growth %
Sources: Manning Advisors, JP Morgan Healthcare Group
Presenter
Presentation Notes
Declining growth rates, Major OEMs buying growth through acquisitions
OEM Growth vs. Contract Manufacturers
0%
10%
20%
30%
40%
2009 2010 2011 2012E
Year
Perc
enta
ge (%
) Δ
M30 Revenue % Δ PPE % Δ CM Revenue % Δ
Sources: Manning Advisors, Covington Assocs.
Presenter
Presentation Notes
For comparison I charted OEM revenue growth rates vs. CM growth rate. I added PPE growth (declining)
Three Drivers Affecting Growth
o
Geographies with different dynamics•
Low growth developed countries 2-4% annual revenue growth•
High growth developing countries 6-20% annual growth•
Currently revenue split about 75% developed world, 25% developing•
1-2% delta in market share between developed world and emerging world per year at this time
o
Geographies with increasingly similar medical needs but different product needs•
Emerging market illnesses starting to match developed country diseases•
However, the product and manufacturing approach will differ by country
o
Healthcare economics are changing•
Pay for service is declining, pay for value/results accelerating
Four Common Strategies To Boost Growth
o
Cut costs
o
Pivot East and South
o
Change product lines to dominate the new realities
o
Acquisitions –
buying growth, buying R&D
Presenter
Presentation Notes
From presentation to presentation, variants of four broad strategies are mentioned
Cutting Manufacturing Costs
o
Fast, effective method of addressing declining profit growth•
High cost structures•
Significant overhead•
Rationalization of a string of acquisitions
o
Closing, consolidating facilities in North America/Europe•
Little investment in manufacturing in the US/Canada, Western Europe•
Investment in plants in Asia•
Examples•
Boston Scientific –
17 plants down to 12•
Biomet –
17 plants to 11, including 2 new plants in China
o
“Strategic sourcing”•
Use of contract manufacturers rising•
Siemens credits 1.8% growth in gross margin between 2007 and 2012 to supply optimization•
Covidien stresses rising gross margin since 2007 due to manufacturing cost savings•
Stryker is looking to reduce COGS 3-5% through outsourcing•
LCC content and research rising•
Between 2009 and 2012 Siemens moved from 17.5% to 20% of its manufacturing to LCCs, 30% of R&D.
•
Terumo to move 50% of manufacturing to LCCs
by 2017 from 31% in 2012
Presenter
Presentation Notes
The tide is running in the established North American contract manufacturers’ favor, for now. However, LCC CM’s are also benefiting.
Pivot East and South
o
China CAGR 3-4X developed countries•
Most optimistic statement –
Siemens Imaging in China to match US market by 2020 with 27% CAGR
o
Other key growth markets –
India, Southeast Asia, Latin America, Gulf States, targeted countries
o
Why the growth?•
The obvious cause -
growing wealth•
A more useful view –
increased access to healthcare
o
The implication –
Increase in local manufacture in growing markets•
J&J, St. Jude, Covidien, Stryker, Siemens, Danaher, Baxter, BD, Terumo, Zimmer, S&N, Varian
Presenter
Presentation Notes
Key statement of this presentation – China CAGR 3-4X developed countries. As important as strategic sourcing and a move to new markets are economic and technical changes that are forcing change in product strategies.
Changing Product Lines
o
2P to 5P/Need to focus on value
o
Entire procedures
o
Informatics and electronics
o
Refurbishing
o
Bifurcated product lines
o
Technological evolution
Presenter
Presentation Notes
Let’s start with economic issues and move on to technology
2P –
5P. What Is It?
o
Device-buying decisions used to be 2P•
Patient and Physician
•
Traditional fee-for service model
•
2P no longer economically viable•
Herbert Stein’s law –
“If something cannot go on forever, it won’t”
Presenter
Presentation Notes
US average life expectancy = 78.6 years with 17% of GDP Canada = 81.5, ~12% of GDP Japan = 83.9, 8% of GDP Germany = 80.2, 12% of GDP UK = 80.2, 10% of GDP China = 74.8, 4% GDP
2P –
5P, continued
o
World has moved/moving to a 5P world to determine how medical care, devices are purchased•
Patient •
Physician•
Provider (hospital/clinic)•
Payer (insurance cos. or governments)•
Policy Makers (governments)
o
Switch med device purchase from traditional pricing decision to a value decision•
5P being driven by hospitals chains, insurers, national health organizations•
Better outcomes at lower costs
o
Rise of Accountable Health Organizations (ACOs)•
Pay for results, not fee for service•
More payment risk on doctors, hospitals•
Bonuses paid for better outcomes and lower costs
Presenter
Presentation Notes
5P looks at medical decision making and device buying a different way.
5P Requires a New Product Strategy
o
If the result
rather than the activity
is key, device companies want more say in the entire process of treatment
o
Opportunity –
Hip Fracture Treatment•
Little consistency to treatment of broken hips•
DePuy/Synthes developed best practices from 911 call to rehab•
Have been training healthcare teams•
Result is a 20% decrease in hospitalization days•
Quicker recovery for patients•
Physicians and providers focused on higher value services•
Lower overall costs for reimbursers and taxpayers•
Providing products for each step in the process•
Dominating a market niche
o
Value-based reimbursement will drive go-to-market strategy
Not Just Discrete Products –
Integrated Offerings
o
OEMs offering a mix of products and services•
Siemens Healthcare systems integration and consulting•
Fresenius Medical offers:•
Devices for renal and liver disease treatments•
Clinic/hospital ownership and management•
Management consulting
o
Room for only 1 or 2 providers in a specialty in a hospital•
High capital investment to create a complete offering•
Broad spectrum of expertise to sell and support•
Smaller OEMs face barriers in a value-driven selling world•
There will be winners and losers
Rise of Informatics and Electronics in Devices
o
Advantages of informatics•
Value-base reimbursement requires continuous reporting and asset optimization
•
Tying together disparate systems, facilities, staffs, and equipment•
Average hospital HVAC system better integrated than an ICU•
Software and electronics become essential•
GE Healthcare, J&J, Siemens, Philips, CareFusion, Cardinal Health
o
Example –
Hospira automated infusion system•
7 manual steps vs. 24 in traditional infusion process•
Scan read prescription bar code presets the machine•
Automated record-keeping and reporting•
Saves $6 million per year in labor costs in an average US hospital•
Fewer medical errors
o
Big payoffs for OEMs with dominant position, not room for many players
Refurbishing Devices at the OEM Level
o
Evolving value trend
o
J&J 2011 acquisition of Sterilmed
o
Topic for Jason Wandersee
of MEDISISS
Bifurcated Product Lines
o
Premium product for US, Europe, Japan, private pay
o
Value product for emerging markets
o
Examples•
Manual hospital beds in Brazil•
Ultrasound units in China lacking pattern recognition technology
o
Manufacturing is likely to remain local
Technology Evolutions
o
Rise of neuromodulation/neurostimulation products•
11% of Medtronic revenues•
7% of St. Jude revenues•
Double digit growth rate
o
Marriage of biologics and devices•
Expansion of pharma trend boosts effectiveness and profitability
•
Biomaterials, particularly in ortho and cardio
o
Powered devices•
Energy-based products for treatment (RF, harmonics, UV)•
Adding power to traditionally hand-powered instruments
Acquisitions
o
Cheaper for major OEMs to buy growth than build it•
Market share•
Plays to global marketing/sales/distribution muscle•
More certain outcome than organic R&D
o
For the supply chain•
Compression of supply chain over time
Three Companies In Greater Detail
o
CR Bard
o
Covidien
o
Johnson & Johnson
Presenter
Presentation Notes
�Talked about general trends, let’s talk about specific appearances of those trends
CR Bard
o
84% of Bard’s revenues come from slow-growth US/European marketso
Revenues are near flat
o
Strategy must focus on innovation and economic value to win
•
Headwinds•
Hospital consolidations (fewer customers)•
Value-driven purchasing by those providers•
Demands for cost-efficacy data•
Broadened number of influencers (5P model)
•
Future trends•
Fewer winners in the future than in the past•
Product leadership within disease state is paramount•
Need to serve and be able to sell to a broader set of stakeholders•
Product offerings must be integrated, not discrete•
Clinical evidence must be paired with economic evidence•
As hospitals consolidate, there will be more concentration on opportunity costs and throughput –
more attention to cost effectiveness
Covidien
o
Focus on the emerging markets•
Double digit growth in the BRIC countries•
Product line split to continue•
Tier 1A products -
Premium•
Tier 1B products –
designed for national health organizations•
Tier 2 products –
Value
o
Using cost savings as a means of funding growth•
Manufacturing facilities down from 67 in 2008 to 51 today•
LCC content has grown from 10% to 14% in same period•
A strong focus on outsourcing
o
Economics of growth•
Acquisitions are proven method of expansion•
Price pressures are real and significant
Covidien’s
Revenue Growth Is Revealing
Johnson & Johnson
o
Largest player in the marketo
Approximately $28 billion in 2012 device/diagnostics revenue, including Synthes acquisition
o
2011 to 2016 expect 3-6% growth, less predictable than in the pasto
Downward price pressure, ACOs, challenging growtho
Strategies•
Focus on leadership position in high growth energy-based products (7% vs. 4%)•
Focus on chronic disease products, particularly diabetes•
Trend of informatic
products moving from hospitals to homes, mobile devices•
Reprocessing •
Will grow biologics business, particularly haemostatic device/compound pairings•
Optimistic can combine procedures/products/services into a 5P winner•
Acquisitions key to growth
Themes for the North American Supply ChainIssue Tailwinds/Headwinds Decision PointsStrategic sourcing by global OEMs
o
Continued flow to current CMso
Manufacturing. moving to LCCs
faster than market growth
o How match LCC labor costs, R&D, market proximity?
Pivot East and South o Short-term export benefitso Mfg. moving to emerging markets
o How offer premium and value variants of a device?o How match LCC labor costs, R&D, market proximity?
5P o
Broad portfolio CMs
best suited to approach medical systems work
o
Competition from electronics and aerospace CMs
with greater system integration experience
o Build or integrate systems, not just products?o Program management?o Cooperate with or offer services for systems?
Informatics and electronics
o
Few medical CMs
have meaningful electronics manufacturing, assembly, or software experience
o Add electronics assembly or development?o Add software development services?
Refurbishing o
Ability to build higher value, higher profit devices
o
Lower volumes
o Support refurbishing, recycling efforts?
Premium/Value o
Favorable LCC economics, market knowledge
o
Can offer both? Worth trying?o
Does a technological, intellectual, or location issue allow competition with local sources of value products?
Technology Evolutions o
Ability to build higher value, higher profit devices
o
Stepping into completely new areas of material science and manufacture
o
Is there value to moving into biologics, electronics, or powered devices?
o
Is program management with alliances sufficient or a first step?
Thank You
o
For more information please contact:
Tony FreemanManaging DirectorManning Advisors(917) [email protected]
Appendix 1 –
Manning 30Rank Company
2012E Revenues(USD billions)
1 Johnson & Johnson $ 27.9 2 Siemens Healthcare 18.13 GE Healthcare 17.54 Medtronic 16.25 Philips Healthcare 12.26 Covidien 11.97 Cardinal Health 9.68 Stryker 8.79 Danaher 8.1
10 Baxter International 7.811 Abbott Laboratories 7.312 Boston Scientific 7.213 Becton Dickinson 6.614 B. Braun 6.515 St. Jude Medical 5.516 3M Healthcare 5.117 Terumo 4.818 Toshiba 4.519 Zimmer 4.420 Smith & Nephew 4.121 Olympus Medical 3.922 Fresenius Medical 3.823 CareFusion 3.624 Bayer 3.425 C.R. Bard 2.926 Biomet 2.827 Varian 2.828 Hologic 2.029 Intuitive Surgical 2.130 Synthes (included in J&J) 0.0
TOTAL TOP 30 $ 221.4
Sources: Manning Advisors, Includes estimated device and capital
diagnostic equipment revenues.
Appendix 2 -
Presentations of note
o
Tim Ring, CR Bard•
Changing face of North American healthcare•
Why there is room for fewer companies to dominate•
JP Morgan Healthcare Conference, 1/8/2013•
http://jpmorgan.metameetings.com/webcasts/healthcare13/webcast_ow.php?p
=10799
•
Webcast requires registration and selection of the C.R. Bard presentation from list
o
Michele Orsinger, DePuy/Synthes•
2P to 5P evolution•
Johnson & Johnson Diagnostics and Medical Device Business Review, 1/22/2013
•
http://files.shareholder.com/downloads/JNJ/2295434626x0x629733/7c409e78-
76dc-42c9-8265-507a61850633/Afternoon_speakers_analyst_2013.pdf
