I’ll be presenting on “Global Trends in the Medical Device Industry and the Supply Chain” at the MPO Summit in Colorado later this week, Thursday October 11 at 9am. If you’re attending, please say hello.
Medical Device
I was asked to contribute an article for the 15th anniversary of MPO Magazine. In it, I reflect upon the growth of the medical device industry and supply chain since 2003. In addition to a discussion of the trends for the last 15 years, there is a section on future trends. Read the full article here. If you have comments or questions, please feel free to contact me at tfreeman@asfreeman.com.
Cadence, Inc., a medical device contract manufacturer has agreed to be acquired by the private equity firm Kohlberg & Company. Terms were not announced. Cadence had its origins in edged and pointed instruments and expanded to full contract manufacturing with the addition of assembly and additional metal working facilities. The company’s 2017 revenues were $96.7 million with $20 million in EBITDA. Kohlberg’s strategy has been to acquire platform companies with an eye to the acquisition of additional bolt-on acquisitions.
On April 6, 2018 NN, Inc. (NASDAQ:NNBR) announced that it would acquire Paragon Medical for $375 million cash. Indiana-based Paragon, a major orthopedic contract manufacturer, had 2017 revenues of $141 million and EBITDA of $24 million. The offer values Paragon at 15.6 times EBITDA on a nominal basis. NN stated that the multiple is best viewed as 9.3X because of significant Year 1 cost synergies including $7.8 million in Day 1 synergies. Details of the synergies were not presented. NN has been an active acquirer of medical device supply chain companies. In 2015 NN bought Precision Engineered Products (PEP), a diversified manufacturer notable for its medical focus. In 2017 NN acquired DRT Medical, an orthopedic machiner. It also acquired Bridgemedica, a device design company, in February 2018. While the Paragon deal multiple may appear high, there is a strategic rationale for NN’s actions. NN’s historic portfolio of industrial businesses have tended to be slower growth and lower potential profitability than medical suppliers. Last summer NN sold its precision bearing company for $375 million, cash still on the books as of year-end 2017. While NN may have paid a premium for Paragon, the move fits with their strategy of swapping businesses with a limited future for medical contractors. In that strategy NN joins Danaher, Teleflex, TE Connectivity, and ITW as American manufacturers changing direction and using significant resources to do so. For detailed information on the transaction please view NN’s presentation: http://phx.corporate-ir.net/phoenix.zhtml?c=110673&p=irol-Agreement Please contact Tony Freeman at tfreeman@asfreeman.com or (917) 868-0772 with comments and questions.
Recent news stories on the possibility of tariffs on Chinese products imported to the United States have focused on industries tangential to medical devices. However, on April 6th the New York Times published a thought-provoking piece on the impact of these kinds of tariffs on medical device pricing. The article suggests that tariffs will likely raise the price of devices in the U.S., although few details or specifics are given. At A.S. Freeman Advisors, our take is more nuanced. Because of its competitive nature, the North American market would be able to absorb much of the fabrication side of the tariff impact, ultimately leaving prices only modestly higher, if at all. More work would flow to non-Chinese facilities, including those in the United States. This will mean that demand for the work of supply chain companies is likely to increase sharply. Of greater concern to domestic manufacturers should be the effect of tariffs on the cost of raw materials sourced from China. It may prove difficult to switch to domestic steel and aluminum, forcing U.S. manufacturers to deal with higher materials prices. Please contact Tony Freeman at tfreeman@asfreeman.com with comments and questions.
I am pleased to announce the publication of A.S. Freeman Advisors’ “2018 Global Trends – Medical Device and Diagnostic OEM Strategy, Implications for the Supply Chain” annual presentation. The presentation covers: Size of the global device market Industry growth rate 30 largest OEMs and their percentage of the market Trends driving the re-design of medical device product lines Consolidation and its effects on the supply chain Growth of global contract manufacturers Four essentials for medical device contract manufacturers to expand in this environment The presentation is available at no charge. Please visit https://asfreeman.com/pf/global-trends-report-2018/. Additionally, A.S. Freeman Advisors will be happy to present these findings with comments customized to your company. To arrange a date please contact me at tfreeman@asfreeman.com. We welcome the opportunity to discuss these timely issues.
Johnson & Johnson released its Q4 2017 results on January 23, 2018. The company’s Medical Device division reported 6.5% year-on-year growth. Adjusted for acquisitions, worldwide global growth was 2% over the same quarter in 2016 with near-flat results in the United States. Cardiovascular, vision care, and advanced surgical products showed solid revenue gains with orthopedic products and diabetes care sales declining. Alex Gorsky, J&J’s CEO stressed 2018 initiatives include robotic surgery systems and digital devices. Our analysis is that J&J remains committed to revive its substantial but slow-growth Medical Device division via two strategies. The first is to move away from markets where it lacks a strong competitive advantage. Examples include the divestiture of its Cordis cardiovascular products to Cardinal Health and of Codman Neuro to Integra LifeSciences. The second strategy is to bring J&J’s tremendous technical and financial resources to bear in desirable evolving markets where it already has strength such as surgical products. The next two to three years should reveal a realigned J&J product offering. For the complete Q4 2017 J&J Earnings Presentation please visit: http://www.investor.jnj.com/events.cfm
Sales of medical devices increased 6.8% in 2017 from a combination of: Organic growth Acquisitions by major OEMs to round out product lines Currency fluctuations Greater detail will be available with the publication of A. S. Freeman Advisors’ “2018 Global Trends in Medical Device and Diagnostic OEM Strategy and Implications for the Supply Chain” on February 2, 2018. For more information or to schedule a presentation of the results please contact Tony Freeman of A.S. Freeman Advisors, LLC at tfreeman@asfreeman.com or (917) 868-0772.
Medical Product Outsourcing (MPO) has published its annual report on the Top 30 companies in the Global Medical Device marketplace. The ranking of companies includes reporting on industry trends of the past year. The piece features Tony Freeman’s insights on the performance of Medtronic, Johnson & Johnson, Becton, Dickinson and Company, and Stryker.