New CEO is molding company to suit OEM needs for European expansion and high-volume device production.
You don’t get to be one of the world’s top injection molding companies by standing still. So, when Matt Jennings became president and CEO of Phillips Plastics in April 2011, he duly noted the company’s strong business foundation and then made several moves to build on it.
One of the first orders of business for Jennings was to complete the acquisition of Medisize from Ratos AB, a Finland-based provider of design and manufacturing services to the medical device and pharmaceutical industries. The share-sale purchase builds on Phillips’ 30-year-old medical business and gives the combined companies total revenues of around $500 million. Jennings also reorganized the company, which is headquartered in Hudson, WI, into two divisions, one forts medical and one for its commercial business.
Completed this past August for an undisclosed amount, the Medisize acquisition fulfills Phillips’ need to expand operations in Europe, Jennings says. The CEO notes that he and the management team are heeding customer entreaties by enlarging Phillips’ European footprint. The internal reorganization and European expansion are two of the four areas Jennings identifies as important steps the company needs to take in order to ensure long-term growth.
Founded in 1964, Phillips has 14 manufacturing locations in the United States, with design centers in Wisconsin and California. On the medical side the company touts more than 176,000 sq ft of space dedicated to medical manufacturing as well as FDA-registered Class 7 and 8 cleanrooms.
Jennings came to Phillips Plastics from Teleflex, where he was president of the North American medical division. The company, which specializes in a range of products for medical applications such as vascular access, respiratory care, and surgery, reported revenues of $1.9 billion and customers in more than 140 countries. Jennings also served as president and CEO of Bioenterprise, a bioscience business founded jointly with the Cleveland Clinic, Case Western Reserve University, and University Hospitals Health Systems in Cleveland. He also held a number of executive positions for 12 years with Baxter International and Allegiance Healthcare.
Jennings holds a BA in marketing from Miami University in Oxford, OH, and an MBA in strategy and business development from Michigan State University. Among his board of directors memberships are positions with Phillips, Canadian Hospital Specialties, and ibiliti, a North Carolina—based online network designed to foster medtech start-ups.
In this MX interview, Jennings talks about his initial plans after taking over from former CEO Brad Wucherpfennig, the speed-to-market challenge facing OEMs, the demands of making ever-smaller devices, simplifying the supply chain, and the potential impact of the pending device industry tax.
MX: What were your plans for Phillips Plastics when you became president and CEO in April? Did you have any specific steps in mind when you decided to take the job?
Matt Jennings: Absolutely. The overall strategy was to build on the great foundation that Phillips has established over the years by investing in people, technology, and facilities. Phillips today designs and contract-manufactures both components and finished products for the commercial, medical device, and drug-delivery industries. What I saw was a company that is particularly good at making complex products that deploy advanced molding, automated assembly, and quality control technologies.
For years Phillips has led in advancing plastics molding technologies. This includes metal-injection molding, advanced multishot molding, and inline decorative plastics painting and printing. With all that said, we heard from our customers that we really needed to expand some of our capabilities and our global footprint. Not having these hindered the growth of Phillips. As a result, there were four main areas I wanted to address early on to further position Phillips for growth. These were to bring a customer-focused approach to our business by splitting it into two focused divisions: the commercial division comprised of consumer, automotive, and defense and the medical division, which consists of drug delivery, diagnostics, and medical devices. We also wanted to expand our geographic footprint to Europe so that Phillips could better serve our global customers. The third area was to expand our high-volume assembly automation for the high-volume disposable drug delivery market. And the fourth was to expand our design and development locations into Europe to be closer to our medical customers’ product development locations.
Speaking of Europe, in July Phillips purchased Medisize. How involved were you in that transaction, and what’s the acquisition do for the business strategy you just mentioned?
I was very much involved with the rest of the management team in the acquisition process. It was a process that had been initiated on a number of occasions over the years between Phillips and Medisize that for whatever reason just never came to pass. The benefits of combining Phillips and Medisize is that Medisize is very well known in Europe for its high-volume automated assembly and strong technical molding capabilities for both component and finished drug-delivery devices. What is interesting is that, like Phillips, Medisize’s growth was limited by its European geographic focus, and it needed production capabilities in the U.S. They also told us they need to expand their design and development business for medical devices.
You can imagine we were very excited that when we completed the transaction on August 12 we created a global leader that designs and contract-manufactures both component and finished products sold into the commercial, drug delivery, and medical device markets. We both have a common strategy to differentiate ourselves by investing in advanced molding and automation assembly technologies, the people that design and industrialize products, and quality systems and equipment that ensure we exceed customer expectations.
You came to Phillips from the North American medical division of Teleflex and have an extensive career executive background with companies such as Baxter. Given your expertise, how would you characterize the state of device manufacturing, especially in this economic and political environment?
From Baxter Healthcare through Teleflex Medical, my background has been in medical device development, manufacturing, and marketing. So this is what I know best. Today there’s continued pressure for our medical device manufacturers—the Medtronics, J&Js, and Boston Scientifics—to innovate with products appropriate for the global markets to drive top-line growth, continually improve quality, stay compliant with the changing regulatory landscape, and simplify the supply chain to reduce costs. That’s a mouthful, but it’s true.
As a result, they’re looking for partners they can team up with, that understand their challenges, and can be a valued resource to help them achieve their goals. Helping them design, develop, and industrialize their ideas to rapidly get products to market is critical. Partners that can help reduce the length of the supply chain by being closer to their end markets and manufacturing is growing in importance. Finding ways to take costs out of the supply chain and improve quality is always a requirement. We take a customer-centric approach and align our strategy from design and development through manufacturing with what customers are trying to accomplish around the globe.
Of the trends you just mentioned—speed to market and shortening the supply chain—which one is the most challenging not just for Phillips but for companies like yours?
I guess it would be speed to market. My impression is that most contract manufacturers today don’t know how a product goes from a clinical idea to the benchtop to the patient’s bedside or have the proper resources to design and develop medical products. As a result, many contract manufacturers are not included in the early design phases of a new product to properly advise on the impact the design will have on preproduction and eventual manufacturing. This results in unnecessary delays and added expense. Phillips-Medisize addresses this problem by providing services out of our design and development centers. We provide experienced medical device design engineers, manufacturing engineers, quality engineer, and regulatory people to partner and accelerate the design and development process to ensure the design can be manufactured at the cost and quality desired.
But, hey, shortening and simplifying the supply chain is a challenge for our medical device customers also. Much of the device industry grew from innovations that occurred with start-up companies. Because of this, much of the supply chain is disjointed and filled with opportunity to streamline operations. When consolidation did occur, it focused on taking advantage of lower labor and transportation costs and never really addressed taking labor out of the design or through automated assembly and quality inspections systems. Contract-manufacturers like Phillips-Medisize provide the opportunity to consolidate operations and take advantage of geographic proximity to shorten the supply chain. They also leverage centers of excellence to drive specialization or economies of scale, or both. It is important to note that we are both faced with the changing regulatory landscape and complexity, which to some degree slows the rate at which we can innovate and shorten and simplify the supply chain.
On that note there’s been recent talk about tightening medtech regulations in Europe, where companies can forum shop in different countries for favorable regulatory climates. What effect would stricter rules have on Phillips’ business dealing with OEMs in Europe?
From a regulatory perspective the EU has been easier to work with as you develop and commercialize devices. Through the years you’ve seen a migration of devices being developed and then eventually brought to market there prior to [being brought] to the U.S. That phenomenon is a result of the tight regulatory scrutiny the U.S. has had relative to Europe. We’ve actually witnessed that shift to Europe into other markets. As Europe looks to overly tighten that [scrutiny], you can assume that those people will look to do some of their innovation and early market entry in other markets.
Asia, for instance?
Asia. Or it could be South American markets as well.
I feel I need to add that what is more important is predictability and continuity of policies. Medical devices may take many years to bring to market. Changes in policies that have the impact of creating uncertainty will slow innovation and growth.
Phillips partners with OEMs in making devices for a range of applications. Are their some products that are more challenging to manufacture than others?
Medical devices are becoming smaller and placing more focus on cosmetic and feel aspects of the product design in addition to the traditional form, function, and fit medical design elements. As a result, drug delivery devices and diagnostic devices must maintain very high tolerances and quality standards while incorporating cosmetic finishes. That’s something we see more and more. So you can imagine, these designs are pressing the limits of traditional device manufacturing capabilities. Fortunately Phillips– Medisize is uniquely positioned with advanced capabilities in multishot molding, automated assembly and quality control, and advanced inline coatings and finishing technologies to help achieve the desired design intent.
Phillips has expertise in multishot molding. Are there any new manufacturing processes or technologies that are in the works? Anything new under the sun?
Well, we are always trying to stay at the leading edge on multishot, where we’re doing four- or five-shot applications. Today we have advanced multishot into using plastic with silicon and metal. We’re in the market with multishot liquid silicone injection molding with thermal plastics and in a few applications over-mold a metal part with plastic or silicon to form a seal. In addition, we are doing advanced applications of metal injection molding that require tight tolerances with very good quality, which has not been the case historically by the industry.
Another important development is people are increasingly integrating electronics into their devices. It’s something that we’ve been doing for a number of our defense applications, and we see more and more application for devices.
I’m glad that you brought up the defense example, because I want to ask you whether there is anything you’ve learned in the defense market, or even automotive market, that has proved useful in device manufacturing.
Yes, very much so. About 75% of our revenue is focused on medical device and drug delivery, and we want to continue to focus and drive growth in that industry. But we also recognize that there’s a lot of value that comes out of our work with the defense and consumer segments of our business. These markets tend to be very innovative and cutting-edge with the cosmetic aspects or their consumer user interfaces and integration of electronics. Two technologies that we are very good in are cosmetic coatings and inline printing as part of molding and assembly as well as the integration of small electronics. A glucose meter would be a good example of a small medical device that has integrated electronics, or an insulin pump or inhaler. Our understanding as to how to make them small, durable, portable with simple user interfaces comes from our work with the defense and consumer markets.
You mentioned cost a minute ago. How cost sensitive in this economic environment are your partners? Are customers more cost-conscious than they were in, say, 2008 or so?
Yes, always. As you go through the product innovation cycle, in the early stage it’s all about innovation and cutting-edge [development] and allowing them to drive growth. It’s about what sort of value-added solutions we can bring in the design, engineering, and fabrication of those products is the primary focus. That tends to help us with people who are looking for help with complex, sophisticated devices that they’re trying to bring to market.
As the product goes through its life cycle, cost always becomes more important, and customers are looking for someone to come to them with ideas to help the with product cost. We have a very active program where we work with our partners to identify cost savings, either through improvements in the design or through process efficiencies, so that we can mutually benefit from those cost savings as it goes through the product life cycle. We are also looking to work with our customer on shortening and simplifying the supply chain to reduce costs. So, cost saving is always an issue in the medical field; never at the expense of safety and quality, though.
I know it’s important for a company such as Phillips to start at the design stage in order to speed market introduction. What percentage of ideas would you say flame out at the design stage?
Design is a broad term, so it really depends on the stage of product development. Over 85% of projects in the later design refinement and process development stages go through to production. The rate is a little lower for projects that are early in the design research or concept development stages, where Phillips is also often involved via our industrial design team. Many of these projects are cutting-edge development, with both established medtech customers and VC-funded start-ups, so there are many challenges to reach proof of concept before even being able to attempt commercialization.
How about subsequent stages? During your career how often have device developments stalled out after the design stage? You get some prototypes perhaps and you determine that for whatever reason it wasn’t going to work out. Has that ever happened?
With regard to the product idea? We actually recently looked at that for Phillips and determined about 98-99% of the products that actually are scaled up for commercialization with Phillips go all the way into production. Usually, where you have your greatest fall-out is during the design phase prior to pre-production.
Phillips has been working with materials such as magnesium in a growing range of industries, including medical devices. How do materials costs factor into manufacturing at the moment?
What we found is that like all industries we’re all impacted by raw material increases. That’s certainly resins in the plastics as well as other raw material increases. That’s always a factor. They haven’t been going down; they’ve been going up. Not only have we been impacted by it, but our partners have as well by the increased cost of parts. If possible, we work with our customers to bring ideas that help minimize these impacts through redesign of the product or taking on more of the overall production of the finished product.
You mentioned resins. Are there any particular materials that have spiked in price recently?
Your more commodity-based [materials]have seen significant increases, and they continue to rise. They’ve increased less lately. The more highly engineered grades have tended to see smaller increases. We saw resin [price] increases in some of the less-engineered products as much as 20-25% in the last 12 months.
Do you try to lock in long-term contracts?
I think everybody has methods for trying to manage their resins, and I think that everybody has the same options. I don’t know that there’s any magic bullet to how you go about managing resin prices except to work openly with your customer and partner with them on what you buy, when that’s possible.
A new study from Advamed asserts that the upcoming 2.3% excise tax in the Affordable Care Act will result in the loss of device industry jobs. What effect do you think the tax will have on a company like Phillips or on the device industry in general?
Specific to the tax, I think most certainly the biggest impact is on the bottom line of our customers and on their overall costs. They have obviously looked at their overall cost structure and what they can do without, where they can do things in lower-cost environments, or how they can simplify and streamline their supply chains to take out costs to offset the impact associated with the tax. The industry has generated about $13.7 billion taxable income and paid approximately $3.1 billion in taxes. The new tax will increase taxes paid by about $2.6 billion, which the industry will need to cover through reduced costs or increased revenue.
How does that trickle down to us? I believe it will place greater emphasis on innovation and on the supply chain as previously discussed. It may drive both innovation and production to other markets outside the U.S. If so, we want to be partnered with them wherever they go to innovate and simplify the supply chain globally.
The point of the legislation is to draw more people into having healthcare insurance. It occurs to me that a counterargument might then be that companies will be selling more devices.
No question this is the intent. If this happens, the extension of more people into healthcare could be truly a net increase in the number of people who are getting care and getting more adequate care. The direct effect for our customers could be a basic increase in demand and growth. Will this be enough to cover the $2.6 billion in new taxes? I don’t know. In the meantime, at Phillips-Medisize we are looking to partner with them to help solve their innovation and supply chain challenges.