Originally Published MDDI June 2004

NEWSTRENDS

Erik Swain

The acquisition of MedSource Technologies Inc. (Minneapolis) by UTI Corp. (Collegeville, PA) could redefine contract medical device manufacturing. UTI, MedSource, and other large players in the field have acquired a number of smaller outfits in recent years. The latest deal, however, is the largest so far among medical contract manufacturers. It dwarfs the last big deal, when Avail merged with Horizon Medical in 2002.

Andrew Kinross, a Boston-based consultant who used to work for MedSource, said, “Combined, this will be the number one player in terms of revenue by a wide margin.” He estimated that the new entity will begin with an annual revenue base of about $400 million. By contrast, the combined annual revenues of Avail and Horizon in 2002 was $135 million.

“Every industry starts out with smaller players and then has to consolidate over time,” said Ron Sparks, UTI's president and CEO.

Sparks said that customers in the medical device industry demand over time that contractors become more cost-effective. “The only way to do that at this point is to consolidate,” he said. Robert Wyckoff, senior outsourcing consultant for Technology Partners Inc. (Alameda, CA), noted that for today's contract manufacturer, bigger is better. “If they are truly able to say they can create economies of scale, it's a tremendous positive,” he said. “What remains to be seen is whether they can scale fast enough.”

Jeffrey Stephens, president of Ixian Consulting Inc. (Jefferson, GA), said that consolidation is inevitable, but he questioned whether very large contractors can be flexible enough to meet all OEM needs.

“It might lead to a situation where the contractor says ‘if you do business with us, you have to use our packaging, our materials, and so on,'” he said. “For a commodity product, that's not such a bad thing. But in some cases, the device company could end up with less flexibility. It's all about costs and economies of scale.”

But, according to Sparks, it was two needs that drove the UTI-MedSource deal. “One is that OEMs want to reduce their number of suppliers,” he said. Another thing OEMs want is a level of sophistication from their contractors similar to what they are used to in-house. “That's been a struggle for them.” 

Regardless of the merits of size, more consolidation is inevitable, Kinross said. “Between 1999 and 2004, there have been a number of smaller deals, and now the players are getting bigger. A lot of medical OEMs would prefer to work with fewer, better, more financially stable, well-capitalized contractors. Some companies will still want to work with smaller contractors, but that is mainly the case when there is a very specific niche.”

The combined UTI-MedSource firm, which will have a new name, will be reorganized into divisions serving three key areas: cardiology and cardiac surgery, endoscopy, and orthopedics. Sparks said each firm brings capabilities that the other did not have. MedSource brings a strong presence in orthopedics, polymer development, and metal injection molding, while UTI excels in metallurgy, high-speed machining, and assembly capabilities. Geographic diversity, design capabilities, and familiarity with requirements for devices sold outside the United States are becoming major needs too, he added.

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