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Medical Device Manufacturing: Competitive Landscape

This is the fifth in a multi-part series that will focus on the competitive landscape in the medical device manufacturing industry, a member of the manufacturing sector.

Competitive Landscape

It is estimated that the four largest firms in the medical device manufacturing industry account for nearly 76% of total revenue in the industry[1], thus making this a highly concentrated industry. The majority of small firms employing fewer than twenty people specialize in developing technology for a niche area and are routinely acquired by larger players seeking their expertise. Medium sized firms are frequently bought out by larger players. Though the number of participants in the industry has steadily increased in the last five years, so has the concentration. Small firms will face increasing competition as the larger playing acquire greater market-share.

Key Success Factors

There are five critical factors for success in this industry[2]:

1. Access to highly skilled workers is important due to the technical nature of the design and production of medical devices.
2. Access to the latest technology is critical as firms need to develop new products and compete with rivals in this space.
3. As a global industry, export markets are critical to diversify from domestic bases and increase capacity usage.
4. Economic of scale are critical for firms to improve profit margins by decreasing variable costs.
5. Access to distributors and end users in necessary for product flow and sales.

Cost Structure Benchmarks

In the industry, earnings before interest and taxes (EBIT) is roughly 4.6% of revenues for the average firm in this space. Larger players have profit margins in excess of 20%. The majority of smaller firms have low margins and new firms operate at a loss. Constraints such as the Patient Protection and Affordable Care Act (PPACA) have restricted improvements on profit margins over the last few years. High-skilled employees command high wages. Accordingly, 20.6% of revenue in 2018 is expected to go towards wages. Automation has reduced some labor costs though the demand for technical expertise will continue to merit high wages. Purchased materials and intermediate goods account for 35% of industry revenue. Such goods include: fabricated metal products, printed circuit boards, plastic products, wiring devices, computing equipment, and other materials. As the costs of raw materials fluctuate, so too do purchasing costs for medical device manufacturers. Another vital component of industry costs is R&D which accounts for 12% of industry revenue.

Sector vs Industry Costs[1]

Competition and Barriers to Entry

Device quality and performance are important basis for competition due to the high-tech, highly specialized nature of devices produced in this industry. Intellectual property is tightly guarded, and customers often sign confidentiality agreements. Price competition is limited across the industry. Firms stay up-to-date with research and falling behind competitors results in revenue losses. Companies can avoid direct price competition by selling products in niche markets. Brand loyalty is not a significant factor in this industry though medical device companies are preferred to consumer electronics manufacturers.

[1]

Barriers to entry are medium and steady. Heavy regulation, high investment costs, and high level of competition and technological change serve as barriers to entry while the high profit margins appeal to entrants. The medical device manufacturing industry is highly globalized and increasing. Global outreach efforts are particularly strong in China, Japan, and Europe. Many US manufacturers are beginning to locally design and manufacture products in emerging markets such as Brazil, India, China, and Russia. Medtronic and St. Jude Medical generate a significant amount of revenue from international sales. Operators will look to emerging markets for sales as the industry consolidates domestically.

Mohammed Siddiqui contributed to this report.

Sources

[1] Curran, J. (2018). Medical Device Manufacturing in the US (Industry Report 33451b). Retrieved August 2, 2018, from IBISWorld database

[2] Funk, J., Jackson, S., & Pain, L. (n.d.). Key Success Factors for MedTechs and Medical Device Companies: Solving the Services Puzzle [PDF]. L.E.K. Consulting.

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
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