Alphatec Spine, Globus Medical and NuVasive, the three largest pure-play spine companies, announced revised manufacturing strategies during 2Q15 earnings calls.
In 4Q14, Alphatec Spine announced its plans to outsource 100 percent of its manufacturing by the end of 2015 to yield a more lean and cost-competitive company from an operations standpoint.
In the company’s 2Q15 earnings call, Jim Corbett, Alphatec President and CEO, noted that costs to make and physically distribute products were too high and not sustainable. The company operated on a fixed asset and inventory requirement of $100 million with revenue just over $200 million in 2013 and 2014.
The operational restructuring is intended to reduce Alphatec’s CapEx and fixed cost burden, allowing the company to increase its focus on design and commercialization, which it views as core competencies. Management stopped short of specifics, but expects that the initiative will reduce expenses by “tens of millions of dollars” in the next few years.
Historically, Alphatec outsourced the manufacturing of its instruments. Moving implants to this model will result in a reduction of nearly 100 employees.
Alphatec has experienced four consecutive quarters of decreased sales and a -6.9 percent sales decrease in 1H15 vs. 1H14. Corbett, who has helmed the company since April 2014, established the operational initiative as one of three strategic pillars, alongside expansions to R&D, the product pipeline and U.S./global expansion.
Acquire Manufacturing Expertise to Insource
Globus Medical acquired Branch Medical Group (BMG) for a final purchase price of $68.4 million. The acquisition was made to strengthen the spine company’s operations and financials.
Neighbors in southeast Pennsylvania, Globus started using Branch as a supplier in 2005. The close nature of their relationship is apparent in the following statements:
- Globus management and insiders owned 49 percent of Branch prior to the acquisition.
- Globus uses Branch to manufacture about 25 percent of its products—a number that management expects to double within next three to four years.
- Branch, which achieved $23.3 million in revenue and $9.1 million in adjusted EBITDA in 2014, booked 94 percent of its sales from Globus.
Analysts noted that the acquisition favorably positions Globus to realize gross profit leverage.
Globus posted strong 16.4 percent sales growth in 1H15 versus 1H14. Company leadership voiced 2H15 and early 2016 plans to increase investments in in-house manufacturing, robotics and biologics.
Build Facility to Insource
In August, NuVasive announced that it pushed its insourcing goal to nearly 100 percent.
NuVasive leadership set a goal of 20 percent operating margins as it drives to $1 billion in revenue. New CEO Greg Lucier said that vertical integration of its manufacturing is the greatest opportunity to hit that 20 percent target.
The company manufactures about 30 percent of its products, a number that can be increased to 60 percent with current resources. To reach the 100 percent target, NuVasive proposed a 130,000-square foot facility that is expected to create more than 300 jobs and house 100 CNC machine tools, inspection equipment and clean room operations. The company expects to begin manufacturing at the facility, at an as-yet-undetermined location, by the end of 2016.
NuVasive took first insourcing steps in 2013 with its purchase of ANC for $4.5 million. The two companies started their relationship in 2010, and ANC quickly became one of NuVasive’s significant implant suppliers.
Leadership has not cited the amount of investment that the insourcing initiative will require, though it will run alongside the company’s goal to expand globally, primarily through M&A.
The strategic benefits of these approaches will be interesting to watch in the coming year. BONEZONE reached out to each of these companies for interviews; Alphatec and NuVasive specifically said they would refrain from commenting further until their initiatives are finalized.
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