Editor's note: We updated this report on May 15 to more accurately depict NN, Inc.'s Life Sciences revenue figures, per our conversations with company executives. The report was further updated on December 8 to reflect the retirement of David Floyd from NN's Board of Directors.
You should anticipate and prepare for M&A activity in your supplier base.
That counsel became reality last week for many device companies, as the orthopaedic industry’s supply chain was shaken up by the NN, Inc. acquisition of Paragon Medical for US $375MM in cash.
This transaction is significant for several reasons, and the impact could be considerable for many OEMs.
To lend perspective and a better understanding of what this news means for you, we offer these takeaways about NN (as well as some pertinent points on supplier M&A).
Who is NN, Inc.?
NN is an industrial conglomerate that designs and manufactures high-precision metal and plastic components, instruments and assemblies for a variety of markets, including orthopaedics, on a global basis. The company is relocating its Johnson City, Tennessee HQ to Charlotte, North Carolina later this year. It presently employs over 5,000 people at 44 facilities throughout North America, South America, Eastern Europe, Western Europe and China.
NN posted sales of $620MM in 2017; its estimated guidance for 2018 is $860MM.
NN had a rapidly-growing presence in the orthopaedic market before acquiring Paragon Medical.
Since 2014, NN has prioritized expansion in medical devices. The company’s growth primarily has come from acquisitions of some household names in orthopaedics, including Bridgemedica, DRT Medical and Precision Engineered Products (PEP), the latter of which was announced within about a year of PEP acquiring Holmed and Trigon.
The 1Q18 acquisition of Bridgemedica for $15.0MM in cash expanded NN’s new product design engineering and development capabilities. “This acquisition aligns perfectly with our strategic plan and long-term objective to further diversify our portfolio and expand into markets that we believe have strong growth potential,” Richard Holder, NN’s President & CEO, said at the time.
In seeking to build its orthopaedic business, NN has added veteran industry professionals to its leadership and management ranks, including folks from Smith & Nephew, Orchid Orthopedic Solutions and Zimmer Biomet. Most notably, NN named David Floyd, Group President of Orthopaedics at Stryker, to its Board of Directors in 2016.
Update December 8, 2020: Mr. David Floyd has stepped down from NN's board, effective January 4, 2021. Mr. Robert Brunner, a director on NN's board, said, "David's deep knowledge of the medical technology industry was instrumental as we built out the Life Sciences business over the last several years, culminating in the sale of the business this past October."
The Paragon Medical acquisition fills out NN’s Life Science portfolio.
NN’s purchase of Paragon Medical was announced just six weeks after the Bridgemedica acquisition. These strategic purchases support NN’s strategy to grow its Life Sciences revenue to $300.0MM this year. Of note, Paragon Medical posted revenue of $141.0MM in 2017. Upon completion of the Paragon acquisition in 2Q18, we estimate that NN will derive 50-60% of its Life Sciences revenue from orthopaedics, with remaining markets including endoscopy, non-orthopaedic surgical tools and drug delivery.
Prior to the Paragon acquisition, Life Sciences accounted for 21% of NN’s 2018 estimated revenue. Post-acquisition, that number jumped to 35%.
Paragon Medical is an attractive purchase because it allows NN to expand its orthopaedic devices and instruments portfolio, and allows NN to enter the delivery systems space.
Additionally, NN is now positioned as one of the 10 largest contract manufacturers in orthopaedics, according to our estimates. To put this in perspective, NN’s top ten customers overall, post-acquisition, will include Johnson & Johnson, Medtronic, Stryker and Zimmer Biomet. That’s quite a lineup for a contract manufacturer unknown in the orthopaedic space earlier this decade.
This transaction is directly in line with supplier M&A trends.
Recent supplier M&A activity is a direct response to device company consolidation. As such, device companies desire one-stop-shop supplier partners that can offer expanded capabilities, capacities and geographic reach, while keeping costs in check. Bolt-on acquisitions are sought to capitalize on orthopaedics’ transition to a less-fragmented industry.
“Many demands are placed on the supplier to be able to meet OEM requirements,” Robert J. Kinsella, President of Kinsella Group, told us in 2015. (Kinsella’s comments remain apropos to today’s supplier climate.) “Resources must be available for machine time; plant space must be responsive to new product introductions. It’s more challenging today because the companies themselves, the big OEMs, are much bigger after consolidation. Larger salesforces are covering more hospitals, so rollout demands are much greater. OEMs need large-player suppliers to respond to those.”
We emphasize that OEMs will continue to seek one-stop-shop supplier partners. We have seen several suppliers recently take strategic steps to position themselves as full-service providers. Take NN, for example. The acquisition of Paragon allows NN to offer cases and trays in addition to its growing portfolio of implantable components and finished devices. NN now considers itself to be a full orthopaedic market participant. Regarding geographic reach, by acquiring Paragon, NN is increasing its presence in the Asian market, specifically China.
We fully expect the volume of supplier M&A activity to continue in 2018 and in years to come. We foresee continued consolidation among the bigger contract manufacturers. This means that smaller contract manufacturers (under $20MM in annual revenue) are going to have to find bigger partners to maintain viability, moving forward.
OEMs must understand that unplanned changes in vendors is the present (and future) of the industry landscape.
Change can be difficult. When your supplier and vendor universe is disrupted, it creates uncertainty, unease and unpredictability—even if the new supplier/vendor turns out to be a great partner. Trust and equity must be established over time. Logistics need to be ironed out. A decision to be loyal to the acquired company was likely made long ago; now that loyalty needs to be built with a new group of people. Your business visions and cultures may have aligned with a trusted vendor; those valued attributes may not be possessed in certain aspects by the buyer…the list of concerns goes on.
So, what can you do to alleviate your concerns and overcome some of these challenges posed by supplier M&A activity that is forced on you? David Finch, one of our contributing authors and President and Founder of Insight Collaboration Partners, provided guidance on this topic earlier this year. For instance:
- Audit your supplier agreements so that all important terms and quality agreements are communicated properly to new vendors.
- Monitor performance and require updates on all open orders for purposes of delivery assurance.
- In initial meetings with new vendors, insist on assurance that all your areas of concern will be met (and get everything in writing).
- Research the company; know its current customers and competitors.
- Work with your quality and regulatory teams to identify any potential issues, including individual country registration requirements and approval timeline.
Of course, answers to many of your questions about what becomes of a supplier that has been purchased—specific effects on supply chain, potential employee downsizing, capabilities elimination and addition, etc.—will be realized in due time.
What’s next for NN?
NN’s strategic plan calls for its Life Sciences division to achieve revenue of $500MM. Based on these aggressive growth plans, we expect that NN will make future acquisitions. Now positioned as a top-10 contract manufacturer in orthopaedics, NN is competing with companies such as Tecomet, Orchid Orthopedic Solutions and Cretex. In considering the offerings of these competitors, NN could seek to add to either end of its manufacturing services—design and development and packaging and logistics—or boost manufacturing capabilities like coatings and additive, the latter of which they’ve invested in previously.
When taking the temperature of the industry, we’ve seen the largest orthopaedic players display a desire to build more comprehensive and diverse portfolios, both on the supplier and OEM sides. NN is now one of these large manufacturers.
No matter how the market forces play out, we remain ready to help you maintain profitable and mutually-beneficial relationships with your supplier base.