As of mid-November, ORTHOWORLD had tracked 44 M&A announcements in 2018. Of those 44, one was unique in its makeup—WishBone Medical (device company) purchased Red Star Contract Manufacturing (supplier), as reported on November 6.
The purchase of a supplier by an OEM does not occur often in orthopaedics. In fact, we can recall only a handful in the last five years: ConforMIS buying certain assets from Broad Peak Manufacturing in 2017, Globus Medical acquiring Branch Medical in 2015, McGinley Orthopaedic Innovation purchasing DS Manufacturing, also in 2015, and NuVasive’s acquisition of ANC in 2013.
The reasons to outsource manufacturing are well-documented: lack of capacity or expertise, cost reduction, demand variability, quality control, etc. The reasons that an OEM would consider purchasing a supplier outright, rather than outsource, are the same but involve more complex financial and strategical analyses. Additionally, for this type of M&A to happen, history tells us that a strong sense of familiarity must exist between the two parties. To wit:
- Broad Peak provided polishing services for many of ConforMIS’ components for three years, pre-acquisition.
- Globus and Branch Medical were neighbors in southeast Pennsylvania. Pre-acquisition, the two worked together for a decade and, according to analysts, Globus management and insiders had owned 49% of Branch.
- DS Manufacturing was McGinley’s exclusive partner for components used in the company’s IntelliSense orthopaedic surgical drill.
- NuVasive took insourcing steps in 2013 with its purchase of ANC. The two companies started their relationship in 2010, and ANC quickly became one of NuVasive’s significant implant suppliers.
In line with these examples, Red Star was a longtime supplier for WishBone. Red Star’s capabilities (insert injection molding, Class 8 clean room packaging, sterilization and fulfillment) align with Wishbone’s pediatric-focused business model of providing anatomically-appropriate implants and instruments in sterile-packed, single-use disposable kits for trauma, spine and sports medicine procedures.
“The more we worked with [Red Star],” WishBone Chairman and CEO Nick Deeter said, “and the more we saw their capabilities, we decided to make the purchase. This was a strategic move to ensure that we had access to plastic-injection molded instruments and sterile packaging.”
For Deeter, current market forces, namely six-month lead times, also weighed heavily in the decision to buy Red Star.
“When we looked at the different vendors that do sterile packaging, [their lead times} are at 26 weeks, at a minimum,” Deeter explained. “Sometimes it takes that long just to get a reasonable quote on when you’ll get your product packaged.”
Realizing this paradigm, Deeter sought an insurance policy. “I have investors who would ask, what keeps you up at night? My biggest concern was whether we’d be able to get all of our products sterile packaged and out to market in a timely manner. The best way to ensure that is to just buy [the supplier].”
Furthering its strategic initiative to rely less on outsourcing, in late November WishBone announced the acquisition of Response Ortho, a device company featuring in-house manufacturing of external and internal fixation and deformity correction products for the pediatric market. Additionally, Response Ortho has a global customer base and is located in Istanbul, Turkey, allowing WishBone to expand into the ex-U.S. market.
Another market force factored into WishBone’s acquisition of Red Star: competition, or in this case, a lack thereof. Consider the following scenario: When an OEM purchases a supplier, the OEM also purchases the obligations of that supplier. If this supplier is at capacity, lead times could be several months. A number of OEMs, which could include direct competitors of the purchasing OEM, already have their products in the supplier’s hands to be sterilized or manufactured. In this example, the purchasing OEM could not simply cancel these open orders placed by competitors, as the legal ramifications would be severe.
WishBone’s competition in the pediatric orthopaedic business is limited, eliminating potential drawbacks of acquiring OEM manufacturing contracts.
“One of the biggest concerns I had when buying this supplier was, will they keep doing contract manufacturing for other companies? In this case, yes they will,” Deeter said. “Nobody sees pediatric companies as a threat to their business. In fact, we’ve lined up a number of OEMs that manufacture implants for adult patients that want to use Red Star.”
Because “not everyone has that luxury,” as Deeter put it, he doesn’t envision a future wherein more OEMs purchase suppliers as an alternative to outsourcing. “I don’t see this becoming a trend,” he said, “if device companies stay with reusable case/tray model. That infrastructure has grown so much, and there a lot of choices for supplier partners. Everyone knows who the suppliers are. You have your main one and a backup or two, and you see who gives you the best price.
“When I started OrthoPediatrics 12 years ago, we used all outside suppliers. We’d have a product 90% finished, in cases and trays, then a big [company] order would come in ahead of us with our supplier and we’d be delayed for six months, waiting on two more pieces to go into our set. I didn’t want to go through that again.”
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