By the end of 2Q12, Greatbatch announced plans to open a manufacturing facility in Ft. Wayne, Indiana to consolidate its orthopaedic operations there. Meanwhile, Symmetry noted a slight uptick in instrument sales and stable results for implants as order activity rose above usual year-over-year levels. Further, Symmetry, while seeking transparency on inventory practices from its customers, mentioned that it was encouraged by what was happening on those fronts.
At OMTEC 2012, Brian Moore, former Symmetry CEO, confirmed that such factors as OEM inventory handling will continue to be far more important to growth for the supplier companies than will orthopaedic procedure volumes, though the supplier base will naturally continue to ebb and flow in reaction to the OEMs’ strategies.
An additional challenge is presented in FDA’s requirement that, as of October 2012, contract manufacturers must register and list the products that they make on the FDA Unified Registration and Listing or FURLS database. Such action could accelerate supplier rationalization as OEMs are facing more strict quality and regulatory scrutiny, themselves.
Moving forward, OEMs will continue to consolidate their supply chains, and suppliers will continue to merge and acquire to meet the OEMs’ needs. A number of such transactions occurred in 2011 and 2012 to date (3Q12), as illustrated in Exhibit 2.
Exhibit 2: Supplier Merger & Acquisition Activity: 2011 to 3Q12
|Qtr/Yr Close||Acquired||Acquired by||Transaction||Value ($MM)||Sales ($MM)||Sales Multiple|
|4Q12||In'Tech Medical||TCR/Arkea Capital||Cash||n/a||$38.0||n/a|
|3Q12||Teleflex OEM orthopaedic business||Tecomet||Cash||$45.2||$36.0||1.26|
|2Q12||Kensey Nash||DSM||Cash for stock||$360.0||$25.6||14.06|
|2Q12||ETI||MRPC||Terms not disclosed||n/a||n/a||n/a|
|1Q12||Sandvik Medical||Altor (Orchid Orthopedic)||Terms not disclosed||n/a||$90.0||n/a|
|1Q12||Remmele Engineering||RTI Intl Metals||Cash and debt||$182.5||n/a||n/a|
|4Q11||ATS-Sferic||Marle International||Terms not disclosed||n/a||n/a||n/a|
|3Q11||Hower Tool||Haven Manufacturing||Terms not disclosed||n/a||n/a||n/a|
|3Q11||Boston Endo-Surgical Technologies||Precision Engineered Products||Terms not disclosed||n/a||n/a||n/a|
|3Q11||Geisert Square||Valtronic||Terms not disclosed||n/a||n/a||n/a|
|3Q11||Olsen Medical||Symmetry Medical||Cash||$11.0||n/a||n/a|
|3Q11||Structure Medical||Squadron Capital||Terms not disclosed||n/a||n/a||n/a|
|3Q11||Hansa Medical||Squadron Capital||Terms not disclosed||n/a||n/a||n/a|
|3Q11||Kemac Technology||Tecomet||Terms not disclosed||n/a||n/a||n/a|
|3Q11||Solidscape||Stratysys||Terms not disclosed||$38.0||$13.4||2.84|
|2Q11||Orchid Orthopedic Solutions||Altor||Terms not disclosed||n/a||n/a||n/a|
|2Q11||Marcam Engineering||Materialise||Terms not disclosed||n/a||n/a||n/a|
|1Q11||Sierra Manufacturing||United Site Services||Terms not disclosed||n/a||n/a||n/a|
|1Q11||Concordia Medical||Biomedical Structures||Terms not disclosed||n/a||n/a||n/a|
|1Q11||Orliman||Riverside (private equity)||Terms not disclosed||n/a||$19.2||n/a|
Despite a slowing to mid-single-digit growth, the orthopaedic market should remain healthy due to solid demographics: an aging population, a more active and more demanding patient, increased reach into BRIC countries, etc.
To keep pace with the OEMs needs, suppliers may find success in offering services other than contract manufacturing, such as Ceram’s regulatory assistance package, Squadron’s customer financing services, etc., to device manufacturers that find themselves more thinly-spread. OEMs and suppliers will work together to build new paths to growth in orthopaedics.