Written by John Brosky
The good-old-days of the double digits growth are behind us as the major players shift their focus to younger product segments and emerging markets. Meanwhile nimble challengers are chewing into market share with innovative technologies. Can CMOs keep up with the changes? In the second part of this interview, Ali Madani from Avicenne Medical shares insights from recent completed studies.
- What is the real potential in emerging markets?
- What role will niche products play in the next five years?
- What is the impact of regulatory changes?
For CMOs, the best is yet to come
You might want to catch your breath. While it’s true that expansion of contract manufacturing organisations (CMOs) in the orthopedic industry has been breath-taking with new acquisitions, the trend is not going to stop anytime soon. And according to Ali Madani, founder and managing partner of Avicenne Medical, the biggest and the best is yet to come.
Ahead of the IMPLANTS 2017 conference on June 8 in Paris, Madani shared insights from his study of trends product manufacturing by major orthopedic companies and how he believes the CMO market can further expand and evolve.
In the first part of the interview, Madani described the need for greater structure in the CMO sector, and detailed the opportunities to be realized. In this second part of the interview he sharpens the focus with a comparison of the trends driving expansion for OEMs and the factors shaping growth among CMOs.
IMPLANTS: Why are you convinced we will see further expansion of major CMOs?
Ali Madani: Purely in terms of size we can see even the largest CMOs today are too small for the opportunities tomorrow. Today we are looking at a sector where the largest supplier generates some $500 million per year, compared to a major OEM with sales of $10 billion that spends something on the order of $2 billion to produce its products. Our studies at Avicenne show the average among the top 15 CMOs is $142 million in annual revenue. Right off we can see why the major OEMs do not have any alternative but to manufacture their products themselves. There is simply not an alternative solution available! Even the biggest CMOs are not capable of providing a full offer to the majors. These companies are too small to absorb the volume of production from the majors.
When an orthopedics company with $10 billion in sales is working with a subcontractor that generates just $10 million in sales, we can safely say there is not a sufficient structure with levels of sophistication as we see in the automotive or aeronautics industries. There is room to grow.
IMPLANTS: How would you summarize the market drivers affecting CMOs?
Madani: Clearly the heavy trend will be for more outsourcing from all OEMs. Yet the OEMs would like to externalize more than products, and we can expect to see a divestiture of implant manufacturing facilities to those CMOs capable of handling the responsibilities. Finally, the headline trend for CMOs would be opportunities in the growth of the market share for challengers to the major OEMs. These nimble competitors tend to outsource as much as 80% of their production, a high outsourcing rate comparable to what we see in other industries. As a result, the growth of challengers will also grow the business for CMOs.
IMPLANTS: How does this compare with the market dynamics in the OEM market?
Madani: First I would set a context by saying that over the past decade or more the OEMs have benefited from population growth globally, and the aging of that population as with age the need for orthopaedic product increases. Obesity in the developed countries has also increased the need for implants. Meanwhile the OEMs have been able to diversify their product mix, introducing new products with higher prices and higher margins.
Still, we believe the double digits growth in developing countries over the past 15 years is behind us and we are expecting 4.4% growth through 2020. Looking ahead to those next five years, the major players are already looking for the growth relays such emerging countries, and we can expect this to continue, even intensify.
For example, in our study we show that the hip implants ratio, meaning the number of implants utilized per 10,000 inhabitants, tends towards asymptote in the developed countries, such as the USA, Europe, or Australia. Where that value is 20, we see in the emergent countries that hip implant ratio has only reached 1 or 2! This prefigures a huge growth opportunity for the next decade. For example, China’s growth in hip and knee for 2015-2020 is forecast at more than 20% per year!
Yet through 2020 we expect this geographic shift will be the only market driver based on macro population factors. Instead, we believe the market will be driven by new product opportunities. Established products like hip and knee have become mature products and the OEM players, are looking to younger product segments where the potential for growth is faster.
- Orthobiologics growth in developed countries
- Extremities to become a multi-billion market with double-digit growth
- Trauma with historically constant growth
- Niche segments with high growth, such as vertebral disks, etc.
IMPLANTS: It sounds like happy days are here again. Are all the arrows on your chart moving upwards?
Madani: In macro terms, there will be a steady growth globally in the number of implants sold. But that does not translate to revenue growth. Healthcare systems are being squeezed on costs everywhere, which places a powerful price pressure at the end-user market level. This has been amplified by the the rise in certain countries of group purchasing, collective negotiations for products that exercises an increasingly powerful influence on the market. This will continue.
Meanwhile the margins for all companies have been hit hard by increasingly heavy regulatory requirements. To the point that some companies employ more people in regulatory affairs than in research and development! This onerous trend will only continue. The new legislation coming into force in Europe, for example, is especially tough on implants.
Finally, there is always the risk of an economic downturn, such as a recession.
IMPLANTS: How does price pressure play out across the industry? Does it hit everyone equally?
Madani: Pricing changes tend to hit the OEM companies hardest, while the impact is felt less directly at the CMO level. The major manufacturers often grant multi-annual contracts wherein they negotiate a “normal & slight” price decrease over several years. As for the OEM challengers, we do not see a significant price decrease for these companies, due to the nature of their products and offering.
IMPLANTS: You mentioned the risk of an economic downturn. How would that play out?
Madani: We have been through recessions in both 2008 and again in 2012. In these periods instruments along with the cases and trays that are linked with them, saw a slight decrease. New instrument projects were postponed by the OEMs. But very quickly, after one year, the instruments along with cases and trays, increased in terms of value and rapidly recovered the loss of growth.
We also note that even in these periods of recession, implants manufacturing, whether at a CMO or internally at OEMs, continued to grow, tough at a lower rate of growth than during “normal” periods.
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