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Current & Critical

Suppliers Consolidate in Response to OEM M&A Activity

In response to frequent merger and acquisition activity at the OEM level, and to stay competitive in the orthopaedic industry, suppliers are engaging in their own strategic initiatives. Through M&A, suppliers have expanded capabilities and production to attract OEMs that may be looking for fewer suppliers, and they’ve broadened their geographic reach, making them more accessible and attractive to device companies.

Of the 37 orthopaedic industry acquisitions that closed in 2014, nearly one-third occurred between suppliers. (Find a full list in Exhibit 1.) These 12 transactions represent an increase from the nine reported mergers in 2013 and four in 2012.

Exhibit 1: Supplier M&A from January 2014-January 2015
 

Acquirer Acquired When Enhanced Capabilities and Reach
Okay Industries Reliance Laser February 2014 Supplies Okay with technology that combines a CNC Swiss Lathe with laser cutting capabilities.
Arcam AP&C Division from Raymor Industries became a subsidiary of Arcam February 2014 AP&C’s titanium strengthens Arcam’s additive manufacturing capabilities.
Arcam DiSanto Tecnology became a subsidiary of Arcam September 2014 DiSanto’s implant engineering and production of finished components enhances Arcam’s electron beam melting technology for additive manufacturing of orthopaedic implants.
3D Systems Medical Modeling April 2014 Creates the largest 3D printing personalized surgery and medical device service; also delivers the only integrated 3D modeling-to-printing capability available in both direct metals and biocompatible plastics.
3D Systems LayerWise September 2014 LayerWise enhances 3D Systems’ product portfolio, metal printing and manufacturing service capabilities.

The transaction strengthens 3D Systems' global reach in advanced metal additive manufacturing.
Tecomet 3D Medical Manufacturing August 2014 3D Medical is a contract manufacturer of medical device components, implants, instruments, cutting tools and mechanical/electro-mechanical assemblies.
Tecomet Symmetry Medical's OEM Solutions business December 2014 Symmetry Medical OEM Solutions supplies contract manufacturing and product solutions for the surgical instrument, orthopaedic implant and sterilization case/tray markets. The acquisition allows for greater forging and casting capabilities.

Tecomet’s acquisition of Symmetry creates the largest orthopaedic contract manufacturer in the world, with 18 facilities in five countries on three continents.
Precision Engineered Products Holmed (business division of Advanced Precision Products) September 2014 Holmed manufactures orthopaedic surgical instruments, including hip, knee, shoulder, spine instruments, and spinal implants. The division also has complex metal machining and cold forming capabilities.
Materialise OrthoView October 2014 OrthoView is a provider of 2D digital orthopaedic pre-op planning/ templating software.

OrthoView’s x-ray based software is used in 2,000 hospitals by >11,000 orthopaedic surgeons in 60 countries.
CoorsTek Medical Nanosurface Industries November 2014 CoorsTek gains Nanosurface Industries’ surface modification technology capabilities such as type I and II anodization.

The acquisition of Nanosurface Industries gives CoorsTek direct access to the European market.
Autocam Medical  Southestern Techology (SET) December 2014 Southeastern Technology serves the orthopaedic and spine markets with precision implants and complex instruments.
Paragon Medical Michael Bubolz GmbH's medical device segment January 2015 Michael Bubolz manufactures close tolerance surgical instrumentation and orthopaedic implantable components and offers complete sterile pack products.

Michael Bubolz is headquartered in Stuhr, Germany and has a facility in Siechnice, Poland.

Source: ORTHOWORLD, Inc.
View M&A activity from 1993 to the present in the Members Area of ORTHOWORLD.com.

 

Tobias Buck Bill Dow Robert Kinsella Tom O'Mara Jorge Ramos Magnus Rene

 

Industry experts and top level executives expect further consolidation at the supplier level based on recent deals and overall trends. Their insights follow.

Robert Kinsella, President of Kinsella Group: Tecomet started the track here with the acquisitions of 3D Medical and Symmetry.

We’ll see a few, maybe three, but certainly not more than three, large—$200 million-plus—players in this industry, and I think it’s going to happen over the next 12 to 18 months.

Many demands are placed on the supplier to be able to meet OEM requirements. 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.

Bill Dow, CEO, Tecomet: This merger (with OEM Solutions) has piqued people’s interest and, I think, given more recognition to the fact that as our customers get bigger, they want to deal with bigger entities that offer them more security both from a quality system standpoint and a fiscal viability standpoint.

You’ll continue to see consolidation among the bigger contract manufacturers, but just as importantly, with the thousands of smaller contract manufacturers that are going to have to find a bigger partner in this business space to maintain viability moving forward.

Kinsella: The supply chain is the major place you’ll see acquisitions. As companies try to rationalize their supply chains, they’re going look to larger players. We believe that the smaller companies, the sub-$20 million contract manufacturers, are going to need a home; otherwise, I’m not sure they’re going to be able to exist in the industry. If you’re doing ten to $15 million in business, it’s pretty tough to reduce costs. The players whom we think are going to be doing those acquisitions are likely to be the mid-tier, the $100 million plus-or-minus players.

Tom O’Mara, Executive Vice President, Autocam: As OEMs combine, the supply base will be affected. It is certain that contract manufacturers will increasingly be required to have tight control of all down-stream operations and sub-contractors. This will likely narrow the sub-supply base to reduce variation and ensure that all steps in the value stream are aligned to the quality standards required to support the OEM’s requirements.

Tobias Buck, Chairman, President and CEO, Paragon Medical: Risk mitigation and economics are forcing consolidation at all levels. This will continue for OEMs and their supply base. Today’s economic context, coupled with amplified regulatory compliance at all classifications levels (1, 2, 3), in concert with an overall compression in procedural reimbursement thresholds from CMS, will reinforce the cadence and magnitude of consolidation.

Jorge Ramos, Chief Administrative Officer, Orchid Orthopedic Solutions: We don’t have empirical evidence that OEMs have reduced the number of suppliers, but many of our OEM customers are telling us that reducing the number of suppliers is one of their goals. The combination of OEMs seeking to reduce the number of suppliers and the other favorable aspects of working with full-scale suppliers leads us to believe that M&A activity at the contract manufacturer level will continue to be relatively high. The contract manufacturing space remains quite fragmented around the globe. We suspect that all areas of the contract manufacturing space will see some M&A activity. OEMs seem to be looking at sourcing more strategically than on a case-by-case purchase.

Kinsella: Will there be some technology acquisitions? Yes. Will it be in additive manufacturing (AM)? I think companies will be buying machines as opposed to making acquisitions. There may be some acquisitions in the metal injection molding (MIM) area, which I think is beginning to grow. In the case of AM, certainly know-how is required to be able to effectively run AM operations, but the basis of that technology is the machine. In the case of MIM, the basis of that technology is trade secrets and know-how; it’s really invested in people.

Magnus Rene, CEO, Arcam: The industry is very fragmented, and the introduction of new technologies like AM is a challenge to many companies, both in terms of investments and in terms of competence.

O’Mara: We view this more as a merger of complimentary organizations versus a traditional “acquisition.”

The combined enterprise’s scale also puts us in a better position to handle large projects. We have a significant base of machining and finishing technology, combined with an access to growth capital, which will be expanded to meet the demands of our OEM customers.

Dow: Yes, we will continue to look at acquisitions that make sense and add new capabilities that we don’t have. For example, we don’t do plasma coating right now; we outsource it. If we could find a business that would help us bring that into our own offerings, that would be attractive.

We probably won’t look as much as we have in the last couple of years as we integrate the OEM Solutions business, but we will keep our ear to the ground and if the right opportunity comes up, we won’t hesitate to pursue it.


Hannah Corcoran is an Editorial & Media Assistant at ORTHOWORLD. She can be reached by email.