United Front: Looking into Spectrum's latest merger
Matt Robida, Spectrum Plastics Group, explains how its recent merger highlights the way in which medical consolidation is also hitting the supply chain.
In May of this year the industry witnessed yet another merger and acquisition announcement between two medical companies. This has been a common drum beat the last several years no doubt. However, in this case, neither company was a major medical device OEM with a well-known industry name such as Medtronic or Boston Scientific. Rather both were boutique medical plastics companies with a particular set of channels within the medical plastics and medical device contract manufacturing supply chains:
Pexco, the Alpharetta, Georgia-based specialty extrusion and custom plastics company with a growing position in medical plastics; and Kelpac Medical, the Wisconsin-based and largest medical tubing manufacturer in North America, merged and rebranded as Spectrum Plastics Group.
The merger case illustrates how the effects of consolidation at the major company level are impacting the supply chain. The highly fragmented $25 billion US medical contract manufacturing and outsourcing market, of which 40% is spent on plastics and which is estimated to be growing near 10% per year through 2020, is beginning to show the same signs of consolidation that the majors have been witnessing. Both private equity firms and investment buyers, which annually are quite active in the plastics manufacturing realm, as well as private or public Industrial strategic buyers, wishing to get in on the medical growth game, have been participating in and exacerbating this supply chain consolidation trend.
In an environment of continued globalisation and higher demand for medical technology and services, medical OEMs are diversifying their product portfolio, scale-up operations and gaining market share to improve their negotiating power with hospital systems and the demands of a value-based healthcare model. Large medical OEMs are increasingly aware of contract manufacturing organisations and their capabilities of lower-cost, time sensitive and highly specialized solutions, permitting OEMs to maintain focus on core business and product innovation efforts. When companies such as Abbott and St. Jude Medical, Medtronic and Covidien, or Zimmer and Biomet merge, the attention is often first directed at their own immediate synergies between the merging entities. This step we might label Phase I. Phase II or more likely a Phase III, addresses their supply chain efficiencies, and this is where the example of Spectrum Plastics Group bears relevance as a continuing sign of what the market is undergoing.
As OEMs continue to diversify their product portfolio to stay relevant in today’s growing healthcare space so must their suppliers and contract manufacturers. Spectrum, as suggested by the name that Pexco and Kelpac have chosen to unite their operations under, features a broad range of capabilities. Pexco and Kelpac had been long-time competitors in the fluid management tubing space. However, over the years both have been bolting on additional capabilities through acquisition. Private equity owned, Pexco acquired injection moulding and tight tolerance extrusion capabilities, whereas Kelpac added silicone, microbore extrusion, mass-market medical injection moulding, finished device and assembly services. The combined entity now features most major manufacturing processes relevant to the medical plastics and performance materials sector.
Behind the consolidation at the major OEM level, companies and their procurement professionals are looking to find ‘one-stop-shop’ suppliers for efficiencies. One-stop shops generally offer more value-added services than individual organisations, such as engineering, assembly, and supply chain capabilities, including vendor-managed inventory and a strong quality system. This driver is indeed part of the rationale behind Spectrum Plastics Group. Working with a manufacturer that has a full product, technology and manufacturing portfolio, in this case across medical plastics and material manufacturing, becomes advantageous for both the buyer and supplier. Buyers get access through a single point of reference to multiple manufacturing capabilities, whereas suppliers may maximise their exposure to target accounts and customers.
Moreover, a consolidation of specialty suppliers provides greater leverage on approved supplier listings (ASLs). Though the qualification process within the buyer-manufacturer relationship still remains site-based, and not necessarily at the corporate level, gaining access to the customer is the issue. A company such as Spectrum Plastics Group, when presenting as an approved supplier to a target account, has greater access to sell a wider suite of solutions on behalf of the full, consolidated footprint. The ability to introduce new solutions that may not have been possible before is a benefit to both buyer, at the engineering and procurement level and manufacturer. When a major OEM needs components or a final solution with multiple layers of complexity, it will want to engage CMO with a range of capabilities, to take the stress off of the OEM, whose core competencies may not be fully in the realm of specialised manufacturing.
When Kohlberg & Company, a private equity firm based in New York specialising in middle market investing, acquired Pexco on behalf of Kelpac Medical, the opportunity to merge the two and create the Spectrum Plastics Group, offering the market a comprehensive suite of plastic and contract manufacturing technologies and services, was rich with consequences for the sector. They were participating in a trend the industry can expect to see a lot more of during the next several years. In a world where, according to the Organization for Economic Cooperation and Development (OECD), healthcare costs have been outpacing normal economic growth by 2% for the past 50 years, with no sign of a slowdown, one can expect this activity to continue . . . on both ends of the industry spectrum.