First Research Industry Profile - Medical Equipment & Supplies Manufacturing

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FULL INDUSTRY PROFILE

7.1.2013

Medical Equipment & Supplies Manufacturing

NAICS CODES: 3391 SIC CODES: 2599, 3821, 3841, 3842, 3843

Industry Overview
Companies in this industry manufacture medical equipment and supplies, including surgical and medical instruments, dental equipment, and surgical appliances. Major companies include Baxter International, Boston Scientific, Johnson & Johnson, and Medtronic (all based in the US), as well as B Braun (Germany), PRIM (Spain), Smith & Nephew (UK), and Terumo (Japan). Global revenue for makers of medical equipment and supplies is about $350 billion. Major markets include the US, Japan, Germany, France, and Italy. The US medical equipment and supplies manufacturing industry includes about 11,000 companies with combined annual revenue of about $90 billion. Moderate growth is forecast for the next two years. Key growth drivers include advances in technology and the increasing number of people over 65 who will increasingly need medical care. Medical equipment and supplies manufacturers produce surgical, ophthalmic, and dental instruments and disposable supplies (syringes, gloves) used in the medical field. The industry doesn't include the manufacture of x-ray or electromedical equipment and devices, such as ultrasound equipment, pacemakers, and electrocardiographs, which is covered in a separate industry profile.

Competitive Landscape
Demand is driven by population demographics and advances in medical knowledge and technology. The profitability of individual companies depends on the ability to develop superior products. Large companies have economies of scale in manufacturing and R&D. Small companies can compete successfully by specializing in a particular market segment, or through technical innovation. The industry is concentrated: the 50 largest companies account for about 60 percent of revenue. Imports of medical equipment and supplies account for about 20 percent of the US market; exports represent about 25 percent of US production. Leading sources of imports include Mexico, Ireland, and China. The largest export markets for medical equipment and supplies are Japan, Canada, and the Netherlands.

Products, Operations & Technology

Service Segmentation by Revenue - Census Bureau

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Major products include surgical and medical instruments (about 30 percent of industry revenue), such as syringes, hypodermic needles, and catheters, and surgical appliances and supplies (about 25 percent), such as sutures, surgical dressings, and orthopedic devices. Other sources of revenue include lab equipment and furniture (centrifuges, scales, operating tables, hospital beds); ophthalmic goods (prescription glasses, contact lenses); diagnostic and anesthetic equipment; and dental equipment and supplies. Syringes are typically produced in assembly lines. The basic stages include needle formulation, plastic component molding, piece assembly, packaging, labeling, and shipping. Needles are produced from molten steel drawn through a die. The steel is rolled into a continuous, hollow wire and cut to form the needle. Plastic barrels and plungers can be made through extrusion or injection modeling. The barrel moves down a conveyor and is held in place to receive the plunger, needle, and safety cap. The completed syringes are packed into boxes, stacked on pallets, and sent to distributors. Sterility and safety are key in manufacturing. Steel is often coated with nickel to prevent corrosion, and the production plant must be free of disease-causing agents. Workers wear masks and sterile garments to prevent the spread of germs. Quality control agents use precise instrumentation like calipers, micrometers, or microscopes to ensure that products are the appropriate thickness, length, and width. For many technically advanced products, manufacturing is labor-intensive. Many small manufacturers outsource manufacturing to facilities operated by contract manufacturers. Manufacturers of low-tech product like latex gloves, tape, syringes, and gauze are most concerned with maintaining a highly efficient, low-cost manufacturing environment. Companies that specialize in diagnostic and therapeutic devices generally emphasize technological innovation and precision. Major inputs include stainless steel, silicone or latex rubber, plastic, aluminum, polymers, and natural fabrics. Electricity and natural gas typically provide the power for manufacturing. The industry is technologically advanced, and new product development is a major activity for most manufacturers. Patents are valuable and patent disputes frequent. Large companies often buy small companies that have developed promising new technologies.

Sales & Marketing

Typical customers are medical supply distributors. Large manufacturers may sell products directly to hospital chains or other major end-users. Major types of marketing include broadcast, online, and print advertising. Manufacturers market products through a combination of direct sales and sales representatives that target hospitals, insurers, and individual doctors. Companies with products tied directly to a particular medical condition often sponsor medical conferences. The general adoption of a specialized technique - for example, the use of metal stents to open clogged arteries - can dramatically increase sales. The actual cost of manufacturing a medical device is often small relative to the marketing costs. Because of the large expense involved in such testing and documentation, small manufacturers often form marketing alliances with larger companies.

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Manufacturer sales tend to be through traditional channels, though some medical supply resellers specialize exclusively in online sales. The Internet plays an important role in marketing product uses, features, and benefits to distributors, hospitals, and physicians. The FDA regulates online sales and marketing of medical devices by third parties. Companies may try to sell devices like contact lenses without a prescription, or may sell items like magnets and patches that purport to cure diseases, aches, and pains.

Finance & Regulation

Receivables can be high -- about 60 days sales is typical -- because of manufacturer dependence on large buyers, including national health care programs outside the US. The fragile economic condition of many European countries may contribute to high receivables. Small manufacturers funded by venture capital may have large cash balances from periodic rounds of fundraising. The costs and availability of liability insurance are a major concern for companies, especially because manufacturers and distributors are routinely named in lawsuits even when their liability is questionable. Product defects can have serious consequences. Litigation over patents, licenses, and intellectual property rights are also common in an industry with rapidly evolving technology. The industry is capital-intensive: average annual revenue per employee is around $390,000. Gross margins are high, typically ranging from 50 and 70 percent. For specialized companies, R&D spending is often between 5 percent and 10 percent of revenue. The industry is heavily regulated by the FDA. The complexity and cost of following regulations depend on the category a medical device falls into: I, II, or III. Class III devices often require expensive clinical trials and Pre-Market Approval (PMA) before they can be marketed for use. Class I and II devices may need only a 510(k) pre-market notification. In Europe and other countries, agencies comparable to the FDA enforce similar regulations. Products marketed in Europe need a CE mark of approval under the European Union Medical Device Directive; products sold internationally often need an ISO 9000 certification of quality.

International Insights
Global revenue for makers of medical equipment and supplies is about $350 billion. The US is both the largest consumer and producer of medical devices in the world, followed by Japan, Germany, France, and Italy, according to the US International Trade Administrations Office of Health and Consumer Goods. Major companies based outside the US include PRIM (hospital and orthopedic supplies, Spain), Smith & Nephew (joint and bone products, UK), Terumo (disposable medical supplies, Japan), Covidien (disposable medical and surgical products, Ireland), and B. Braun (medical and surgical products, Germany). The top five medical device markets (the US, Japan, Germany, France, and Italy) comprise only about 13 percent of the worlds population but account for more than 75 percent of the use of medical devices, according to the International Trade Administration. Countries such as South Korea have seen faster growth in the medical equipment and supplies industry, partly because of increased focus on health care. China, too, is experiencing growth, as its burgeoning economic development and aging population boost demand. The Chinese medical device industry is expected to reach nearly $43 billion in 2019, according to Pharmaphorum. Since some emerging economies lack the infrastructure to develop and manufacture high-tech medical devices, they may import those products while focusing on production of disposable medical supplies. Malaysia, for instance, is one of the worlds largest rubber sources, and latex products make up the biggest share of its medical equipment and supplies exports.

Major Medical Device Markets - US Department of Commerce

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Global packaging, labeling, and unique device identification technology are top issues for manufacturers of medical equipment and supplies. The benefits of standardized packaging and labeling include patient safety and product identification and tracking. The International Medical Device Regulators Forum (IMDRF), which is made up of the EU, the US, Australia, Brazil, Canada, China, Japan, and the World Health Organization (WHO), is working to standardize national and industry medical device regulations and requirements. Health care providers, the main purchasers of medical equipment and supplies, depend on reimbursement from insurance companies and government entities. However, reimbursement policies vary widely by country and there is little if any standardization, according to the International Trade Administration. Low reimbursement rates can restrict trade and discourage manufacturers from expanding into new markets. Global demographic trends favor manufacturers of medical equipment and supplies. By 2050, the number of people over 60 years old will be about 2 billion, according to the United Nations. The regions with the fastest growing percentages of elderly people are the US, the EU, and Japan, which are also top markets for medical equipment and supplies. As populations age and become more prone to disease and chronic conditions, markets for health care and medical devices grow. Products that will be the most impacted by this change in demographics will include hip and other joint replacement products and home kits for monitoring chronic conditions.

Change in Dollar Value of US Trade - US International Trade Commission

Imports of oilseeds to the US come primarily from Canada, China, Argentina, India, and Chile. Major export markets for US oilseeds include China, Mexico, Japan, Indonesia, and Germany.

3391 MEDICAL EQUIPMENT AND SUPPLIES

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Regional Highlights
In the US, leading states for manufacturing medical equipment and supplies include California, Indiana, and Florida, which account for more than 30 percent of total US industry revenue.

Human Resources
Average hourly wages for workers in medical products manufacturing are slightly lower than the national average. Because of relatively small production runs, much of the manufacturing is labor-intensive, prompting manufacturers to move production to lower-cost countries like Ireland, Mexico, and China. Most medical products manufacturing workers require only average skills. Injury and illness rates for the industry are about 30 percent lower than the national average. Common injuries include strains, sprains, cuts, and wrist pain from working with machinery, moving containers, and overexertion. Industry Employment Growth Bureau of Labor Statistics

Average Hourly Earnings & Annual Wage Increase Bureau of Labor Statistics

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Industry Growth Rating

Demand: Tied to demographics and new medical technology Strong patent protection Risk: FDA and insurers must approve

Recent News
FDA Voice Blog: Considering Women?s Needs in Developing Medical Devices: Here?s 'HoW' FDA Devices, 30 August, 2013 FDA's official blog brought to you from FDA's senior leadership and staff stationed at home and abroad - s background, announcements and other information about the work done at the FDA on behalf of the... Which U.S. State Is Best for Medical Device Companies? Qualified Suppliers to the Medical Device Industry, 27 August, 2013 Medical Device Business An economic researcher based in Michigan, Graham Billey, posed the above question in a thr Medical Devices Group on Linkedin. The thread, which asked specifically for... The Applicability of Good Laboratory Practice in Premarket Device Submissions: Questions and Answers - Draf for Industry and Food and Drug Administration Staff FDA Devices, 27 August, 2013 This draft guidance answers commonly asked questions about the applicability of the Good Laboratory Practice (GLP) r nonclinical laboratory studies conducted to support research and marketing applications for...

View All News

Quarterly Industry Update

7.1.2013

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Opportunity: Medical Monitors Trade Clumsy Leads for Wireless Tech - Medical monitoring devices that track patient vital signs are increasingly taking advantage of wireless technology, according to Qmed. Wireless technology eliminates the need for wires and cables used to link the device to the patient and often get in the way of patient care. Supporting to this trend is the FCCs allotment of radio spectrum for medical body area networks (MBANs), which will prevent interference from Wi-Fi and other devices. Several device manufacturers are using technology such as nearfield communication and disposable sensors that prevent cross-contamination. Industry Impact - Demand for wireless technology is driving innovation in the industry, providing companies with the opportunity to expand market share.

4.8.2013
Opportunity: Repeal of Medical Device Tax Advances - Legislation pending in Congress would repeal the medical device tax, which many industry insiders say reduces innovation and employment and drives manufacturing overseas. The tax is estimated to cost the industry $30 billion over the next 10 years. The proposal to repeal, recently approved by the Senate, still has to pass the House and may not survive further federal budget negotiations. Industry Impact - While the Senate vote to repeal the medical device tax holds promise for the industry, medical device and equipment manufacturers will have to operate under the current system until further notice, which could require cutting employment or R&D investments.

1.14.2013
Challenge: Regulations, Taxes Could Hinder Growth - The output of US medical instrument and supply manufacturing is expected to grow 3 percent in 2013 compared to 2012, according to the latest industry forecast for First Research by INFORUM. Despite favorable demographic trends that will boost demand for innovative medical equipment and supplies, the industry faces unpredictable government regulations and taxes, according to the Medical Device Manufacturers Association. A new medical device tax, which could collect $30 billion over the next decade, could put pressure on margins for the industry. Industry Impact - Many manufacturers believe a new tax on medical devices could cause them to cut jobs or reduce hiring, and product innovation could suffer if fewer talented employees are available.

10.8.2012
Challenge: Makers of Carotid Stents Face Opposition - Companies that make carotid stents designed to prevent stroke are asking Medicare to widen approval for the products, but their use has raised controversy. Medical researchers say that modern stroke drugs are more effective, which could render the technology obsolete. If Medicare broadens the use of stents in at-risk patients who as yet show no symptoms, the market for preventive stent placement could be as many as 100,000 new patients, according to The Wall Street Journal. Surgeons who side with the medical device makers say that doctors should be able to have all tools at their disposal. Researchers counter that studies show that the use of drugs is safer and more effective than stent surgery. Industry Impact - If researchers opposed to the use of carotid stents convince doctors to prescribe drugs to prevent stroke, it could significantly curtail the market for these devices or even make them obsolete.

Industry Indicators
US consumer prices for medical care commodities, which may impact supply and device makers' profitability, fell 0.1 percent in July 2013 compared to the same period in 2012. US manufacturers' shipments of miscellaneous durable goods, an indicator of demand for medical supplies and devices, rose 4.6 percent year-to-date in June 2013 compared to the same period in 2012. US retail sales for health and personal care stores, a potential measure of consumer spending on medical supplies and devices, increased 0.6 percent in the first seven months of 2013 compared to the same period in 2012.

Industry Forecast

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The output of US medical instruments and supplies is forecast to grow at an annual compounded rate of 5 percent between 2013 and 2017. Data Published: March 2013 Medical Supply and Equipment Manufacturing Growth Flattens

First Research forecasts are based on INFORUM forecasts that are licensed from the Interindustry Economic Research Fund, Inc. (IERF) in College Park, MD. INFORUM's "interindustry-macro" approach to modeling the economy captures the links between industries and the aggregate economy. Forecast FAQs

Industry Drivers
Changes in the economic environment that may positively or negatively affect industry growth. Data provided by First Research analysts and reviewed annually

Energy Prices Change in crude oil and related energy prices

Government Regulations Changes in federal, state, or local government regulations or business-related policies

Commodity Prices Changes in prices for commodities, such as crops, metals, and other raw materials

Critical Issues
Dependence on Regulators - All new medical devices require approval from the FDA to be marketed, and from Medicare and other insurers that ultimately pay for use. Although FDA and Medicare have streamlined procedures, review for new devices can be lengthy and approval uncertain. Devices that get FDA approval may be unsuccessful if insurers judge them to be too expensive. The costs associated with such regulation can be high, particularly with higher risk, Class III devices. Medical Device Tax - Medical device manufacturers say that a 2.3 percent medical device tax put in place under the Affordable Care Act poses a considerable financial burden for the industry. The tax is expected to cost the medical device industry about $30 billion over the next 10 years. Critics say that the tax will limit investment in the industry, cause cutbacks in R&D, and place an inordinate burden on small startups with innovative products.

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Business Challenges
Patent and Intellectual Property Issues - Patents and intellectual property are crucial to a companys success. Many companies spend around 10 percent of their revenues on intellectual property research and development, and must also expend resources in obtaining and defending their patent rights. Companies often acquire rivals to obtain their intellectual property, which in turn contributes to industry consolidation. New Disclosure Rules - Under the federal Sunshine Act, medical device manufacturers will have to report to Medicare any payments to physicians and teaching hospitals, such as investment interests, ownership, or other transfers of value. After the law takes effect in 2014, manufacturers will have to compile the information annually. The Sunshine Act is designed to make transactions between manufacturers and physicians transparent to patients and others. Mandatory Product Labeling - The FDA is considering structured product labeling requirements for the medical equipment industry, along the lines of the requirements for the labeling of pharmaceutical products. A standardized device label is already in development. Medical device manufacturers are concerned that requirements would be too rigid and would not account for the wide variety of medical devices -- a catheter, for instance, would need to impart different medical and safety data than a more advanced device. Product Liability - Companies in the industry are at risk of being held liable for injuries alleged to be caused by their products. They may be subject to product recalls, lawsuits, and FDA investigations, all at great expense. As a result, the cost and availability of liability insurance are a major concern for most companies. Dependence on Large Customers - Buying groups act as distributors for about half the nation's nonprofit hospitals. Often, smaller medical device and supply companies can be shut out of sales to hospitals when a larger competitor has secured exclusive contracts with the purchasing group. Most large medical manufacturers sell heavily to purchasing groups. Product Obsolescence Risks - Medical device manufacturing is highly specialized, and rapid industry innovation greatly increases the risk of technological obsolescence. Most medical device companies are small and specialize in just one type of device, targeted toward a particular market, so they can't spread the risk of obsolescence across multiple products and markets. Competition from Alternative Products - Device manufacturers are concerned that advances in biotechnology may make certain devices obsolete. Biotech treatments like bone, organ, and tissue replacements may ultimately be more restorative than devices implanted into patients. Even preventive and pay-for-performance health care, with its proactive focus to reduce the risk of disease and debilitating conditions, may be considered competition for manufacturers. Health Care Cost Containment - Because of rapidly increasing health care costs, private insurers and government programs like Medicare have moved to limit payments for many medical treatments that require medical supplies or devices. Doctors and hospitals, in turn, have a greater incentive to resist price increases. US producer prices for medical equipment and supplies rose 10 percent between 2005 and 2012. Some medical device manufacturers are concerned that the insurance industrys negotiations for volume discounts on pharmaceuticals could also be successful for the medical technology industry, further suppressing prices.

Business Trends
Specialization - Medical device manufacturers are increasingly specializing in one area of medicine and sometimes in just one type of treatment. AtriCure, for example, makes only devices that treat atrial fibrillation. The high degree of specialization in a field of rapid innovation allows small companies to compete successfully, but also greatly increases the risk of technological obsolescence for any individual company. Consolidation - Increased consolidation of manufacturers and distributors has been driven partly by customer consolidation: hospitals, doctors groups, clinics, purchasing groups, and MCOs. To buy in bulk at lower costs, customers form large buying groups, and sellers are more likely to get contracts with these groups if they can offer a wide product assortment. Other factors driving consolidation are shorter product life cycles and the high cost of new technology development. Outsourcing Distribution - Strong sales and marketing skills are often necessary to convince health care providers to accept new technologies. Many medical product manufacturers outsource sales and marketing to networks of specialty distributors, who typically are small and local, selling a dozen manufacturers' lines.

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Industry Opportunities
Steady Demand - While many industries are affected by economic downturns, the growth of medical technology remains largely undeterred due to its indispensable nature. Implanted defibrillators, female diagnostics, and cardiac monitoring equipment are rapidly growing market segments. Additionally, medical devices may come on the market faster than other medical or health care products, making medical device companies attractive to investors. Advances in Wireless Technology - Manufacturers of implantable medical devices and diagnostic equipment are rapidly adopting wireless capabilities into their designs. With wireless technology, doctors and patients have better access to real-time data from medical devices. For example, wireless technology in hearing aids allows patients and doctors to remotely adjust volume and balance. Favorable Demographic Changes - Changing demographics of the US population favor the medical device industry, quite aside from the pace of technological innovation. From 2010 to 2020, the number of Americans 65 and older is forecast to increase by more than 35 percent. Total US population is forecast to increase by 10 percent during the same period. Reprocessing Medical Devices - As the US becomes increasingly concerned about health care costs, some analysts have pegged medical supply waste as part of the problem. Due to increasing concern over the volume of medical waste, some medical devices are now recycled or reprocessed for resale. New FDA rules stipulate that all hospitals and third-party medical device reprocessing facilities must comply with the same FDA regulations as original equipment manufacturers of medical devices.

Executive Insight
Chief Executive Officer - CEO
Thriving in a Complex Regulatory Environment Manufacturers of medical supplies and devices face a complex and changing regulatory environment affecting the development, manufacture, and sale of products. The FDA continues to evolve regulations governing approval of new products; standards for good manufacturing practices (GMP); and standards for use of medical supplies and devices. The Centers for Medicare and Medicaid Services (CMS) has proposed competitive bidding for medical supplies and devices and changes to hospital reimbursement rates that may discourage purchases of innovative medical technologies. Executives must stay abreast of regulatory changes and develop effective responses to maintain growth and profitability. Managing Alliances and Acquisitions The high cost of development and regulatory approval for new medical devices, along with pressure to reduce health care costs, is driving consolidation among manufacturers. Small manufacturers are teaming with larger companies through both marketing and sales alliances and company mergers. These combinations provide additional resources and efficiencies in managing the regulatory approval process and justifying the cost-effectiveness of new products with third-party payers.

Chief Financial Officer - CFO

Controlling Insurance Costs Manufacturers of medical supplies and devices are often named in patient suits against hospitals and physicians. As a result, the cost and availability of product liability insurance is a key concern. Rising rates and increased exclusions in coverage by insurers are causing many manufacturers to adopt a self-insurance strategy for product liability. Financing Acquisition Opportunities As consolidation in the medical supplies and device industry continues, manufacturers must have access to the financial resources required to take advantage of potential acquisitions. Companies must choose the proper mix of selfgenerated cash, new equity, and debt financing to fulfill capital needs and meet expectations of investors and lenders.

Chief Information Officer - CIO

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Managing Research & Development New product development is essential to a company's operations. Spending on R&D typically accounts for around 10 percent or more of a companys revenues. Intellectual property and patent rights comprise a significant part of a companys operations. Integrating Supply Chain Systems Manufacturers are lowering costs and reducing lead times by implementing software systems that integrate the entire supply chain from purchasing to manufacturing to distribution. Manufacturers of medical supplies are also being required to integrate with the supply chain management systems of distributors or hospitals to deliver needed supplies the same-day. Hospitals are seeking to minimize supply inventory levels as part of cost-containment programs.

Human Resources - HR
Hiring and Retaining Research Specialists Smaller manufacturers of medical devices and supplies tend to focus on a particular medical area and must recruit and retain research specialists in that area. Competition can be intense for researchers in medical areas with strong growth prospects, such as reproduction diagnostics or cardiac monitoring. Companies often rely on consultants who specialize in medical recruiting to source experienced researchers from competitors and academic environments. Merging Cultures and Systems As companies grow through acquisitions, theyre often challenged by merging diverse corporate cultures and incompatible HR systems. Some choose to retain acquired companies as separate subsidiaries to minimize integration issues, a strategy that also limits potential synergies and works only where each companys medical devices address separate markets. Successful mergers are usually the result of having detailed integration plans upfront, assigning dedicated managers to the merger process, and actively communicating plans and expectations to all employees.

VP Sales/Marketing - Sales
Building Physician Relationships Physicians are not only key customers for medical supplies and devices, but also serve as consultants for the design of new products and development of marketing programs. Companies rely on them for feedback on how products are used, and theyre important in clinical trials and regulatory submissions. Manufacturers must build and maintain strong relationships with physicians who specialize in the medical areas targeted by their new products. Negotiating with Buying Groups To reduce the cost of medical supplies, half the nonprofit hospitals in the US now buy through buying groups. These buying groups may offer exclusive contracts to suppliers in exchange for price discounts. Sales teams for manufacturers of medical supplies and devices must successfully negotiate contract terms with buying groups to retain access to the hospital market while also meeting profit goals.

Executive Conversation Starters

Chief Executive Officer - CEO
How do changing and complex regulations challenge the company? Complex and changing regulations affect the development, manufacture, and sale of, and insurance reimbursement rates for, medical supplies and devices. How important are alliances and acquisitions to the company's strategy? Alliances and mergers bring efficiencies in managing the regulatory approval process and justifying the cost of new products with third-party payers.

Chief Financial Officer - CFO

What strategies does the company use to control liability insurance costs? Rising rates and increasing exclusions in insurance coverage lead many manufacturers to adopt a self-insurance strategy for product liability.

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What financing methods work best to fund the company's acquisitions or other expansions? Companies choose the proper mix of self-generated cash, new equity, and debt financing to fulfill capital needs and meet investor expectations.

Chief Information Officer - CIO

How important is R&D to the company's operations? Spending on research and development often accounts for 10 percent or more of a company's revenues, as new product development is essential. How is the company challenged by integrating supply chain systems with suppliers, distributors, and customers? Integrating with software systems of suppliers, distributors, and customers, especially hospitals, aims to achieve sameday delivery on orders.

Human Resources - HR
What methods work best to recruit highly specialized researchers? To find experienced researchers, manufacturers often rely on consultants who specialize in medical recruiting. What experience has the company had merging company cultures and systems after an acquisition? Detailed plans and clear responsibilities and communications help merge cultures and systems after acquisitions, which are common in the industry.

VP Sales/Marketing - Sales
How important are physician relationships to the company's product and sales strategies? As key end-users, physicians give input on new product design and marketing, and are important in clinical trials and regulatory submissions. What challenges does the company have negotiating with hospital buying groups? Half of US nonprofit hospitals buy supplies through buying groups, which get discounts.

Call Prep Questions

Conversation Starters
What difficulties has the company had meeting FDA and insurer approval? All new medical devices require approval from the FDA to be marketed, and from Medicare and other insurers that ultimately pay for use. How does the company manage prices in the face of pressure by Medicare and insurers to keep costs low? Medical device manufacturers say that a 2. How does the company protect its patents and intellectual property from infringement? Patents and intellectual property are crucial to a companys success. How much is demand for the company's products affected by the growth of the economy? While many industries are affected by economic downturns, the growth of medical technology remains largely undeterred due to its indispensable nature. What are the company's more recent technological innovations? Manufacturers of implantable medical devices and diagnostic equipment are rapidly adopting wireless capabilities into their designs. What changes in product demand does the company think will result from the aging of the US population? Changing demographics of the US population favor the medical device industry, quite aside from the pace of technological innovation.

Quarterly Industry Update

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How has demand for wireless monitoring devices impacted the companys product development? Demand for wireless technology is driving innovation in the industry, providing companies with the opportunity to expand market share.

Operations, Products, and Facilities

How many facilities does the company operate? Most producers have a single manufacturing location; large companies may have facilities overseas to take advantage of lower costs. How does medical device reprocessing fit into the company's operations? The FDA stipulates that all third-party medical device reprocessors comply with the same FDA regulations as the original equipment manufacturers. Does the company handle low-tech products such as latex gloves, tape, gauze sponges, and syringes, or specialized high-tech products? Low-cost manufacturing efficiency is the main production concern for companies producing low-tech products. R&D is key for high-tech products. How long has the company been in business? New companies often find it harder to compete because of difficulties in establishing distribution. How many products does the company handle? Many companies concentrate on one or a few products. What key raw materials or components are crucial? High-technology products often require specialized components.

Customers, Marketing, Pricing, Competition

Does the company sell to a large, or limited, number of customers? Many specialized products have a limited market. Does the company sell directly to large end-customers like hospitals, or does it use distributors? Some companies sell to both wholesalers and large national accounts. What is the companys market share within the particular segment where it competes? While the market is only slightly concentrated, some companies may dominate a particular type of device. Does the company compete against similar products with different price/performance characteristics? The cost-benefit ratio of devices is becoming a greater concern for large buyers. How does the company promote its products? Even small manufacturers of medical devices market products through a combination of direct sales and sales representatives. Large distributors handle mainly well-known products that can be sold in quantity. How have cost-containment measures by government and other third-party payers affected the company? Third-party payers like Medicare, Medicaid, manged care organizations, and commercial insurance companies determine the cost reimbursement levels for medical supplies and devices doctors and hospitals use.

Regulations, R&D, Imports and Exports

How does the company manage the FDA review process? The FDA approval process can be lengthy. Under what FDA regulations do the companys products fall? The complexity and cost of following the FDAs regulations depends on the class of a medical device: Class I, II, or III. How does the company work with Medicare and other third-party payers to get approval for products and devices? Medicare approval is crucial, even if a product has been approved by the FDA. How crucial are foreign markets to the company? Many medical supply and device markets that are slowing in the US are still developing in other countries.

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How does the company mitigate the risk of product liability? Cost and availability of liability insurance are major concerns for companies.

Organization and Management

What trend has the company seen in worker wages? Wages for workers in medical products manufacturing are slightly lower than the national average. What is the company doing to improve production costs? Because of relatively small production runs, much of the work is labor-intensive, prompting manufacturers to move production to lower cost countries such as Ireland, Mexico, and China. What kind of technology licensing agreements does the company have with other companies or universities? Technology licensing is common in the industry.

Financial Analysis
How are development costs being affected by changes in technology? Increasing development costs are an industry trend. How does the company manage cash flow? The typical product cash cycle consists of outflows during R&D and early regulatory phases, and inflows only after marketing has begun. How does the company manage equipment obsolescence? High-tech production equipment can lose value rapidly. How does the company fund growth? Because of the many risks in the industry, venture capital and other equity financing are typical. How does the company manage exposure to foreign currency risk? Companies of all sizes may have substantial exports. What are the company's typical gross margins? Gross margins generally range from 40 to 60 percent. What are the company's accounts receivable? Receivables are typically 30 to 60 days sales. How much does the company spend on R&D as a percentage of revenue? Some companies spend 10 percent or more of revenue on R&D.

Business and Technology Strategies

Does the company develop its products in-house, acquire product lines from other companies, or rely on a mix of both strategies? Highly specialized companies usually spend a large percentage of sales on R&D and rely on new products for future revenue. How do acquisitions fit into the company's strategy? Consolidation is a growing industry trend. Does the company's success depend on technological innovations or on enhancing existing products? Most companies depend on new technological advances. How does the company balance the need for high-cost technology with competitive pricing? Hospitals, with funding often restrained, decide what medical devices and supplies to buy based primarily on cost. What market areas has the company targeted for long-term development? Cancer diagnostics is an example of a growing market, due to the increased incidence of cancer in an aging population.

Financial Information

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COMPANY BENCHMARK TRENDS

Quick Ratio by Company Size The quick ratio, also known as the acid test ratio, measures a company's ability to meet short-term obligations with liquid assets. The higher the ratio, the better; a number below 1 signals financial distress. Use the quick ratio to determine if companies in an industry are typically able to pay off their current liabilities.

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available by subscription or single report purchase at www.microbilt.com/firstresearch.

COMPANY BENCHMARK INFORMATION

NAICS: 3391 Data Period Table Data Format Last Update July 2013 Mean

Company Size Size by Revenue Company Count

All

Large Over $50M

Medium $5M - $50M 167

Small Under $5M 6764

6949

17

Income Statement Net Sales Gross Margin Officer Compensation Advertising & Sales Other Operating Expenses Operating Expenses 100% 47.0% 2.1% 0.7% 38.5% 41.3% 100% 34.9% 1.2% 0.9% 27.7% 29.8% 100% 45.2% 1.7% 0.7% 37.5% 39.8% 100% 64.6% 3.6% 0.5% 53.7% 57.8%

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Operating Income Net Income

5.7% 3.0%

5.1% 2.7%

5.4% 2.9%

6.8% 3.7%

Balance Sheet Cash Accounts Receivable Inventory Total Current Assets Property, Plant & Equipment Other Non-Current Assets Total Assets Accounts Payable Total Current Liabilities Total Long Term Liabilities Net Worth 14.8% 19.0% 13.3% 54.0% 14.7% 31.3% 100.0% 7.6% 23.2% 31.7% 45.1% 13.0% 16.4% 14.4% 50.8% 15.1% 34.1% 100.0% 7.6% 21.7% 32.6% 45.8% 14.7% 20.8% 13.5% 55.2% 15.6% 29.2% 100.0% 7.9% 25.1% 31.2% 43.7% 17.8% 22.3% 10.7% 58.2% 13.6% 28.2% 100.0% 7.3% 24.8% 31.1% 44.2%

Financial Ratios (Click on any ratio for comprehensive definitions) Quick Ratio Current Ratio Current Liabilities to Net Worth Current Liabilities to Inventory Total Debt to Net Worth Fixed Assets to Net Worth Days Accounts Receivable Inventory Turnover Total Assets to Sales Working Capital to Sales Accounts Payable to Sales Pre-Tax Return on Sales Pre-Tax Return on Assets Pre-Tax Return on Net Worth Interest Coverage EBITDA to Sales 1.54 2.33 51.4% x1.74 x1.22 x0.33 56 x4.88 84.4% 26.0% 6.2% 4.9% 5.8% 12.8% x5.44 9.1% 1.48 2.34 47.4% x1.51 x1.19 x0.33 56 x4.86 96.2% 28.0% 7.1% 4.4% 4.5% 9.9% x5.52 8.7% 1.47 2.20 57.4% x1.86 x1.29 x0.36 56 x5.50 76.3% 23.0% 5.8% 4.6% 6.1% 13.9% x5.19 9.1% 1.66 2.35 56.1% x2.31 x1.26 x0.31 59 x4.53 75.4% 25.2% 5.4% 5.9% 7.8% 17.8% x5.80 9.7%

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Capital Expenditures to Sales

5.0%

5.5%

5.3%

4.2%

Financial industry data provided by MicroBilt Corporation collected from 32 different data sources and represents financial performance of over 4.5 million privately held businesses and detailed industry financial benchmarks of companies in over 900 industries (SIC and NAICS). More data available by subscription or single report purchase at www.microbilt.com/firstresearch.

ECONOMIC STATISTICS AND INFORMATION

Index of Industrial Production - Federal Reserve Board

VALUATION MULTIPLES
Medical Equipment & Supplies Manufacturing Acquisition multiples below are calculated using at least 6 private, middle-market (valued at less than $1 billion) industry asset transactions completed between 4/2003 and 4/2011. Data updated annually. Last updated: October 2012.

Valuation Multiple Median Value

MVIC/Net Sales 0.4

MVIC/Gross Profit 1

MVIC/EBIT 4.1

MVIC/EBITDA 3.8

MVIC (Market Value of Invested Capital) = Also known as the selling price, the MVIC is the total consideration paid to the seller and includes any cash, notes and/or securities that were used as a form of payment plus any interest-bearing liabilities assumed by the buyer. Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any. Gross Profit = Net Sales - Cost of Goods Sold EBIT = Operating Profit EBITDA = Operating Profit + Noncash Charges
SOURCE: Pratt's Stats (Portland, OR: Business Valuation Resources, LLC) To purchase more detailed information, please either visit www.BVMarketData.com or call 888-287-8258.

Industry Websites

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Advanced Medical Technology Association (AdvaMed) Trade group for medical device manufacturers. FDA Center for Devices and Radiological Health (CDRH) Medical devices news releases, regulations, MedWatch warnings and recalls. Independent Medical Devices Association Online publications, links. MEDEC - Canada's Medical Technology Companies Media, events, issues, advocacy, and resources. Medical Device Link News and articles. Medical Device Manufacturers Association Industry News. Medical Devices Today News and analysis on the medical device industry Office of Health and Consumer Goods US International Trade Administration information on health care technology, including medical equipment and supplies. Repertoire News and analysis for medical products distributors and manufacturers. Repertoire Dail-E News Industry news.

Glossary of Acronyms
AHA - American Hospital Association CDRH - Center for Devices and Radiological Health CMS - Centers for Medicare and Medicaid Services GMP - Good Manufacturing Practices HHS - Department of Health and Human Services ITA - International Trade Administration MCO - Managed care organization OEM - original equipment manufacturer PMA - Pre-market approval

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