Medical manufacturing is exploding. According to work by KPMG, the global sector is due to enjoy a CAGR of 5% over the next decade, reaching almost $800bn by 2030. That’s echoed by the rise of specific companies: industry titan Stryker announced a revenue jump of almost 10% last September, even as Siemens Healthineers and J&J posted similar figures. Nor is this bonanza particularly hard to understand. Between new technologies and ageing populations, there is vast space for medtech to thrive, in fields as motley as nanobots and hearing aids.
Yet with soaring growth comes challenges. It may take between three to seven years to bring a new device to market. But as countries like China bolster their own medtech industries by 7% a year, that’s often too slow for OEMs squeezed by ever greater competition. By the time you add in broader difficulties around securing the right technical expertise, or around congested supply chains – let alone when emergencies like Covid force managers to transform their production lines on a dime – it can be near impossible for manufacturers to cope with the pressures of modern medtech. Enter contract manufacturing. By offloading aspects of the production process to outside experts, OEMs can dramatically bolster their supply chains, ensuring products reach patients faster and more cheaply.
Examine the numbers and this approach is clearly popular. All the same, it’d be wrong to imply that contract manufacturing is straightforward. From cybersecurity to intellectual property, finding the right partner requires time and patience – relationships that must be honed even once initial contracts have been signed. And though the contract manufacturing sector is going from strength to strength, it’d equally be foolish to assume it’ll keep rising forever. Especially with looming geopolitical tensions in East Asia, an increasing group of manufacturers, often prodded by their governments, are rushing to secure new partners, or even reshore their operations entirely. It goes without saying that, notwithstanding the current excitement, the consequences for contract manufacturers could be profound.
Round the world
It’s hard to overstate how important contract manufacturing now is to global medtech. Once again, the statistics here are revealing, with work by MarketsandMarkets finding that the global field was already worth $71.2bn in 2022, a figure that could rise to almost $120bn by 2027. As so often in international pharma, the developing world is especially impressive here, with the Asia-Pacific region set to enjoy particularly dynamic growth. Beyond the headline figures, meanwhile, it’s clear that some of the biggest names in global medtech are galloping down the contract road. It’s surely no accident, after all, that giants as varied as Philips and GE Healthcare should have lately re-upped agreements with contract manufacturing organisations (CMOs).
How to explain this dynamic and expanding marketplace? To an extent, suggests Ash Shehata, partner at KPMG’s Global Healthcare Center of Excellence, the answer lies in broad industry trends: “When we look at manufacturing capabilities, it isn’t just at the top line – it’s also at the sub-specialty line.” To explain what he means, Shehata evokes the bewildering spread of medical devices now flooding the market, from long-term cardiovascular devices to disposable stents. The point, he stresses, is that OEMs can’t hope to develop all these machines in-house – hardly surprising when the WHO notes that there are some two million different kinds of medical devices on the world market today, categorised into over 7,000 different groups.
With those kinds of figures, it’s no wonder that OEMs lean on external expertise, especially when two in five skilled US manufacturing jobs could be vacant by the middle of the decade. That’s doubly true when you factor in supply chain woes. Though they’re crucial everywhere, from patient monitors to defibrillators, microchips and other technical components have lately been in short supply. It therefore makes sense for OEMs to partner with CMOs in places such as Taiwan – an island that makes 60% of the world’s semiconductors.
$120bn
The potential size of the global contract medical manufacturing sector by 2027.
Markets and Markets
For her part, Jenny Harte, a life sciences partner with KPMG, stresses the value of contract manufacturing in an emergency. Unsurprisingly, the most recent obvious example here is Covid, noting that the pandemic sparked a “massive acceleration” in the contract manufacturing space. In Harte’s telling, companies had to “pivot” towards manufacturing point-of-care and diagnostic solutions essentially overnight. “And that,” she stresses, “really hadn’t been something that was significantly there.” Certainly, it’s a point amply supported by the facts. In Minnesota, for instance, the 3M manufacturing giant rushed to ‘surge’ production of N95 respirator masks, over the spring of 2020 doubling output to 100 million units a month. With that kind of pressure to adapt, it’s unsurprising that so many manufacturers tapped CMOs for help, either to pump out Covid-specific equipment or else bolster other production lines.
1/5
The amount by which intellectual property theft cases have lately jumped in the US.
Cyberhaven
Making contract
The pandemic-era enthusiasm for CMOs has persisted – quite aside from the headline growth figures, that’s apparent geographically, with countries as diverse as India and Costa Rica quickly becoming contracting hotspots. All the same, it’d be wrong to conclude from this booming landscape that managers can simply ink a third-party deal before returning to other concerns. On the contrary, Shehata says that fruitful contract manufacturing relationships must represent “a true extension” of an OEM’s operations, and not merely encompass an abstract statement of work. Harte agrees. While noting that the practicalities naturally depend on a range of factors – from the type of device being manufactured to the level of in-house expertise – she says that outsourcing requires plenty of work.
82%
The percentage of organisations that have experienced data breaches caused by third parties.
Process Unity
There are several ways to understand the importance of honing such intimate professional relationships. Some are obvious. If, after all, you’re an OEM engaging a contract manufacturer to develop a new stent or heart valve, you need to ensure your new partner can actually help. For that reason, Shehata says it’s often a good idea to bring them in early in the process, even during R&D. From her own work at KPMG, Harte makes a similar point. “We would put together a prototype, then take the feedback from that prototype,” she explains. “And during that period, there may be some consideration there: like what are the other sustainable materials that we could potentially use?” From there, Harte continues, OEMs would be wise to understand a partner’s regulatory standing, not least given rules such as ISO 13485 demand consistent quality throughout a product’s life cycle.
Beyond these broad efficiency questions – ensuring a new product travels down the supply chain from factory to patient as smoothly and cheaply as possible – CMOs can potentially pose other challenges. Perhaps the most salient involves intellectual property. Think about it like this: contract manufacturing can only succeed if partners understand the product involved, but what if unscrupulous operators take the chance to steal or copy the technology? Nor is this merely a hypothetical challenge. According to a recent report by Cyberhaven, intellectual property theft cases have lately jumped by 21% in the US with convictions rising by nearly a third. A related difficulty, both Shehata and Harte agree, involves cybersecurity. Fair enough: 82% of organisations have experienced data branches caused by third parties, with remediation costing an average of $7.5m a pop.
An un-shore future
Not that either problem is intractable here. When it comes to both intellectual property and cybersecurity, in fact, the experts advocate similar solutions: technology. When it comes to IP, for instance, Shehata suggests encrypting a device, with a key allowing use at the point of service. It’s a similar story, Shehata continues, with cybersecurity. “I think there are some good technology solutions that are starting to maintain the integrity and trust between multiple organisations,” he says, suggesting that OEMs and CMOs alike are going to need “very heavy investments” in their cybersecurity capabilities.
All the while, the potential threats to the future of contract manufacturing extend to the geopolitical. With the prospect of war in Asia- Pacific looming – and Taiwanese microchips potentially unavailable to global markets – many countries have started reshoring their manufacturing. A prime example here is the US, where dozens of companies have reopened sites domestically over recent years. That’s shadowed by the tendency of OEMs to find CMOs in less politically vulnerable regions. Whatever other problems South Africa faces, for example, invasion by China seems unlikely, transforming the country into a prime contract manufacturing candidate for Western medtechs. The point, stresses Shehata, is that geopolitical concerns “continue to kind of outweigh” any kind of business concern. To put it differently, the cost of contract manufacturing may rise in future, with uncertain consequences for CMOs – and for a sector that’s thrived for years.
