From startups to giants, medtech manufacturers are outsourcing like crazy.
Before the ’08 financial crisis, medical device R&D spending averaged 15.5% of the top manufacturers’ annual budgets. As the Great Recession put companies into survival mode, R&D spending fell, bottoming out at 4.7% by 2017.
But then, a slew of new pressures — higher regulatory standards, increased competition, and the rise of wearable devices, among others — threw the spotlight back on R&D and manufacturing.
Once a vital cost-cutting measure, reduced R&D and manufacturing spend now imperiled medtech manufacturers.
They now faced a need to innovate — design, test, manufacture — at top speed. Cue a wave of consolidation: Medtronic acquired Mazor Robotics for $1.7 billion; Stryker bought K2M for $1.4 billion; Wright Medical spent $435 million to absorb Cartiva — all in 2018 alone. Contract R&D and manufacturing outsourcing followed suit.
Here’s why medtech manufacturers outsource — and why, for the next several years at least, they will continue to do so at an increasing rate.
Why outsource R&D and manufacturing?
- Gain operational efficiencies. R&D isn’t easy. It requires a thorough understanding of customer health trends and needs, highly skilled engineers to design and iterate products, robust quality controls to meet evolving regulatory standards, and more. Once this process is complete, medtech companies need to produce devices at scale. Short of complete vertical integration, this is no easy feat. R&D and manufacturing are complex, infrastructure-heavy, and labor-intensive. Medtech companies’ core competencies are taking products to market and building customer relationships. Outsourcing R&D and manufacturing keeps medtech manufacturers lean, enabling them to devote more resources to core efficiencies.
- Save on costs. Adding R&D and manufacturing arms sophisticated enough to compete in the modern landscape is incredibly expensive. By contrast, hiring (or acquiring) companies who can handle these crucial functions is a long-term cost-effective solution.
- Get a competitive edge. Specialized R&D and manufacturing companies focus exclusively on advancing the medtech frontier. For major device manufacturers, attempting to match or exceed this level of innovation is a dicey proposition at best. Engaging these companies allows medtech manufacturers to stay on the technological leading edge.
Key trends in orthopedic outsourcing
- The medtech market is growing — and specializing. After posting $425 billion in sales in 2020, the medtech market is projected to grow to $680 billion by 2027. At the same time, the FDA estimates that the U.S. market alone offers nearly 175,000 types of medtech devices. A larger market with more tailored solutions puts extra emphasis on innovation, boosting demand for strong outsourcing partners.
- The medtech contract manufacturing alone will nearly double. To meet the demands of a growing, specializing market, medtech contract manufacturing will approach $100 billion by 2027 — nearly doubling its 2019 mark.
- Consolidation should continue. Just as hospitals have consolidated to reduce operating costs and grow revenue, medtech manufacturers will continue to acquire R&D and manufacturing outfits that enable reliable, revenue-healthy scaling.
- Medtech manufacturers will pursue long-term outsourcing partnerships. The complexities of medtech innovation pose complex questions to industry players. Long-term partnerships with credible partners help medtech manufacturers answer these questions, giving them innovation engines for years to come.
Rising pressure to innovate put medtech manufacturers on the back foot. After crisis-driven cuts to R&D, manufacturers have had to scramble to keep up with customer needs, quality standards, and competition from companies like Apple and Google. Their reliance on strong outsourcing partnerships has skyrocketed, and will continue to rise for the foreseeable future.