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Page 1: Medical Instrument and Supply Manufacturing Industry Report

Oregon Business

Consulting Group

The Medical Instrument and Supply Manufacturing Industry

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17.4 19.2

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Average Costs of all Industries in

Sector

Industry Costs

Other Rent & Utilities Marketing Depreciation

Purchases Wages Profit

Healthcare Sector vs. Medical Instrument

and Supply Manufacturing Industry Costs

Industry Overview The Medical Instrument and Supply Manufacturing

Industry researches, develops, and manufactures

surgical, medical, dental, and veterinary products.

With over 15,429 businesses in this industry, it is

considered quite large. The company with the largest

market share in this is Johnson & Johnson, with a

7.1% market share, followed by Stryker Corporation

and Becton, Dickinson, and Company with market

shares of 4.6% and 3.3%, respectively.4

Companies in this industry have moderate fixed

capital expenses. A large variety of products are

made in this industry for highly specialized

applications, so not all products can be made on an

automated manufacturing line. Skilled employees are

needed to make many of these products, and these

companies usually receive salaries that are above the

average for the manufacturing sector. For every $1

spent on capital, approximately $0.17 is spent on

wages for employees. 4

Larger companies in this industry have a few

advantages, one being economies of scale. They are

able to significantly reduce the costs of the

production of goods. Not only this, but their greater

revenues allow them to spend more on research and

development, which is critical in this industry.

Larger companies are also able to use their large

financial resources to acquire the smaller companies.

The smaller companies are usually more innovative,

so these acquisitions greatly benefit companies such

as Johnson & Johnson and Becton, Dickinson & Co.

If current trends continue, the industry will

consolidate and the market shares of larger

companies will grow.

Growth potential for this industry is moderate. While

the industry is mature and has many large,

established companies, the possibilities of growth for

companies, even the largest ones, are great due to the

availability of small, innovative companies that can

be acquired. Also, with the rate at which medical

technology is advancing there is great potential for

growth. Not only this, but there are many favorable

macroeconomic factors that will assist in the growth

of this industry.

Macroeconomic Factors Aging Adult Population

In the past few years, the percentage of the adult

population aged 65 and older has increased

significantly. This is mostly due to baby boomers

(adults born between the years 1945 and 1964). The

growth rate of this population over the last 5 years

has been about 3.1%, compared to a growth rate of

0.8% between the years of 1995 and 2000.3 This

growth rate is expected to increase to 3.3% between

2014 and 2019. This is due to the majority of baby

boomers that still remain that have not crossed the 65

year threshold.

In the US in 2019, senior adults (age 65 or over) are

expected to make up approximately 16.4% of the

population, compared to 14.5% currently. 4

In most

cases, as people age they require more medical care.

This increase in medical care will lead to an increase

in demand for medical supplies. An increase in

healthcare expenditure is one indicator of healthcare

industry performance.

Per

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% Change of Adults Over the Age of 65

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Student Consultant: Charles Pontrelli

Email: [email protected]

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Page 2: Medical Instrument and Supply Manufacturing Industry Report

Oregon Business

Consulting Group

The Medical Instrument and Supply Manufacturing Industry

2

Patient Protection and Affordable Care Act

The passing of Patient Protection and Affordable

Care act by President Obama and his administration

has changed the US healthcare market. The goal of

the PPACA is to increase the quality and

affordability of health insurance by expanding private

and public health insurance coverage. It requires all

insurance companies to cover all people who apply

for insurance within new standards. Not only this,

but it requires insurance companies to offer the same

rates regardless of pre-existing conditions or sex.

One adverse effect that comes from the PPACA is the

enactment of a 2.3% medical excise tax on sales of

certain medical products within the US. 4

This tax

could arguably stifle innovation and cut into research

and development. Another adverse effect of the

PPACA is that it reduces Medicaid and Medicare

payments to hospitals, clinical laboratories, and

pharmaceutical companies. This could reduce the

amount of medical procedures performed, which, in

turn, would reduce the demand for medical supplies.

Finally, the PPACA could lower the reimbursement

rates for many companies’ products, therefore

reducing sales.

However, the PPACA will at the same time affect

many companies favorably through the expansion of

healthcare. Healthcare expenditures will

undoubtedly increase substantially, with an estimated

32 million people gaining healthcare by 2019. 4

Even

though there are possible adverse effects, as listed

above, it can be expected that there will be a net

benefit from the PPACA.

Product Regulation The Medical Instrument and Supply Manufacturing

industry is extremely regulated by the Food and Drug

Administration (FDA) and other agencies. The

approval of the sale of a product by the FDA takes at

least 90 days, with the majority taking much longer

than that. Any change to a device that has already

been cleared must be refiled with the FDA. Even

after a device is cleared, there is extensive product

testing that occurs. There are many regulatory

requirements, such as medical device reporting

(MDR), Quality System Regulation (QSR), and

labelling regulations. 4

All of these are time-intensive

and, if not passed, can result in a long delay of the

product or a serious fine. While these regulations are

substantial, they also lead to the securing of patents,

because of how long it takes to get approved. Small

firms with these patents are seen as lucrative

acquisitions by larger companies because of the new

and innovative products they can acquire.

Globalization

Expansion into international markets, especially

emerging markets like China and South America,

pose promising opportunities for companies in the

healthcare industry. China, for example, is having an

enormous boost in population and healthcare

expansion. Companies such as Johnson & Johnson

and Becton Dickinson will be competing to obtain

market shares in these emerging markets because of

their opportunities for growth. However, with

expansion into global markets comes foreign

currency exchange risk. Many of the largest

companies conduct a large portion of their business

operations outside the United States, and are

therefore subject to this foreign currency exchange

risk.

Competition and Barriers to Entry The Medical Instrument and Supply Manufacturing

industry is considered moderately competitive.

Because of the amount of government regulation on

products and companies within the industry,

competition can be limited. As stated before, the

regulation by organizations like the FDA can be a

significant barrier to entry.

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% Change of People with Health Insurance

Barriers to Entry Checklist Level

Competition Medium

Concentration Low

Life Cycle Stage Mature

Capital Intensity Medium

Technology Change High

Regulation & Policy Heavy

Industry Assistance Medium

Industry Barriers to Entry

Page 3: Medical Instrument and Supply Manufacturing Industry Report

Oregon Business

Consulting Group

The Medical Instrument and Supply Manufacturing Industry

3

However, the industry is fueled by innovation, so

every company is looking for how to improve and

add to their line of products. Specialization is very

important in the medical industry, so this allows

smaller companies to compete. Since the 1990’s,

R&D investment in this industry has more than

doubled, and is currently twice the average for all US

manufacturers overall.3 As stated before, these small

companies are attractive targets of larger companies

for buyouts. While this rapid technological

innovation has its benefits, it also has some

drawbacks. The constant change in technology

means that any one company is at risk at becoming

obsolete.

Pricing power will become more important in the

coming years, due to the price concessions that

healthcare providers and governments are pushing

for. Companies will need to cut costs and achieve

economies of scale to be competitive. As stated

earlier in the report, highly skilled workers are

necessary in this industry due to the high amount of

specialization. According to US Bureau of Labor

Statistics, the median hourly wage is $18.96, with the

mean hourly wage being $25.17. 2

This is quite high,

and is only expected to get higher with current trends

in the United States calling for higher wages. These

companies will therefore most likely turn to

outsourcing, increasing spending on acquisitions, and

increasing research and development costs to develop

proprietary technology.

While there is a large amount of internal competition

within the Medical Instrument and Supply

Manufacturing industry, there is traditionally little

external competition. The US is the largest producer

of medical devices in the US, and the domestic

market in 2008 was valued at more than $100 billion.

3 However, this is changing due to the advancements

of the biotechnology industry. Treatments from the

biotech industry, such as synthetic bone, organ, and

tissue replacements can make some medical

instruments and supplies obsolete. Technology

advancements in this industry are therefore critical to

the survival of a firm.

The Industry in Oregon The Medical Instrument and Supply Manufacturing

Industry is relatively small in the state of Oregon.

While some of the companies in this industry are

scattered across the state, most operate in the

Portland metro area, specifically the Washington and

Multnomah counties. The industry accounted for

approximately 1% of total statewide employment in

2012.1

While the industry comprises only a small percentage

of the Oregon’s total exports (a little more than 1% in

2012), total exports in the industry has been growing

rapidly. From 2002 to 2012 exports from the

Medical Instrument and Supply Manufacturing

Industry has grown approximately 300%, while

Oregon’s total exports only grew approximately 82%

in the same time. 1

With the introduction of the PPACA, there will be

greater demand for products from this industry. The

key to being successful in this industry as a smaller

company is by maintaining innovation. If these

Oregon manufacturing companies do not maintain

rapid technological advancements, they can be

pushed out by one of the larger companies.

However, if they are successful at creating and

manufacturing new products, there is a possibility of

them being acquired by a larger manufacturing

company.

While there is a lot of possibility for growth in this

industry in Oregon, pushes for higher wages will put

some downward pressure on companies. This

industry has traditionally been able to have a lower

average wage for its workers than the entire

manufacturing industry. In 2012, the average annual

wage for 3,671 workers in the industry in Oregon

was $48,305, which was much lower than the total

manufacturing industry average annual wage of

$62,161. 1

Conclusions Even with possible downward pressures from wages,

the Medical Instrument and Supply Manufacturing

Industry is poised for growth. With the introduction

of the PPACA nationwide and in Oregon, as well as

an aging population, demand for medical products

should increase in the coming years. The key to

success for Oregon businesses is maintain innovation

in the industry to combat larger companies, as well as

maintaining low costs.

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Management Financial Production Sales

Median Hourly Wage Mean Hourly Wage

Wages Among Occupations in Industry W

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Page 4: Medical Instrument and Supply Manufacturing Industry Report

Oregon Business

Consulting Group

The Medical Instrument and Supply Manufacturing Industry

4

Works Cited

1. Kraal, Martin. "A Small but Growing Industry: Oregon's Medical Equipment and Supplies Manufacturing."

Qualityinfo.org (2013): Web. 31 May 2015. <https://www.qualityinfo.org/article-display/-

/asset_publisher/ob5AVoEZjWoy/content/a-small-but-growing-industry-oregon-s-medical-equipment-and-

supplies-manufacturing/pop_up?_101_INSTANCE_ob5AVoEZjWoy_viewMode=print>.

2. "May 2014 National Industry-Specific Occupational Employment and Wage Estimates." Bureau of Labor

Statistics. United States Department of Labor, May 2015. Web. 31 May 2015. <http://www.bls.gov/>.

3. "Medical Devices Industry Assessment." International Trade Administration, n.d. Web. 31 May 2015.

<http://ita.doc.gov/td/health/medical%20device%20industry%20assessment%20final%20ii%203-24-10.pdf>.

4. Phillips, Jocelyn. "Medical Instrument & Supply Manufacturing in the US." 2015 ed. IBISWorld. Web. 31 May

2015. <http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=881>.