$300+ Billion Industry and Growing

Conservative estimates put sales of medical devices at approximately $275 billion in 2007 and are predicted to top $300 billion for 2008. One of the many areas that are growing at a rapid pace is the cardiovascular device industry - being fueled by an aging population around the world and the rapidly-developing drug-device combinations. Companies such as Johnson & Johnson and Baxter International are as much involved in drug development as they are in medical device development, creating ideal situations to further the drug-device combination industry.

So, how does this translate into stability and growth for manufacturers?

The medical device industry is comprised of a range of products - imaging, would care, infusion therapy, orthopedic, in vitro, dental, cardiovascular and surgical devices. As baby boomers age and hearts fail, bones get broken and teeth go bad, there is a continued need for medical devices; a continued demand for manufacturing of medical devices.

Of the top 25 medical device companies, 16 of them are U.S.-based and account for 72% of the revenue.

2009 Looking Good

Despite a challenging market related to the global credit situation, the U.S. medical technology industry continues to grow, according to a report released by Ernst & Young. In the report, Richard Ramko, Ernst & Young U.S. medical technology leader, writes, "The industry is poised for growth in the years ahead due to aging populations, the wider prevalence of chronic diseases, and an expected surge in demand for companion diagnostics to accompany new generations of targeted therapies."

Fitch Ratings is a leading global rating agency committed to providing the world's credit markets with independent, timely and prospective credit opinions. In the 2009 Outlook for the U.S. Healthcare, Fitch has a Stable Outlook for the medical device sector in 2009. "The relatively non-discretional nature of medical devices should support demand growth for this part of the healthcare industry in 2009 in spite of rising unemployment and economic challenges," the report states.

The report continues, explaining that "the most important issues for the medical device industry in 2009 relate to the drug eluting stent (DES) and implantable cardioverter defibrillator (ICD) markets . After resolving concerns related to safety, efficacy and manufacturing, both of these device platforms have experienced stabilization and a subsequent return to growth in their respective global markets. The improvement of these markets are important to device makers since DES and ICD products are high margin and have a material impact on profitability. New product introductions are expected to shift the competitive advantages between individual device makers, but the overall industry should generate sufficient cash to fund their operations and strategic initiatives while preserving their credit profiles."

Overall expectations for 2009 are mixed. The Business Survey Committee of the Institute for Supply Management (ISM) released their Semiannual Economic Forecast, which shows those surveyed are pessimistic about the first half of 2009 and more optimistic about the second half of 2009. Comparing respondent's outlook for the first half of 2009 to the last half of 2008 shows that 20% predict it will be better, 54% predict it will be worse, and 26% expect no change.

However, when comparing predictions for the first half of 2009 to the second half, purchasing and supply executives are more optimistic about the second half of 2009. The percentage of survey respondents who forecast the second half of 2009 to be better than the first half is 45% with 16% expecting it to be worse and 39% predicting no change.

What's at Risk?

Millennium Research Group's latest quarterly publication looks at how the medtech market will weather the U.S. economy. According to their research, although the myriad segments of the global medical device markets are affected by diverse factors, one element that unites medical technologies is the importance of the U.S. market to each segment's revenue generation. With the U.S. economy facing its worst financial crisis since the Great Depression, top Wall Street investment firms falling, and a gloomy outlook for house prices, industry players and investors alike are worrying about the stability of the medical technology markets. In the past, medical markets have shown more resilience than other sectors in the face of economic downturns. Nevertheless, questions still remain: how important are consumer confidence levels to the success of medical devices that, for the most part, are necessary treatments? How will frightened medtech investors react to global financial instability?

The answers to these questions lie in an examination of current medtech markets and an analysis of opportunities and threats. While elective markets, such as aesthetics and dental devices, are more vulnerable than others, the overall long-term outlook remains positive for medtech. Although the market will undoubtedly feel somewhat constrained due to shrinking hospital budgets, consumer and investor uncertainty, and the patient switch to less expensive insurance plans, most medical device markets will weather the financial crisis, providing shelter for investors worried about drops in other, more volatile industries.

Chief Economist for the Manufacturers Alliance/MAPI, Dan Meckstroth, offered this insight in a recent webcast: "Manufacturing industrial production peaked in July 2007. Manufacturing has been in a recession for more than a year…Hurricane Ike and the Boeing strike aggravated the harshness of the downturn but even after adjusting for the decline in refinery and aerospace production declines, the manufacturing decline was severe. We expect manufacturing production fell at a 6.5% annual rate in fourth quarter 2008 and we anticipate declining industrial activity throughout next year.

"In total, manufacturing production fell 1.4% in 2008 and is forecast to fall 4.2% in 2009 before posting meager 0.9% growth in 2010. When high tech industries like computers, semiconductors, and communications equipment are omitted, non-high tech manufacturing industrial production fell 2.9% in 2008 and is projected to decline a severe 6.3% in 2009 before posting 0.9% growth in 2010."

One item to note in Meckstroth's presentation is that "the vast majority of major manufacturing industries will decline both this year and next. The worst losses are in: housing-related products like carpeting and household textiles, wood products, furniture, appliances, and heating, ventilation, and air conditioning; the consumerled recession hurts motor vehicles and apparel; the decline in nonresidential construction will depress structural metals and electrical equipment; and declining capacity utilization, falling profitability will reduce domestic demand for most types of machinery.

"There are only a couple of industries that will continue to grow in recession: medical equipment and medical supplies and aerospace."

What to Think?

With all these numbers and varied predictions for manufacturing's overall outlook, one theme remains solid in every analysis and report: medical manufacturing, medtec sectors, show stability and growth in times of uncertainty. Baby boomers and medical necessities enable those that focus on growth-oriented industries to weather economic turmoil with greater ease and survival rates - especially when using state-of-the-art machine tools and working with suppliers alike to make sure products being manufactured are done as efficiently and effectively as possible. Machine tool and cutting tool manufacturers, as well as software companies, all recommend manufacturers make sure they are utilizing the newest technology available today to enable the highest and most precise production.