Company and Business Model Overview
Phillips-Medisize (“PM”), which generates sales of approximately $600 million, is a global provider of outsourced design, development, and manufacturing services for the medical and specialty commercial sectors. Approximately 80% of revenues come from services to customers in the medical sector, including the top original equipment manufacturers (OEMs) of products such as: “disposable insulin pens, glucose meters, specialty inhalation drug delivery devices, single-use surgical devices and consumable diagnostic components.” A key competency is the ability to mold plastic components and devices, though PM’s expertise extends to multiple types of materials. The company employs over 3,400 people and has 14 production facilities around the world, in addition to dedicated design facilities in the U.S. and the Netherlands. PM’s business model is not too dissimilar from that of Donner, except that it focuses on the medical device sector.
Customer Value Promise
By specializing in mass manufacturing of the highest quality, PM allows its customers to focus on their core competencies, such as drug development. For example, PM will manufacture a plastic injection device for an oncology drug that a major medical OEM will generate. By handling the manufacture of millions of these devices for the OEM, PM in effect lets the OEM specialize in its core competency. The ability to meet FDA quality standards and mass produce millions of medical devices globally (in a timely manner) requires substantial capital expenditures, which would distract OEMs from their primary task of creating new drugs and devices.
Additionally, through specializing in the manufacturing process, PM has developed an expertise in design for manufacturability (“DFM”), which involves sophisticated adjustments to tooling, production processes, and product design to ensure high quality device production at scale, thus assisting medical OEM customers in meeting market demand for their innovative medical advances. Though most of PM’s revenue comes from mass producing medical devices, a substantial minority of revenue is “pre-production revenue,” which involves a consultative service to OEMs, offering them prototyping and DFM expertise concurrent to OEM’s internal development of drug and device IP. Pre-production mandates almost always result in greater long-term revenues, given how closely PM is integrated in the initial design and development with the OEM. PM then becomes the natural choice as a mass producer of the fully developed medical device. Furthermore, the concurrent DFM and drug/device development helps reduce the OEM’s time to market for a given device, thus allowing them potentially to secure a first mover advantage in the relevant market (which is a huge benefit in the medical industry). Please see the attached image for an illustration.
Operating/Business Model Alignment with Customer Value Promise
Dedication to Pre-Production Business: PM has invested in dedicated design facilities in strategically placed areas, notably California, Wisconsin, and the Netherlands; these facilities allow for superior delivery of DFM and related services to clients — a key part of PM’s customer value proposition. California and the greater Twin Cities area are medical industry hubs, and the area around Amsterdam is a convenient central point to serve European customers. Many of its regular production facilities also have design capabilities.
Quality: A key component of PM’s value proposition is producing components and devices of the highest quality; after all, human beings depend on medical products for day to day life, and the medical OEMs’ reputation is hard to build and easy to tarnish with a recall. Thus, the medical device industry is a conservative supply chain that values quality over price in many instances. PM is compliant with ISO (International Standards Organization) and FDA requirements, and invests millions of dollars to meet and maintain this standard, including in its new Chinese facilities. These investments range from Quality personnel to capital equipment to facility maintenance.
Human Capital: Due to continued double digit revenue growth, PM is ever more focused on making human capital investments, particularly in operations and engineering staff. Rather than being short-term focused, PM recognizes the strength of its franchise and the fact that medical device production mandates can last over 7 years, making its commitment to prudent upfront investments in personnel a wise operating choice. Just last month, PM in a press release announced plans to add a “significant number of new technical positions” in conjunction with a 33,000 square foot expansion in a Wisconsin medical facility.
Through investing in quality, pre-production, and human capital, PM fulfills its customer promise of value-added design and manufacturing services to its demanding medical OEM customer base. The below video demonstrates PM’s long-term investment approach that promotes strong growth.