Medtech manufacturers and suppliers have had a tough go of it in recent years.

Caught in the crossfire of COVID-19-related supply chain snafus, decades-high inflation, geopolitical unrest, labor shortages, and recurring natural disasters, major companies in the industry are facing a seemingly impossible task: ensuring medical supply stability (an exceptionally difficult job in itself)while cutting costs and streamlining their supply chains—and simultaneously developing and manufacturing high-end products for penny-pinching customers.

Contract manufacturers (CMs) have an equally unenviable mission—building a resilient supply chain in a post-COVID-19 world beset by high inflation, and maintaining solid working relationships with leery OEMs asking for price cuts.

The dynamic between these two groups and the factors impacting their often fragile relationship was among a half-dozen discussion topics at the recent MPO Summit in Denver, Colo. Some of the more interesting questions raised during the event follow (along with their answers).

Why is the industry at this point, wrestling with inflation and OEM-CM conflict?

A confluence of factors: Skyrocketing healthcare spending that is outpacing inflation (driven by an aging world population), declining Medicare reimbursement, higher administrative costs, and increased pressure on OEMs, to name a few.

“Healthcare spending continues to grow,” explained Ben Dunn, managing director of Covington Associates, a Boston-based investment banking firm. “We also have growing drug spending that does not take into account GLP-1s. Now, GLP-1s will reduce healthcare costs somewhat but the question is over what time frame? The benefits will be five or six years down the road. We’re dealing with increased healthcare utilization, the rising costs of healthcare services, and higher administrative expenses. So, we have a system that has a lot of issues. This is the backdrop of what is happening in the industry, and the OEMs and contract manufacturers are caught behind this.”

How are OEM challenges affecting contract manufacturers?

Many ways, but mostly in the pocketbook. Healthcare’s digitization has added a new layer of complexity to medtech supply chains as companies increasingly incorporate electronics into their products. Bigger supply chains are harder to navigate, particularly for OEMs unfamiliar and unaccustomed to sourcing hard-to-get electronic components. OEMs also are notoriously inept at tracking their inventory, which is making supply chain managers’ jobs more difficult.

“OEMs have traditionally had a hard time keeping track of how much inventory they have. The orthopedic sector faces severe margin pressure from value-based care and declining reimbursement,” Dunn noted. “For OEMs, the Cost of Goods Sold is the greater percentage of their total expense base. That means the CFO is now going to take a closer look at the COGS, and that is a big bulls eye on the backs of supply chain managers. In addition, OEMs are stretching their payables and in return, stretching their suppliers. They want to extend payment times as a way to enhance their profitability, and this is probably the most maddening thing for suppliers. On top of that, we still have to think about COVID because we are still in a COVID hangover from a supply chain perspective.”

How has consolidation affected medtech innovation?

It’s forced both large and smaller companies to innovate in non-traditional ways. While consolidation may have slowed organic innovation inside OEMs, these multinationals are advancing technology through acquisition and startup support.

“[Consolidation] has hurt organic innovation inside OEMs, but to say they don’t innovate sounds harsh because they do put the innovations they acquire out there,” said Perry DeFazio, a vice president at Covington Associates, who was part of a three-member panel on medtech industry consolidation. “Where consolidation hurts is the consolidation of healthcare facilities. When you have the consolidation of anything in one space, the prices are going to be affected. But innovation takes many forms…”

One of the most common forms is through startups.

“We‘ve seen good people leave big companies and start little companies,” said fellow panelist Dave Sheppard, co-founder and managing director of M&A advisory firm MedWorld Advisors. “I think we need that. Companies get consolidated and people get pushed out but then they find a way to create something wonderful, and that’s really fun to watch.”

In many cases, those creations are nurtured by large OEMs.

“I’m seeing more tolerance for the engineers in the big companies to take the ideas they have and actively support it and introduce it into the companies that they step out of,” observed Tasha Bond, founder of medical equipment manufacturer Ikigai Medical Development. “The Medtronics of the world are supporting these engineers and playing that role in nurturing startups. It’s wrong to not recognize that the big OEMs are innovating. Innovation is not just engineering, it’s about how do we deliver better care to patients more efficiently and cost effectively.”