WASHINGTON – One of the panelists at yesterday's talk on contract manufacturing at AdvaMed 2008 was Philip Borden, a principal at private equity firm Riverside Partners (Boston), who said his firm has invested about 25% of its capital in this industry after talking to executives at about 50 contractors and client companies.

"So far, we've made two large platform investments," namely New England Precision Grinding (NEPG; Holliston, Massachusetts), and J-Pac (Somerset, New Hampshire), both last year. Borden said "the growth in contract manufacturing has been astonishing," forecast to rise from $2.2 billion in 2002 to a forecast of $8.9 billion by 2010.

"There's a broad recognition in the industry" that manufacturing is not what a lot of potential clients want to continue to do, and "clearly, cost is another key component" due to capital costs, among other things.

A steady customer base is another reason private equity likes contract manufacturing. "Switching from that contract manufacturer is very difficult" and expensive, and tough to justify if the contractor is doing a good job, Borden said. He said it costs as much as $1 million and the effort can devour a year.

Also, "the customers are relatively price-insensitive" in part because "the margins medical device makers are making" are fairly healthy, Borden observed. Hence, there is "a little less sensitivity to price, with quality and time to market" being the prime motivators.

"One of the weaknesses [of the large contracting firm] is the lack of responsiveness, particularly for smaller medical device firm" clients, Borden said, adding that one comment he has heard more than once is "we can't get the time of day" from the contractor. He said customer service "has suffered" despite economies of scale and good capital and professional skills sets.

Small players in the contract manufacturing business are responsive, but not a one-stop shop for the most part, which many manufacturers want. Mid-size players tend to "focus on a niche," he said, and develop skills that are not easily replicated. They do not compete on price, but on service.

Borden said Riverside picked up NEPG because the company has "the ability to get in early and form a tight relationship with customers," which he said "is absolutely critical." NEPG, like most successful businesses, "knows what it does and what it doesn't do well," and hence is a well-focused business.

— Mark McCarty, Washington Editor

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