Medical parts' ups & downs spell solid growth.

* According to data reported by the Federal Reserve Board, U.S. production of medical equipment and supplies expanded a solid 6% in 2006 compared with the previous year. This followed an outstanding 2005, when output jumped by almost 12%. The growth in production is consistent with the increase in the number of medical-device establishments registered with the FDA. There were 12,679 of them in 2006, up more than 11% from the previous year. By far, the state with the largest number of manufacturing facilities is California, with New York, Massachusetts, Illinois, and Texas rounding out the top five.

In 2007, our forecast calls for slower growth in production during the first half of the year, followed by gradual acceleration during the second half. Overall growth in output is expected to be 5% this year.

During the past 10 years, the average growth in U.S. medical equipment has been 5%/yr. Total personal spending on medical care in the U.S. during the past decade advanced at an average rate of 3.5%/yr after adjusting for inflation. These figures compare quite favorably to the 2% average rate of expansion for production in overall U.S. plastics processing and the 3% average gain in output for all U.S. manufacturers during the same time period.

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Uniform cycles

As the chart illustrates, the pattern of growth in output of medical equipment has a distinct cyclical pattern with a very consistent cycle length of two and half years. If this pattern holds, then the next low point in growth will occur in the first half of 2007. Growth will then accelerate gradually until the next peak in the second half of 2008. It is interesting to note that the annual growth rate was negative only once in the past 10 years (down 1% in 2004), and this was followed by a year of booming growth in 2005. So even in the slow periods, business is still pretty good.

This market outlook is good news for plastics molders that are already supplying the medical industry as well as those considering a venture into this market. In recent years, the medical device industry has enjoyed stronger growth in sales, profits, and margins than the average for the S&P 500. And it is estimated that average margins for medical OEMs are as high as 70%.

Yet it should come as no surprise that all of this growth does not come without substantial cost. Plastics processors planning on getting into the medical sector will have to invest in both the equipment and the know-how that will take them to the leading edge of manufacturing technology. Medical devices of the future will be amazingly small, incredibly precise, and unfailingly reliable. And of course, there will be constant pressure to push prices lower. To accomplish all of this, plastics processors will be forced to use sophisticated and expensive tools and materials.

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But as many processors and toolmakers are discovering, the rewards for overcoming these barriers are well worth the costs. Processors who have the capability to get involved early in the design process, and then can take the product all the way through the manufacturing and packaging stages, will have the greatest odds for success.

Bill Wood, an independent economist specializing in the plastics industry, heads up Mountaintop Economics & Research, Inc. in Greenfield, Mass. He can be contacted by e-mail at [e-mail]. His monthly Injection Molding and Extrusion Business Indexes are available at www.ptonline.com.