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How Design For Manufacturing Can Effect Company Valuation At Exit

Throughout a medical device’s Life Cycle, few opportunities ever afford themselves to the organization to initiate a strategic approach to Design for Manufacturing in order to optimize product profitability.  This is especially true for companies navigating the transition from clinical stage to commercial stage operations.  The pressure to get to market and begin generating revenue is fierce.  A device that has successfully cleared FDA/secured CE mark, and demonstrated its merits in clinical studies, is going to market as it’s configured, regardless of how well optimized the design might be for manufacturability. 

The fact of the matter is, strategic imperatives, and the organization’s resulting priorities, evolve over time.  The imperatives that drove Design for Risk Management during development, with a focus on safety and efficacy, may not have foreshadowed the imperatives necessary for optimizing manufacturability.  Such concerns are often deferred downstream, as burn rate and critical milestones compete for the finish line.

One point early in a device’s life cycle that may afford a closer look is prior to executing one’s exit via acquisition.  At perhaps no other point in time will a device’s profitability have a greater strategic impact on the company.  Every dollar saved in COGS, through lowering part counts, minimizing assembly time or reducing the scrap rate, drops to the company’s bottom line.  Thus a dollar savings in COGS will deliver a multiplier effect on company valuation at acquisition.  Depending on the perceived market value of your technology, that multiple will likely run somewhere between 8 to 12 times EBITDA (earnings before income taxes, depreciation and amortization…also referred to as cash flow).  So every dollar saved in COGS equates to an eight to twelve dollar increase in valuation.

The question at this potential inflection point is, who’s going to capture that increase in company valuation?  The innovators or the acquirers?  Unfortunately, this question is often precluded by resource constraints.  Interestingly enough, those constraints are frequently demonstrated by both parties involved in the manufacturing transfer that typically follows an acquisition.

Obviously, the company selling may have exhausted their capital reserves by this point, but less obvious perhaps, are the human capital constraints the acquiring company may be experiencing as well.  I wrote extensively last year about the ongoing labor shortage of experienced, medical device engineers and the impact this will continue to have in the marketplace.  It’s bearing out, as established engineering teams in large corporations are operating at full, or beyond full, capacity.  Job boards are full of open engineering positions for companies of all sizes, and as wages begin to lift, the threat of turnover adds an element of risk to ongoing operations throughout the industry.

Manufacturing transfer, whether it be to an internal site or a CMO, triggers the need to revalidate the line and quite often, the remediation of documentation to align with the new owner’s Quality System.  If these two requirements fall into the have to do list of priorities, why not also take the time to examine the underlying design issues that may, if properly addressed, more than pay for the required IQ/OQ/PQ and remediation efforts at hand?  What we’ve learned over the years at REV.1 Engineering® is the fact that investments in strategic Design for Manufacturing achieves breakeven in a mere matter of months, and elevates profitability and cash flow for years to come. 

© 2019, REV•1 Engineering.