STERILIZATION: Contract Sterilizers Expanding, Not Contracting
Consolidation and expansion in contract sterilization shows that service providers are aiming to become one-stop shops for product manufacturers. What benefits—and risks—can manufacturers expect?
Daphne Allen, Editor
Contract sterilizers are expanding their capabilities and capacities, and they are willing to expand even more, given the right partner. Growing through acquisitions and other initiatives, these firms are adding new services and facilities each year.
But is more—or bigger—better? Service providers say they are focused on building long-term relationships by meeting customer needs with expanded services and competitive pricing. But some industry participants still fear the reduced competition that comes with consolidation.
|Steris's acquisition of Cosmed's EtO facilities expanded its network.|
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A number of acquisitions have taken place in the last quarter. In January, Steris Corp. (Mentor, OH) completed its acquisition of the Cosmed Group's medical device sterilization facilities. Five ethylene oxide (EtO) sterilization facilities were added to Steris Isomedix Services' network, bringing its number of sterilization operations to 21, in the United States, Puerto Rico, and Canada. The firm now offers extensive experience in both radiation and EtO sterilization.
In February, Ethox Corp. (Buffalo, NY) acquired STS duoTEK Inc., bringing its number of facilities up to five. With Ethox's capabilities in design, manufacturing, laboratory testing, and sterilization, and STS duoTEK's laboratory services and contract sterilization, the deal creates one of the largest fully integrated U.S. contract medical manufacturers.
Also in February was the purchase of Titan Scan Technologies's three contract sterilization service centers by BeamOne LLC (San Diego). Beam- One's service centers, located in Colorado, Ohio, and California, will continue to provide contract sterilization services using electron beam (e-beam) irradiation systems.
Robert Reich has been watching this activity with interest. Reich is currently president of Pharmaceutical Systems Inc. (PSI; Mundelein, IL), a provider of consulting and laboratory services to support sterilization and packaging operations. He formerly worked as vice president of microbiology for Ethox. "The industry is consolidating into a smaller number of contract sterilization participants," he observes. "The contract industry is also very much trying to expand their services in order to be a true partner with their clients. We began this process a decade ago at Ethox, and it continues to this day with product-release functions, parametric release of loads, final QC inspection of postprocessed product, postprocessing packaging or assembly, and drop shipment of partial loads directly to distribution centers or in some cases directly to customers."
Acquisitions are enabling contract sterilizers to offer such services. For instance, Steris Isomedix Services now offers Cosmed's proprietary one-day turnaround methodology, EOExpress, as an additional option to its current EtO, gamma, and e-beam sterilization methods. "The medical device market in general was requesting advancements in EtO processing methods, allowing us to move in that direction," says Kevin Cmiel of Steris. "We've been working on it in-house with some success, but the acquisition of Cosmed Medical and EOExpress catapults us ahead. It takes us from being solely a leader in gamma to being a leader in EtO."
While Ethox has long offered laboratory services, its acquisition of STS duoTEK expands them. STS duoTEK has provided a full line of toxicology, biocompatibility, and analytical services, including material identification, drug and material stability and quality control analysis, and general organic and inorganic material analysis of volatile or nonvolatile chemicals. "Ethox wanted to expand into this area, so the acquisition is the perfect marriage," says Gary Benson, manager of sterilization and laboratory sales and service. "The STS division of Ethox, in turn, can now offer its customers Ethox's capabilities, which include engineering, development, and manufacturing."
Consolidations have enabled service providers to expand their network of facilities, which will help some manufacturers penetrate certain regions more cost-effectively. These providers often promote the distribution and logistics services almost as much as they do the sterilization services.
"This will be a very good activity for the small- to medium-size companies that currently don't have affordable distribution centers," says Don Barcan, president and CEO of Donbar Industries Inc. (Long Valley, NJ), a consultancy for medical device packaging. "With the contract sterilizers being regional, they are positioned correctly."
A map of Steris's 21 locations, for instance, shows balance on both coasts. "Our expanded locations give our customers greater geographic coverage and more flexibility," says Cmiel.
Bringing multiple facilities under one umbrella may also help standardize procedures. "The upside is that it can bring a more-structured approach to sterilization, which will help standardize practices between sites," says one director of sterilization at a major U.S. medical device manufacturer. For instance, some larger sterilizers "can provide more resources at each of the sterilization facilities to help those sites lacking management or technical skills."
Larger corporations are not limited by large capital expenditures, adds this director. "They are able to leverage the corporate balance sheet to make expansions. Large contract sterilizers offer more coverage across North America and sometimes Europe and Asia."
|Laboratory services are routinely available from contract sterilizers, such as Centurion Sterilization Services.|
Growing through acquisitions or not, contract sterilization firms are increasing the number of services they offer to manufacturers. And those increased lineups are appreciated.
"I think the broadening of services offered by contract sterilizers and expansion into markets is excellent," says Barcan.
These expanded services appear to be coming at the right time. Brenda Sparks, contract sales manager for Centurion Sterilization Services, says that companies are outsourcing their entire process, including production, packaging, and sterilization, so they can focus on product design and development. "Many companies, particularly smaller facilities or start-up corporations, are mainly focused on the design of the product and obtaining FDA approval. Design houses want to spend their time and resources developing the device design," she says. "They are trying to take advantage of our core competencies to reduce their own costs."
Benson of Ethox says that manufacturers are also looking at ways to reduce their burden. "If they can reduce their vendor list from four down to one very good, qualified vendor, they see huge savings in time and money," he explains.
Cmiel has seen an increasing emphasis on supply chain management. "Medical device companies want to reduce turnaround time and time to market, so we have added services—like parametric release—that help them do so."
Reich says that by offering expanded services, contract sterilizers are working to establish real partnerships. "They are flexible and willing to entertain things contractors wouldn't do before, like break up loads and ship smaller amounts. With warehousing and shipping services, they are the de facto distributors. And they are bundling services, like laboratory and sterilization services."
Sterigenics (Oak Brook, IL), a company that has experienced a few mergers and acquisitions over the years, has continued to expand its sterilization and laboratory services. The firm has 28 facilities in North America and another 11 worldwide. The company is currently growing through expansion, by breaking ground on an e-beam facility in Shanghai that is expected to open in late fall 2005. It is also making chamber expansions in California, North Carolina, Texas, and New Mexico.
SteriDirect is Sterigenics's newest service, a process in which Sterigenics distributes packaged and sterilized product to end-users, such as hospitals or doctors' offices. "Customers are asking us how quickly they can get their products through sterilization to the end-user," says Jack Fitzpatrick, director of business development. "With SteriDirect, we get a pick order from our customers on how to break down pallets into shipments that are more palatable to their supply chain needs." For instance, a 20-pallet load can be quartered and sent to four locations.
Other services that Sterigenics sees increased interest in are its consulting and laboratory services offered by its SteriPro group. "We are helping develop sterilization cycles and dose levels," says Fitzpatrick. And the firm's CycleOne service using parametric release for EtO is also in demand.
Small medical device firms will most likely appreciate expanded services. Says Reich: "Small companies do not have to factor in the cost of buying and validating units and hiring the staff to keep up with regulations and OSHA concerns."
Larger firms, however, can. But cost is still an issue. "As to whether the large device companies will join will depend on costs and service," says Barcan. "If they can lower their distribution costs, I'm sure they will be candidates. Potentially, this service has the opportunity to make device companies' job easier."
Reich reports the "big guys are downsizing." As a result, he sees an increase in the use of consultants, especially for parametric release.
Despite the benefits, Barcan warns that less competition is worse for the economy. "If we have learned nothing else in the last 50 years, it's that a free market is better for the consumer than the alternative. With ownership in contract sterilization houses diminishing, I have no doubt that prices will increase and that profits for these companies will also increase. The trickle-down theory will ultimately increase device manufacturing cost and thus selling price. Without more competition what will prevent price gouging?"
Contract firms, however, say they are looking for long-term relationships, not quick profits. Says Benson of Ethox: "There is risk to the consumer when there are fewer providers. But we want to sustain life-long partnerships. We have always been fair about our pricing strategies."
Adds Fitzpatrick from Sterigenics: "Some of our customers are global players, so they look at the big picture. We can't overcharge them in the United States and expect them to do business with us in Shanghai." What large medical device firms are interested in is bundling. "They look at the amount of cubic feet of sterilized product around the world and ask to bundle relationships," he says.
The commitments these larger firms make—often enough for a contract sterilizer to open a new facility—may benefit smaller firms that can't negotiate good prices on large volumes. "Large users—base loaders—and their commitments of cubic feet pay the bills," says one contract sterilizer. Remaining capacity can then be "shopped to smaller companies."
Cmiel of Steris describes an incredibly diverse customer base, one in which some firms send Steris "a box at a time." Others send fully loaded tractor trailers at once, he says.
Costs aside, the director of sterilization sees other downsides to contract sterilization consolidation. "First, the innovation and speed in which change is implemented can be lost. Secondly, some of the personal touches you receive from a small contractor can be lost. Customers that once were significant clients in the small firm are now just another account."
This director also says that while contract service providers are "definitely helping to improve the logistics of product in bound to the sterilizer and then out bound to distribution or the customer, they tend to require a great deal of management to ensure they are working well. We are still dealing with a very manual process when it comes to putting boxes and pallets on tucks. I believe that as the number of contract sterilization providers shrinks, such service is the primary differentiator for the industry."
|In-process product moves along at BeamOne's e-beam service center.|
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Smaller contract sterilizers are emphasizing customer service. Beam- One focuses exclusively on contract sterilization, rather Titan Scan's previously combined equipment sales and services for e-beam technology. "The advantage is that we can focus entirely on customer service and quality," says Susie Perlman, director of customer relations for BeamOne. To make the transition from Titan Scan to Beam-One easier for manufacturers, Perlman says that the firm is using the same QA system written by Glenn Thibault, who was previously the Denver service center manager and is now executive vice president.
Ray Calhoun, president of Beam-One, reports that the firm is looking to grow the network, first with a location on the East Coast. "Our objective is to add one service center per year," he says.