Medical devices industry is Penang’s hidden gem
20 Oct 2020
It is not a widely known fact that Penang, famous for its thriving electrical and electronics (E&E) industry, also has a burgeoning medical device industry. The state is slowly gaining a reputation as a medical device manufacturing hub among world-class manufacturers.
Its most recent investments include US company DexCom Inc, a global leader in continuous glucose monitoring, and Switzerland-based electrical measurement company LEM.
Malaysia is seen as the leading medical device manufacturing hub in the East, competing against the likes of mature hubs such as Puerto Rico, Costa Rica and Ireland.
While central Malaysia attracts latex-related medical device companies such as those in glove and condom manufacturing because of its proximity to raw materials, Penang is making a name for itself in non-glove medical device manufacturing or, more specifically, medical technology (medtech).
Unlike industries with low barriers to entry, medical device producers usually stay put once they have decided on a location for their manufacturing base.
Devices manufactured in Penang tend to be on the higher end of the value scale, such as cardiovascular products or orthopaedic implants and tools.
Invest-in-Penang Bhd (InvestPenang) CEO Datuk Loo Lee Lian says the sector is actually an offshoot of the state’s E&E sector. Part of the credit for its growth should be given to B Braun, she adds. It was the first foreign medical devices company to set up operations in Penang in 1972, around the same time the “8 samurais” of the E&E sector arrived here.
“B. Braun was the training ground that started the medical devices industry in Malaysia. A lot of the CEOs in the medical device industry today are alumni of B. Braun.
“They did for the medical devices industry what companies like Intel did for the semiconductor industry. B. Braun helped create the ecosystem for the medical device industry in Penang,” she explains.
The rapidly growing E&E sector in Penang created opportunities for some companies in the industry to transition into medical device manufacturing.
“We realised in 2005 that it is easier for the existing E&E and manufacturing industrial players in Penang to transition into medical device manufacturing by leveraging similar manufacturing skillsets in the E&E industry.
“Since then, the Penang state government has been focusing on growing the medical device cluster by working closely with the captains of the industry,” says Ching Choon Siong, executive director of the Association of Malaysian Medical Industries (AMMI).
Ching says Penang’s success at attracting foreign investments is due to its competitive costs and established infrastructure. But equally important is the talent pool available, which is partly the result of the clustering effect of the medical device supply base.
T H Su, CEO of home-grown Straits Orthopaedics Manufacturing Sdn Bhd, says Penang is considered as the best-cost manufacturing hub these days, not a low-cost base like before. He explains that other factors, such as a skilled workforce and logistics infrastructure, have made up for the lower costs offered by other hubs.
Dave Mitchell, Boston Scientific vice-president and general manager for manufacturing and distribution in Malaysia, shares similar sentiments. The strong collaboration among the industries that he experienced here helped cement the company’s decision that Penang was a good place to do business.
“InvestPenang was specifically helpful in helping us network with other companies. They connected us with other companies, both in the medical devices and other high tech industries, when we were here looking. That really helped us understand how we would fit and how our needs could be met,” he says.
Boston Scientific set up a massive 375,000 sq ft manufacturing plant in Batu Kawan in 2017, its first factory in Asia.
“Besides the usual aspects of site selection like economics, the availability of talent, labour, infrastructure and also intellectual property protection — which is very important to a medtech company like us — Malaysia also has the advantage of English fluency, which helps a lot because most of our R&D teams are English-speaking,” says Mitchell.
The sector’s growth story in Penang is remarkable. Loo relates that between 2011 and 2015, annual approved investments from scientific and measuring equipment, under which medtech is categorised, was below the RM600 million mark.
In 2016, it started to see a pick-up in investments, with the number reaching RM983 million. By 2019, of the RM2.52 billion of approved investments in the scientific and measuring equipment segment in Malaysia, RM2.45 billion was from Penang.
Malaysian Investment Development Authority (MIDA) statistics show that in 1Q2020, Penang recorded RM1.85 billion out of the RM1.92 billion total approved investments for the segment.
Notably, more than 95% of the investments for this sector are foreign direct investment, evidence that the medical device industry in the country is dominated by multinational corporations (MNC).
MNC presence unmissable
Depending on how one looks at it, having multinational corporations in an industry is an advantage. In Ching’s opinion, when an MNC sets up a manufacturing site, it creates opportunities for local suppliers of raw materials, services and value-added outsourcing. In the process, these local companies can gain skills and knowledge of the sector, possibly enabling them to venture into the manufacturing business.
He likens MNCs’ presence in Penang to the concept of an anchor tenant in a shopping mall, which naturally draws others to the mall.
“The strategy makes sense for us because without them, we find ourselves unable to go into a new sector sometimes. So, we might as well bring them in here and create more business opportunities for local business suppliers. There is also a chance that those working at these MNCs will themselves become entrepreneurs eventually,” says Ching.
Based on a survey by AMMI, Ching says MNCs that are members of AMMI have sourced RM550 million worth of local materials from local suppliers, RM1.74 billion of services from local small and medium-size enterprises and RM1.92 billion worth of contract manufacturing opportunities.
Nevertheless, InvestPenang’s Loo believes that more improvements can be made to localise the supply chain but admits the process will take time. InvestPenang has been pushing the MNCs to do so but the amount of localisation has been lower when compared with the E&E sector.
“The reason for the slow progress is because of the stringent [United States Food and Drug Association] requirements and lengthy qualification process. They don’t want to have to requalify their suppliers. The parts from suppliers are small in size and since they have gross margins of 70% to 80%, they are not cost sensitive and would rather fly in their parts from existing qualified suppliers wherever they are in the world,” she explains.
Loo points out that a cluster is key for the development of the sector. The medical device industry, like the E&E industry, tends to cluster.
“When you have a cluster, you attract talent. If you build the ecosystem, the supporting industries (will grow) as well. We are growing that cluster slowly but surely.”
While MNCs dominate, there are a few home-grown companies in the space.
A notable one is Straits Orthopaedics, which is a contract manufacturer for orthopaedic implants. It is also an associate company of listed healthcare group Apex Healthcare Bhd.
Currently, more than 50% of Straits Orthopaedics’ products are supplied to medical technology company Smith & Nephew plc, which focuses on orthopaedics, sports medicine and ENT as well as advanced wound management.
Straits Orthopaedics has been a contract manufacturer for Smith & Nephew for the last 17 years.
Smith & Nephew recently started construction of a 250,000 sq ft manufacturing facility in Batu Kawan Industrial Park to support its orthopaedics franchise, which has been growing strongly in Asia Pacific.
Encouragingly, Ching notes that there has been growth within the domestic industries. Between 2013 and 2019, a total of RM8 billion in domestic direct investment (DDI) was approved compared with RM11.8 billion in FDI, according to MIDA statistics.
“DDI’s share of 40% cumulative investment over this period is very encouraging,” states Ching.
The handful of local companies in the industry believe that there is room for more local players but they say more needs to be done to encourage this.
Michael Hng, managing director of Allen Healthcare Products (M) Sdn Bhd, a Malaysian company pioneering Rapid Diagnostics Test kits in Malaysia, says one of the main challenges for entry is the high investment cost.
“Some of the main factors that hinder local players from setting up a full-scale medical device manufacturing plant in Malaysia is the high investment capital, incomplete supply chain of supportive materials, regulatory requirements and compliance cost and a long seeding time before a product becomes marketable,” he adds.
Hng hopes to see more collaboration between the Ministry of Health and local medical devices manufacturers as the ministry is the biggest customer for these products.
Malaysia is the largest medical device market in Southeast Asia, with a market worth US$1.55 billion (RM6.44 billion). Public sector procurement accounts for about 50% of that, notes AMMI’s Ching.
Hng also believes that there needs to be a paradigm shift in mindset for both the government and private sector to move from merely “repackaging” to becoming full manufacturing set-ups.
Propelling the industry further
While lots of hard work and money has been invested to make Penang the medical device hub it is today, the industry believes much more can be done to keep Malaysia, specifically Penang, as the choice for world-class medical device companies.
One of the industry’s main concerns is that the types of incentives provided do not necessarily meet its needs. It is calling for incentives that are tailored for them.
Boston Scientific’s Mitchell, for one, says there needs to be improvement in the investment incentives programme, particularly in the area of reinvestments.
“For example, if, in five years, we are going to go into another significant investment, we find that other countries are better in reinvestment support. A new product can be made in any of our other 29 plants around the world. So, it is about how the country attracts reinvestment for new products,” says Mitchell.
AMMI’s Ching too believes that while the government has been very generous with grants and money for businesses, the incentives are outdated.
“Current incentives for R&D given to companies are for buying equipment. For R&D, we actually need to spend money on human capital. There is a lack of holistic incentives right now to support the R&D of medical devices,” he says.
He points out that Singapore, which emphasises R&D, is offering to pay 50% of the salaries of companies’ R&D engineers.
“The government co-invests. It is a good strategy and a better commercialisation than our current strategy here,” Ching says.
However, the local players see things a little differently.
“To me, the grants or the incentives aren’t the main things. The main thing is for regulators and authorities to assist companies in every way they can. But I feel that they don’t understand how steep the competition is like outside of Malaysia.
“Emerging countries like Vietnam have a very aggressive investment board and they have a hungry workforce of both skilled and unskilled workers. They have a huge talent pool of engineers and they also have a relatively younger population.
“They may not be ‘there’ yet, but with time, they will build up their infrastructure and they will soon close the gap,” says Straits Orthopaedics’ Su.
Says AHP’s Hng: “I don’t need the money or grants. What I would like is for regulators to support the local industry in terms of sales. We produce world-class products too.”
Besides incentives and support, B. Braun says improvement can be made with greater emphasis on the training and development of highly skilled talents in the country.
“[One way] of doing this is to instil great interest in the STEM (Science, Technology, Engineering and Mathematics) subjects while students are still in primary and secondary school. Introduce medtech content as an elective engineering course in local universities or give prominence to the medical device industry at career fairs as an industry of choice for graduates and job seekers,” says B Braun Asia Pacific president Lam Chee Hong.
AMMI’s Ching hopes that in the next five to 10 years, Malaysia will be able dominate certain sub-sectors of the medical device industry, like orthopaedics, high-value electronic-based medical products or even plastic-based products.
“In order for that to happen, we have to be good in certain products, [and] we focus our attention in these areas. Today, we are doing well in rubber glove manufacturing. In the future, we hope to see Malaysia doing well in other sectors.
“I believe the metal-related industries can do as well as the plastic-based products. So, our vision is to leverage our skill sets to do well in areas that we are strong in.”
Industry leaders share their journey
Continuing to grow in the orthopaedics space
For a business that started “by accident”, as CEO T H Su puts it, Straits Orthopaedics (Mfg) Sdn Bhd’s growth has certainly been impressive.
Today, it generates annual sales of around US$30 million (RM124.4 million) and operates from three manufacturing sites in Penang. Its net margins are high too, at between 10% and 20%.
The company is a contract manufacturer of orthopaedic devices, components and surgical tools.
“It sounds easy, but it really wasn’t,” says Su, who ventured into orthopaedic manufacturing after retiring as a lawyer.
With no background in the industry, he says the first two years were about making more “rejects than anything else”, but he persevered.
Su’s big break came about 17 years ago when the company was noticed by Smith & Nephew Plc, a leading medical technology company that was also in the orthopaedic manufacturing business.
“They were looking for a low-cost country supplier at that time. They came to see me and they liked what they saw, even though there was not much at that time. So, they decided to have a supply relationship with us,” Su recalls.
Smith & Nephew provided Straits Orthopaedics with an interest-free loan of US$3 million to invest in machinery and building facilities in order to supply them. The loan, says Su, was to be repaid progressively from the products that it supplied to the multinational corporation.
“They were very good to me. Whatever we have learnt in the last 17 years is primarily because of them. They invested in us, brought in engineers to help us and they taught us. I believe ours was the first Malaysian company to learn about orthopaedics in Penang,” he says.
In 2014, Su sold a 40% stake in Straits Orthopaedics to listed Apex Healthcare Bhd in order to expand the business. Both parties, he says, have not looked back since.
About 60% of the company’s revenue is currently derived from contract manufacturing for Smith & Nephew but it also functions as a contract manufacturer for about 20 other customers from around the world.
While the prospects for the orthopaedic sector look bright, especially with the growing awareness and higher income levels in Asia, Su expects 2021 to be an unpredictable year.
“This year, we were supposed to increase sales to US$35 million but Covid-19 has affected it. People have chosen to put elective surgeries on hold for now.
“2021 can be good because there is a lot of pent-up demand that will be released if there is a vaccine available. There are quite a number of customers banking on pent-up demand being released next year because they are still buying from us,” he says.
AHP is unique, say MD
Speak to Allen Healthcare Products (M) Sdn Bhd (AHP) managing director Michael Hng and he will tell you that the rapid diagnostic test (RDT) market in Malaysia is huge.
“Malaysia spends more than RM100 million in RDTs per year. We went into this business because we saw the potential,” says Hng, who started the business in 1997 by importing kits and repackaging them.
RDT, as its name suggests, is a method of diagnosis that involves testing or investigating a specimen outside the human body and yields results immediately. These kits often come in the form of a dipstick or cassette. The most common RDT is the home pregnancy test.
Pregnancy test kits are AHP’s best seller although value wise, they cost less than the other tests. Drug-testing kits also form a large part of AHP’s sales. The company also makes test kits for infectious diseases.
“Since we have the technology to fabricate RDTs and it is a supply and demand business, we will venture into a test where there is demand,” Hng says.
He believes that AHP is unique as it is involved in research and development (R&D), and fabricating, assembling and marketing the in-vitro diagnostic tests.
“It takes a lot to set this up because it needs some knowledge of engineering, science and manufacturing,” he adds.
Hng does not have a background in science or engineering. He describes himself as an entrepreneur who happens to have friends and many people to consult with regards to the RDT industry.
AHP evolved from a repackaging company for RDT kits into a research-based manufacturer of such kits in 2008.
While it sells its products under its own brand, it is also a contract manufacturer for other companies. Hng says that AHP caters largely for the Malaysian market, with less than 10% of its products exported.
The company has a workforce of only 15 people. Hng notes that this is the norm in the biomedical device industry — 75% of the players have fewer than 20 employees each.
“You don’t need many people in the lab. Plus, a lot of errors can happen if there are too many people working in the lab,” he explains.
Hng believes that the outlook for the medical device industry in Malaysia is bright, especially with the high amount of foreign direct investments coming into the country.
He hopes, however, that the government can encourage public healthcare centres to use locally manufactured RDTs instead of imported ones.
“It is the country that will benefit most as jobs for skilled workers will be created. Furthermore, less funds will leave the country and there will be synergy for creating supporting industries, which will result in more money being poured into R&D [and] that will finally [result in] more products.”
B. Braun the first venture to Penang
Those who know the history of the medical device industry in Penang would know that B. Braun was the first in the sector to set up shop in the state. The company’s operations there started in 1972, around the same time as the arrival of the cluster of pioneer electrical and electronics (E&E) multinational companies, dubbed the “8 samurais”.
B. Braun has played a pivotal role in helping to grow the medical device ecosystem in Malaysia. To many Penangnites, working for the company meant a secure, long-term career.
The company currently employs over 7,400 people in its four production facilities spread over a 47.8-acre site. Products made for the global market include intravenous access solutions, pharmaceutical products and surgical instruments.
As at August 2020, B. Braun had invested a total of RM4.46 billion in its production site in Penang, B. Braun Asia-Pacific president Lam Chee Hong reveals.
Besides its manufacturing facilities, Penang is also home to the multinational corporation’s Asia-Pacific regional headquarters as well as a Centre of Excellence for Intravenous Access which has full R&D capabilities the only one outside Europe.
In addition, the German medical technology company chose Penang as the location for its Global Test Centre, which conducts more than 600,000 scientific measurements each year.
Lam says the business ecosystem, efficient infrastructure and Malaysians’ multilingual proficiency continue to make Penang an investment of choice for many new players.
“Penang and the surrounding states have a vibrant and thriving medical device manufacturing base, [the best] not only in Malaysia, but also in Southeast Asia. This needs to be further highlighted and promoted by the state,” he notes.
Lam believes the outlook of the medical device industry in Penang is positive when it comes to new investments and the growth of the industry.
“With the US-China trade war and the Covid-19 situation, multinational companies may be looking at relocating their plants, and Malaysia offers an excellent new investment opportunity,” he says.
Penang is Boston Scientific’s choice for factory in Asia
It spoke volumes of Penang, and Malaysia, when world-class medical technology company Boston Scientific chose to set up its manufacturing site on the island. Notably, the massive plant, which commenced operations in 2017, is its first in Asia.
Dave Mitchell, vice-president and general manager of manufacturing and distribution Malaysia, explains how Boston Scientific ended up in Penang.
“Our company was growing fast and we needed global capacity. We didn’t start out saying that this new site had to be in Asia and we did look everywhere in the world. However, we did have a significant commercial presence in Malaysia but not much of a supply chain here,” he says.
“There are benefits to being here. We bring doctors to Penang and we have people who can train them. We’re not here just to be in Asia.”
He adds that InvestPenang was especially helpful in connecting Boston Scientific with other companies in Penang, which gave it an understanding on how it would fit in and how its needs would be met.
“The collaboration among all the industries here is huge; it’s a good place to do business,” he notes.
Boston Scientific’s factory in Penang manufactures high-value cardiology products like heart valves and angioplasty balloons that are shipped to the entire world. About 40% of the content of the products is locally sourced. Mitchell says that because its products are highly regulated, getting the approval of the US Food and Drug Administration takes longer as its suppliers need to be vetted as well.
Nevertheless, one of its goals is to continue increasing local content through local sourcing. “The more we can locally source, the better it is for us from a supply chain and inventory perspective. It would be easier as well from a service perspective,” he notes.
Asia-Pacific is one of Boston Scientific’s fastest-growing regions and it contributed US$1.9 billion (RM7.9 billion) in total revenue, or around 17.7% of consolidated net sales, to the medical devices group.
In the next five years, Mitchell sees the manufacturing facility increasing its employees annually from the current 800. “The plant has been successful and we have hit and even exceeded the targets that we set. We’re thrilled with our investment here.”
Source: The Edge Markets Posted on : 20 October 2020