Over the past four years, the medical device industry has looked to mergers and acquisitions to produce immediate growth and optimize competitiveness.
Major players are merging to consolidate their capabilities and looking to niche acquisitions to broaden their offerings and keep up with the shifting healthcare landscape.
Although moves like Medtronic’s $50 billion acquisition of Covidien hog the spotlight, behind the curtains medtech contract manufacturers are experiencing their own run of M&A activity, as manufacturers look to consolidate to keep up with their OEM partners.
In 2013, Phillips-Medisize snagged two Adval Tech Group manufacturing facilities. The next year, Tecomet snatched up both 3D Medical Manufacturing and Symmetry Medical’s OEM Solutions business. And then in 2015, Greatbatch merged with Lake Region Medical and went on to rebrand the new medical device contract manufacturing giant as Integer Holdings Co.
Last year Molex turned the tables on Phillips-Medisize, shortly after that company acquired Injectronics, and TE Connectivity expanded its interventional offerings by acquiring Creganna Medical Group.
This year we’ve seen private equity giant Kohlberg & Co. buy out specialty plastics manufacturer Pexco to merge it with PPC Industries to create Spectrum Plastics. These larger plays are joined by a wealth of smaller M&A deals, as all companies in the field try to ramp up to stay competitive in an increasingly demanding market.And the trend isn’t showing any signs of stopping.
“I think that there will be continued consolidation. I’d say it’s hard to forecast the volume. We think that there is efficiency for companies that consolidate, we think that the OEMs prefer to work with the elite provider, so they’d rather deal with fewer contract manufacturers,” said Standard & Poor’s corporate ratings director David Kaplan.
The sentiment seems to be shared across the industry: Consolidation allows CMOs to mirror their OEM counterparts – which are increasingly focused on consolidating their supply chains – and stay competitive as their size and capabilities expand.
“Consolidation in the specialist device component and general contract manufacturing base mirrors the consolidation that is happening among the customer base. Both trends are interlinked,” said TE Connectivity medical sales & marketing VP Jeffery Stanton.
Both OEMs and CMOs are reaping similar benefits from the consolidation, including immediate bumps to production scale, broadened capabilities and a diversified customer base – all things that are difficult to achieve with organic growth.
For OEMs, consolidation has become vital as efficiency objectives shift toward value-based care initiatives.
“Medical device companies are responding on the frontline to ongoing pressures in healthcare spending. Mega-mergers and acquisitions are a route to achieving scale and efficiency while positioning for success by delivering the widest portfolio of products to hospital buyer groups. In parallel, these companies are also seeking efficiencies in their supply base with a preference for partners who can provide the widest range of capabilities for multiple products and at a global scale,” Stanton explained.
Consolidation allows for faster adaptation, which is vital in the ever-shifting healthcare landscape for OEMs. The same can be said for CMOs, which not only have to meet previous manufacturing demands but are also taking on more responsibility from their partners.
Increasingly, CMOs are being asked to operate outside previous boundaries – adding their own product design and development expertise and filling in gaps for large OEMs that make them vital to the supply chain.
When time is at a premium, consolidation is a natural strategy for players looking to keep up and meet OEM needs without the extended timeframes necessary for organic growth.
“Medical device OEMs are looking for partners that bring to bear broad and deep turnkey capabilities that have the ability to fill technology gaps in their portfolios and accelerate time to market for disruptive innovations. They are looking for partners with the scale and sophistication required to support increasingly complex global supply chains,” said Spectrum Plastics medical president Mauricio Arellano.
For TE Connectivity, Stanton noted, the acquisitions of both Creganna Medical and AdvancedCath allowed the company to place itself near the head of the pack for specialist solutions for interventional devices – and quickly. The company only took 12 months to integrate the acquisitions as strategic suppliers to its customer base.
“This could not have been accomplished through organic growth in that same timeframe,” Stanton said.
Other needs are much more easily met with consolidation than with organic growth, such as customer and manufacturing capability diversification.
“Consolidation is sometimes focused on increasing customer diversification. Some of them are very concentrated on their customers – diversifying in a way so that they’re not too [dependent] on just one or two of them,” Standard & Poor’s research assistant Sarah Kahn said.
Major players will often consider acquisitions based on diversifying their capabilities within a particular industry, like plastics, Kahn added. Larger companies often look to acquisitions to broaden their offerings within their niche, which more often comes from companies that aren’t direct competitors but are offering similar products.
“It’s really about the capabilities they can develop and not just the niche. If they can acquire a competitor that’s not a direct competitor, because they don’t have similar capabilities, that can also be a target,” Kahn explained.
As large OEMs rely on consolidation to expand their businesses, the implications flow to the CMO space, meaning that smaller players are edged out over time. So who among the smaller CMOs will be the most safe? Those with niche expertise, according to Standard & Poor’s Kaplan.
“I think as an existing business, it’s probably safe for most of them, certainly to the extent that they have niche expertise,” he said. “But I think that proportionately more of the new revenue will go to the bigger ones.”
Geographic advantages, such as being located near an OEM medical device company, could also play in favor of smaller businesses.
Although smaller companies might not have access to the capital needed to fund buyouts, manufacturers with a specialized knowledge or production capabilities could stand out to larger companies as possible acquisitions.
In most cases, major players in the space prefer to acquire “mid-sized” companies, Kaplan said, with revenues in the 10s of millions. But a smaller company offering specialized expertise could pique interest from larger manufacturers looking to expand their own capabilities.
“They could be interested in some of the very small ones as long as there’s a niche expertise which is complementary to their own,” he said.
And although the M&A craze doesn’t seem to be slowing down on the OEM or CMO side, Kaplan thinks we may see some larger players taking time between acquisitions to “digest.”
“One element that might be a constraint would be companies that have completed transactions recently. There’s kind of a period of digestion, where a company makes sure they’ve fully absorbed and integrated the company, the culture, the system,” he said.
It’s difficult to consider consolidation a “trend,” as it’s likely here to stay so long as it’s one of the most efficient survival and growth strategies for both OEMs and CMOs.
“For both medical device companies and contract manufacturing partners, scale and portfolio breadth are vital to competitiveness. All companies in the medical device eco-system will continue to work toward these strategic imperatives,” Stanton said.
Managing editor Chris Newmarker contributed to this story.