What private equity means for medtech OEMs, suppliers and their employees

Private equity cash is flooding into the medtech industry as investors look for medical device manufacturers and suppliers to buy, improve their profitability and deliver better returns than those investors might get from public markets.

To learn more about this trend and how it affects medtech companies and the broader industry, Medical Design & Outsourcing spoke with two lawyers who work with medical device OEMs, their outsourcing partners and PE firms. (In the first part of our interview, we discussed the private equity business model.)

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Jamie Snelson and Carl Numrich are shareholders at Minneapolis-based law firm Fredrikson, which represents private equity platform sponsors including KKR (which is buying CDMO Integer for $5.7 billion), Bain Capital and Morgan Stanley.

Snelson works with medtech OEMs and was previously in-house legal counsel for Medtronic. He’s helped the world’s largest medical device company buy public companies and stock and assets of private businesses, along with dispositions, strategic investments and technology licensing deals.

Numrich represents PE firms and investment firms such as Audax, Arcline, Kolos Partners and Goldner Hawn.

The following has been lightly edited for clarity and space.

MDO: What does the expansion of PE into medtech (both on the OEM and supplier side) mean for employees in the medtech industry and the people who own and run these businesses?

Numrich: “The infusion of capital into the market and liquidity available to founders and entrepreneurs that are building and growing businesses and looking to exit, that’s the biggest and probably the most obvious thing that private equity brings: liquidity to an illiquid market.

“If I’m an employee or working for one of these companies that’s about to be acquired by private equity, that can be an intimidating thing. But private equity often gets a bad rap. We see private equity funds come in and they’re partnering with management in a close way and bringing additional skills and advice to unlock future growth and take a really successful business to the next level. It’s that professionalization of management and systems and scale that that can be really attractive and can often benefit employees through a second bite of the apple when the business is ultimately sold by the private equity fund. Employee incentive programs and the like may not have been available without that capital infusion.”

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Snelson: “The opportunities for founders and their management teams through potential transactions with private equity are very favorable. Not necessarily more favorable than the — perhaps more prevalent 20 years ago — path of of selling your medical technology business to one of the strategics, because many people did well with that too and continue to. But private equity has become more interested in exposure to the medical technology space, not necessarily on the regulatory path but on the periphery, whether it’s a component supplier, a provider of services to the medical technology business sector.

“There’s a lot of ways that value can be made available in a way that doesn’t involve the kind of regulatory risk that often requires the infrastructure a strategic has. There are great opportunities for folks who build medical technology businesses. It’s a little bit different in that the maturity of your product probably has to be at a little different level than in the past in the medical technology product space. In the old days, if you had something that was development stage but had great promise, you could engage in an M&A transaction or even potentially access the public markets. To move forward with private equity, more often you have to have some evidence of commercial success and a path to growth.”

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I’ve heard about the biggest OEMs leveraging their purchasing power, wanting fewer suppliers and deeper relationships with them, essentially more control. Does PE backing give those suppliers more leverage to push back on OEMs?

Numrich: “Leverage just naturally comes with scale. If you’re talking about a founder-led business that’s trying to negotiate a one-off agreement with a large OEM, they have less leverage than one that’s PE-backed and part of a much larger platform. And the professionalization that can come with private equity backing, the resources, the access to outside consultants and advisors, the know-how of other portfolio companies within the the private equity portfolio, all of those things add leverage.”

Previously: Medtronic cuts suppliers and manufacturing sites, CEO says in supply chain and operations update

Snelson: “Contract manufacturers are in a great place if they have the right capabilities. The right capabilities and discipline and operating expertise will be of great value. There’s probably more of a partnership between an OEM and the contract manufacturers now than ever. If you’re capable, if you can deliver on the timeline and at the quality level that’s required, and you are also of course in compliance with the regulatory framework that applies to contract manufacturers and the jurisdictions where you have a footprint, all those things are of continuing value to the OEMs. That’s why we’ve seen several very successful contract manufacturing organization transactions in recent years.”

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