Sector Spotlight: Medical Contract Manufacturing Organizations

Medical contract manufacturing organizations (CMOs) are experiencing substantial and sustained growth, creating a long-term opportunity for corporate and financial buyers.

Recently back from MD&M West—a conference covering medical design and manufacturing innovations and technology—senior professionals from the Harris Williams Healthcare & Life Sciences Group discuss the industry dynamics generating interest in CMOs and what investors should look for in a winning platform.

What Is Driving Investor Interest in CMOs?

Bradshaw: Demand for a wide range of medical devices continues to grow, supported by tailwinds like an aging population in need of ongoing healthcare, the rising prevalence of chronic diseases, and increases in surgical procedures and therapies.

To help meet this expanding need for medical devices, original equipment manufacturers (OEMs) are increasingly outsourcing production to CMOs. In addition to providing capacity, many CMOs can also provide specialized skills at lower costs than OEMs are able to achieve in-house. CMOs with value-added manufacturing capabilities and a reputation for quality and on-time delivery have a great opportunity to grow organically and gain market share.

Will: In addition to these tailwinds and the potential for organic growth, the subsector’s fragmentation continues to draw strong M&A interest from both strategic and financial buyers. In fact, the scope of the investor set has widened as industrial-focused platforms seek to add medical exposure to their portfolios. Some strategic buyers are also looking at CMOs to gain new customers, add unique and defensible capabilities, or expand their manufacturing footprint.

CMOs are continuing to prove their resilience to market-wide headwinds, such as supply chain issues and rising input costs. Most notably, over the past 18 months, CMOs have demonstrated their ability to pass rising input costs along to OEM customers while preserving their margins and maintaining share.

Bredrup: Put all of this together, and you get fierce competition for the best opportunities in this sector. Buyers with a thesis in this space are looking to put money to work.

What Trends Are Creating M&A Opportunities in This Segment?

Will: As we just discussed, growth is a major trend: The global CMO industry is outpacing the broader medical products market, growing at an 11.5% CAGR and expected to exceed $110B by 2026.i While CMOs have seen steady growth by helping OEMs meet the growing demand for devices, recent supply chain challenges present an even greater opportunity for CMOs of scale with superior supply chain management capabilities. Best-in-class operators are taking market share as OEMs consolidate their supply bases.

Bradshaw: We expect the need for top-performing CMOs to continue to trend upward, with OEMs turning their attention to managing supply chain disruptions and inflation. CMOs that maintain quoted lead times and deliveries will be rewarded by OEMs that are now putting more value on reliability and quality among a smaller group of suppliers.

Will: Raw material and labor costs are also elevated, creating competitive advantages for CMOs that can manage their input costs more effectively. Labor tightness is accelerating a trend of upgrading systems and creating more automated processes that cut labor costs. CMOs with expertise in these areas can positively affect an OEM’s business and establish a healthy, mutually beneficial relationship.

What Separates the Highest Performing CMOs From Others From an Investor Perspective?

Bradshaw: Being a reliable source for customers is essential—especially for difficult-to-manufacture components and assemblies. In the present environment, simply having a proven track record of fulfilling orders on time is a competitive advantage. However, offering a tailored solution across multiple pain points, not just capacity, is a key differentiator of the most valuable assets.

OEMs are consolidating their supply chains, so companies with larger scale and highly professionalized platforms will benefit the most long term. The leading CMOs have everything streamlined. They’re a one-stop solution with the sophistication to link several manufacturing and other outsourced services’ needs together. They help OEMs design and engineer before manufacturing and offer differentiated pre- and post-production services.

Will: Being able to manage today’s supply chain and labor challenges is also important to investors. At MD&M West, there was lots of conversation about managing input costs and using automation to boost capacity, as well as locating plants in areas with favorable real estate and labor dynamics.

The top-performing CMOs are solving a multitude of problems at once. These operators are not just manufacturers. They have engineers who are experts in production and can collaborate with the OEMs’ product engineers to improve manufacturing volume and efficiency.

Conclusion

Increasing medical device demand, supply chain disruptions, and inflation continue to highlight the value created by CMOs. The top assets provide consistent on-time product delivery, manage supply chain and labor challenges, and offer services that go beyond manufacturing. Such operators are well positioned to take advantage of the organic and inorganic growth opportunities this dynamic space provides.

The Harris Williams Healthcare & Life Sciences (HCLS) Group has experience across a broad range of sectors, including healthcare providers, payors and payor services, outsourced pharmaceutical services, medical device supply chain, healthcare IT, and pharmacy. For more information on the HCLS Group and other recent transactions, visit the HCLS Group’s section of the Harris Williams website.

Register to Download

All fields with an asterisk (*) are required.