Medical Contract Manufacturing: Five Key Takeaways from MD&M West

Medical contract manufacturing organizations span a broad set of design and manufacturing services provided to the healthcare industry. Harris Williams bankers recently attended one of the largest medical design and manufacturing events in the industry, MD&M West. They met with medical technology engineers, business leaders, and innovators to inform their perspectives on the strength of the contract manufacturing segment and future M&A activity. Here, they summarize key trends and opportunities in five key takeaways. 

1. General interest in medical contract manufacturing is strong.

Bredrup: The secular tailwinds of original equipment manufacturer outsourcing, combined with general healthcare trends, make medical contract manufacturing an attractive area for investors. We continue to observe CMOs shifting their business mix to increase emphasis on medical and healthcare end markets. Given the healthcare sector’s strong margin profile and revenue tailwinds, businesses deriving at least 80% of their revenue from the space tend to command higher multiples from investors.

2. Sponsors and strategics are hungry for M&A.

Bradshaw: The demand for businesses large and small is very healthy across a wide spectrum of buyer sets. Some are looking for ways to leverage their precision manufacturing expertise in the healthcare sector. Existing sponsor-backed platforms are eager to find add-on opportunities to increase the breadth and depth of their companies' capabilities. Larger strategics are looking for businesses of scale that would add capacity or capability or be more transformative in nature.

3. Asset scarcity is driving multiples, and 2022 will be a good year to exit CMOs.

Bradshaw: There is a gap between demand and supply, with only a few businesses of scale likely to trade in 2021. There were a number of businesses purchased in 2018 and 2019, and, given the typical holding period, there are naturally fewer A+ platforms coming to market this year.

Will: The pandemic also plays a role here. For CMOs, the impact of the shutdown in elective procedures during the pandemic lagged several months as hospitals and OEMs worked down inventories in the supply chain. Demand has since returned, but for many companies positioning to sell, the next 12-month financial and volume growth projections look better than the past 12 months. CMOs considering an exit will have a better revenue and growth story to tell by mid-2022. Overall, given the scarcity of supply, we expect to see healthy multiples, which should drive more businesses to market in 2022. 

4. Multiple avenues of growth are available to buyers.

Bredrup: We see businesses considering multiple avenues to accelerate growth. One is via exposure to faster-growing end markets, such as minimally invasive surgery. Exposure to the robotic surgery market is also attractive. However, manufacturing in this market requires skill and precision. Businesses are considering adding upstream design/engineering capabilities or downstream assembly and packaging capabilities to be more value-added suppliers to OEMs and capture a larger wallet share.

5. Volume and demand from OEMs are strong.

Will: The industry has generally rebounded from COVID-19 and is back to seeing volume-based revenue growth over 2019 results. However, certain end markets (e.g., ortho) are now beginning to anticipate potential reductions or halts to elective procedures due to rising COVID-19 cases. Looking forward to the next 12 months, we believe the M&A opportunity looks healthy.

Rapidly changing technologies and a constantly shifting regulatory environment are facts of life in the healthcare and life sciences marketplace. Our Healthcare & Life Sciences Group is dedicated to understanding these complex industry dynamics and providing superior merger and acquisition advisory services to companies that operate within it.

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Published September 2021
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