Medical Device Contract Manufacturing Offers Healthy Growth Potential: Part Two

Market Segmentation and Growth Drivers

Three Key Segments

The medical device contract manufacturing industry is typically segmented along three dimensions: the product’s FDA class, its end market or use, and the contract manufacturer’s service capabilities.

Product Class

The U.S. Food and Drug Administration (FDA) classifies medical devices based on a device’s intended use, the risks associated with the device, and the regulation necessary to reasonably ensure the device is safe and effective. Devices are classified into one of three regulatory classes.

  • Class I devices pose low risk to the user, and include such things as bandages, dental floss, and examination gloves.
  • Class II devices, which pose moderate risk, are more-complicated devices and include infusion pumps, blood pressure kits, and diagnostic equipment.
  • Class III devices are generally considered to be the most complex, pose the greatest risk (often because they are used inside the body), and require more stringent regulatory controls. They include pacemakers, balloon catheters, and artificial joints, as well as arthroscopes used in MIS procedures. 

“Because of their increased complexity, risk, and regulation, Class III products require the highest level of expertise and capabilities to produce,” says Will. “That’s where contract manufacturers can provide the greatest value to a medical device OEM.”

End Markets

Medical device contract manufacturers typically serve five main end markets, with a product’s end use generally dictating the sophistication and scope of the capabilities a manufacturer must provide. All five segments have grown in the past several years—some more quickly than others—and that trend is expected to continue for the foreseeable future.

Orthopedics. The outsourced orthopedic market continues to experience strong growth driven by demographic trends and increases in procedure volumes. Extremities and sports medicine, in particular, are two of the fastest-growing submarkets, spurred by numerous new product launches and continued expansion in international markets. Spine, knee, and hip procedure volumes should remain steady, with ongoing market evolution from innovation, including robotics and 3-D printing.

meddevice_thumbnail_2.jpgMIS surgical components. A $2.6 billion market in 2015, MIS contract manufacturing is growing at a CAGR of 5.5% and is expected to hit $3.4 billion in 2020.1 A continued rise in the volume of procedures—especially those involving bronchoscopy and ear, nose, and throat treatment—as well as adoption of MIS surgical techniques in additional procedures, will be the driving forces behind revenue increases and will require more-complex components manufactured to narrow tolerances.

“Advancements in MIS techniques are really opening the surgery door to a lot more people who in the past would have opposed invasive procedures,” says Bradshaw. “Patients are more likely to consider MIS because of its reduced procedure time, recovery time and risk, and downsides, not to mention its lower intimidation factor relative to more invasive surgery.”

Cardiac support. As cardiac disease becomes increasingly prevalent, the need for cardiac-related devices—including those used in valve replacement, valve repair, and ventricular assist device (VAD) surgery—continues to grow. The global percutaneous mechanical circulatory support devices market is expected to post growth of 12% between 2018 and 2025, by which time it’s anticipated to reach $2.9 billion.2 When looking to outsource the manufacturing of these devices, leading OEMs consider quality, capacity, and on-time delivery as their top selection criteria.

Electronic manufacturing. The market for contract manufacturing of electronic components used in such equipment as ultrasound machines, defibrillators, endoscopes, and respiratory monitors is projected to hit $37 million by 2019, up from $29 billion in 2017—a CAGR of 11.7%.3 Electronic precision manufacturers are aggressively pursuing this market—they currently command a 12% share—because growth and margin opportunities there are more attractive than in the traditional computer, automotive, and aerospace and defense markets.4

Plastic manufacturing. Healthcare is a key segment of the global injection molded plastics market that is estimated to grow at a CAGR of 4.8% between 2016 and 2020, reaching $162 billion.5 In the healthcare industry, an increase in plastics as a critical material for prostheses and patient safety, as well as strong technology, demographic, and regulation trends, are all favorable drivers of growth in plastics contract manufacturing. In fact, the scarcity and attractiveness of medical plastics acquisition candidates have resulted in high demand and strong valuation multiples.

Service Capabilities

A third way to segment the medical device contract manufacturing market is by the scale and scope of providers’ capabilities. There are engineering shops that will custom-design products and build prototypes for OEMs, for a very specific use, but stop short of actual manufacturing. Providers that do focus on manufacturing may produce subcomponents of larger products, make the entire device themselves, or assemble various subcomponents produced by other manufacturers. Some also may specialize in treating some part of a finished device, for example, by applying a special coating. 

“At a minimum, an OEM looking to outsource needs a contract manufacturer with the basic capabilities to make a component for the OEM’s product—for instance, a surgical blade,” notes Bradshaw. “Also important is an outsourced partner’s value-added capability working with plastics, metals, balloons, silicon, or rubber. But then the question becomes, does the OEM want to work with a company to produce just the blade, or with a provider that can handle the entire subassembly? Most OEMs will typically prefer the latter—the market continues to shift toward the solutions provider model.”

Read Part Three to understand the segment’s M&A dynamics and key buyer considerations.

Published December 2019

 

1. Minimally Invasive Surgery Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2019-2024, IMARC Group

3. 2016 Primer for Investing in EMS Sector, RBC Capital Markets, 2016.

4. ibid

5. Injection Molded Plastics Market by Raw Material Type and Application, Allied Market Research, 2016.