Both the plastics and packaging and the medical sectors are experiencing thriving M&A environments, spurred by investor interest in each sector’s unique strengths and their common trait of steady, recession-resistant demand. When two such attractive sectors intersect, it creates substantial opportunities.
In this article, senior bankers from Harris Williams’ Industrials and Healthcare and Life Sciences (HCLS) Groups share their perspectives on what’s putting medical plastics and packaging on the radar for so many strategic buyers and investors.
- The medical plastics and packaging segment provides opportunities for steady, cycle-resistant growth.
- However, high barriers to entry limit the number of players and can contribute to high valuations.
- Packaging companies with three key characteristics can provide an alternative path into the medical plastics and packaging space. Harris Williams’ recent experience with Spectrum Plastics Group illustrates these principles in action.
Two Strong Sectors Converge
Significant demographic forces continue to create strong and growing demand for medical services. As reported in our recent market analysis of the global health and wellness space, medical spending among Americans continues to grow. Demographic trends, combined with the increasing importance and accessibility of healthcare worldwide, are creating robust demand for all parts of the global medical supply chain, including packaging materials.
“There is strong demand for all things medical,” says Geoff Smith, a managing director in Harris Williams’ HCLS Group, “and that demand is very resilient.”
For its part, the global packaging market is expected to grow in line with GDP growth, with steady and cycle-resistant demand sustained by the near ubiquity of packaging at all levels and corners of the global market. As Patrick McNulty, a managing director in Harris Williams’ Industrials Group, says: “Consumers may choose more- or less-expensive products based on the economy, but they all come in some form of packaging.”
Medical plastics and packaging represents the nexus of these segments, benefiting from the growth and demand that characterizes each. It also benefits from its own positive trends, says Brad Morrison, a director in Harris Williams’ Industrials Group.
“Medical products manufacturers are increasingly looking to outsource aspects of manufacturing, including packaging,” says Morrison. “They want to gain access to specialized skills and jettison non-core activities. That’s creating an opportunity for plastics and packaging companies that can bring specialized, advanced engineering skills to the table, proactively innovating to solve problems and improve package performance.”
Medical Plastics and Packaging: A Sweet Spot
Based on recent deal flow, Harris Williams sees particular growth potential in medical plastics and packaging. The scope of medical plastics and packaging is broad, from trays, films and bags to medical tubing, injection-molded components, medical devices and dosage and dispensing technologies. Growth is promising: The segment is projected to increase from $13.85 billion in 2016 to $21.06 billion by 2022, at a CAGR of 7.3 percent.1
The growth in demand for medical plastics and packaging is motivated in part by growing interest in single-use products. For example, hospitals are seeking disposable products to enhance sterility, reduce the risk of infections and increase convenience. According to Paul Hepper, a director in Harris Williams’ HCLS Group, “The demand for single-use, single-dose packaging and the necessity of sterility in the hospital and surgical settings are pushing greater use of plastics. Plastic can be engineered into a variety of shapes and sizes and it can be used once and thrown away, eliminating the effort, cost and sterility risk associated with the cleaning and reuse of other substrates.”
In addition, specialty devices that use sophisticated plastic components are experiencing strong growth, spurring upstream demand for medical plastics and packaging. For example, medical technology advances are enabling minimally invasive surgeries that use implantable bio-absorbable plastic components. Medical bio-absorbable applications of plastics include stents, bone screws/anchors, tissue scaffolding, sutures and drug delivery mechanisms. While this is just one micro-market for medical plastics, it is indicative of the innovation that will sustain market growth for the foreseeable future.
While prospects for future growth are good, the medical plastics and packaging space does have high barriers to entry, says Morrison. It requires advanced engineering, a high level of precision, deep experience with resins and resin market dynamics and clean room manufacturing, all of which restrict the number of companies able to supply medical products industries.
“The quality level of the product must be extremely and consistently high given that people’s lives are directly impacted. A stellar quality record is a given,” Morrison explains. “Ancillary services and innovation are what help packaging providers differentiate themselves and protect their competitive position.”
Further protection is provided by high switching costs. Once the Food and Drug Administration (FDA) approves a product and its packaging, the manufacturer is unlikely to change its suppliers. Likewise, once a component is specified into the value chain of an end product, changing that component supplier can require recertification and risk disruption to supply. This also makes it rare for a customer to change a plastic component or packaging supplier once a product is on the market.
“All of these barriers to entry make medical plastics and packaging companies relatively scarce,” adds McNulty, “And ‘pure play’ companies generally draw a higher EBITDA multiple than diversified businesses.”
Three Key Characteristics
Investors not wanting to pay the price that pure play medical plastics and packaging companies command do have an alternative: businesses that aren’t 100% medical, but instead serve multiple specialty end markets.
For example, with the right strategy and relationships in place, a plastics company with deep knowledge of resins and advanced engineering strength could have the potential to gain entry into medical packaging. Likewise, a generalist packaging company with a medical packaging business unit could provide buyers and investors with a lower-cost way to participate in the segment.
Whether considering the acquisition of a pure play or diversified business, there are three critical characteristics to look for in a company: deep plastics expertise, built-in flexibility and a commitment to creating value for customers.
It may seem obvious that leading companies will have a full understanding of the nuances of plastics procurement, materials science, engineering, storage, manufacturing and distribution. There are many different grades and types of resins, different manufacturing techniques and distribution methods, and only through continuous innovation on all fronts can a plastics and packaging company achieve and maintain leadership status.
Less obvious, however, is the fact that several industries using plastics and packaging are ahead of the medical segment in areas such as precision manufacturing, and reducing tolerances to the smallest possible degree, says Hepper. “Leading plastics and packaging companies can bring expertise in these techniques from other industries to the medical sphere and gain an advantage over more-entrenched players.”
Inherent flexibility allows leading medical packaging companies to do more for their customers, more quickly. During trials in particular, contract manufacturers need the ability to produce small runs of custom product to meet evolving end-product needs. The approval process for medical plastics products can take years and require multiple changes to what is being produced. Thus, the ability to do shorter and more-customized runs is critical. Packaging companies also have to be constantly “in the know” on the regulatory environment so they can anticipate potential changes and avoid risks related to shifting regulations.
Part of being flexible is having responsive manufacturing capabilities that can match customers’ footprints and key markets. Indeed, medical products manufacturers value having suppliers in their own geography, which makes it easier for the packager to co-innovate and to provide them with just-in-time inventory. As such, suppliers with facilities in key medical technology locations have a market advantage.
Clearly, the more a supplier can do for its customer, the more valued that supplier becomes. Co-innovation is one example: As they push to innovate and optimize cost, medical products companies are increasingly turning to their suppliers to design innovative solutions to meet their needs.
“Based on an understanding of the problem they are trying to solve, plastics manufacturers must have the material science, engineering and operational expertise to source or work with suppliers to create a resin with the unique traits that will enable the performance characteristics they desire,” says Morrison. “This plastics innovation and engineering is enabling new surgical techniques, drug delivery methods and other breakthroughs previously not possible, and is making plastics and packaging companies more important than ever.”
“Medical plastics companies also have to be able to design to manufacturability, which increases the importance of having both design and operational expertise,” adds Hepper.
Value can also take the form of additional services such as cutting, kitting or assembly. For example, rather than sending six items to the manufacturer, those items could be kitted and wrapped for end use, eliminating a step in the value chain. Or, if the packager makes many components that will be assembled together into a surgical tool, assembly could be done by the packager before shipping. Priced right, such services can bring additional profit to the packager while helping to retain its most valuable customers.
Key Traits in Practice: Spectrum Plastics Group
Spectrum Plastics Group (Spectrum)—acquired by AEA Investors in January 2018—exemplifies the traits that make medical plastics and packaging companies attractive investment opportunities.
For one thing, it was not exclusively a medical plastics supplier: Two other sizable divisions included specialty plastic profiles and specialty films sold outside of the medical industry. Spectrum also had deep procurement and materials expertise across hundreds of resin grades, highly technical advanced manufacturing processes, and industry-leading development and engineering capabilities.
Its materials expertise and processing capabilities allowed the company to flexibly deliver solutions for complex and fast-growing medical applications. It was an industry pioneer in high-growth, technically demanding specialty categories including microbore extrusions, micromolding, silicone molding, implantable and bio-absorbable injection molded components, and other in-the-body solutions. It operated a network of facilities strategically located around the world, giving it the flexibility and scale to serve the industry’s leading customers.
Finally, the company took a proactive approach to innovation, offering a full suite of value-added services that created turnkey solutions for customers. Value-added capabilities included design and prototyping, material selection, fabrication and finished devices, and regulatory services, among others.
Macro trends in both the packaging and medical sectors are creating compelling opportunities for investors in medical plastics and packaging. With growth and cycle resistance in their profile, medical plastics and packaging companies are attractive targets for investors with either packaging or medical expertise. As the trend toward greater use of plastics accelerates, the medical plastics segment in particular has tremendous upside potential for those companies with the deep expertise and capabilities that success in the segment requires.
Published August 2018
1. “Medical Plastics Market Worth 21.06 Billion USD by 2022,” Markets and Markets, https://www.marketsandmarkets.com/PressReleases/medical-plastics.asp