Fast Forward: Consolidation Continues in Medical Device Contract Manufacturing

Consolidation continues at a rapid pace in the medical device contract manufacturing industry, driven by dual imperatives: Original equipment manufacturers (OEMs) are simplifying supply chains, and larger players are diversifying and seeking exposure to higher-growth segments.

Those are the key takeaways from the Medical Design & Manufacturing (MD&M) West conference, North America’s largest medical technology conference.

The event attracted over 20,000 executives from leading medical technology companies, and gave Andy Dixon, Tyler Bradshaw and Ricky Ng, professionals from Harris Williams & Co.’s Healthcare & Life Sciences (HCLS) Group, a wealth of opportunities to get the latest intelligence on this dynamic industry.

Simplification Spurs Strong M&A Environment

With plenty of cash on balance sheets, favorable financing terms and many remaining opportunities to simplify supply chains, consolidation remains a key facet of the medical device contract manufacturing industry.

“It’s consistent with what we saw in 2017,” explains Ricky Ng, a vice president in the firm’s HCLS Group. “M&A activity is still very strong. The companies we spoke with said they see no signs of it stopping.”

This consolidation trend extends from the top of the supply chain to the bottom, and across major segments such as orthopedics, spine and surgical devices. Simplification is an important driver, spurring horizontal acquisitions that are creating fewer, larger players at many levels of the industry.

“Whether it’s an OEM or a contract manufacturer, companies are trying to streamline their supply networks,” says Tyler Bradshaw, a vice president in the HCLS Group. “They used to have to talk to 20 or 30 suppliers to source the parts they needed. Now that’s getting down to four or five.”

The trend is creating more valuable and differentiated companies that can provide one-stop-shopping to their clients. “That,” says Ng, “is boosting multiples and acquisition activity.”

Some Markets Attracting More Attention than Others

Companies are also seeking acquisitions that bolster their positions in strategically important and growing end markets. Specifically, market segments with emerging, in-demand technologies are providing greater growth and differentiation.

One example is minimally invasive surgical products, says Managing Director Andy Dixon. “Minimally invasive procedures are driving better clinical outcomes, often at lower cost. That’s creating demand for those procedures and the devices that make them possible.”

Another example is neuromodulation. Increasingly used for treatment of chronic pain, movement disorders and a host of other conditions, neuromodulation represents one of the fastest growing areas within the medical device industry. 

“There has been a lot of R&D there recently, which is creating new applications for products in that space and opportunities for contract manufacturers that supply highly specialized components,” says Ng.

Participating in such specialized segments can also give medical device contract manufacturers a degree of protection from supply chain consolidation, says Dixon. “In some of these newer areas, contract manufacturers are developing differentiated capabilities that allow them to compete without the breadth of offerings required in more mature medical device manufacturing market segments.”

Conclusion

M&A activity is expected to continue within the medical device contract manufacturing industry, driven by efforts to simplify supply chains and participate in high-growth end markets. Deep cash reserves, favorable financing terms and a host of consolidation opportunities are reinforcing this trend.

For more information, please contact Andy Dixon, Tyler Bradshaw or Ricky Ng.

Published March 2018