There has been a significant increase recently in private equity and venture capital purchases of contract manufacturers in the medical device space. According to Axios, medical devices and supplies deals were worth nearly $44B in 2021, which was the highest value over the last decade by far.
At a ground-level view from someone who operates in the industry, we are seeing the same thing – of the top ten medical device contract manufacturers that we track, 80% have been purchased by private equity/venture capital or larger suppliers already in the industry since 2017.
Reliable Cash Flow & Huge Market
In a volatile economy with visible scars from the pandemic and plenty of investment money sitting on the sidelines, private equity investors have flocked to industries that provide steady, reliable cashflow. The medical device category and its’ suppliers is one such industry. It is fairly recession-resistant, because patients need medical treatment regardless of economic conditions, and the industry is dependent on reliable, local contract suppliers.
Also, the pandemic shed light on shortcomings in the US healthcare system, prompting many to see business opportunities. Plus, the medical device market is huge – according to Grand View Research, the US Medical Device Market was $186.5B in 2021 and is forecasted to grow to $262.4B by 2028, a CAGR of 5%.
Backbone of Small Companies
Even though the largest medical device companies like Medtronic, Edwards, J&J, and Boston Scientific are highly recognizable and well-known globally, the secret of the industry is that much of the heavy lifting is done by companies with less than 100 people. According to AdvaMed, an industry support organization, “there are over 6,500 MedTech companies in the U.S., which are mostly small- and medium-sized enterprises…” “These companies, most with fewer than 100 employees, are in the highly competitive business of creating constant progress through constant innovation.
Much of the work is often done by small, locally owned product design firms, contract assemblers, and packaging companies. These companies have worked closely with large and small OEMs for decades to shore up the capabilities that they don’t have in-house. They are a critical component to the successful development and delivery of new and existing medical devices.
In many cases, investment firms are purchasing multiple medical device suppliers to bundle them together, find efficiencies where they can, and offer a vertically integrated suite of services to potential customers. In theory, this is a positive thing — there is interest in the category and the influx of cash should help increase investment in technology, innovation, and professional talent throughout the supply chain.
However, in practice, the reality has been more about cost-cutting rather than capability-building. The concern is that we are losing expertise throughout the medical device supply chain. For example, when an investment group purchases a molder, a contract packaging company, and a label provider, it naturally seeks to prioritize whichever segment in that chain delivers the highest return in the short-term. In some cases, that means that both existing and new customers cannot get access to the services they need unless they are large, well established, and profitable to the new entity.
The opportunity with this consolidation is to leverage the different skills and expertise that are being bundled into one entity and use that integration to foster and accelerate operational efficiencies and innovation. Today, what we are hearing from customers that have experienced this change is that the focus on cost-cutting has outweighed innovation and integration, and startups who need to outsource their manufacturing and assembly are having a harder time finding willing and competent contract manufacturing partners. On a larger scale, this diminishes the ability for innovation to take hold and drive the industry. If this innovation is restricted at the outset because there are not enough partners to help it blossom, start-ups, suppliers, doctors, and patients will all suffer the consequences.
Potential Knowledge Drain
In the world of medical device contract manufacturing, much of the knowledge is kept in the heads of the people doing the work over many years. These people have a unique understanding of things like manufacturing efficiencies, FDA regulations, and sterilization requirements. The blending of this knowledge is a key part of the supply chain for medical device production, assembly, packaging, and sterilization, and we are at risk of losing that if that expertise is not recognized as a valuable asset.
If the focus from new ownership is primarily on aggressive cost-cutting, then the experienced leaders, who have the most tenure, as well as the highest salaries, could be casualties in the transition. This loss of knowledge and expertise would be felt at less visible, but critical junctures in the medical device industry.
Return to Reliability
With that said, we anticipate that demand for reliable, knowledgeable partners will come from customers. We have seen that trend begin to emerge in our own conversations with customers who have become disgruntled with the decline in service they have experienced from contract manufacturers who they had partnered with for many years. Accountability and consistency will become more important in the decision-making of OEMs to award new projects and we anticipate that these characteristics will carry the day and direct growth towards those suppliers that can deliver.
Future – Device + Technology Integration
As we look forward, many forecasters predict that the future of the medical device industry will be driven by increased technology, miniaturization, biocompatibility, and digital computing power. These trends will be driven by the largest, multinational companies to be sure, but the rest of the supply chain will have to keep up. This requires further commitment to invest in technology, digital connectivity, and talent that understands the intersection of devices and technology. We expect that the industry will look to reliable partners who prioritize their partnerships with customers, have invested in technology and people, and have proven to be agile during turbulent times.
Aaron Swanson is President of Pro-Tech Design & Manufacturing. He has worked in medical device packaging for over 25 years and oversees all aspects of medical device assembly, packaging, and sterilization for the company. Aaron holds a B.S. in Biology from the University of Minnesota, and an M.S. in Microbiology from California State University, Northridge. He has two patents in medical device sterilization and packaging.