Supported by an ageing population, a rising incidence of chronic disease, and an increased focus on early diagnosis and treatment, the global medical device contract manufacturing market is expected to grow at an 11% CAGR and exceed $125bn by 2027. This growth is also supported by increasing demand for outsourcing by medical device OEMs as they focus more on product design, development, marketing and sales. Many are consolidating their outsourcing partner base and shifting volumes to those that can support the full product life cycle, from pre-production services to complex manufacturing and post-production services.
In addition, the medical device space is normalising following a few years of significant disruptions: raw material supply chain issues experienced as a result of Covid-19 have largely been resolved and the demand swings as a result of inventory stocking and de-stocking have normalised. Many medical device manufacturers are resuming their typical ordering cycles, creating steady demand and revenue for contract manufacturers and bolstering optimism in the space. With these factors in place, medical device contract manufacturing has experienced strong M&A momentum over the past 12 months, and we believe it will continue to do so. The sector’s strong and sustainable growth continues to attract attention from a wide range of private equity groups and strategic buyers. An example is Tinicum’s purchase of Harris Williams client Greene Group Industries (GGI), a leading outsourced provider of design, engineering and manufacturing focused on the advanced surgical device and minimally invasive device end markets.
Illustrating growing strategic buyer activity, Ametek acquired Paragon Medical while DuPont acquired Spectrum Plastics, both transactions approaching nearly $2bn. The fact that Paragon and Spectrum focus on different manufacturing processes and end markets is representative of strategic buyer interest across the broader medical device contract manufacturing segment. In fact, in our estimation, the majority of M&A transactions in the sector in 2023 were completed by strategic buyers. And for quality businesses across size ranges, valuations have generally been strong.
Looking ahead, we’re encouraged by several trends. For one thing, the supply chain issues and OEM stockpiling that challenged this and many other sectors have largely been resolved, clearing the way for renewed growth. Similarly, the pandemic-induced reduction in OEM R&D is ending, and healthy new product development pipelines will provide a host of opportunities for contract device manufacturers.
While we’re excited about investor interest across the sector, a few areas stand out. Broadly, device manufacturers with roughly 75%-plus revenue exposure to medical end markets will see the most intense attention, specifically those active in cardiology and vascular applications, micro-fluidics and drug delivery, and robotic-assisted surgery (RAS) and other areas linked to minimally invasive surgeries. All of these areas share powerful demographic drivers paired with the promise of better clinical outcomes.
For example, in the cardiology segment, there are six million-plus Americans with some type of heart failure, growing to eight million by 2030. Heart failure is more common as people get older, so, as the population ages, these conditions will only become more common, driving demand for devices used in transcatheter aortic valve replacement (TAVR), a minimally invasive alternative to open-heart surgery.
In terms of micro-fluidics and drug delivery, there are a few different drivers at play. Continually rising diabetes rates are supporting growing demand for insulin pumps and driving innovation around more advanced dose control and diagnostics. On the autoinjector side, we’re seeing more pharmaceuticals being developed to use this technology, including diabetes and chronic pain medications.
And, overall, RAS stands to benefit from the greater precision it lends across a wide range of lessinvasive procedures. Minimally invasive surgeries are known to reduce hospital stays and total system costs, and often result in better health outcomes.
Across these areas, contract device manufacturers that solve a greater number of complex problems for OEMs will continue to rise to the top. OEMs are becoming increasingly attracted to ‘one-stop shop’ outsourcing partners that can provide a full suite of services. The more services CMOs can offer an OEM, such as prototyping, tooling, sub-assembly, assembly or supply chain logistics, the greater value they bring and the stickier the relationship. In particular, leading contract device manufacturers are engaging earlier in the product life cycle, offering expertise in product design and manufacturability. Some contract device manufacturers may even be specified in as an approved component during final regulatory filings.
This is a powerful differentiator: OEMs typically avoid altering approved components in a medical device since doing so requires re-clearing the product with regulators. This process entails expensive and time-consuming regulatory hurdles. When a contract device manufacturer’s products are specified into the end device, the company will continue to benefit as long as that device is being manufactured.
Another way for contract medical device manufacturers to create sticky long-term manufacturer partnerships is by offering superior technical engineering capabilities. Along the same lines, it is highly valuable to have direct, engineerto- engineer relationships with customers. That language and technical knowledge shared with manufacturers empowers the medical device contract manufacturer to more readily translate customer goals into products that can be manufactured at scale.
Strong investor interest
We’ve seen first-hand the strong M&A investor interest in such companies. GGI, for instance, has made significant, purposeful investments in manufacturing equipment, processes and systems. In particular, GGI’s expertise in metal injection moulding (MIM) allows it to produce complex components at high volumes while significantly improving efficiency and reducing cost for its OEM customers. GGI’s end-to-end solutions allow the company to act as a full-service partner to its customers, from design for manufacturing and prototyping through high-volume production. This endto- end approach and focus on design for manufacturing provides significant value for its OEM customers, which supports strong long-term relationships.
Another business exemplifying the characteristics of best-in-class contract device manufacturers is Motion Solutions, which Harris Williams advised on its sale to Novanta. Motion Solutions supplies customised, application-tailored engineered products to manufacturers and industrial customers in multiple high-growth end markets, including medical, life sciences, semiconductors, robotics, and industrial automation. As a precision motion specialist, the company partners with manufacturers to engineer custom mechatronic solutions that empower the science driving their customers’ innovations. It also serves as an essential supply chain partner for its clients via the development of highly engineered, specified-in components and subsystems for extended life cycle programmes.
Investors find companies with precision mechatronic engineering capabilities highly attractive, particularly when they enjoy the attractive customer profile possessed by Motion Solutions. Its proficiency in developing repeatable sub-micron motion subsystems across a wide range of advanced applications is a key differentiator, and one that positions the business for ongoing growth.
Conclusion
Overall, the ageing population, medical and technological advances, and a clear push by OEMs to outsource bode well for medical device contract manufacturing. And, across the medical device contract manufacturing subsector, secular trends, a normalising environment, and burgeoning OEM innovation are fostering strong M&A momentum. At Harris Williams, we believe this will continue to be an attractive sector for M&A investors seeking sustained growth for the foreseeable future.
While those investors will have a wide range of opportunities, a few key themes can help them discern those with the greatest promise. At the highest levels, medical device contract manufacturers with a pronounced focus on medical end markets are preferable to companies that serve a more diverse set of end markets. Within medical end markets, long-term demographic and medical trends favour companies specialising in minimally invasive procedures, including RAS, as well as those with a focus on cardiology and vascular applications and micro-fluidics and drug delivery. Perhaps most importantly, the most attractive medical device contract manufacturers are thoughtfully investing in comprehensive capabilities that help them solve a wider range of customer challenges and create lasting differentiation in the marketplace. Such companies are better positioned to create high-value, long-lasting relationships with their customers, earning a spot as trusted advisors versus service providers. Medical device contract manufacturers able to achieve that level of customer value are best positioned to benefit from the growth this sector promises.
