Private Equity Focuses on Medical Device Contract Manufacturers as Growth Accelerates

What’s in a name?

On your most recent visit to a doctor’s office, the devices surrounding you likely bore the logo of one of a few household names in the medical device industry: Medtronic, Boston Scientific, Phillips, Johnson & Johnson, or GE—in industry parlance, an Original Equipment Manufacturer (“OEM”). Yet, despite the products’ packaging, many medical devices today are actually produced not by these large corporations themselves but by a network of privately-owned contract manufacturing organizations (CMOs).

Unbeknownst to most healthcare consumers, and perhaps even the hospitals and medical teams who use these devices, a tectonic shift is underway in the medical device industry. Whereas contract manufacturers historically produced products based on their clients’ intellectual property, they are now shifting more toward a wholesale model with their own engineered products and IP.

Some of the more prominent OEMs don’t even employ engineering teams to develop products in specific categories of devices they market, relying instead on their CMO partner to innovate, patent, produce, and iterate upon the products they sell. Furthermore, many big names never even touch some of their products in the supply chain process, as contract manufacturer partners can ship directly to customers.

Ironically dubbed as “original” in the device industry, these large device corporations favor partnering with CMOs for the many advantages they provide. CMOs help OEMs maintain more asset-lite business models; outsource pure manufacturing, some engineering, and development; and focus on the core R&D activities of their flagship devices.

CMOs often specialize in specific and niche technologies or processes, enhancing the quality of finished devices or device parts and helping navigate U.S. Food & Drug Administration processes. In addition, by utilizing a CMO, OEMs can benefit from strong supply chains, potentially saving time and money during device or device part production.

Electronics CMOs Lead the Pack in Growth

Among the highest growth categories of medical devices are Class II devices, which are projected to grow at 11% CAGR over the next five years, reaching $76 billion in revenue by 2026, according to Arizton Advisory and Intelligence. These are often complex devices in close contact with a patient’s internal organs and therefore carry a higher risk profile.

As a result, electronics manufacturing services (“EMS”) grabbed the lion’s share of the global medical device CMO market last year. The affordability of devices and increasing cost pressures have supported this segment’s growth. As OEMs rely more and more on their EMS partners, the sector is expected to expand further.

Product manufacturing and assembly services are critical offerings of CMOs, but even more valuable to OEMs are the specialized expertise, production speed, and supply chain solutions CMOs offer. The more complex the products—especially in the case of electronics—the more valuable these advantages become.

Transaction Activity Ramps Up

There are thousands of medical device CMOs across the globe, and private equity firms are setting their sights on those with attractive IP and steady contracts with large strategic device companies.

Despite slowdowns across the broader manufacturing segment spurred by supply chain challenges during the COVID-19 pandemic, transaction activity has accelerated since the pandemic’s onset. Cascadia has tracked at least 16 private medical device acquisitions in the last 18-months, with the bulk of the companies selling to private equity firms or PE-backed strategics. Public strategics like Zimmer BioMet and Nolato have also made acquisitions within the same period.

M&A is white-hot—and with good reason. The overall medical device contract manufacturing market is expected to grow at a CAGR of over 10% from 2020-2026, according to Arizton Advisory and Intelligence.

In the near term, strategic buyers will focus on EMS acquisitions due to their increasing importance in OEM deliverables and vertical integration of services for implantable or disposable devices that require sterilization, as the table of transactions completed since the beginning of the pandemic shows below

Specialized Guidance

Cascadia’s team has the unfair advantage of multiple industry-specialized practice groups that work together to combine intelligence across a range of interconnected sub-verticals. In the case of medical device manufacturers, our Healthcare Group, which has direct device transaction experience, leverages the broader insights of our Industrials, Technology, and Robotics, Automation & Artificial Intelligence groups to create a holistic view of the CMO market. We are happy to share our insights with you directly as you evaluate opportunities for business growth or mergers and acquisitions. Please don’t hesitate to reach out with questions or ideas.

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