Mark Bonifacio, President, BCS LLC03.04.20
A new decade has dawned, and along with it, a possible new beginning in medtech manufacturing.
The start of the millennium’s third decade offers the medical device industry an opportunity to build value through new technologies, collaborations, clinical validations, and value-based outcomes.
While big changes are continuing and have somewhat become the norm in healthcare, some things are also remaining the same, particularly the outsourcing and medtech manufacturing landscape.
A Brief Look Back
As the 2010s ended, the M&A backdrop that was solidly in place for the last few years continued. The market consolidation that hit its stride shortly after the 2008 financial crisis has been continuing in full force for five years or so. The past decade saw many mega device deals: Medtronic purchasing Covidien, Zimmer Holdings acquiring Biomet, Abbott buying St. Jude Medical, and Becton Dickinson pairing with C.R. Bard, to name just a few. Deals of all shapes and sizes in virtually all end markets (orthopedic, minimally invasive surgery, respiratory, etc.) have been the norm.
Consolidation also impacted the contract manufacturing (CM) sector during the 2010s. Some of the factors that drove these deals include access to capital, low interest rates, strong buying interest from strategic investors, private equity, and industrial players. Supply chain “tiering” continued as well and valuations were at all-time highs.
The final month of the decade became a time of resolution, as new FDA Commissioner Stephen Hahn assumed his duties on Dec. 17, and the controversial medical device tax finally died (repealed)—after a protracted battle—just three days later (Dec. 20).
2020 Vision
Coronavirus and the U.S. presidential election will likely dominate headlines and potentially impact both the national economy and the medtech industry this year. Healthcare is expected to be a main issue in the presidential campaign due to the nation’s skyrocketing healthcare costs; consequently, the political party that wins the House and Senate this fall will have a golden opportunity to shape American healthcare and medical technology in the first quarter of the new decade.
Many of the Democratic candidates are either proposing various tweaks to Obamacare policies or big changes, like Medicare For All. It is difficult, though, to assess precisely how these proposals might impact the medical device industry. While universal healthcare coverage could be considered a positive for the sector (it’s adding patients to the overall healthcare system), skeptics contend the pros and cons of such a plan cannot be boiled down so simply. In any case, it is currently unclear if any major changes to healthcare will occur during a second Trump term.
Overlapping from the 2010s will be a confluence of healthcare disrupters such as connected health, informatics, robotics, biologics, and gene therapies. Some will impact medtech sooner than others and some will be more disruptive than others, but they all are inclined to change the field in the next 10 years. Also contributing to this paradigm switch is an amalgamation of medical technology and digital health; clearly, artificial intelligence, big data, and connected health will help usher in some of the most significant changes to medicine in the last 40 years.
Confidence levels in healthcare/medtech are high and should remain that way for the short term. Most OEMs and CMs in various medtech markets seem optimistic about 2020 and the short term in general, with many CMs in the cardiovascular, interventional, and drug delivery realms expecting double-digit growth (outpacing the overall medical device market). This optimism extends to the overall device market too, thanks to growth drivers that haven’t changed much in a few years—namely, an aging global population; longer life spans; mobile home care products; and a growing middle class worldwide.
More Wheeling and Dealing
Private equity and strategic OEM buyers continue to compete for assets in all sectors of medtech contract manufacturing. OEMs increasingly want to flesh out their portfolios or place a bet on a rising technology in an area in which they currently serve or want to serve. The acquisition of surgical robotic assets by several large OEMs is a perfect example. Virtually all major medtech OEMs have had at least one, and in some cases, many acquisitions and partnerships centering on surgical robotics and its enabling technologies.
The deal making in 2019 and early 2020 did not disappoint (so far). One of the more interesting CM alliances is Jabil Healthcare. Born on Feb. 3, the new entity was formed from the merging of Jabil’s Nypro Injection molding unit (acquired in 2013) into the St. Petersburg, Fla.-based company’s existing Healthcare business. The new organization will encompass 35 global sites and consist of more than 20,000 employees.
The union of Jabil’s two units highlights the trend in the medical device world to infuse electronics expertise and final assembly work with more traditional CM capabilities. The new organization will serve five sectors: medical device, orthopedics, diagnostics, pharmaceutical delivery systems, and consumer health. Each one of these value-based care segments is driving digital health solutions and innovations that fit Jabil’s capabilities well. The move clearly demonstrates Jabil’s continued commitment to healthcare, which has generally been a higher margin business than consumer electronics.
Besides substantiating the need to diversify its offerings, Jabil Healthcare’s creation highlights a trend among medtech CMs to form tier one providers. Combining the molding, tooling, and plastics expertise of Nypro with the global scale, design and development resources, electronics, automation/assembly, packaging, and finished goods experiences of Jabil make the new entity a savvy partner for multinational OEMs.
About 17 months before Jabil Healthcare’s unveiling, the company bought 14 manufacturing plants (in the United States and Europe) from J&J for $153 million. Also included in the deal were 6,000 J&J employees. The purchase and the (later) creation of Jabil Healthcare can be considered the start of a new era in medical contract manufacturing.
Jabil isn’t writing a new chapter in healthcare by itself, however. Flex (formerly Flextronics) has amassed more than $2 billion in healthcare revenue through various acquisitions over the past decade. Others have beefed up their medical profits too, including TE Connectivity (via the Creganna purchase); Molex (Phillips-Medisize acquisition); Celestica (Impakt Holdings deal); Plexus, and Sanmina all have medical revenues in excess of $500 million and growing.
Another example of the growing interest in the healthcare sector by non-traditional entities is the fourth-quarter 2019 acquisition of CM Providien Medical by publicly traded Carlisle Companies Inc. The firm, which previously had purchased MicroConnex and LHi Technology in China, folded CM Providien Medical into its CIT (Carlisle Interconnect Technologies) business unit. The deal clearly illustrates a new level of medtech CM with vertical capabilities, design and development, scale, and global resources the industry has not seen in more than 30 years.
This non-medical crossover is requiring smaller CMs, specialty component/capability suppliers, and other private equity-backed platforms to possibly rethink their strategies as they continue to acquire capabilities, and niche technologies to bolster their holdings.
Some very recent and good examples of this strategic realignment is Teleflex OEM’s acquisition of IWG, which adds fine wire capabilities to its OEM medical business unit, and the string of acquisitions by Heraeus Medical Components (HMC) in the last 14 months. The first of Heraeus’ purchases was Evergreen Medical, a contract design, development, and manufacturing consultant specializing in neuromodulation technologies, followed by Via Biomedical, a Minnesota-based small outsource supplier focused on contract development, prototyping, processing, and manufacturing of interventional devices. The last acquisition occurred in February with the purchase of Dresden, Germany-headquartered Contract Medical International (CMI).
“Our service offering is reflective of our customer’s needs to increasingly outsource development, production, and regulatory services,” HMC president Nicolas Guggenheim said upon announcing the CMI deal. “This acquisition, our fourth in just over two years, is part of an ongoing expansion of capabilities and competences within growing interventional device markets.”
HMC is clearly adding to its upfront design and development offerings so it can engage OEMs earlier in the product development process and chase scaled manufacturing opportunities. The firm has also added a Minnesota location near some of the large OEM players, and enhanced its metals capabilities with other competencies and skill sets that broaden their footprint beyond metals, nitinol guidewires, and hypo-tubes. This is a space where traditional CMs like Flex and Jabil have yet to gain great capabilities.
This kind of activity and competition will likely keep valuations high in 2020. Many pureplay medical CM operations are trading either in the double digits and low teens or higher where additional synergies or a strong strategic fit exist. How long this will continue is hard to predict, though if interest rates rise and leverage ratios drop, growth may slow. However, the amount of “free cash” still on PE and strategic OEM balance sheets indicates this ride isn’t quite over. Both OEMs and CMs will continue to consolidate in much the same fashion as the automotive and aerospace industries have in the past.
One of the headwinds challenging this medtech consolidation is the availability of actionable assets, especially for mature, well-run companies. Buyers are now eyeing smaller niche assets and more affordable EU assets. Cross border activity between, Asia, the EU, and the United States remains robust and should continue throughout 2020.
Between crossover from non-healthcare companies, continued industry consolidation, and the upcoming presidential election, 2020 should be an interesting year.
As president and founder of Bonifacio Consulting Services, Mark Bonifacio works with medical device OEMs and contract manufacturers to help them grow organically and through mergers and acquisitions. Bonifacio leverages his education, decades of global medical manufacturing engineering & operating experience, along with his extensive international network to provide unique value. He is well known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.
The start of the millennium’s third decade offers the medical device industry an opportunity to build value through new technologies, collaborations, clinical validations, and value-based outcomes.
While big changes are continuing and have somewhat become the norm in healthcare, some things are also remaining the same, particularly the outsourcing and medtech manufacturing landscape.
A Brief Look Back
As the 2010s ended, the M&A backdrop that was solidly in place for the last few years continued. The market consolidation that hit its stride shortly after the 2008 financial crisis has been continuing in full force for five years or so. The past decade saw many mega device deals: Medtronic purchasing Covidien, Zimmer Holdings acquiring Biomet, Abbott buying St. Jude Medical, and Becton Dickinson pairing with C.R. Bard, to name just a few. Deals of all shapes and sizes in virtually all end markets (orthopedic, minimally invasive surgery, respiratory, etc.) have been the norm.
Consolidation also impacted the contract manufacturing (CM) sector during the 2010s. Some of the factors that drove these deals include access to capital, low interest rates, strong buying interest from strategic investors, private equity, and industrial players. Supply chain “tiering” continued as well and valuations were at all-time highs.
The final month of the decade became a time of resolution, as new FDA Commissioner Stephen Hahn assumed his duties on Dec. 17, and the controversial medical device tax finally died (repealed)—after a protracted battle—just three days later (Dec. 20).
2020 Vision
Coronavirus and the U.S. presidential election will likely dominate headlines and potentially impact both the national economy and the medtech industry this year. Healthcare is expected to be a main issue in the presidential campaign due to the nation’s skyrocketing healthcare costs; consequently, the political party that wins the House and Senate this fall will have a golden opportunity to shape American healthcare and medical technology in the first quarter of the new decade.
Many of the Democratic candidates are either proposing various tweaks to Obamacare policies or big changes, like Medicare For All. It is difficult, though, to assess precisely how these proposals might impact the medical device industry. While universal healthcare coverage could be considered a positive for the sector (it’s adding patients to the overall healthcare system), skeptics contend the pros and cons of such a plan cannot be boiled down so simply. In any case, it is currently unclear if any major changes to healthcare will occur during a second Trump term.
Overlapping from the 2010s will be a confluence of healthcare disrupters such as connected health, informatics, robotics, biologics, and gene therapies. Some will impact medtech sooner than others and some will be more disruptive than others, but they all are inclined to change the field in the next 10 years. Also contributing to this paradigm switch is an amalgamation of medical technology and digital health; clearly, artificial intelligence, big data, and connected health will help usher in some of the most significant changes to medicine in the last 40 years.
Confidence levels in healthcare/medtech are high and should remain that way for the short term. Most OEMs and CMs in various medtech markets seem optimistic about 2020 and the short term in general, with many CMs in the cardiovascular, interventional, and drug delivery realms expecting double-digit growth (outpacing the overall medical device market). This optimism extends to the overall device market too, thanks to growth drivers that haven’t changed much in a few years—namely, an aging global population; longer life spans; mobile home care products; and a growing middle class worldwide.
More Wheeling and Dealing
Private equity and strategic OEM buyers continue to compete for assets in all sectors of medtech contract manufacturing. OEMs increasingly want to flesh out their portfolios or place a bet on a rising technology in an area in which they currently serve or want to serve. The acquisition of surgical robotic assets by several large OEMs is a perfect example. Virtually all major medtech OEMs have had at least one, and in some cases, many acquisitions and partnerships centering on surgical robotics and its enabling technologies.
The deal making in 2019 and early 2020 did not disappoint (so far). One of the more interesting CM alliances is Jabil Healthcare. Born on Feb. 3, the new entity was formed from the merging of Jabil’s Nypro Injection molding unit (acquired in 2013) into the St. Petersburg, Fla.-based company’s existing Healthcare business. The new organization will encompass 35 global sites and consist of more than 20,000 employees.
The union of Jabil’s two units highlights the trend in the medical device world to infuse electronics expertise and final assembly work with more traditional CM capabilities. The new organization will serve five sectors: medical device, orthopedics, diagnostics, pharmaceutical delivery systems, and consumer health. Each one of these value-based care segments is driving digital health solutions and innovations that fit Jabil’s capabilities well. The move clearly demonstrates Jabil’s continued commitment to healthcare, which has generally been a higher margin business than consumer electronics.
Besides substantiating the need to diversify its offerings, Jabil Healthcare’s creation highlights a trend among medtech CMs to form tier one providers. Combining the molding, tooling, and plastics expertise of Nypro with the global scale, design and development resources, electronics, automation/assembly, packaging, and finished goods experiences of Jabil make the new entity a savvy partner for multinational OEMs.
About 17 months before Jabil Healthcare’s unveiling, the company bought 14 manufacturing plants (in the United States and Europe) from J&J for $153 million. Also included in the deal were 6,000 J&J employees. The purchase and the (later) creation of Jabil Healthcare can be considered the start of a new era in medical contract manufacturing.
Jabil isn’t writing a new chapter in healthcare by itself, however. Flex (formerly Flextronics) has amassed more than $2 billion in healthcare revenue through various acquisitions over the past decade. Others have beefed up their medical profits too, including TE Connectivity (via the Creganna purchase); Molex (Phillips-Medisize acquisition); Celestica (Impakt Holdings deal); Plexus, and Sanmina all have medical revenues in excess of $500 million and growing.
Another example of the growing interest in the healthcare sector by non-traditional entities is the fourth-quarter 2019 acquisition of CM Providien Medical by publicly traded Carlisle Companies Inc. The firm, which previously had purchased MicroConnex and LHi Technology in China, folded CM Providien Medical into its CIT (Carlisle Interconnect Technologies) business unit. The deal clearly illustrates a new level of medtech CM with vertical capabilities, design and development, scale, and global resources the industry has not seen in more than 30 years.
This non-medical crossover is requiring smaller CMs, specialty component/capability suppliers, and other private equity-backed platforms to possibly rethink their strategies as they continue to acquire capabilities, and niche technologies to bolster their holdings.
Some very recent and good examples of this strategic realignment is Teleflex OEM’s acquisition of IWG, which adds fine wire capabilities to its OEM medical business unit, and the string of acquisitions by Heraeus Medical Components (HMC) in the last 14 months. The first of Heraeus’ purchases was Evergreen Medical, a contract design, development, and manufacturing consultant specializing in neuromodulation technologies, followed by Via Biomedical, a Minnesota-based small outsource supplier focused on contract development, prototyping, processing, and manufacturing of interventional devices. The last acquisition occurred in February with the purchase of Dresden, Germany-headquartered Contract Medical International (CMI).
“Our service offering is reflective of our customer’s needs to increasingly outsource development, production, and regulatory services,” HMC president Nicolas Guggenheim said upon announcing the CMI deal. “This acquisition, our fourth in just over two years, is part of an ongoing expansion of capabilities and competences within growing interventional device markets.”
HMC is clearly adding to its upfront design and development offerings so it can engage OEMs earlier in the product development process and chase scaled manufacturing opportunities. The firm has also added a Minnesota location near some of the large OEM players, and enhanced its metals capabilities with other competencies and skill sets that broaden their footprint beyond metals, nitinol guidewires, and hypo-tubes. This is a space where traditional CMs like Flex and Jabil have yet to gain great capabilities.
This kind of activity and competition will likely keep valuations high in 2020. Many pureplay medical CM operations are trading either in the double digits and low teens or higher where additional synergies or a strong strategic fit exist. How long this will continue is hard to predict, though if interest rates rise and leverage ratios drop, growth may slow. However, the amount of “free cash” still on PE and strategic OEM balance sheets indicates this ride isn’t quite over. Both OEMs and CMs will continue to consolidate in much the same fashion as the automotive and aerospace industries have in the past.
One of the headwinds challenging this medtech consolidation is the availability of actionable assets, especially for mature, well-run companies. Buyers are now eyeing smaller niche assets and more affordable EU assets. Cross border activity between, Asia, the EU, and the United States remains robust and should continue throughout 2020.
Between crossover from non-healthcare companies, continued industry consolidation, and the upcoming presidential election, 2020 should be an interesting year.
As president and founder of Bonifacio Consulting Services, Mark Bonifacio works with medical device OEMs and contract manufacturers to help them grow organically and through mergers and acquisitions. Bonifacio leverages his education, decades of global medical manufacturing engineering & operating experience, along with his extensive international network to provide unique value. He is well known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.
