Mark Bonifacio, President, BCS LLC10.01.20
It’s been more than six months since my thoughts last appeared in this column and the world has drastically changed—to the point where it almost seems surreal. In January, I reflected on the past decade in medtech and made some predictions for the next 10 years, though I was completely oblivious to the global pandemic that was well underway. While I stand behind my prognostications, the virus has accelerated many ongoing changes—namely, the explosion of telehealth and disruption to existing healthcare delivery models. COVID-19 also has created new opportunities and headaches (i.e., supply chain disruptions, diagnostic testing confusion, and medical device shortages).
With so much topical fodder, I will focus on two of my favorites for this column: the general state of medtech/life sciences M&A, and the outsourcing trends triggered by the worldwide COVID-19 pandemic.
Before COVID-19 arrived in the U.S., the medtech and life sciences industries were on a pretty steady M&A roll, with deal volume at record levels and deals of all sizes in all sectors occurring practically on a daily basis. Basically the entire healthcare services and supplies system was experiencing robust and steady deal volume. Low interest rates, cash on balance sheets, asset competition between PE and strategics, industry consolidation, and rapidly changing market dynamics contributed to the flurry in deals. As the pandemic became more serious and widespread, M&A activity paused for about two months or so (early March through mid-May) and then slowly picked up again. The gap was mostly expected by industry insiders, since many deals had been initiated before March and were delayed simply because the pandemic made it harder to perform due diligence, finalize legal terms, and conduct traditional closings.
Since the pandemic did not disrupt life until late March, first-quarter M&A activity was not affected all that much. In the year’s first half, completed medtech deals remained below $2 billion but unfinished transactions were worth about $21 billion (the latter included the now-dead Thermo Fisher–Qiagen union). The diagnostics sector experienced COVID-19’s influence via Invitae’s June purchase of ArcherDX. Blood testing for cancer gained popularity during the pandemic, as patients sought blood draws at doctors’ offices or at home to avoid undergoing tissue biopsies at hospitals. There could be more activity in this area as the pandemic continues.
Stryker Corp.’s pending $11.5 billion acquisition of Wright Medical Group has been stalled by both the virus and concerns from the U.S. Federal Trade Commission and the U.K.’s Competition and Markets Authority. With the FTC halting Illumina’s $1.2 billion purchase of Pacific Biosciences, the Stryker-Wright medical deal could be in serious jeopardy.
The average deal size was down significantly in the first half of 2020, but it should rebound in the second half with the closing of a few major deals that were recently announced. Medtronic, Danaher, 3M Healthcare, and others have displayed a continued appetite for strategic acquisitions.
The same pattern emerged in contract manufacturing (CM) M&A, as the pandemic (temporarily) ended the flurry of activity that ensued during the winter. But different areas of the space were affected in different ways. The virus negatively impacted elective surgeries, dental work, and cosmetic procedure volumes, but fostered significant growth in PPE, IVD, telehealth, and respiratory equipment. With influenza season and the winter months quickly approaching in Northern Hemisphere countries, CM M&A could suffer familiar setbacks.
Private equity (PE) has played a key role in CM M&A this year. Clearlake Capital Group-backed Team Technologies Inc., for example, expanded its molding, automation, and finished goods assembly capabilities with the August purchase of Baril Corporation. The deal provides Baril with deep domain expertise in die cutting, laminating, adhesives, and flexible materials. Similarly, PE-backed MedBio added to its molding capabilities by acquiring Polymer Conversions Inc. (PCI). The September deal was the second add-on purchase for Graham Partners-supported MedBio, as the company took AIM Plastics under its wing last year. PCI serves customers in the medical, life sciences, pharmaceutical, and other critical-to-life end-markets.
In one of the largest CM deals, publicly-traded Nolato Group bought privately held GW Plastics in a cross-border deal. Before the acquisition Nolato operated only one plant in the U.S.; the purchase, however, adds significant molding, tooling, LIM/silicone molding to the company’s platform. Headquartered in Torekov, Sweden, Nolato develops and manufactures products made of polymer materials such as plastic, silicone, and TPE for healthcare, automotive, and consumer electronics companies. The acquisition adds seven additional global manufacturing facilities to the more than 25 facilities Nolato operates worldwide and gives the company a solid global footprint in North America, Asia, and Europe. The deal also provides significant synergies and a strong position for Nolato in North America for the healthcare, filtration, and automotive safety-critical markets, and supports its relationships with existing customers while also creating new growth opportunities.
If this deal sampling is a portent of future activity, there might be plenty of fodder for next year’s columns.
A Fresh Look at Outsourcing/Reshoring and China
As with M&A, there was lots of activity, discussion, and media attention surrounding medical device outsourcing as supply chain dynamics played out on a national stage.
Having been involved with the medtech supply chain for more than 30 years, I have witnessed many cycles and waves. There have been various waves of outsourcing over the last two decades, driven mainly by economics (profits) and emerging markets growth. These factors will surely be key components of a revamped medtech supply chain in the United States in the decade ahead.
The OEMs and CMs I’ve spoken with in recent months have reinforced this viewpoint. Most large OEMs have complex global supply chains, covering various technologies, disposables, hardware, and software. From simple Class I to the most intricate Class III devices, most of these products have a Tier 1 or main CM supplier (like a Flex or Jabil) and a sub supply chain of components or materials feeding the Tier 1 CM. Assuming the significant resources and budget needed to make reshoring feasible were available, this is not something that is easily or quickly executed. There are potential regulatory hurdles to consider, along with travel restrictions, revalidations, and re-registrations, thus making reshoring a costly and resource-heavy initiative. Most CMs and OEMs cited these concerns when mentioning manufacturing in Asia for the Asian market or questioning the ability to stay competitive on lower-margin products. “It’s economics. With the labor content of this product and the availability and cost of the components, it is impossible for me to compete without LCC manufacturing,” one supplier said.
“We have some capacity in the U.S. but the majority of our volume comes from our LCC (low-cost country) supply base,” an OEM agreed.
Such qualms must be addressed if medtech firms are serious about reshoring or nearshoring critical medical and pharmaceutical manufacturing to America. A piecemeal approach or political rhetoric will not make this happen. A multi-pronged, multi-faceted, multi governmental agency effort across many levels is necessary to make reshoring/nearshoring a reality.
One of the first steps in achieving this reality is retraining and remaking the medtech workforce. As businesses nationwide begin to reopen, some states are recording unemployment rates above 10 percent yet manufacturing jobs are going unfilled due to the scarcity of skilled labor. The workforce must be retrained through apprenticeships and technology/work programs within high schools and community colleges. These programs should be free (with some possible repayment plans) for those who are not interested in enrolling in a four-year university track. While this is a larger debate, I believe it plays into how we grow our manufacturing in this country. Not everyone is cut out for college or a white-collar career. There must be a national mindset shift to encourage manufacturing-centric career paths both during and after high school. As the new decade gets underway, the need for an ever-more engaged and skilled manufacturing workforce will become evident thanks to the Fourth Industrial Revolution, artificial intelligence, robotics, and the Industrial Internet of Things. New technologies, big data, and automation are all a part of the 2020 factory. Having spent the last 40 years outsourcing, America is not going to reverse this trend overnight.
Another challenge in reshoring involves the sub-supply chains, and raw materials needed in manufacturing some medical supplies. Medical electronics have materials that require extensive sourcing, and many of these components are mostly available in the East. For example, melt blown polypropylene—a key raw material in N95 masks—was scarce in the U.S.
Finally, the federal government must take a more proactive multi-departmental approach and long-term view in providing the proper incentives, programs, grants, or rebates to prioritize the reshoring of some critical medical products and pharmaceuticals. It is essential to hold national and local politicians accountable in order to provide this support to private industry. Without such a commitment, there will be a short-term push that results in some anecdotal stories of reshoring but no real big moves. Only time will tell whether America is truly committed to bringing back medical manufacturing to its shores. Here’s to brighter days ahead.
As president and founder of Bonifacio Consulting Services, Mark and his team assist medical device OEMs and contract manufacturers grow operationally, organically and through mergers and acquisitions. Bonifacio leverages his engineering education, decades of global medical manufacturing & operating experience, along with his extensive international medtech network to provide unique value and industry knowledge. He is well known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.
With so much topical fodder, I will focus on two of my favorites for this column: the general state of medtech/life sciences M&A, and the outsourcing trends triggered by the worldwide COVID-19 pandemic.
Before COVID-19 arrived in the U.S., the medtech and life sciences industries were on a pretty steady M&A roll, with deal volume at record levels and deals of all sizes in all sectors occurring practically on a daily basis. Basically the entire healthcare services and supplies system was experiencing robust and steady deal volume. Low interest rates, cash on balance sheets, asset competition between PE and strategics, industry consolidation, and rapidly changing market dynamics contributed to the flurry in deals. As the pandemic became more serious and widespread, M&A activity paused for about two months or so (early March through mid-May) and then slowly picked up again. The gap was mostly expected by industry insiders, since many deals had been initiated before March and were delayed simply because the pandemic made it harder to perform due diligence, finalize legal terms, and conduct traditional closings.
Since the pandemic did not disrupt life until late March, first-quarter M&A activity was not affected all that much. In the year’s first half, completed medtech deals remained below $2 billion but unfinished transactions were worth about $21 billion (the latter included the now-dead Thermo Fisher–Qiagen union). The diagnostics sector experienced COVID-19’s influence via Invitae’s June purchase of ArcherDX. Blood testing for cancer gained popularity during the pandemic, as patients sought blood draws at doctors’ offices or at home to avoid undergoing tissue biopsies at hospitals. There could be more activity in this area as the pandemic continues.
Stryker Corp.’s pending $11.5 billion acquisition of Wright Medical Group has been stalled by both the virus and concerns from the U.S. Federal Trade Commission and the U.K.’s Competition and Markets Authority. With the FTC halting Illumina’s $1.2 billion purchase of Pacific Biosciences, the Stryker-Wright medical deal could be in serious jeopardy.
The average deal size was down significantly in the first half of 2020, but it should rebound in the second half with the closing of a few major deals that were recently announced. Medtronic, Danaher, 3M Healthcare, and others have displayed a continued appetite for strategic acquisitions.
The same pattern emerged in contract manufacturing (CM) M&A, as the pandemic (temporarily) ended the flurry of activity that ensued during the winter. But different areas of the space were affected in different ways. The virus negatively impacted elective surgeries, dental work, and cosmetic procedure volumes, but fostered significant growth in PPE, IVD, telehealth, and respiratory equipment. With influenza season and the winter months quickly approaching in Northern Hemisphere countries, CM M&A could suffer familiar setbacks.
Private equity (PE) has played a key role in CM M&A this year. Clearlake Capital Group-backed Team Technologies Inc., for example, expanded its molding, automation, and finished goods assembly capabilities with the August purchase of Baril Corporation. The deal provides Baril with deep domain expertise in die cutting, laminating, adhesives, and flexible materials. Similarly, PE-backed MedBio added to its molding capabilities by acquiring Polymer Conversions Inc. (PCI). The September deal was the second add-on purchase for Graham Partners-supported MedBio, as the company took AIM Plastics under its wing last year. PCI serves customers in the medical, life sciences, pharmaceutical, and other critical-to-life end-markets.
In one of the largest CM deals, publicly-traded Nolato Group bought privately held GW Plastics in a cross-border deal. Before the acquisition Nolato operated only one plant in the U.S.; the purchase, however, adds significant molding, tooling, LIM/silicone molding to the company’s platform. Headquartered in Torekov, Sweden, Nolato develops and manufactures products made of polymer materials such as plastic, silicone, and TPE for healthcare, automotive, and consumer electronics companies. The acquisition adds seven additional global manufacturing facilities to the more than 25 facilities Nolato operates worldwide and gives the company a solid global footprint in North America, Asia, and Europe. The deal also provides significant synergies and a strong position for Nolato in North America for the healthcare, filtration, and automotive safety-critical markets, and supports its relationships with existing customers while also creating new growth opportunities.
If this deal sampling is a portent of future activity, there might be plenty of fodder for next year’s columns.
A Fresh Look at Outsourcing/Reshoring and China
As with M&A, there was lots of activity, discussion, and media attention surrounding medical device outsourcing as supply chain dynamics played out on a national stage.
Having been involved with the medtech supply chain for more than 30 years, I have witnessed many cycles and waves. There have been various waves of outsourcing over the last two decades, driven mainly by economics (profits) and emerging markets growth. These factors will surely be key components of a revamped medtech supply chain in the United States in the decade ahead.
The OEMs and CMs I’ve spoken with in recent months have reinforced this viewpoint. Most large OEMs have complex global supply chains, covering various technologies, disposables, hardware, and software. From simple Class I to the most intricate Class III devices, most of these products have a Tier 1 or main CM supplier (like a Flex or Jabil) and a sub supply chain of components or materials feeding the Tier 1 CM. Assuming the significant resources and budget needed to make reshoring feasible were available, this is not something that is easily or quickly executed. There are potential regulatory hurdles to consider, along with travel restrictions, revalidations, and re-registrations, thus making reshoring a costly and resource-heavy initiative. Most CMs and OEMs cited these concerns when mentioning manufacturing in Asia for the Asian market or questioning the ability to stay competitive on lower-margin products. “It’s economics. With the labor content of this product and the availability and cost of the components, it is impossible for me to compete without LCC manufacturing,” one supplier said.
“We have some capacity in the U.S. but the majority of our volume comes from our LCC (low-cost country) supply base,” an OEM agreed.
Such qualms must be addressed if medtech firms are serious about reshoring or nearshoring critical medical and pharmaceutical manufacturing to America. A piecemeal approach or political rhetoric will not make this happen. A multi-pronged, multi-faceted, multi governmental agency effort across many levels is necessary to make reshoring/nearshoring a reality.
One of the first steps in achieving this reality is retraining and remaking the medtech workforce. As businesses nationwide begin to reopen, some states are recording unemployment rates above 10 percent yet manufacturing jobs are going unfilled due to the scarcity of skilled labor. The workforce must be retrained through apprenticeships and technology/work programs within high schools and community colleges. These programs should be free (with some possible repayment plans) for those who are not interested in enrolling in a four-year university track. While this is a larger debate, I believe it plays into how we grow our manufacturing in this country. Not everyone is cut out for college or a white-collar career. There must be a national mindset shift to encourage manufacturing-centric career paths both during and after high school. As the new decade gets underway, the need for an ever-more engaged and skilled manufacturing workforce will become evident thanks to the Fourth Industrial Revolution, artificial intelligence, robotics, and the Industrial Internet of Things. New technologies, big data, and automation are all a part of the 2020 factory. Having spent the last 40 years outsourcing, America is not going to reverse this trend overnight.
Another challenge in reshoring involves the sub-supply chains, and raw materials needed in manufacturing some medical supplies. Medical electronics have materials that require extensive sourcing, and many of these components are mostly available in the East. For example, melt blown polypropylene—a key raw material in N95 masks—was scarce in the U.S.
Finally, the federal government must take a more proactive multi-departmental approach and long-term view in providing the proper incentives, programs, grants, or rebates to prioritize the reshoring of some critical medical products and pharmaceuticals. It is essential to hold national and local politicians accountable in order to provide this support to private industry. Without such a commitment, there will be a short-term push that results in some anecdotal stories of reshoring but no real big moves. Only time will tell whether America is truly committed to bringing back medical manufacturing to its shores. Here’s to brighter days ahead.
As president and founder of Bonifacio Consulting Services, Mark and his team assist medical device OEMs and contract manufacturers grow operationally, organically and through mergers and acquisitions. Bonifacio leverages his engineering education, decades of global medical manufacturing & operating experience, along with his extensive international medtech network to provide unique value and industry knowledge. He is well known in medical device manufacturing and is a regular speaker and contributor for industry events and publications.
