The Shrinking Supply Chain

Last year was particularly active for acquisitions in medtech contract manufacturing. More than 40 deals were completed, with strong interest and activity on both the buy and sell sides. The large majority of deals in 2016 were follow-on acquisitions by portfolio companies of private equity firms, with many of the targets being private companies with annual revenue of less than $25 million. Notably, Kelpac/PPC Industries and Arch Global Precision, portfolio companies of Kohlberg & Company and Strength Capital Partners respectively, each had two add-on acquisitions—as did Phillips-Medisize, a Golden Gate Capital portfolio company—before they were acquired by Molex later in the year. The Phillips-Medisize (Molex) and Creganna Medical (TE Connectivity) acquisitions were certainly the largest deals of the year, and are reflective of the growing interest of corporate strategic buyers in building substantial platforms in the industry quickly.

Private equity certainly continues to play a key role in the industry by providing succession and liquidity opportunities for smaller company entrepreneurs, and providing growth capital and stewardship to scale these companies to the next level. In addition, lower middle market and middle market private equity platform builds have successfully scaled and scoped businesses to respond to changing market and customer needs—a trend that is likely to continue.

While the medtech contract manufacturing industry is still populated by a very large number of small, privately owned entrepreneurial businesses, it is increasingly facing a changed environment. Customer consolidation (e.g., Medtronic/Covidien, Cardinal Health/Cordis, Becton Dickinson/Carefusion, Abbott/St. Jude, etc.) is changing the industry, and the influence those deals are having and will have on supply chains is significant. The balance of power rests with the OEMs in these relationships and there are significant pressures to: 1) Streamline the approved vendor list, 2) Cut costs, and 3) Provide more value-added services. This is driving the industry toward a tier structure, similar to the automotive or aerospace industries. There is a marked trend toward the development of tier 1 contract manufacturers, generally through acquisition, who have both the scale and the scope (design-develop-manufacture, onshore-offshore-nearshore, component-assembly-supply chain management, etc.) to be the partners of the future. Several of these companies currently have revenue approaching or greater than $1 billion, such as Integer, FlexMedical Solutions, and Nypro Healthcare, while quite a few more are approaching or are already greater than $500 million in revenue.

What’s Selling?
There appeared to be strong interest on the buy side in all areas of medtech contract manufacturing.

Components > Materials

• Trelleborg Sealing Solutions acquired Specialty Silicone Fabricators as a new business platform in silicone components for the U.S. life sciences market.
• New Mountain Capital merged two of its portfolio companies—Avantor and NuSil—into a market leading, ultra-high-purity materials business for the life sciences and advanced technology markets.

Components > Metals > Precision Machining

• Strength Capital Partners portfolio company Arch Global Precision added Advanced Precision to strengthen its precision machining capabilities for medical instruments and devices, particularly in the spine and orthopedic markets. Later in the year, Arch also added Bob Inc. to further strengthen its offerings of both implants and instruments for the orthopedics market.
• Lisi Group of France acquired Remmele Medical from Alcoa to add complementary products and technologies and to strengthen its U.S. position in precision machining in medical device manufacturing.
• Century Park Capital portfolio company CirTec Medical added Stellar Technologies for its precision machined components business and to offer its customers an expanded suite of services for Class III active implantables.
• Tecomet added Mountainside Medical to strengthen its presence in precision machined components for the minimally invasive surgery market segment.
• SFS Group of Switzerland acquired Tegra as a new business platform in medtech contract manufacturing.

Components > Metals > Precision Wire

• Vance Street Capital partnered with Motion Dynamics, a leading wire-based micro-component and sub-assembly expert, to accelerate growth in advanced catheters, pacemakers, and neuromodulation devices and components.

Components > Packaging

• Bemis Company acquired the packaging operations of Steripack in Ireland to expand its geographic and packaging product solutions for customers.
• Mason Wells portfolio company Nelipak added the thermoformed rigid packaging operations of Tegrant Alloyd in Puerto Rico to expand its geographic and packaging product solutions for customers.
• Berwind Corporation portfolio company Oliver-Tolas added Mangar to expand its packaging converting solutions for sterile barrier products, specifically in pouches, lids, and mounting cards.

Components > Plastics > Extrusion

• Odyssey Investment Partners portfolio company Pexco added Precision Extrusion to strengthen its advanced medical tubing and catheter solutions, particularly in engineering plastics.
• Hitachi Metals of Japan acquired HTP-MEDS to expand its capabilities in the medical tubing segment, while complementing its significant ultrasound diagnostic cable and assembly business.

Components > Plastics > Molding and Assembly

• Technimark acquired CI Medical, formerly Classic Industries, to strengthen its medical injection-molded components business and launch its Technimark Healthcare group.
• Kohlberg & Company portfolio company Kelpac, a division of PPC Industries, added Vitalmed to expand its offering beyond extruded tubing into injection-molded components and device assembly. Kelpac also added Xeridiem later in the year to expand its extrusion, molding, and assembly services beyond thermoplastics into silicone products.
• Mason Wells acquired MGS Manufacturing Group to build a new business platform in injection-molded plastic components, tooling, and equipment.
• Squadron Capital continued its investments in medtech contract manufacturing by acquiring Forum Plastics as a new business platform in injection molding, with a particular focus on minimally invasive surgical devices.
• Nordson added LinkTech Quick Couplings to strengthen its product line of couplings and fittings.
• Water Street Healthcare Partners, together with JLL Partners, re-entered the medtech contract manufacturing market with the acquisition of MedPlast as a new platform business.

Design and Development

• FlexMedical Solutions added Farm Design to extend its design and development services for medical device and diagnostic companies.
• Surmodics acquired NorMedix to strengthen its catheter development capabilities.
• Ximedica added Accel Biotech to expand its west coast development offering, particularly in IVD and life sciences.
• Altaris Capital Partners portfolio company Paramit added Lathrop Engineering to strengthen its instrumentation product development offering to customers.
• SMC added Oval Medical Technologies to strengthen its design and development services, specifically for autoinjectors and drug delivery.

Integrated Solutions > Catheters

• TE Connectivity added Creganna Medical to its 2015 AdvancedCath acquisition to establish a market-leading platform business, delivering integrated solutions to minimally invasive and interventional market segments.
• Teleflex Medical OEM added Cartika Medical to strengthen its engineering, prototyping, and catheter manufacturing capabilities.
• 3i portfolio company Q Holding added Degania Silicone to transform its largely medical component business into a global integrated solutions provider for silicone catheters and devices.
• Linden Capital Partners portfolio company Flexan added Medron to enhance its contract manufacturing service offering.

Integrated Solutions > Devices

• Molex placed a big bet on an expanded presence in the medtech market with the acquisition of Phillips-Medisize, adding over $700 million in revenue from the integrated solutions provider for medical devices and diagnostics, built on a strong foundation of injection molding. Phillips-Medisize had bulked up pre-sale with the acquisitions of Injectronics and Medicom Innovation Partner during the year and is increasingly focused on biologics drug delivery devices.

Integrated Solutions > Instruments

• LongueVue Capital Partners acquired the torque limiting instrument manufacturer ECA Medical Instruments as a new platform business.

Services > Contract Coating

• Katahdin portfolio company Precision Coating acquired its main competitor, Boyd Research Coatings, to strengthen its market-leading fluoropolymer coating services business.
• KISCO of Japan added Specialty Coating Systems (SCS) to strengthen its market-leading parylene coating services business.

Services > Contract Sterilization and Testing

• Warburg Pincus portfolio company Sterigenics added Nelson Laboratories to expand the range of testing and analytical services offered to customers, specifically in microbiological testing.

Who’s Buying?
Financial Buyers: Lower middle market and middle market private equity firms, in particular, have been very attracted to the medtech contract manufacturing industry. First, industry fundamentals are solid, supported by demographic trends and attractive growth and margins. Second, this is a manufacturing-driven industry that is not necessarily high-tech, but which is often characterized by unique and/or differentiated material, process, and manufacturing capabilities that help create “stickiness” in relationships and revenue streams. Third, this is still a fragmented industry with relatively few companies with revenues over $500 million, and many companies with revenues less than $50 million. Fourth, ongoing industry consolidation is rewarding good stewards who can bring strategic focus, operational investments and improvements, and add-ons to bear to take smaller “founder-owner” companies to the next level. Private equity (PE) firms, and the founder-owners that partner with them, see potential for generous returns here arising from both EBITDA and multiple expansion. There is a very long list of PE firms actively looking for deals in this space. Some of the more active PE firms in the space who did not execute a deal in 2016 include Inverness Graham Investments, KRG Capital, Roundtable Healthcare Partners, and Sverica Capital Management.

Strategic or Corporate Buyers: Diversified industrials have been particularly attracted to this industry for many of the same reasons as PE firms. The medtech contract manufacturing industry also relies upon many of the manufacturing technologies (e.g., molding, extrusion, coatings, precision machining, and assembly) that these firms employ in their automotive, aerospace, electronics, or other industrial divisions. Some of the corporates actively engaged in medtech contract manufacturing include TE Connectivity, Molex, Ametek, Nordson—all of which made acquisitions in 2016—as well as Lubrizol, Heraeus, and Freudenberg.

Foreign Corporate Buyers: Foreign strategic buyers were active in the U.S. medtech contract manufacturing space, with six significant acquisitions in 2016, establishing both market diversification and a foothold in the attractive U.S. medtech market for these corporations. From Japan, KISCO and Hitachi Metals, and from Europe, Trelleborg Sealing Solutions (Sweden), Lisi Group (France), and SFS Group (Switzerland) all entered the U.S. medtech contract manufacturing market. Expect there to be continued foreign buy-side interest

Who’s Selling?
The large majority of sellers were independently owned private companies. This is not surprising, as outsourcing in the medtech industry really began to develop as component outsourcing in the 1980s. It then evolved into contract manufacturing in the late 1990s and matured in the 2000s. Many of the early entrepreneurs in the field, who founded their companies in the 1980s and 1990s, are now at (or approaching) retirement age. Many of them have remained independent and adapted as the industry grew and changed. Today, many of these companies (typically with annual revenue between $10 to $100 million) either do not have successors or are finding the combined threats of customer consolidation, competitor consolidation, cost pressures, and nearshoring to be quite challenging. They view the opportunity to become part of a larger contract manufacturing organization as a strong incentive to secure their legacy and meet their estate planning needs through the sale of their business.

What’s On Deck for 2017?
Investment bankers active in the medtech contract manufacturing industry are already busy preparing for a number of sales in 2017. Provided the economy holds up and the regulatory/reimbursement environment stays the same (or improves), we should see another buoyant year for deals in the medtech contract manufacturing industry.

• Genstar Capital is reportedly exploring the sale of Tecomet, which will be a sizeable transaction in the industry.
• Several other sizeable PE-backed platforms are rumored to be coming to market early in 2017, which should create a flurry of activity and leave more than a few bidders at the altar and hungry to find something else.
• Several other smaller PE-backed platforms are getting long in their hold periods and are likely to be coming to market later in 2017. These are likely to be attractive businesses that will generate a lot of interest among both strategic and financial buyers.
• Industry consolidation, high purchase multiples, and aging entrepreneurs should continue to create a fair amount of interest on the sell side. 

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Bill Ellerkamp is a medical device industry executive and strategic advisor. He has more than 35 years operating experience, primarily in medtech contract manufacturing. He currently serves on several boards and consults with private equity firms, corporations, and independent business owners on strategy, market assessment, business development, operational planning, buy- and sell-side planning, and due diligence. He can be reached at [email protected].