Medtech Consolidation And The Outsourcing Competitive Landscape
By Sanketh Kamath and Zaid Al-Nassir, Decision Resources Group (DRG)
In recent years, consolidation has been one of the most consistently observed trends across various medtech markets. It has been spurred largely by heightened interest in value-based care, increased cost-consciousness in most geographies, and the growing influence of integrated delivery networks (IDNs) and group purchasing organizations (GPOs). While consolidation may have somewhat predictable effects in most medtech markets, this trend has a distinct impact on competitors in the outsourced devices market.
Consolidation in Medtech
The effects of consolidation are generally consistent in most medtech markets. In brief, an ongoing global shift toward value-based care, coupled with generally slow economic growth, has led to heightened cost-consciousness among health care providers; consequently, the presence and influence of GPOs has expanded, spurring original equipment manufacturers (OEMs) to engage in M&A to expand their portfolios, which allows them to provide high-volume, discounted product bundles.
Moreover, the growing interest in value-based care has shifted purchasing decision-making away from physicians and medical experts and toward hospital administrators, who are generally more focused on costs than products or product features.
This has resulted in downward pricing pressure across the medtech landscape and has rendered market entry more challenging — specifically, for smaller companies, which have responded by seeking out partnerships or positioning themselves as appealing acquisition targets for larger competitors as a means of entering the market.
The Impact of Consolidation on the Outsourced Devices Market
Due to the nature of the outsourced devices market — particularly the complexity of outsourcing supply chains — increased consolidation has a somewhat unique impact in this space. As OEMs become more consolidated, their contracting needs will expand in terms of volume and breadth, and they will begin considering their relationships with contract manufacturers (CMs) not merely as transactional affairs, but as strategic undertakings.
More specifically, OEMs will increasingly seek out large and experienced CMs that have sufficient resources, machine time, and plant space to adapt to changing demands and new product introductions, which allows them to be better prepared for uncertainty in the market. In addition, OEMs will look for partner CMs that can augment particular weaknesses in their portfolios, which allows them to more quickly bring novel and innovative offerings to market, thereby supporting their market share. Overall, OEMs will value partners that enable them to expand their manufacturing potential in order to meet growing demand for full-service vendors and one-stop shops.
Further, as OEMs look to optimize operational efficiency and minimize their supply chains, smaller CMs will no longer be sought out as approved suppliers, whereas better equipped CMs will be able to leverage the increased clarity into OEM supply chains to obtain — whether by M&A or internal development — the necessary capabilities that render them appealing strategic partners.
Major Reasons Spurring CM Consolidation
The benefits incurred by CM consolidation include shortened validation processes; when dealing with multiple vendors, OEMs must verify the compatibility, quality, and safety of components and materials from individual vendors separately. Conversely, integrated CMs can provide the OEM with “pre-validated components and materials”.
Moreover, working with integrated CMs can allow OEMs to have a thorough top-down view of their final products — ranging from the materials used in manufacturing to specific design decisions — which provides the OEM with substantial control and oversight over every step of the product development process and enables centralized accountability. In brief, effective and strategic consolidation can turn a CM into a one-stop shop for OEMs, thereby streamlining product development from inception to delivery. This dynamic is spurring CMs to pursue consolidation or risk being driven out of the market.
Examples of Recent CM M&A Activity and Associated Reward
In the orthopedic trauma device segment, NN, Inc. recently improved its ability to offer one-stop–shop contract manufacturing solutions through its acquisition of Paragon Medical. By adding Paragon Medical's expertise in developing and marketing trauma device technologies, NN, Inc. improves its ability to compete effectively in the outsourced trauma device space.
Similarly, in 2018, Tecomet acquired HD Surgical, which has products ranging from orthopedic instruments to cardiovascular and ENT devices. This deal strengthened Tecomet’s precision instrument capabilities and ability to meet the needs of its mid-size clients. Additionally, Confluent Medical Technologies acquired Corpus Medical in 2018 in order to better position itself in the advanced catheter space. Other examples include Linden’s acquisition of Avalign Technologies, as well as Heraeus Medical Components’ deal with Evergreen Medical Technologies.
The positive impact of consolidation in this space has already been demonstrated by past M&A activity. For instance, following Nordson Corporation’s acquisition of Vention Medical’s advanced technologies business, the former company’s revenue and EBITDA increased by nearly 5x and 15x, respectively. Similarly, following its acquisition of Paragon Medical, NN Inc’s revenue nearly tripled. Similar outcomes have been reported by several other OEMs and CMs that have engaged in M&A in recent years.
Opportunity and Risk Going Forward
Over the coming decade, the outsourcing industry will be led by OEMs and CMs that are able to not only adapt, but also capitalize, on this new streamlined supply chain. Particularly, OEMs and CMs that work in tandem to continuously improve efficiency in collaboration and reduce redundancies will be best positioned for success in the future.
This operational agility is particularly pertinent when considered in the context of ongoing healthcare trends, such as the rise of healthcare economics, the increasing influence of GPOs worldwide, and additional OEM consolidation. Each of these trends renders smaller CMs less appealing, spurring further integration among CMs and necessitating closer collaboration between OEMs and CMs.
That said, as CMs continue to expand, they may begin to pose a threat to their partner OEMs. Given that these integrated CMs will likely, ultimately, be able to develop proprietary products in some fields, some CMs may turn from OEM partner to competitor.
Moreover, CMs do not generally compete with other CMs. Rather, these companies typically compete with OEMs (i.e., their own customer base). Because OEMs have the capability to manufacture the same products as CMs, but choose not to for cost and logistical considerations, the latter are highly reliant on the performance of OEMs. Therefore, both OEMs and CMs would be wise to monitor their relationships closely, or risk being overtaken by their own partners.
Finally, though strategic partnerships and acquisitions have previously led to clear benefits for all associated parties, consolidation is by no means a low-risk affair. Both OEMs and CMs must be vigilant in their approach to these deals because failing to appropriately streamline operations — which can lead to irregularities in production standards, the loss of prospective clients, and the inability to maintain existing key relationships — may result in increased operational costs and reduced revenue potential, thereby damaging both parties’ competitive standing in this market.
This article was partially informed by Decision Resources Group’s 2019 global outsourced device market report.
About The Authors
Sanketh Kamath is a senior analyst within the Endoscopy, Diagnostics, and Healthcare IT Medtech Insights team at Decision Resources Group. He holds an MBA in Pharmaceutical Marketing from the National Institute of Pharmaceutical Education and Research, India. Sanketh can be contacted on Twitter (@ksankethb_DRG) and at ksankethb@teamdrg.com
Zaid Al-Nassir is a senior product support analyst at Decision Resources Group. He holds a B.A. focused in Political Science, History, and Writing & Rhetoric from the University of Toronto. Zaid can be contacted at zalnassir@teamdrg.com