Medical Device M&A Update – September 2023

Medical Device Outsourcing M&A Resiliency Drives Interest from Strategic and Private Equity Buyers

The Medical Device Outsourcing mergers and acquisitions (M&A) market has contended with significant supply chain issues and surgical procedural volume disruptions due to COVID in recent years. Despite these headwinds, the sector has been remarkably resilient continuing to benefit from an aging population and device innovation, as well as original equipment manufacturers’ (OEMs) increased emphasis on nearshoring production to protect against future supply chain bottlenecks. Despite a recent uptick in cases during the summer months, COVID-related challenges have also largely subsided, with elective surgery volume and hospital capacity normalizing and subsequently driving demand for medical device production. Of note, several types of elective surgeries performed in the U.S. have seen year-over-year (YOY) increases, including outpatient knee replacement surgery volumes which have increased 10.3% as of May 2023 according to a Strata Decision Technology report.¹ Additionally, U.S. inpatient hospital admissions have risen 7.3% YOY during the same period, while U.S. outpatient hospital visits have risen 6.9% YOY. To capitalize on the long term favorable sector dynamics and  heightened demand from clients, many outsourced medical device manufacturers have prioritized expanding service offerings to include design and development, packaging, sterilization, as well as regulatory support and compliance solutions. Sector participants have increasingly utilized acquisitions to add capabilities, strengthen and diversify client bases, and augment organic growth.

Sector Poised for Banner M&A Year with Flurry of Add-on and Tuck-in Transactions

M&A transaction volume in the Medical Device Outsourcing sector is on pace to record another banner year in 2023, with 59 transactions announced or completed year-to-date (YTD )—marking a 20.4% increase YOY. Additionally, YTD deal volume has outpaced M&A activity in YTD 2021 which experienced elevated dealmaking across most industries. Buyers have actively pursued outsourced providers with specialized capabilities to broaden service offerings enabling them to better address the unique needs of their OEM customers. Through the first half of 2023, the market has seen an increasing prevalence of private equity add-on transactions versus platform deals and strategic buyer tuck-ins. Private equity add-ons have accounted for 44.1% of all transactions in YTD 2023, compared to 37.4% of all transactions in YTD 2022. As financial buyers have offset higher borrowing costs by moving down market and focusing on deals requiring less debt, sponsors are expected to continue utilizing portfolio companies to acquire and integrate smaller firms. Medical device OEM Stryker (NYSE:SYK) has prioritized moving down market in its M&A strategy to pursue middle market tuck-in acquisitions over larger deals. “This year is more of a year of tuck-ins than it is doing billion dollar type of deals. But as we get into next year, if we continue with the strong cash flow performance that we’re currently experiencing, we will be back in the market for those larger-size deals,” Stryker CEO Kevin Lobo said in the company’s Q1 2023 earnings call.²

Outsourced Providers with Regulatory Expertise in High Demand

The medical device development and approval process has not only lengthened but has become increasingly complex due to more stringent requirements from regulators both here in the U.S. and abroad. Medical device OEMs, similar to what pharmaceutical firms did a decade ago, are turning to outsourced providers to provide regulatory affairs support and manage key points along the development process to help accelerate time to market. Additionally, outsourced regulatory consulting providers serving the Medical Device end market have benefited from elevated spending on research and development (R&D) by medical device companies, which has increased 19.8% YOY in 2023 to $26.4 billion, according to Medical Design & Outsourcing.³ A constantly changing regulatory environment has necessitated the need for outsourced regulatory experts, as the European Union revised its medical device regulations in May 2021 and the Food and Drug Administration (FDA) is currently in the process of finalizing revisions to its medical device quality management system regulation. Through YTD 2023, outsourced regulatory consulting providers have experienced strong interest from private equity firms and private equity-backed strategic buyers. Of note, Blackford Capital acquired Puerto Rico-based PACIV in June for an undisclosed sum, while Novo Holdings-backed Ellab acquired qualification and validation provider PharmaSys (May 2023, undisclosed). The Packaging subsegment has also seen robust private equity deal activity including SV Health Investors’ acquisition of Packaging Compliance Labs (June 2023, undisclosed) and One Equity-backed DWK Life Sciences’ acquisition of Assem-Pak (May 2023, undisclosed).

Select strategic buyers have opted to acquire multiple outsourced providers in different subsegments to provide full-service regulatory and development solutions for medical device OEMs. RQM+, a serial acquirer in the Medical Device Outsourcing sector, has consolidated an array of outsourced providers in recent years to build its proprietary medical device development platform. Through inorganic growth, RQM+ has added risk analysis and clinical trial management capabilities (Libra Medical, May 2023, undisclosed), sterilization and lab testing services (JordiLabs, September 2022, undisclosed), and a proprietary artificial intelligence (AI)-driven software platform that creates efficiencies in regulatory report filing for medical devices (L2F, February 2023, undisclosed). RQM+ has continued its acquisition streak in 2023, acquiring Germany-based contract research organization (CRO) Kottmann (August 2023, undisclosed), expanding its geographic coverage into Europe through CRO Kottmann’s pre-clinical testing and product commercialization services for medical device companies. RQM+’s rapid consolidation activity has become representative of growth strategies for sector players who are looking to capture additional revenue, providing OEMs with a full suite of regulatory support, quality consulting, clinical trial, lab, and reimbursement services, as well as technology solutions to support the entire product lifecycle.

Public Companies Boost Revenue Through Inorganic Growth

Although surgical volume and hospital capacity is on the rise nationally, many public medical device companies have seen only marginal improvement in revenue figures YOY. In turn, public strategic buyers have pursued acquisitions to bolster organic growth. Optimizing supply chains through enhanced vertical integration has also been a key motivation for M&A by large strategic players.

Public companies have been the most selective in pursuing M&A through YTD, accounting for 14.6% of all transactions, the lowest among any buyer type. Several public company buyers have targeted outsourced providers operating in high-growth segments, such as Sterilization and Fabrication. Notable transactions highlighting this trend are outlined below.

• Stratec Acquires Natech Plastics (June 2023, $30 Million) - In June 2023, Stratec (XTRA:SBS), a German-based manufacturing solutions provider, acquired New York-based Natech Plastics, for an enterprise value of $30 million, equivalent to 1.8x EV/Revenue. Natech offers engineering, custom injection molding, and contract manufacturing services for medical device applications. Stratec has cited services diversification along with Natech's annualized double-digit sales growth over the last three years, including $16.3 million in sales in 2022, as rationale for the acquisition, according to a press release.⁴ Stratec also expects the deal to have a positive impact on the company's adjusted earnings per share (EPS).
• Ingersoll Rand Acquires Trace Analytics (May 2023, Undisclosed) - Medical technology provider Ingersoll Rand (NYSE:IR) completed its acquisition of Trace Analytics in May 2023 for an undisclosed sum. Trace Analytics offers laboratory testing services for medical device manufacturers, including compressed air quality testing. Ingersoll Rand pursued the acquisition due to Trace Analytics' recurring revenue stream across attractive end markets. The deal is also expected to be highly complementary to Ingersoll Rand's acquisition of industrial components supplier, Lawrence Factor (November 2021, $6 Million), according to an earnings presentation.⁵

• Distribution Solutions Acquires HISCO (March 2023, $281.7 Million) - Distribution Solutions (Nasdaq:DSGR) completed its acquisition of HISCO in March 2023 for an enterprise value of $281.7 million, equivalent to 0.7x EV/Revenue and 9.7x EV/EBITDA. HISCO distributes and sells mission-critical materials and components to medical device manufacturing companies. Distribution Solutions expects the deal to bolster its industrial distribution platform, offering compelling growth opportunities. HISCO also brings significant sales growth, having generated sales in excess of $400 million and adjusted EBITDA of approximately $29 million in the company's fiscal year 2022, according to a press release.⁶

Private Equity Firms Emphasize Add-on Acquisitions

A large percentage of add-on acquisitions to-date has demonstrated a healthy private equity appetite for further investment in the Medical Device Outsourcing sector. Add-on acquisitions have ranged from targets possessing unique expertise and narrowly focused service offerings to outsourced providers with broad capabilities from component manufacturing to assembly, design, prototype development, packaging, sterilization, and regulatory compliance. A few notable private equity add-on transactions are highlighted below.

• PPC Enterprises-Backed Life Science Outsourcing Acquires J-Pac Medical (January 2023, Undisclosed) - Life Science Outsourcing (LSO), a PPC Enterprises-backed contract manufacturer serving the Medical Device end market, acquired outsourced medical device developer J-Pac Medical in January 2023 for an undisclosed sum. New Hampshire-based J-Pac offers a wide variety of outsourced services that reach every level of the medical device development process. The company specializes in outsourcing services for the Implantable Medical Textiles and Diagnostic Device end markets, offering in-house packaging, manufacturing, and assembly with a 60,000 square foot cleanroom, according to the transaction press release.⁷ Additionally, J-Pac provides OEMs with supply chain pressure relief, offering onshore and managed nearshore solutions for medical device development. J-Pac also provides significant product development services, including manufacturing design, rapid prototyping, label development, sterilization validation, 3D printing, inventory management, and supply chain value engineering. "The combination of LSO and J-Pac Medical allows us to provide a wider array of services to our customers across an even broader geographic footprint. This should allow a greater number of medical device and diagnostic organizations to accelerate their development and manufacturing capabilities," said John Morgan, an Operating Partner at PPC, in the press release.
• Blackford Capital Acquires PACIV (June 2023, Undisclosed) – Blackford Capital, a private equity firm specializing in acquisitions of lower middle market businesses, acquired full-service industrial automation provider for medical device manufacturers, PACIV, in June for an undisclosed sum. PACIV offers control systems, commissioning and qualification system validation, and batch control services to companies in the Medical Device, BioPharma, and Power & Energy markets. The company has previously served leading medical device OEMs such as Boston Scientific (NYSE:BSX), Johnson & Johnson (NYSE:JNJ), and Proctor & Gamble (NYSE:PG), providing automation solutions within their manufacturing lines to improve processes and ensure compliance with industry regulations, according to PACIV’s website.⁸  “PACIV is well positioned for strategic add-on acquisitions, targeted geographic expansion, and continued organic growth. We believe PACIV is at an exciting inflection point in the company’s growth and is poised for new opportunities in the automation of the Pharmaceutical, Biotechnology, and Medical Products industries,” said Blackford Capital Managing Director Jeff Johnson, in a press release.⁹

To discuss sector M&A activity, provide an update on your business, or learn about Capstone's wide range of advisory services and Medical Device Outsourcing sector knowledge, please contact us.

Endnotes

1. Strata Decision Technology, "National Patient and Procedure Volume Tracker," https://info.stratadecision.com/hubfs/Website/NPPVT/NPPVT%202023_June_Final_w_Appendix.pdf?__hstc=251652889.5a81eddef2357eb537946258cd44a6fe.1688581631367.1688581631367.1688581631367.1&__hssc=251652889.2.1688581631367&__hsfp=3673447727, accessed June 22, 2023.

2. Seeking Alpha, "Stryker Corporation (SYK) Q1 2023 Earnings Call Transcript," https://seekingalpha.com/article/4598669-stryker-corporation-syk-q1-2023-earnings-call-transcript, accessed June 26, 2023.

3. Medical Design & Outsourcing, “Medtech Big 100 Analysis: Sales grow, jobs decrease, R&D spending climbs,” https://www.medicaldesignandoutsourcing.com/medtech-big-100-largest-device-makers-sales-jobs-rd-spending/#:~:text=Medtech%20Big%20100%20R%26D%20rises,billion%20year%2Dover%2Dyear, accessed June 26, 2023.

4. Conmed, "Investor Presentation: Q1 2023 Earnings Call," https://conmed.gcs-web.com/static-files/dd7c9606-2fa0-44d4-830f-c742361a309d, accessed June 26, 2023.

5. Stratec, "Stratec Further Expands Its Presence in USA by Acquiring Natech Plastics," https://ir.stratec.com/websites/stratec/English/2100/news-detail.html?newsID=2528669, accessed June 26, 2023.

6. Ingersoll Rand, "Q1 2023 Earnings Presentation," https://s23.q4cdn.com/965037804/files/doc_financials/2023/q1/v2/Q1-Earnings-Presentation-Final.pdf, accessed June 26, 2023.

7. Hisco, "Distribution Solutions Group Enters Into Agreement to Acquire Hisco, a Leading Industrial Equipment Supplier," https://www.hisco.com/dsg-enters-into-agreement-to-acquire-hisco, accessed June 26, 2023.

8. PRNewswire, "Life Science Outsourcing Completes Acquisition of J-Pac Medical," https://www.prnewswire.com/news-releases/life-science-outsourcing-completes-acquisition-of-j-pac-medical-301714574.html, accessed June 26, 2023.

9. PACIV, “Medical Devices,” https://paciv.com/medical-devices/, accessed June 26, 2023.

10. Blackford Capital, “Blackford Capital Acquires Industrial Automation Leader PACIV,” https://www.blackfordcapital.com/portfolio-companies/blackford-capital-acquires-industrial-automation-leader-paciv/, accessed June 26, 2023.