Medical Device Outsourcing M&A Market Remains Healthy Despite Economic Headwinds
Merger and acquisition (M&A) activity in the Medical Device Outsourcing sector has remained robust in contrast to many other sectors, which have experienced significant declines in transaction volume as economic conditions have softened and the Federal Reserve has aggressively raised rates to dampen inflation. While not immune to economic headwinds, medical device demand is resilient even in a recessionary environment. Consumers may pull back on discretionary spending, but critical medical procedures such as cardiovascular surgeries are not deferrable. Additionally, since the Great Recession, the overall Healthcare environment has been fortified by The Affordable Care Act and expansion of Medicaid. Robust innovation in medical technology, a rising geriatric population, and an increase in the prevalence of chronic diseases continue to support favorable long-term demand in the Medical Device Outsourcing sector. Private equity firms and strategics remain bullish on the space, fueling healthy transaction activity.
Private Equity Buyers Drive an Active M&A Market
Merger and acquisition volume in the Medical Device Outsourcing sector has nearly matched 2021’s record pace with 41 transactions announced or completed through year-to-date (YTD) 2022. Buyers have continued to pay premiums for high-quality target companies as the average transaction multiple has amounted to 13.9x EV/EBITDA from 2018 through YTD 2022. Premium valuation drivers for targets have included a blue-chip client base, a scalable business model, multi-site manufacturing facilities, highly specialized capabilities, recurring revenue, and healthy margins.
Private equity buyers have driven transaction activity, accounting for 68.3% of YTD 2022 deal volume. Favorable long-term and recession-resistant dynamics have led sponsors to deploy capital towards the sector. This has been evidenced by GTCR's continued expansion of Resonetics, a leading provider of advanced engineering and manufacturing solutions for the Life Sciences sector. In June, Resonetics acquired Agile MV which marked the tenth add-on acquisition since GTCR's backing in 2018 and the second since The Carlyle Group's (Nasdaq:CG) strategic investment in December 2021 (see more details below). Outsourced players with specialized capabilities and a track record of sustainable growth are expected to continue to garner elevated financial buyer interest. Select recent private equity-led transactions are outlined below.
- ARCH Medical Solutions Acquires MedTorque (July 2022, Undisclosed) - ARCH Medical Solutions, a Jordan Company portfolio holding, has acquired MedTorque from Parallel49 Equity for an undisclosed sum (July). MedTorque is a leading precision manufacturer of orthopedic instruments and implants serving applications including spinal fusion and arthroplasty, large joint reconstruction, trauma, and robotic surgery.
The acquisition of MedTorque expands ARCH Medical Solutions' service offerings to include an expansive suite of surgical instrument handles, torque-limiting drivers, and single-procedure devices for orthopedic original equipment manufacturers (OEMs). In addition, MedTorque is a key strategic supplier of instruments with tight tolerances for robotic-assisted and navigated surgical platforms within the Orthopedic and Minimally Invasive Surgery Technologies space, according to a press release.1 The transaction continues an active M&A streak for ARCH Medical Solutions and follows its acquisition of M&K Engineering in May (undisclosed), a precision manufacturer serving the Medical, Aerospace, and Defense markets.
- Resonetics Acquires Agile MV (June 2022, Undisclosed) - GTCR-backed Resonetics, a leading provider of advanced engineering and manufacturing solutions for the Life Sciences industry, has acquired Agile MV (June). Terms of the transaction were not disclosed. Montreal-based Agile MV provides product development and turnkey device assembly for the high-growth Electrophysiology and Interventional Cardiology Catheter market.
The addition of Agile MV complements Resonetics' existing product development capabilities in catheter-based delivery systems and implants. "This represents Resonetics' tenth acquisition since our initial investment, and we expect to continue to aggressively pursue tuck-in acquisitions as well as more transformative opportunities," commented Sean Cunningham, Managing Director and Co-Head of Healthcare at GTCR, in a press release.2
Strategics Continue to Consolidate, Public Company Trading Multiples Remain Healthy
Strategic buyers have remained acquisitive through YTD 2022, accounting for 31.7% of total transactions. Sector players have increasingly consolidated to assist OEMs through all stages of device development and commercialization. Contract manufacturers and other outsourced players that operate as a "one-stop shop" stand to recognize significant revenue opportunities. Leading public strategics in the sector have also demonstrated valuation resilience with the average last twelve-month (LTM) EBITDA trading multiple among public companies in Capstone's Medical Device Outsourcing Index standing at 16.8x EV/EBITDA in mid-September—outpacing the S&P 500 average multiple of 12.9x EV/EBITDA.
Medical devices have become increasingly sophisticated, particularly in complex segments such as Surgical Robotics. Attractive growth opportunities have drawn large strategic players from other industries to the space, expanding the relevant M&A buyer universe and contributing to healthy levels of transaction volume.
The Medical Device industry is viewed as a safe haven in periods of economic uncertainty by strategic and private equity investors alike, which is certainly supporting the strong deal activity we are witnessing in 2022.
Trelleborg Bolsters its Healthcare & Medical Unit
Trelleborg (OM:TREL B), a leading polymer solutions provider, has increasingly pursued the Medical Device Outsourcing sector in recent years as it continues to build out its Healthcare & Medical business unit. While the Healthcare & Medical market segment only accounts for ~5% of the company's net sales, Trelleborg has identified this as a growing space where polymer-based solutions have many applications. In August 2021, Trelleborg launched its Rapid Development Center in Minnesota to provide a single partner for design, rapid prototyping, development, and serial production for its healthcare clients. The key purpose of the center has been to accelerate time to market, reduce production costs, and improve the transition from design to serial production, according to its annual report.3
Trelleborg has leveraged inorganic growth in recent months to increasingly penetrate the Medical Device Outsourcing sector. In April 2022, Trelleborg acquired EirMed (undisclosed) which specializes in technical precision plastic injection molded components, primarily applied in medical devices for in-vitro diagnostics, minimally invasive surgery, and orthopedics. "Part of our strategy is to expand our capabilities beyond thermoplastic molding and liquid silicone rubber. To that end, EirMed is a much-needed addition to our business, bringing extensive medical device assembly experience and expanding our capabilities and capacity in thermoplastics," commented Linda Muroski, President of Trelleborg Global Healthcare & Medical, in a press release.4 The acquisition also helps simplify the supply chain for OEMs; allowing Trelleborg to assist customers throughout all phases of development and manufacturing rather than forcing OEMs to manage multiple vendors.
In August 2022, Trelleborg announced the acquisition of Minnesota Rubber & Plastics, bolstering its North American presence and accelerating its offerings in the Medical Device Outsourcing and broader Healthcare areas. Key transaction details and motivations are outlined below.
- Trelleborg Acquires Minnesota Rubber & Plastics (August 2022, $950 Million) - Trelleborg has agreed to acquire Minnesota Rubber & Plastics from KKR (NYSE:KKR) for an enterprise value of $950 million, equivalent to ~10x EV/EBITDA including synergies. Minnesota Rubber & Plastics is a leading manufacturer of polymer and thermoplastic components serving industries including Medical Equipment, Water Management, Food & Beverage, and several industrial applications. Its Medical segment represents 25% of its business, the second largest to Specialty Industrials.
"The acquisition makes us the natural development partner for sealing solutions for both local and global customers. The company's new state-of-the-art innovation center enables accelerated product development and strengthens us in R&D [Research and Development] and areas such as Healthcare & Medical," said Peter Hahn, President of the Trelleborg Sealing Solutions business area, in a press release.5
M&A Activity for Plastic Injection Molding Segment Rises
The continued adoption of plastic components in healthcare products, coupled with technological advancements in the Medical Device sector, has driven robust demand for plastic injection molding capabilities. The global Medical Injection Molding sector is expected to reach $33.3 billion by 2030 with a compound annual growth rate of 5.7%—driven by the Plastic Injection segment which accounted for nearly 99% of sector revenue in 2021, according to Research and Markets.6 Heightened appetite for plastic injection molding solutions has been evidenced by the surge in M&A activity in the segment. Through YTD, 13 plastic injection molding transactions have been announced or completed compared to seven transactions in full-year 2021. Historically, the buyer pool has been split evenly between private strategics and private equity firms pursuing add-on transactions. However, the majority of buyers in YTD 2022 have been private equity firms looking to establish platforms in the sector, accounting for 70% of Plastic Injection Molding deal flow.
Market fragmentation, OEM demand for plastic injection molding solutions, and diverse end market applications have contributed to the uptick in private equity transaction activity. The Plastic Injection Molding segment has high barriers to entry, requiring expensive machinery and a stringent manufacturing accreditation process. This creates a unique value proposition for sponsors looking to scale existing businesses for eventual exits. Private equity's $1.2 trillion of dry powder (PitchBook7) has also created a favorable backdrop for continued sponsor-led dealmaking in the segment.
In June 2022, Intermediate Capital Group (LSE:ICP) completed its acquisition of Seaway Plastics Engineering, a plastic injection molding manufacturer that generates a majority of its revenue from medical devices, for an undisclosed sum. "The global Medical Device market is large, defensive, and growing. As device manufacturers seek high-quality outsourcing partners for complex production and related services, Seaway is particularly well-positioned to benefit," said Kevin Gregory, Healthcare Sector Lead for North American Direct Private Equity at Intermediate Capital Group, in a press release.8 Private equity segment appetite has been further evidenced by TruArc Partners' acquisition of Molded Devices, a leading provider of high-precision plastic and rubber component manufacturing, including injection molding (August 2022, undisclosed). The acquisition provides TruArc with greater exposure to the Healthcare market, while Molded Devices is expected to broaden its manufacturing capabilities offered to medical OEMs.
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 Managing Director Eric Williams.
ARCH, "MedTorque acquired by ARCH Medical Solutions," https://archglobalprecision.com/news-events.html#, accessed September 15, 2022.
Cision, "Resonetics Announces Acquisition of Agile MV," https://www.prnewswire.com/news-releases/resonetics-announces-acquisition-of-agile-mv-301566089.html, accessed September 15, 2022.
Trelleborg, "2021 ANNUAL REPORT WITH SUSTAINABILITY REPORT," https://www.trelleborg.com/en/investors/reports-and-presentations/annual-reports, accessed September 15, 2022.
Trelleborg, "Trelleborg Grows its Healthcare & Medical Business with EirMed Acquisition," https://www.trelleborg.com/en/seals/news-and-events/news/healthcare-medical-business-with-eirmed-acquisition, accessed September 15, 2022.
Trelleborg, "Trelleborg to acquire Minnesota Rubber & Plastics," https://news.cision.com/trelleborg/r/trelleborg-to-acquire-minnesota-rubber---plastics,c3609417, accessed September 15, 2022.
Research and Markets, "Medical Injection Molding Market Size, Share & Trend Analysis Report by Material, by System, by Product, by Region, and Segment Forecasts, 2022-2030." https://www.researchandmarkets.com/reports/5595884/medical-injection-molding-market-size-share-and?gclid=Cj0KCQjwmouZBhDSARIsALYcouq93M5efz2atOhHBeHrji3USR1pQYyuMCmFW9yYuAxQjmZFwD2SO4MaAjOXEALw_wcB, accessed September 15, 2022.
PitchBook, “Q2 2022 Global Private Markets Fundraising Report,” https://pitchbook.com/news/reports/q2-2022-global-private-markets-fundraising-report, accessed September 15, 2022.
Business Wire, "ICG’s North American Direct Private Equity team acquires Seaway Plastics Engineering," https://www.businesswire.com/news/home/20220623005095/en/ICG%E2%80%99s-North-American-Direct-Private-Equity-team-acquires-Seaway-Plastics-Engineering, accessed September 14, 2022.
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