Manufacturing Resources are Creeping Beyond the Reach of Medical Innovation

Major M&A in medtech manufacturing seems to be leaving small business production behind to focus on their most profitable clients. Is this the consequence of success?

Kate Stephenson, PhD

March 31, 2023

5 Min Read
quote by Kate Stephenson, PhD
Image courtesy of MD+DI

For those seriously focused on the art of turning money into more money as efficiently as possible, my little industry niche has never been the favored child. Medical device manufacturing does not have the mammoth scale of major industrial powerhouses, the widespread public awareness of consumer goods, or the sheer return multiples of digital unicorns.

But something started shifting in the years leading up to the 2020 pandemic. Suppliers that had been my go-to for certain services or parts for a decade suddenly dropped into radio silence. A year later, they would reappear, merged under a new business entity with expensive branding and all new marketing materials. The same shop floors, the same employees, the same fundamental processes, only now smashed together into an “end to end solution” like some industrial Voltron from a Saturday morning cartoon. A few years later, it would happen again. The colors and logos behind my long-term tradeshow colleagues seemed to shift as rapidly as fashion trends.

It has been a unique experience to see fabrication shops and assembly houses progress from supporters of profitable medical device companies to attractive money makers in their own right. Even before the trend was accelerated by COVID-19’s supply chain woes and evolving geopolitical situations, a small number of investors realized the value of domestic life science focused manufacturers as investment opportunities. Buying up critical supply chain elements and consolidating them into larger, more efficient organizations was a solid way to rapidly build a business. Most of the smaller shops being acquired were highly profitable, well run and had impressive customer lists. By being acquired and merged, these smaller companies could offer more streamlined services to their customers, while gaining the scale of resources needed to modernize their infrastructure and secure their own supply chains. Investors could buy a series of $5 to $10 million dollar revenue companies and create a $50 to $100 million company within a few years. That return on investment is something that any one of those smaller companies would need decades of steady organic growth to meet.

For the most part, I applaud this trend. It’s great to see vital, hardworking businesses that were previously ignored and underappreciated become the safe-and-steady darlings of private equity. The improved efficiency and modernization support is vital to reaching the dream of safe and cost-effective technologies for healthcare. However, the bundling of those smaller companies into larger organizations has some serious ramifications for our industry in the long term.

As these new, larger organizations undergo integration and refinement, they will be following certain business best practices. These include pruning back the disparate array of services the pre-merger companies may have offered. Depending on their strategy, management may decide to focus on just the needs of their most profitable clients or work to better position the company in an emerging market trend. Unfortunately, there are many vital medical devices produced by specialist companies with less than $10 million in revenue. Fragile startups with their freshly minted market approvals also find themselves on the bottom of a growing manufacturer’s priority list. With “smart money” being placed on gaining larger and more established clients, every new M&A inevitably sets off a wave of ex-customers in search of a new resource.

Supplier changes for critical medical device components are not done lightly. For higher risk devices, changes must be reported to the FDA, with proof that the change had not impacted the final product’s safety or efficacy. A large enough change can kick off a re-submission effort and put a company’s ability to sell the product at risk. Smaller companies will often work with a sub-par relationship for years rather than struggle through the risk and documentation inherent in onboarding a new one. Startups with minimal reputation or funds to secure a favorable partner often contract with whoever they can afford. While the current M&A activity is securing the supply chain for the larger medical device producers, it is destabilizing it further for small and emerging companies by removing many of the best options from an already limited pool of partners.

In most businesses, this resource vacuum would be rapidly refilled by a host of entrepreneurs with new, more agile businesses. This has not been the case with medical manufacturing. One of the biggest red flags around shops being acquired is their age. While most of the acquisitions have evolved considerably since their roots, many started as general contract assembly or fabrication shops in the generation post World War II (1940-1970’s). As medical implants took off in the 80’s, and minimally invasive surgery in the 90’s, these shops pivoted to meet the growing medical device industry and now carry 30-plus years of highly specialized knowledge. This is not easily replaced. While there are hundreds, if not thousands of emerging medical device startups, there are few new manufacturing resources set to grow alongside them.

These two challenges — smaller companies losing their manufacturing resources as those resources thrive and expand, and a failing pipeline for new resources — are both major opportunities for innovation and entrepreneurship.

Technology can help larger companies hold on to their smaller customers as they grow. The young e-commerce company Chamfr has been growing rapidly by providing the small-customer platform for many major medical component suppliers. This is allowing startups and companies too small for premier customer status direct access to the same raw materials as Medtronic and Edwards.

While many of the major federal programs (such as the CHIPS act) are focused on funding very large infrastructure efforts to meet existing product needs, there are unique programs focused on meeting the needs of future products. One example is the Regional Innovation Engines program created by the National Science Foundation’s brand new TIP directorate. The program’s mission is to build new “hotspots” for innovation away from the traditional areas along the East and West coasts of the United States. With regional tax subsidies, low costs of living, and numerous clients with federally funded budgets, these proposed centers will be fertile ground for agile new manufacturing businesses.

The resources that support cheap, high-volume production often conflict with those that are needed for efficient innovation. Its why research labs don’t run production lines. However, both new ideas and a well-run machine to produce them are needed to meet the needs of our industry. When we see a trend pushing resources towards one or the other, we need to ensure a counterbalancing force to keep the long-term balance.

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