MEDICAL CONTRACT MANUFACTURING
M&A PULSE
FEBRUARY 2015
CONTENTS
Introduction Page 3
Market Overview Page 4-9
Medical Manufacturing
Transaction Overview Page 10-13
General Transaction &
Macroeconomic Discussion Page 14-15
Forecast and Thoughts Page 16
Consolidation Discussion Page 17
Sale Planning Page 18
www.pmcf.com
1
Medical Contract Manufacturing – M&A Pulse – February 2015
MEDICAL TECHNOLOGY TRANSACTION UPDATE
SALE OF SOUTHEASTERN TECHNOLOGY, INC. TO
AUTOCAM MEDICAL DEVICE HOLDINGS
P&M Corporate Finance (“PMCF”) is pleased to announce that it served as
the exclusive financial advisor to Autocam Medical Devices, LLC, of Grand
Rapids, MI in the successful acquisition of Southeastern Technology, Inc.
(“SET”), of Murfreesboro, TN. SET is a leading contract manufacturer of
precision-machined components, assemblies and engineered solutions primarily focused on serving original equipment manufacturers (“OEMs”) in the
medical device industry. SET serves the orthopedic and spine markets with
precision implants and complex instruments. SET also machines precision
components for other medical applications such as oncology and dental.
SALE OF FISHER/UNITECH, INC. TO RIVERSIDE COMPANY
P&M Corporate Finance (“PMCF”) is pleased to announce that it served
as the exclusive financial advisor to FISHER/UNITECH, Inc. (“FISHER/UNITECH” or the “Company”), of Troy, MI in a successful recapitalization with
The Riverside Company (“Riverside”) of New York City, NY. The transaction
and Riverside’s partnership with FISHER/UNITECH will provide access to
additional capital and resources to support the next phase of the Company’s
growth. This includes investing in the Company’s sales, marketing, and
tech support efforts to capitalize on the strong growth in the Company’s core
product offerings, as well as entering new markets and supporting new product offerings both organically and through add-on acquisitions.
FISHER/UNITECH (www.funtech.com) is a market leading value-added reseller of 3D solid modeling design software, 3D printing hardware and related products and services to the industrial, automotive, and medical markets.
PMCF Medical Technology Team
BRYAN W. HUGHES
BRIAN GORSKI
Director
312.602.3636
bryan.hughes@pmcf.com
Vice President
312.602.3623
brian.gorski@pmcf.com
DAVID SASTRE
MIKE BROOKS
Associate
312.602.3570
david.sastre@pmcf.com
Analyst
312.602.3644
mike.brooks@pmcf.com
P&M Corporate Finance, LLC
3
Medical Contract Manufacturing – M&A Pulse – February 2015
Introduction
Consolidation in the Medical Contract Manufacturing Market
In the wake of Zimmer’s April 2014 announcement that it was acquiring cross-town rival Biomet for $13.4 billion, the
medical device press immediately questioned the deal’s impact on a combined workforce and supply-chain. The Wall
Street Journal went so far as to lead their coverage with the title “The Deal That Shook Warsaw, Ind.”
Zimmer has stated it expects to realize cost synergies of $270 million annually by the third year after closing. Zimmer CEO
David Dvorak explained that the company would go through a “methodical planning process” to “retain the best talent in
both organizations” and would “work very hard” to maintain its sales employees and skilled production workers. Combined, Zimmer/Biomet will have over 2 million square feet of manufacturing, R&D and administrative facilities in Warsaw.
At the same time, Qmed contributor Stephen Levy frames the synergies impact on the supply-chain stating, “Larger purchasers can negotiate better deals with all of their suppliers, from suppliers of raw materials to the companies that make
and print the packaging, and these savings will be a significant percentage of that number.”
•To build on that thought, the following is a summary of recent notable transactions in the medical technology space, as
well as expected synergies in each case based on assumed outsourced spend. It is interesting to note synergies represent
approximately 25% of this number.
($ MM)
Buyer/Target
Medtronic/Covidien
Deal Size
Combined Combined
Revenue
COGS
Est. Combined
Outsourced*
Expected
Synergies
Synergy
%
$ 42,900
$ 27,898
$ 8,559
$ 2,140
$ 850
39.7%
Thermo Fisher/Life Technologies
13,600
19,706
9,994
2,499
300
12.0%
Zimmer/Biomet
13,400
7,977
2,144
536
270
50.4%
BD/Carefusion
12,200
12,366
6,118
1,530
250
16.3%
1,500
4,925
1,230
308
85
27.6%
$83,600
$72,871
$28,046
$ 7,011
$1,755
25.0%
Smith & Nephew/Arthrocare
Total
Source: S&P Capital IQ, Company Financial Information
*PMCF Est. combined Outsourced equals 25% of Target and Buyer combined COGS
•In order to cope with rising costs and increased purchasing power of hospital customers, cash rich OEMs like Zimmer have
embarked on an aggressive pursuit of M&A opportunities. In an environment of continued globalization and higher demand for medical technology products and services, key players are feeling compelled to scale-up operations, gain market
share and diversify their product portfolio in order to improve their negotiating power with hospital systems and comply with
the demands of a value-based healthcare model.
•The highly fragmented medical contract manufacturing/outsourcing market is undergoing significant transformation, driven by the consolidation among OEM clients as well as sound macroeconomic conditions. Medical OEMs are increasingly
aware of CMO’s (contract manufacturing organization) capabilities as true providers of lower-cost, time sensitive and high
quality solutions. This versatility enables OEMs to improve their operational performance, and meet shorter product life
cycles while maintaining focus on their core business. As a result, the outsourcing of manufacturing functions has increased,
a trend that is expected to continue as OEMs seek one-stop solutions to accommodate their growing needs in terms of
increased volume, product differentiation and compliance with a more stringent regulatory environment.
•This shift towards outsourcing will likely prompt further consolidation, particularly in the therapeutic, diagnostic and cardiovascular segments. Large CMOs are expected to lead this industry consolidation by acquiring smaller specialized companies with complementary services from engineering and precision machining to quality assurance. As their multi-faceted
cost-saving capabilities broaden, large CMOs are better positioned to become the preferred supplier among OEMs, and
ultimately benefit from additional partnerships. This is exemplified by Tecomet, which recently acquired Symmetry Medical
Inc.’s OEM Solutions Business and 3D Medical Manufacturing, Inc., in an effort to create a CMO with a global footprint,
capable of extending their comprehensive array of services. (Additional information on the Symmetry transaction can be
found on page 12).
•Conversely, small players, which account for approximately 40% of the medical manufacturing/outsourcing’s market share,
may opt to exit the market by selling to a larger competitor.
Source: S&P Capital IQ, Company Financial Information, Qmed
www.pmcf.com
4
Medical Contract Manufacturing – M&A Pulse – February 2015
Market Overview
Medical Technology
The medical technology market has expanded in recent years, driven primarily by longer life expectancy and increased
expenditure on healthcare, especially in emerging economies. Additionally, the regulatory environment in North America
and Europe has created a shift to value-based healthcare solutions, which has resulted in increased competition, changing
business models, and innovative strategies to achieve sustainable growth in this dynamic market.
Medical Technology Global Market Size Estimate*
($ MM)
Company Name
Johnson & Johnson
Medical Technology Revenue
2010
2014
2014 LTM
Market Share
2014LTM
CAGR
2010-2014
$ 24,601
$ 28,490
$ 28,179
7.7%
3.5%
General Electric Co.
16,897
18,200
18,283
5.0%
2.0%
Medtronic Inc.**
15,392
16,589
17,368
4.8%
3.1%
Siemens AG
16,660
17,842
16,828
4.6%
0.3%
Koninklijke Philips Electronics nv
11,410
12,719
12,436
3.4%
2.2%
Roche Holding
10,020
11,308
11,772
3.2%
4.1%
Cardinal Health Inc.
8,750
10,060
11,102
3.0%
6.1%
Covidien Plc**
8,438
10,235
10,659
2.9%
6.0%
Baxter International Inc.
7,203
8,695
9,972
2.7%
8.5%
Stryker Corp
7,320
9,021
9,525
2.6%
6.8%
Total Top 10
126,691
143,159
146,124
40.0%
3.6%
11-25
72,127
78,029
80,461
22.0%
2.8%
26-50
40,802
51,342
53,368
14.6%
6.9%
Remaining
42,137
71,887
85,041
23.3%
19.2%
$281,757
$344,417
$364,994
100.0%
6.7%
Total Market
*Company Market Share data is based on the TTM of each company’s most recent reported financials as of 1/6/15
**Medtronic acquired Covidien, effective 1/26/15
Source: Bloomberg, Company Filings, PMCF Analysis
•Medical Technology market size amounts to an estimated $365 billion in terms of estimated 2014 revenues.
•Top 10 companies account for approximately 40% of the total market.
•Top 50 companies account for approximately 77% of the total market.
•Middle market and start-up technology firms have experienced strong revenue growth, as smaller firms
(those outside the top 50) have doubled in aggregate size from $42.1 billion in revenue in 2010 to an estimated
$85 billion in 2014. This segment has significantly outpaced the growth of larger players, increasing at a 19% CAGR
versus a combined 4% for the top 50 firms.
•With long life expectancy and emerging economies’ increasing expenditure on healthcare, there is an increased demand
for technologically superior medical devices. As such, the medical technology market will continue to grow in the U.S.,
and in other developed countries and emerging markets.
www.pmcf.com
5
Medical Contract Manufacturing – M&A Pulse – February 2015
Medical Contract Manufacturing Overview
Market Sizing Methodology/Estimates
Approximating the total size of the medical contract manufacturing market has proven difficult. However, by estimating
outsourced manufacturing costs for medical OEMs as a percentage of total cost of goods sold, a reasonable proxy for
market size of medical contract manufacturing can be established.
Methodology
Step 1: Revenue Estimates for Overall Medical Technology Market
•Taking a relatively conservative view of medical technology market
size, PMCF estimates total 2014 revenue at $365 billion, with an
annual growth rate of just under 6.0% to 2020.
Step 2: Gross Margin % Estimates for Overall Medical Technology
Market
•Estimated at 60.5% by taking a weighted average of the gross
margins of the largest “pure play” medical device OEMs shown in
the adjacent chart.
•Given estimated medical device market revenue of $365 billion
in 2014 and a 39.5% COGS percentage, total cost of goods
sold for the medical device market is estimated at $144 billion for
the period.
Step 3: Percentage of OEM Manufacturing Costs Outsourced
•
Various market estimates assume medical OEMs outsource
approximately 25% of manufacturing costs.
•Using this as a proxy, PMCF estimates the market size for medical
contract manufacturing as roughly $36.6 billion in 2014.
Top Pure-Play Medical Device OEMs
bioMérieux SA (ENXTPA:BIM)
Nipro Corporation (TSE:8086)
Terumo Corporation (TSE:4543)
Boston Scientific Corporation (NYSE:BSX)
Hologic Inc. (NasdaqGS:HOLX)
Smith & Nephew plc (LSE:SN.)
Medtronic, Inc. (NYSE:MDT)
Stryker Corporation (NYSE:SYK)
Becton, Dickinson and Company (NYSE:BDX)
Zimmer Holdings, Inc. (NYSE:ZMH)
Coloplast A/S (CPSE:COLO B)
Varian Medical Systems, Inc. (NYSE:VAR)
CR Bard Inc. (NYSE:BCR)
Biomet Inc.
B. Braun Melsungen AG
Edwards Lifesciences Corp. (NYSE:EW)
Getinge AB (OM:GETI B)
Hitachi Medical Corporation
St. Jude Medical Inc. (NYSE:STJ)
Abbott Laboratories (NYSE:ABT)
Alcon, Inc.
Baxter International Inc. (NYSE:BAX)
DENTSPLY International Inc. (NasdaqGS:XRAY)
Gr oss Mar gi n We i ght e d A ve r age
A ve r age CO GS % of R e ve nue
LTM Gross Margin %
76.7%
75.5%
74.8%
73.3%
72.9%
72.7%
71.8%
68.7%
68.6%
66.2%
63.3%
62.2%
54.7%
54.3%
52.2%
51.2%
51.1%
50.5%
49.6%
45.5%
42.7%
32.9%
29.7%
39.5%
60.5%
As of 1/16/15
Source: S&P Capital IQ, Company Reports
Medical Contract Manufacturing Market Estimate
($ MM)
2013
$ 344,417 $
2014
364,994 $
6.0%
2015
386,801 $
6.0%
2016
409,910 $
6.0%
2017
434,400 $
6.0%
2018
460,353 $
6.0%
2019
487,857 $
6.0%
2020
517,004
6.0%
Cost of Goods Sold
Gross Margin %
Percentage COGS Outsourced
$ 135,896 $
60.5%
24.7%
144,015 $
60.5%
25.4%
152,619 $
60.5%
26.1%
161,737 $
60.5%
26.9%
171,400 $
60.5%
27.6%
181,641 $
60.5%
28.4%
192,493 $
60.5%
29.2%
203,993
60.5%
30.1%
Contract Manufacturing Revenue
Estimated % Growth
$ 33,546
36,565 $
9.0%
39,856 $
9.0%
43,443 $
9.0%
47,353 $
9.0%
51,615 $
9.0%
56,260 $
9.0%
61,324
9.0%
Medical Device Market Revenue
Estimated % Growth
$
Source: PMCF Forecasts, Company Reports, Espicom, Visiongain, IBISWorld, BCC Research, Frost & Sullivan
Market Forecast Assumptions
•The medical contract manufacturing market presents a long term growth industry driven primarily by the underlying
macro trends of the medical device market as well as increased outsourcing amongst OEMs. We anticipate the broader
medical technology market to grow at an annual rate of just under 6% through 2020 to $517 billion in revenue.
•Medical Device OEMs will increasingly outsource services to contract manufacturers with the ability to address growing
customer needs. We believe that driven by this trend, amongst others, the medical contract manufacturing market is
expected to exceed the growth rate of the medical device market, reaching $61.3 billion in revenue in 2020, which represents
a CAGR of 9%.
www.pmcf.com
6
Medical Contract Manufacturing – M&A Pulse – February 2015
Medical Contract Manufacturing Market By Segment
•The medical contract manufacturing market includes many discrete segments as diverse as the products the
industry produces. To simplify this analysis and market forecast we have allocated all such segments into three categories. These are:
Electronic
Manufacturing
Services “EMS”
Raw Materials/
Components
Medical Technology Revenue
•Patient Monitoring
•Stainless Steel
Finished Goods
Market Share
•Instruments/Screws
•Engineered Plastics
•Diagnostic Imaging
•Surgical Equipment
•Various Components
•Pacemakers
•Disposable Devices
•In-vitro Diagnostics
•Wound Management
•Disposables
2014 Medical Contract Manufacturing Revenue By Segment ($MM)
•A breakdown of the estimated $36.6 billion of medical contract manufacturing revenue in 2014 by segment is shown on the right.
Finished Goods
$8,899
24.0%
•Moving forward, we believe the primary driver of growth in the medical
contract manufacturing space will be an expansion of the EMS segment as increased technological innovations and specializations will
influence OEMs to outsource to suppliers with technical expertise. Additionally, EMS providers have been increasing their service offerings to
provide the entire range of outsourcing activities to OEMs.
Raw Materials/
Components
$10,895
30.0%
Electronic Manufacturing Services
$16,771
46.0%
Medical Contract Manufacturing Revenue by Segment ($MM)
$70,000
$60,000
$50,000
$40,000
29.8%
29.0%
28.2%
$30,000
30.6%
$20,000
44.9%
45.9%
46.9%
47.9%
24.5%
24.3%
24.2%
2013
2014
2015
$10,000
0
Raw Materials/Components
27.4%
26.6%
25.2%
25.9%
50.9%
51.9%
23.5%
23.3%
23.0%
2018
2019
2020
48.9%
49.9%
24.0%
23.8%
2016
2017
Electronic Manufacturing Services
Finished Goods
Source: S&P Capital IQ, PMCF Estimates, Company Reports
www.pmcf.com
7
Medical Contract Manufacturing – M&A Pulse – February 2015
Medical Contract Manufacturing Market Share*: Finished Goods
Lake
Region/
Accellent
8.2%
Greatbatch 6.8%
Tecomet/Symmetry 4.7%
Market Facts
•Total 2014 Market Size — $8.9 billion
•HHI(1) — 226
Flexible
Other
49.2%
•CAGR (2014-2020) — 8.0%
Phillips-Medisize 4.2%
Cantel, 3.6%
West Pharma 3.4%
Orchid 2.8%
B. Braun, 2.5%
Industrial
Nolato 2.3%
9%
AptarGroup Inc. 2.2%
Creganna 1.8%
Lisi Medical 0.9%
MedPlast 1.7%
Nordson 1.1%
Teleflex 1.6%
Paragon 1.4% Mack Molding 1.6%
*Company Market Share data is based on the TTM of each company’s most recent report as of 1/6/15.
The Herfindahl-Hirschman Index (HHI), measures the market concentration in an industry to determine if the industry is
competitive. It is calculated by the sum of the squares of market share for the industry’s largest firms. An HHI of 10,000
would indicate a monopoly. The U.S. Department of Justice considers an industry to be moderately fragmented when HHI
reaches 1,500.
(1)
Finished Goods Segment Leaders
Lake Region Medical (Formerly Accellent Holdings Corp.)
• Size Estimate: $729 million
• Segments: Cardiology, orthopedics, endoscopy, stimulation therapy, urology, cardiovascular applications
• Customers: Abbott Laboratories, Johnson & Johnson, Medtronic, Smith & Nephew plc
• Acquisitions: Lake Region purchased by Accellent, Inc. – Feb. 2014
Greatbatch, Inc.
• Size Estimate: $608.6 million
• Segments: Cardiology, neuromodulation, orthopedics, portable medical, vascular
• Customers: General Electric Company, Johnson & Johnson, Stryker Corporation
• Acquisitions: CCC Medical Devices – Aug 2014
Tecomet, Inc.
• Size Estimate: $413.9 million
• Segments: Orthopedic reconstruction, trauma, extremities, dental, spine, cardiovascular, radiography
• Customers: Smith & Nephew, Stryker Corporation, St. Jude Medical Inc., Medtronic, Inc.
• Acquisitions: Symmetry Medical, Inc. – Aug 2014; 3D Medical Manufacturing, Inc. – Aug 2014
Phillips-Medisize Corporation (sold to Golden Gate Capital in May 2014)
• Size Estimate: $375 million
• Segments: Drug delivery, medical device, primary pharmaceutical packaging, diagnostic products
• Customers: Antares Pharma, Inc., Insulet Corporation
• Acquisitions: Omni Manufacturing Services SA – July 2013
West Pharmaceutical Services, Inc.
• Size Estimate: $299.2 million
• Segments: Pharmaceutical packaging systems and proprietary delivery systems
• Customers: DexCom, Inc., Discovery Laboratories, Inc., Dyesol Limited
• Acquisitions: N/A
Source: S&P Capital IQ, PMCF Estimates, Company Reports
www.pmcf.com
8
Medical Contract Manufacturing – M&A Pulse – February 2015
Medical Contract Manufacturing Market Share*: Electronic Manufacturing
Services (EMS)
Jabil
8.2%
1.Market Facts
•Total 2014 Market Size — $16.8 billion
•HHI(1) — 251
•CAGR (2014-2020) — 11.3%
Flextronics
9.5%
Flexible
Other
66.9%
Celestica 4.7%
Sanmina 3.8%
Plexus 4.2%
Benchmark Electronics 1.8%
Sparton 0.9%
*Company Market Share data is based on the TTM of each company’s most recent report as of 1/6/15.
The Herfindahl-Hirschman Index (HHI), measures the market concentration in an industry to determine if the industry is
competitive. It is calculated by the sum of the squares of market share for the industry’s largest firms. An HHI of 10,000
would indicate a monopoly. The U.S. Department of Justice considers an industry to be moderately fragmented when HHI
reaches 1,500.
(1)
EMS Segment Leaders
Flextronics International Ltd
• Size Estimate: $1.6 billion
• Segments: Consumer diagnostics, drug delivery, microelectronics for implantable devices, disposable devices, laboratory diagnostics
equipment, imaging & monitoring
• Customers: Alimera Sciences, Inc., Cellnovo Limited
• Acquisitions: Knightscop, Inc. – Dec 2014; Sonetar, LLC – Sep. 2014; Sønderborg Værktøjsfabrik A/S – Sep. 2014; Tech Mold, Inc. –
May 2014
Jabil Circuit Inc.
• Size Estimate: $1.38 billion
• Segments: Diagnostics, consumables, medical devices, pharmaceutical
• Customers: Abaxis, Inc., Ulthera, Inc., Antares Pharma Inc.
• Acquisitions: Nypro, Inc. – July 2013
Celestica, Inc.
• Size Estimate: $783 million
• Segments: Diagnostic imaging equipment
• Customers: International Business Machines Corporation, Honeywell, Hewlett-Packard, Inc.
• Acquisitions: D&H Manufacturing Company – Sept 2012
Plexus Corp.
• Size Estimate: $697.3 million
• Segments: Diagnostic imaging, therapeutic, monitoring, laboratory research, healthcare management
• Customers: Physio Controls, Illumina Diagnostics, St. Jude Medical
• Acquisitions: Kontron Design Manufacturing Service – Jan 2012
Sanmina Corporation
• Size Estimate: $634.5 million
• Segments: Consumable equipment, diagnostic imaging, large systems, invasive, implanted, and disposable products
• Customers: Medifocus Inc., Haemonetics Corporation, Incline Therapeutics, ReWalk Robotics Ltd.
• Acquisitions: N/A
Source: S&P Capital IQ, PMCF Estimates, Company Reports
www.pmcf.com
9
Medical Contract Manufacturing – M&A Pulse – February 2015
Market Overview
Publicly Held Contract Manufacturers – Finished Goods vs. EMS
Alphaform AG
Cantel Medical Corp.
Greatbatch, Inc.
Merit Medical Systems, Inc.
Nordson Corporation
Nolato AB (publ)
RTI Surgical Inc.
Teleflex Incorporated
Utah Medical Products Inc.
Varian Medical Systems, Inc.
West Pharmaceutical Services, Inc.
High
Mean
Median
Low
24.2
1,845.4
1,320.2
774.3
4,863.4
655.5
302.7
4,979.8
219.5
9,296.7
3,820.0
9,296.7
2,554.7
1,320.2
24.2
Benchmark Electronics Inc.
Celestica Inc.
Flextronics International Ltd.
Jabil Circuit Inc.
Nortech Systems Inc.
Plexus Corp.
Sanmina Corporation
Sparton Corp.
High
Mean
Median
Low
1,281.3
1,957.7
6,287.7
3,978.5
15.6
1,345.2
1,887.9
262.1
6,287.7
2,127.0
1,616.5
15.6
35.5
(2.4)
503.3
95.9
694.7
124.3
496.9
73.3
1,704.0
429.4
541.1
79.1
262.8
31.7
Medical
Technology
Revenue
1,839.8
417.8
41.3
19.6
3,076.2
657.7
1,421.4
272.7
3,076.2
657.7
965.2
199.9
541.1
95.9
35.5
(2.4)
2,844.4
5,631.3
27,078.6
15,969.9
110.9
2,509.0
6,215.1
338.9
27,078.6
7,587.3
4,237.8
110.9
156.0
227.1
1,161.0
762.1
3.6
164.8
309.4
32.1
1,161.0
352.0
196.0
3.6
5.9
NM
93.6
1.0x
190.0
1.5x
240.5
3.3x
815.9
1.9x
8.8
0.1x
87.5
2.8x
Market Share
1,068.4
2.6x
4.9
0.2x
525.0
0.8x
346.7
1.3x
1,068.4
3.3x
307.9
1.5x
190.0
1.4x
4.9
0.1x
0.8x
3.8x
2.1x
2.0x
3.3x
1.2x
1.6x
3.1x
5.0x
2.9x
2.8x
5.0x
2.6x
2.8x
0.8x
NM
19.9x
11.7x
13.8x
13.1x
8.0x
13.5x
13.8x
10.5x
13.5x
14.4x
19.9x
13.2x
13.5x
8.0x
9.7
2,398.1
1,677.9
12.7
265.8
547.1
42.0
2,398.1
619.2
153.9
-
0.3x
0.3x
0.3x
0.3x
0.3x
0.5x
0.3x
0.9x
0.9x
0.4x
0.3x
0.3x
5.6x
7.8x
6.2x
6.2x
7.8x
8.3x
6.4x
9.3x
9.3x
7.2x
7.1x
5.6x
0.1x
2.1x
2.2x
3.5x
1.6x
1.8x
1.3x
3.5x
1.6x
1.7x
-
As of 2/23/2015
Source: S&P Capital IQ, Company Reports
(1)
Historical Finished Goods CMO Trading Multiples
25.0x
20.0x
19.5x
20.7x
25.0x
20.7x
17.1x
15.0x
15.6x
20.0x
16.2x
13.2x
10.0x
5.0x
0.0x
Historical EMS CMO Trading Multiples
15.0x
10.0x
3.7x
2008
3.9x
2009
3.7x
2010
3.2x
2011
2.9x
2012
Average Enterprise Value/EBITDA
Average Enterprise Value/Revenue
2.7x
2013
2.5x
2014
5.0x
0.0x
10.0x
7.4x
0.5x
2008
0.5x
2009
8.8x
7.5x
0.5x
2010
8.1x
0.4x
2011
7.8x
0.4x
2012
7.1x
0.4x
2013
Average Enterprise Value/EBITDA
Average Enterprise Value/Revenue
www.pmcf.com
0.4x
2014
10
Medical Contract Manufacturing – M&A Pulse – February 2015
Medical Manufacturing Transaction Overview
Medical Contract Manufacturing M&A Activity
2010
19
8
4
31
Finished Goods
EMS
Other
Total
2011
39
15
4
58
2012
61
10
3
74
2013
47
23
3
73
Due to higher fragmentation, the Finished Goods segment
has seen significantly more consolidation throughout the
historical period when compared to the EMS section. The
five largest firms in the Finished Goods segment account
for approximately 25% of the estimated segment size, compared to the top five firms in EMS, which account for approximately 33% of the estimated segment size.
Q1 - Q3
2014
39
15
3
57
Buyer Type Information
Total Transaction By Type
Number of Deals
80
70
7
60
10
10
50
20
10
0
18
8
40
30
15
7
3
Strategic Buyer
Financial Platform
Financial Add-On
2
7
57
47
40
40
22
2010
2011
2012
2013
Q1-Q3 2014
•Overall consolidation activity in the medical manufacturing sector has increased significantly in recent years, from
31 transactions in 2010 to 73 transactions in 2013, an annual growth rate of 23.9%. Additionally, once final numbers are released, 2014 looks to be on pace to continue the growth trend, with 57 transactions completed in the first
nine months.
•The number of financial transactions surged in 2013, however the first nine months of 2014 has experienced a slight
decrease in PE activity.
Source: S&P Capital IQ, PMCF Research
www.pmcf.com
11
Medical Contract Manufacturing – M&A Pulse – February 2015
2014 PE Platform Transactions
•On May 20, 2014, New Heritage Capital, LLC partnered with management and certain members of the Dearborn
family to acquire a majority stake in Eptam Plastics, Inc. Heritage will own 70% of the stock in the company while the
management team and Dearborn family have also invested in the recapitalization.
•Golden Gate Capital entered into a definitive agreement to acquire Phillips-Medisize Corporation from Kohlberg Investors V, L.P. and Kohlberg Investors VI, L.P. managed by Kohlberg & Company, L.L.C. on May 7, 2014. Phillips-Medisize
has annual sales of approximately $600 million with medical representing 75%.
•An undisclosed British Virgin Island based private equity company entered into a definitive agreement to acquire European Medical Contract Manufacturing B.V. from AAP Implantate AG (XETRA:AAQ.DE) for €18 million in cash on FebruMedical Technology Revenue
Market Share
ary 24, 2014.
Key Transaction Metrics
($$ inMM)
Millions
Date
Dec-14
Sep-14
Aug-14
Aug-14
Aug-14
Aug-14
Jul-14
May-14
May-14
May-14
Apr-14
Apr-14
Apr-14
Apr-14
Mar-14
Mar-14
Mar-14
Mar-14
Feb-14
Feb-14
Feb-14
Jan-14
Dec-13
Dec-13
Dec-13
Dec-13
Nov-13
Nov-13
Nov-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
May-13
Apr-13
Mar-13
Mar-13
Feb-13
First Quartile
Median
Third Quartile
Target Name
Southeastern Technolgy, Inc
DiSanto Technology, Inc.
Corgenix Medical Corp. (OTCPK:CONX)
3D Manufacturing
Avalon Laboratories, LLC
Symmetry Medical, Inc.
CDR Manufacturing, Inc.
Aeroflex Holding Corp.
Shenzhen Dong Di Xin Technology Company Limited
Phjilips Medisize Corporation
Advance Tooling Concepts LLC
Processing Equipment Solutions, Inc.
Triad Group, Inc.
Solid Concepts Inc.
Tri Town Precision Plastics, Inc.
AVID Technologies, Inc.
Medegen Medical Products, LLC
Interplex Industries, Inc.
European Medical Contract Manufacturing BV
Oscor Inc., Lead Business
Lake Region Medical, Inc.
Laser Design, Inc.
ATMI Inc., LifeSciences Business
Tecomet, Inc.
Beckwood Services, Inc.
Collbio Ltd.
Patheon Inc. (TSX:PTI)
Paragon Medical, Inc.
Onefit Medical
Molex Incorporated
RIWISA Ag
Opalia Pharma S.A.
Product Development Technologies, Inc.
NuVasive Manufacturing LLC
Rapid Product Development Group, Inc.
AndersonBrecon Inc. (nka: Packaging Coordinators, Inc.)
Edac Technologies Corp.
Trident Manufacturing, Inc.
Nypro, Inc.
Acquirer Name
Autocam Medical
Arcam AB (OM:ARCM)
ORGENTEC Diagnostika GmbH
Tecomet, Inc.
Nordson Medical Corporation
Tecomet, Inc.
Key Tronic Corp. (NasdaqGM:KTCC)
Cobham plc (LSE:COB)
Kingworld (Hong Kong) Holdings Limited
Golden Gate Capital
ARC Group Worldwide, Inc.
Middleby Corp.
Medline Industries, Inc.
Stratasys Ltd.
Smith & Wesson Holding Corporation (NasdaqGS:SWHC)
Premier Farnell plc
Inteplast Group
Amtek Engineering Ltd (SGX:M1P)
Undisclosed
Sorin SpA (BIT:SRN)
Accellent, Inc.
CyberOptics Corp.
Pall Corporation (NYSE:PLL)
Genstar Capital, LLC
Sparton Corp.
Collagen Solutions PLC (AIM:COS)
JLL Partners; Koninklijke DSM N.V. (ENXTAM:DSM)
Beecken Petty O'Keefe & Company
EOS imaging SA (ENXTPA:EOSI)
Koch Industries, Inc.
Flextronics International Ltd. (NasdaqGS:FLEX)
Recordati SpA (BIT:REC)
Telefonix, Inc.
NuVasive, Inc. (NasdaqGS:NUVA)
3D Systems Corporation (NYSE:DDD)
Frazier Healthcare Ventures, et. al.
Greenbriar Equity Group LLC, Greenbriar Equity Fund II, L.P.
Probe Manufacturing Inc.
Jabil Circuit Inc.
Implied
Enterprise
Value
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Implied
Enterprise Value /
Revenue
PMCF PROPRIETARY
1.3x
15.8
14.9
1.4x
PMCF PROPRIETARY
180.0
5.3x
439.5
1.1x
0.4x
46.9
1,507.2
2.4x
NM
32.0
800.0
1.3x
24.0
1.4x
15.0
0.9x
7.1
NM
4.5x
295.0
22.8
NM
1.6x
13.5
78.6
0.5x
210.0
NM
1.5x
24.7
20.0
NM
PMCF PROPRIETARY
2.7
0.5x
185.0
NM
PMCF PROPRIETARY
15.3
0.9x
NM
6.5
1,922.5
1.9x
PMCF PROPRIETARY
7.1
NM
7,228.6
2.0x
PMCF PROPRIETARY
48.3
NM
0.3x
5.0
4.5
NM
44.5
NM
5.3x
308.0
141.7
1.3x
NM
3.0
665.0
0.6x
15.2
0.9x
1.4x
46.9
252.5
2.0x
Sources: Capital IQ, company filings, news reports, PMCF research
www.pmcf.com
EBITDA
NM
21.7x
11.0x
7.3x
7.5x
12.3x
NM
NM
5.5x
NM
NM
NM
NM
NM
3.3x
7.5x
NM
NM
NM
NM
NM
NM
15.0x
NM
12.0x
NM
0.3x
NM
NM
NM
9.9x
NM
NM
7.3x
8.5x
11.5x
12
Medical Contract Manufacturing – M&A Pulse – February 2015
Case Study – Symmetry Medical
Since its formation in 1976, Symmetry Medical, Inc. (NYSE: SMA) achieved sustained growth both organically and through
acquisition. As detailed below, in the years leading up to the company’s sale to Tecomet, Inc., Symmetry expanded its
product and service offerings through nine strategic acquisitions, which increased revenue from $245 million in 2006 to
$359 million in 2011. This “roll up” strategy is perhaps indicative of the further consolidation we are likely to see in the
medical contract manufacturing space.
Date
Target
Deal Size
($MM)
Year Ending
Revenue ($MM)
Rationale
12/12/2011
Codman and Shurtleff, Inc.
165.0
Distributes specialized surgical instrumentation for the O.R.
359.0
8/3/2011
Olsen Medical, LLC
11.0
Manufactures medical devices for electrosurgical market. Also
designs and fabricates large industrial equipment, components, and machined parts
359.0
1/25/2008
DePuy Orthopedics, Inc.,
Orthopedic Instrument
Manufacturing Facility
45.3
Manufactures orthopedic instruments as well as general surgical instruments and small implants
423.0
9/04/2007
Specialty Surgical Instrumentation, Inc.
15.1
Distributes surgical instruments and sterilization containers,
respectively, directly to hospitals
290.9
4/3/2007
TNCO, Inc.
7.0
Designing and supplying instruments for arthroscopic, laparoscopic, sinus and other minimally invasive procedures
290.9
1/9/2007
Clamonta Engineering Co.,
Ltd.
10.0
Machining and finishing products for the global aerospace
industry
290.9
8/31/2006
Everest Metal Finishing, LLC
and Everest Metal International
10.2
Machining and finishing for the orthopedic industry
245.0
5/02/2006
Riley Medical
45.0
Specializes in cases and trays for the orthopedic industry
245.0
6/11/2003
Mettis (UK) Ltd.
163.9
Expanded the company into manufacturing forged, cast and
machined implants for the global orthopedic device market
N/A
•Symmetry Medical, Inc. aggressively pursued acquisitions in recent years, ultimately leading to the sale of its OEM Solutions business segment to Tecomet, Inc., a portfolio company of Genstar Capital, in December 2014 at an implied
Enterprise Value of $439.5 million (1.1x EV/Revenue, 8.7x EV/EBITDA). According to Tecomet, the acquisition creates
the largest orthopedic contract manufacturer in the world with 18 facilities located in five countries on three continents.
The transaction follows several large deals among publicly traded medical devices companies, and continues the trend
of outsourcing firms expanding their capabilities to become “one-stop” solutions for their customers.
•Bill Dow, Chief Executive Officer of Tecomet, said, “The combination of Tecomet and OEM Solutions creates a contract
manufacturing enterprise that is capable of meeting the growing needs of our customers. OEM Solutions will not only
extend the capabilities we offer but also our global reach. Our experienced and successful Tecomet team looks forward
to working with OEM Solutions’ strong management crew and workforce to offer exceptional products, services and
capabilities to the industries we serve.”
•Headquartered in Warsaw, IN, OEM Solutions manufactures high precision surgical instruments, orthopedic implants,
and plastic and metal sterilization cases and trays, selling its products to global medical device OEMs. OEM Solutions
has over 450 customers, nearly 2,300 employees and 13 facilities in the U.S., the U.K., Ireland, France and Malaysia.
•Founded in 1964 and based in Wilmington, MA, Tecomet manufactures orthopedic implants, precision surgical instruments, trauma plates and photochemical etched products for medical device customers. Tecomet uses its industry-leading prototyping and engineering capabilities to produce highly complex products that provide innovative solutions for its
customers’ most demanding products and applications. Tecomet is also a leading manufacturer of precision components
to the aerospace & defense industry, producing products used in missile & satellite propulsion systems, vision systems,
and infrared applications.
Source: S&P Capital IQ, Company Press Releases
www.pmcf.com
13
Medical Contract Manufacturing – M&A Pulse – February 2015
Private Equity Hold Analysis and Recent Platforms
With an average investment age of 5.2 years, medical contract manufacturing “platform” companies represent a maturing
portion of private equity portfolios. While a wave of forced liquidity events is not expected, the age of CMO investments,
along with an attractive lending environment and high levels of available capital, should result in increased M&A activity.
CMO Platform Aging in Private Equity Portfolios
1.Representative 5+ Year Investments
4–5 Years
23%
•Avalign Technologies, Inc. (acquired by RoundTable Healthcare Management, LLC in 2007)
•Seabrook International, LLC (acquired by FdG
Associates LP in 2005)
5+ Years
35%
3–4 Years
28%
•Lake Region Medical/Accellent Holdings Corp.
(acquired by KKR in 2005)
•Tegra Medical (formed by the simultaneous
acquisitions of New England Precision Grinding
and Accu-Met Laser by Riverside Partners
in 2007)
2–3 Years
13%
Source: S&P Capital IQ, PMCF research
1–2 Years
1%
Recent Noteworthy PE Acquisitions
•Phillips-Medisize Corporation Acquired by Golden Gate Capital – May 2014
Golden Gate Capital entered into a definitive agreement to acquire Phillips-Medisize Corporation from Kohlberg Investors V, L.P. and Kohlberg Investors VI, L.P. managed by Kohlberg & Company, L.L.C. on May 7, 2014. Phillips-Medisize
has annual sales of approximately $600 million. Based in Hudson, WI, Phillips-Medisize is an injection molder that
estimates 75 percent of its business is in health care applications such as medical devices, pharmaceutical packaging,
drug delivery, glucose meters, drug inhalation devices, and disposable surgical devices and diagnostic components. The
company also is a player in defense, automotive and consumer markets.
•Tecomet, Inc. Acquired by Genstar Capital – December 2013
Genstar Capital, LLC acquired Tecomet, Inc. from Charlesbank Capital Partners, LLC on December 19, 2013. Tecomet,
Inc. is a leading precision contract manufacturer supporting the medical device and aerospace & defense industries.
Based in Wilmington, MA, Tecomet manufactures orthopedic implants, precision surgical instruments, trauma plates and
photochemical etched products for medical device customers. Rob Rutledge, Principal at Genstar Capital, said, “Tecomet
is led by an outstanding management team that we are excited to partner with. Bill Dow, John Connolly and the rest of
Tecomet’s employees have built the company into one of the premier precision manufacturers for the medical device and
aerospace & defense industries, driving growth both organically and through the sourcing and integration of strategic
acquisitions. Genstar is eager to partner with the Tecomet management team to expand the company’s capabilities,
product offering and geographic reach while continuing to provide excellent quality and service to its customers.”
Source: Company press releases
www.pmcf.com
14
Medical Contract Manufacturing – M&A Pulse – February 2015
General Transaction & Macroeconomic Discussion
U.S. M&A Activity Overview
6,000
5,000
4,000
3,000
2,000
1,000
0
U.S. M&A Activity: Deals < $500 Million
U.S. M&A Activity: Deals < $500 Million
Deals in Billions
Deals in Billions
5,625
4,267
4,235 4,307
3,790 4,016 4,053
3,966
3,742 3,794
4,527 4,479 4,336
4,731 4,864
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
’11 ’11 ’11 ’11 ’12 ’12 ’12 ’12 ’13 ’13 ’13 ’13 ’14 ’14 ’14
Deal Volume
Deal Value
$160
$140
$120
$100
$80
$60
$40
$20
$0
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
13,012
2007
11,531
2008
14,315
16,126
16,542
12,063
10,342
2009
2010
2011
Deal Volume
Source: S&P CapitaI IQ, PMCF research
18,133
2012
2013
13,931
Q3
Q3
YTD’13 YTD’14
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
Deal Value
Source: S&P CapitaI IQ, PMCF research
•Following a moderate dip in M&A activity in 2013, U.S. middle market M&A activity was on pace to surpass 2013 levels
through Q3 2014.
•M&A activity in 2014 was driven by a variety of factors, including the following:
• Sustained improvement in the outlook for U.S. economic growth, driving buyer interest for M&A
• Strong performing public markets and attractive interest rates to fund transactions
• Strategic companies returning to M&A to put large cash reserves to work in order to increase shareholder value while
private equity firms, which have significant uninvested capital, continue aggressively pursuing acquisitions
Private Equity Excess Capital
$600
PE Capital Overhang by Fund Size
PE Capital Overhang ($B)
$525.62
$500
$504.06
$483.87
$497.04
$508.64
$486.35
2013
$400
Cumulative Overhang
$300
2012
$5B+
2011
36%
2010
$200
2009
Overhang by Vintage
2008
$100
2007
2006
$0
2008
2009
Source: Pitchbook
2010
2011
2012
Under
$250M $250M–
6% $500M
8%
$500M–
$1B
12%
$1B–$5B
38%
Flexible
2013
As of Year
•As of December 31, 2013, Private Equity investors have accumulated approximately $486 billion of undeployed capital,
sometimes referred to as dry powder. This represents a 5% decline from 2012, in which there was $509 billion in dry
powder.
•58% of undeployed PE capital in 2013 consists of funds raised in 2013 (30%) and 2012 (28%). Funds raised in the years
immediately following the financial crisis have relatively little dry powder as a result of weak fundraising environments at
the time.
•Funds less than $500 million represent 14% of available PE capital, which amounts to $67.2 billion. Funds of this size
are more likely to invest in the size of companies that represent the medical manufacturing industry, which is highly fragmented with many small players.
Source: S&P Capital IQ, PMCF research
www.pmcf.com
15
Medical Contract Manufacturing – M&A Pulse – February 2015
•Global M&A activity in the medical device sector remained strong in 2014.
The total number of medical device transactions between Q1 and Q3 2014
was 451 compared to 358 between Q1 and Q3 2013.
•The desire to broaden portfolio capabilities, access new geographies and
consolidate core businesses in order to achieve scale, and thus respond to
increased competitive and financial pressure. This strategy has resulted in
an increase in mega-deals, particularly in the therapeutic area, exemplified by Medtronic’s $42.9 billion acquisition of Covidien plc. and Zimmer’s $13.4 billion acquisition of Biomet Inc.
•The cardiovascular segment has been experiencing significant consolidation among major corporations in the wake of market saturation and low
growth rates of therapeutic devices, especially pacemakers, defibrillators
and drug eluting stents. In turn, key players have been acquisitive in growing areas such as ventricular assist devices and atrial fibrillation, trends
that are expected to continue.
•Reduction of healthcare costs, particularly in the areas of preventive monitoring and early detection. Additionally, hospitals are adopting a more
prudent approach to device purchases and are demanding new technologies that improve patient experiences and outcomes. These trends may
drive acquisitions designed to innovate and transform business models.
•Consistent upward trends in in-vitro diagnostic, equipment, and services.
These three segments have been increasing their share and accounted for
approximately 50% of transactions in the medical device industry through
Q3 2014.
•Divestments of non-core assets by large companies as a means to offset
the medical excise tax in businesses where they don’t have a strong foothold or critical mass. Relevant large examples include:
Number of M&A Transactions
•Corporate buyers’ robust M&A activity was motivated by the following:
Medical Device M&A Transaction
Statistics
180
160
140
120
100
80
60
40
20
0
•Tax inversions to address repatriation of cash accumulation. Tax inversions, which allow US corporations to be domiciled in foreign countries
with lower corporate tax rates, account for approximately 39% of global
cross-border M&A activity across all industries year to date through Q3
2014, but face an increasingly stringent regulatory environment. A recent
example of this type of transaction in the medical technology space is
Medtronic Inc.’s recent acquisition of Covidien Plc.
•Large cash reserves, and availability of credit with favorable terms. The
number of US companies with more than five years of cash increased
approximately 40% year-over-year to 14% in 2013. Arguably, this is one
of the reasons behind the decline in capital raised in the US and Europe,
which amounted to $22.8 billion between July 2013 and June 2014.
$250
$200
$150
$100
$50
Q3 ’12 Q4 ’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14
M&A Transactions
$0
Avg. Transaction Value
Source: S&P CapitaI IQ, PMCF research
U.S. Public Medtech Cash Index,
2011-13
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
10%
8%
10%
8%
9%
10%
14%
11%
7%
24%
23%
17%
48%
50%
51%
2011
2012
2013
<1yr
1-2 yrs
2-3 yrs
>5 yrs
3-5 yrs
Source: EY, S&P Capital IQ and company financial
statement data
•Abbott Laboratories’ $5.3 billion divestiture of a share of its generics
pharmaceuticals business to Mylan Inc., aimed at saving taxes and
expanding its portfolio.
•$4.0 billion divestiture of Johnson & Johnson’s orthoclinical diagnostic
business to the Carlyle Group to increase its focus on the core pharma
business.
$300
Average Transaction Value ($ MM)
Medical Device Sector Overview
Capital Raised in the U.S. and
Europe
$25
$20.1
$20
$15
$10
$5
$0
$23.1
$19.4
$11.8
$2.4
$0.8
Jul 2009Jun 2010
IPO
$1.0
$0.4
Jul 2010Jun 2011
$4.2
$0.2
$2.0
$1.4
Jul 2012Jun 2013
Jul 2013Jun 2014
Follow-on and other
Debt
Source: EY, BMO Capital Markets, Dow Jones VentureSource and S&P Capital IQ
Source: Reuters, EY, S&P Capital IQ, Company Reports, PMCF Research
www.pmcf.com
16
Medical Contract Manufacturing – M&A Pulse – February 2015
Forecast and Thoughts
Key Market Trends
•The underlying regulatory framework established by
the Affordable Care Act and other developed economies continues to enhance a value-based healthcare
system, whereby the cost of a product is based on
the value of care provided. As a result, companies
will continue to revisit their business models and reevaluate their products in order to comply with this
trend.
•In the upcoming years, global M&A in the medical technology market is expected to be driven by
the higher incidence of chronic diseases (diabetes,
respiratory, neurological and cardiovascular), an
increasing aging population, a higher demand for
home monitoring devices and cost-saving strategies
based on preventive care. These factors will positively increase the target patient base for drug delivery
services, particularly those that treat the increasing
prevalence of prostate and breast cancer.
Increase
in chronic
diseases/aging
population
Developing
countries
Value-based
health care
Scale and
technology
driven
acquisitions
Vertical
integration
•The aforementioned increase in chronic diseases and age-related conditions, which facilitate degenerative joint dysfunctions such as osteoarthritis, coupled with the improvement and longer durability of new materials and implants, are
expected to be important catalysts for the orthopedic and related markets. Additionally, the increasing adoption of active
lifestyles and the advent of technologically advanced products will foster growth in the industry by allowing surgeons to
treat a larger and increasingly younger patient population.
•Scale-driven acquisitions is another area of attention, as medical technology companies continue to build their product
portfolio, generate more cross-selling opportunities, and attempt to improve their negotiating power with hospitals,
which has been mitigated in recent years by a scenario of falling prices for medical devices. Companies that offer
enhanced technological applications, such as integrated diagnostic imaging products, in-vitro molecular diagnostics,
or mobile technology used in hospitals (acute ventilators, portable anesthesia workstations and intra-oral scanners),
can also be attractive acquisition targets. These circumstances create opportunities for vertical integration and greater
supply-chain synergies.
•As medical technology companies strive to partner with hospitals to structure a wider range of cost-cutting and efficient
operational strategies, acquirers could seek M&A opportunities in companies with significant experience dealing with
FDA approval and the regulatory environment.
•Increased healthcare spending by developing countries has also played a significant factor in recent industry trends.
Although the United States accounts for approximately one third of the global medical technology market share, the domestic market is considered relatively mature. Greater expansion opportunities exist in several countries, such as China,
India, Russia and Brazil. Many players have established a presence in some of these markets but will likely pursue further
opportunities. China is currently the 6th largest market, worth $9 billion, and is expected to grow 15% to 20% in the
following years, driven by higher demand for medical devices and an increasingly larger middle class.
•According to EvaluateMedtech, IVD is expected to remain the largest medical technology subsector by sales, reaching
$58.8 billion in 2018, while increasing its global market share from 12.5% to 12.9% in the same period. Ophthalmics
and endoscopy are other relevant areas that are expected to gain market share by 2018. Ophthalmics is forecasted to
account for 7.2% of medtech’s global market’s share in 2018, a 40 bp increase from 2012, while endoscopy is expected
to account for 5.3% in 2018, a 20 bp increase over the same period.
Source: Capital EvaluateMedtech, September 2013, PMCF Estimates, Company Reports
www.pmcf.com
17
Medical Contract Manufacturing – M&A Pulse – February 2015
Consolidation Discussion
PMCF believes the medical CMO industry is in the early stages of
consolidation
In outlining the strategic rationale for divesting its OEM Solutions business to Tecomet, Symmetry Medical kicked off an investor slide with the following statement:
“Recent transactions imply a risk of consolidation in OEM Solutions competitive market, increasing the need for
Symmetry Medical to explore acquisitions - both in orthopedic implants and adjacent medical device categories - to
maintain a leadership position” – Symmetry Medical Investor Presentation, August 4, 2014
Clearly the question has to be asked — as Symmetry management suggested — is the medical manufacturing industry poised
for consolidation? At PMCF we’ve asked the same question in previous market overviews, and recent industry publications
have posed the same asking, “Will the Medtech Outsourcing Market See a Wave of Consolidation?” — (European Medical
Device Technology, December 2014). This is not entirely a new question; in its March 2004 edition, MDDI published a similar
article suggesting, “As Outsourcing Increases, So Does Consolidation”.
Rather than debate this question further (we are assuming some level of consolidation is likely) we have started to ask a more
important question — Assuming the industry does consolidate, what will it look like? And what can companies do to best
position themselves when it does?
We will explore this topic in future editions of M&A Pulse; here we simply overlay current industry data with one industry consolidation framework.
•Merger Endgames S-Curve Framework, proposed by consulting partners at A.T. Kearney in early 2000s
•Studied ≈1,500 transactions and 25,000 companies
•Proposed that all industries consolidate and follow a similar course
•4 stages over 20–25 year cycle
•Given fragmentation of medical manufacturing, the industry has a CR3 score (industry concentration) around 20 which
likely places it in the early phases of Stage 2 — Scale
•Within the Endgames Framework, by the end of Stage 2 the number of industry participants is reduced by 75%
•While the 25 year cycle is theoretical, based on this framework the medical manufacturing industry likely has 5–7 years until
it reaches the beginning of the next stage (Stage 3 — Focus)
•While average profitability bottoms at the mid-point of Stage 2, it is forecast to increase as much as 700 bp over the next
decade
•The authors suggest private equity investors should acquire companies at the lower part of the curve (NOW) and sell at the
beginning of the next stage
Rolls Royce
Commercial Engine Supplier
Consolidation
Aerospace / Rolls Royce Example
We can also look at other industries as a predictor of how consolidation in the
medical manufacturing supply chain will unfold. In the aerospace example at
right you can clearly see both the scale and speed of supplier consolidation.
With its RB211 engine, which was ultimately superseded by the Trent family of
engines, Rolls Royce utilized over 400 direct suppliers. By the time the Trent 500
class was placed in service 25 years later, the supply base had been reduced by
approximately 37% to 250.
While it took 25 years to see this 150 supplier reduction, Rolls Royce focused on
rationalization over the coming decade and when the XWB was placed in service
for the Airbus 350, the direct supply chain had been reduced by 80%.
450
400
400
-37.5%
15 yrs
350
300
250
250
-80.0%
≈10 yrs
200
130
150
100
70
50
50
0
Source: EMDT, MDDI, Winning the Merger Endgame: A Playbook for Profiting From Industry Consolidation - Financial Times, Rolls
Royce Company Reports, Deloitte LLP
RB211-524
Trent 500
Trent 900
Trent 1000
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Trent XWB
18
Medical Contract Manufacturing – M&A Pulse – February 2015
Sale Planning
Picking the right time to sell can be a daunting task. In fact, you may never know the “right” time to sell your company. Factors that impact the value of your business – breadth and depth of product lines and value-added service offerings, customer
entrenchment, strength of vendor relationships, geographic coverage, the presence of sustainable and supportable growth
opportunities, balance sheet strength, capabilities of your management team and employees, macro level industry trends and
M&A market activity, among others – are numerous and overwhelming to assess quickly when trying to time your ultimate exit.
To help simplify the process of assessing your company’s sale readiness, we have narrowed the laundry list of attributes into
three broader categories – (1) market readiness, (2) company readiness and (3) personal readiness. The first attribute – market readiness – can be an important contributor to the success of any sale process and accordingly should be followed closely.
However, it is also the category over which you have the least control. As such, we consider company readiness and personal
readiness – attributes you can significantly influence – to be the most important areas to focus your efforts if a sale or capital
transaction is in your future.
Transaction planning involves balancing shareholder and company goals – a challenging exercise. Our senior bankers can
assist in guiding your decision making with insight regarding shareholder succession, timing, acquisitions, major capital expenditures, personnel changes, and other key milestones.
Company Goals
• Maximize Financial Performance
and Growth
• Improve Competitive Position
Impact
Valuation
ROI
Sale Timing
• Maintain Financial Flexibility
• Generate Returns for Shareholders
Shareholder Goals
• Maximize Shareholder Value
• Maintain Adequate Risk/Return
Profile
• Liquidity/Wealth Diversification
• Adequate Succession Planning/Exit
Strategy
Readiness Discussion
PMCF is ready to assist in the preparation or refinement of your strategic planning by bringing industry expertise, information, and
insight gained from 20 years of experience and the nearly 200 transactions we have successfully completed.
1.Transaction Planning Approach
1.Working with PMCF
•PMCF is frequently requested to complete an analysis
of a company’s strategic positioning within the medical
device marketplace
•PMCF is a licensed and FINRA-registered investment
banking organization
•Our review may consider your operations, products,
end markets, financial trends, growth opportunities,
and management team
•We are available to brief your management team, ownership, or board with our thoughts on strategic alternative including capital raises, acquisitions, or a sale
•PMCF can provide a benchmark comparison of your
organization’s strengths and weaknesses and our viewpoints on valuation
•Confidentiality is of the highest importance and we welcome the execution of appropriate agreements prior to
the exchange of data
•Our strategic planning services are generally provided
on a no-fee basis as we work toward our goal of demonstrating long term value
•PMCF’s senior bankers will respond to any inquiries and
will be directly involved in all discussions
•If engaged, the majority of PMCF’s costs are contingent
on a successful transaction
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Select PMCF Medical Technology Transactions
has acquired
has acquired
Universal Container Corporation
About PMCF
P&M Corporate Finance (“PMCF”) is an investment banking firm, focused exclusively on middle market transactions, with professionals in Chicago, Detroit and across the
globe through Corporate Finance International associates.
Our dedicated Medical Technology team has deep industry
knowledge and covers a wide range of industries including
contract manufacturing, diagnostics, drug delivery, clinical
laboratories, medical devices and orthopedic implants. Offering a breadth of advisory services, the Medical Technology
team has helped clients worldwide meet their sale, acquisition, financing and strategic growth objectives.
CHICAGO
Investment Banking Services:
• Mergers & Acquisitions
• Sales & Divestitures
• Capital Raising
• Strategic Assessments
225 W. Washington St., Suite 2700
Chicago, IL 60606
312.602.3600
DETROIT
Two Towne Square, Suite 425
Southfield, MI 48076
248.603.5300
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