The market for mergers and acquisitions in medical-device outsourcing is expected to bounce back this year and that could lead to more opportunities for companies like RoundTable Healthcare Partners.
The number of such deals has been in decline since 2008, when 44 were made, according to Rob Andrews, a managing director with the Stout Risius Ross Advisors LLC financial firm in Chicago. That number plummeted to 16 in 2009 and 10 in 2010, but looks to be increasing, Andrews said at the Plastics in Medical Devices 2011 conference, held April 11-13 in Huron.
Overall revenue in the medical-device outsourcing (MDO) sector was estimated at $8.5 billion for 2010. Sales in the sector are growing at annual rates of 8-12 percent, rates that are twice as high as those of the underlying medical-technology sector, he said.
But the market remains highly fragmented, with West Pharmaceutical Services Inc. being the largest player, and the only company with a market share of more than 10 percent. Lionville, Pa.-based West Pharmaceutical has a 12 percent share, but is one of only nine medical-device outsourcers to have a share of 2 percent or more.
And in spite of its high growth rate, the MDO sector faces several challenges.
Despite growth in the sector, it's also seen decreasing margins, Andrews said. There are high costs of product development and a complex regulatory process. It's also dealing with a threat from low-cost manufacturers and increasing complexity in technology and materials.
These challenges, however, have done nothing to discourage Lake Forest, Ill.-based RoundTable. The firm bought a majority stake in Vesta Inc. a maker of silicone-based catheters and tubing in Franklin, Wis. in 2007, and then used Vesta to purchase ExtruMed LLC in 2009. ExtruMed is a maker of thermoplastic medical tubing based in Placentia, Calif.
At the conference, RoundTable senior partner David Koo and Jim Fitzgerald Vesta's executive vice president of sales and marketing outlined some benefits and challenges the two firms have faced.
We want to be more than capital to a company not just a passive investor, said Koo, whose private equity firm is dedicated solely to health care, and has invested $1.9 billion in 10 firms in the last decade.
We're interested in this [MDO] space because of its above-average growth rates, Koo added. We typically partner with a firm for five or six years, so we're not an early stage investor. In medical, new products wouldn't come to market until our time with the company is over.
Fitzgerald pointed out that expectations can change when a medical-device outsourcer is acquired by a private equity firm. If you go to private equity, there's an expectation to grow and a defined timeline to grow, he said. Koo added that private equity firms typically want to double the size of firms acquired within four to six years.
According to Fitzgerald, the most significant change in the MDO market in the last 18 years has been the focus on quality.
Customers look for us to design-in quality or inspect for quality before it goes out the door, he said.
Working with RoundTable also has allowed Vesta to grow in ways that it might not have been able to on its own. In addition to buying ExtruMed, Vesta last year completed a 50,000-square-foot expansion in Franklin and consolidated its plants in Placentia and Temecula, Calif., into a new plant in Corona, Calif.
We had been only silicone, and we needed another material platform, Fitzgerald said of the ExtruMed deal. Vesta also has made sure to keep the ExtruMed name active because of the value it had with customers, he added.
After adding ExtruMed, Fitzgerald said Vesta integrated both firms' sales teams. The first 90 percent of that effort wasn't difficult, but he said the last 10 percent may have been more difficult than the first 90 percent because of the need to work with different systems and validations.
Looking across the entire MDO spectrum, Koo said the market has a great opportunity to consolidate.
Customers want to outsource, but they also want to reduce their number of vendors, he said. There aren't enough large players in the [MDO] sector. That makes it attractive to large corporate buyers. Larger industrial companies are looking to get into the medical market because of its higher growth.
Koo also encouraged MDO companies that might want to work with private equity firms to continue to invest in the business as if you're going to own it for the next five to 10 years.
And, of course, at the end of the day, strong financial performance plays a key role. Koo said his firm passes on the majority of companies it considers buying because of inadequate margins. RoundTable prefers acquisition targets that can provide gross pretax margins of more than 20 percent. Vesta was able to meet that requirement.
Koo added that the MDO market is primed for rollup strategies, but he cautioned that combining several companies and taking cost buys earnings growth for a year but it doesn't make you a better company.
The Plastics in Medical Devices conference was hosted by Plastics News Global Group.