Houlihan Lokey Inc.
03/31/2023 | News release | Distributed by Public on 03/31/2023 20:30
The Takeaway: A Q&A with Paul Tomasic on MedTech
The Takeaway: A Q&A with Paul Tomasic on MedTech
Which areas currently are keeping you the busiest in healthcare M&A?
The healthcare sector as a whole tends to be more resilient than most other sectors when impacted by global or macroeconomic events. We see certain subsector trends emerge that attract increased interest and capital from strategic or private investors. Some examples in the current environment include the push for greater use of healthcare technology, earlier-stage diagnosis, and outsourcing. Outsourcing within the medical device sector-as distinct from pharmaceutical outsourcing-is attracting particular attention in the current healthcare M&A environment.
Why the push for outsourcing in medtech?
- A move to "value-based care" models has increased the pressure on OEMs to innovate. This has opened the door for a new group of providers of "outsourced services," who can accelerate R&D efforts or provide manufacturing or marketing services.
- The regulatory approval environment has become increasingly complex and difficult to navigate for OEMs, particularly in Europe, where implementing MDR remains a core challenge.
- The underlying technological improvements in the design and manufacturing of medical devices are increasing at an unprecedented rate-particularly in 3D printing, injection molding, sterilization, and in the use of plastics or material technologies.
So what makes this sector so attractive to investors?
Investors believe that it's at the early stages of a significant growth curve due to:
- Low penetration-outsourcing is significantly lower than in the pharmaceutical industry, with growth potential even greater as similar trends impact both subsectors.
- Expansion of capability set and service offering-the increase in penetration in emerging areas is regarded as "competency gaps" for some OEMs-materials management, digital, or drug/device combinations.
- High fragmentation-deployment of follow-on capital in a type of "buy-and-build" strategy. The top 10 medical device outsources hold less than 25% of the total market share, with many of these players acting across a range of industries beyond healthcare.
What possible headwinds do you see?
Potential short-term headwinds are a global recession, the return of COVID, and the prospect of price pressure and margin compression. Finally, the proverbial "cat is out of the bag" on the subsector so investors will need to be comfortable with relatively high valuation levels for platform assets in the space as well as the prospect of executing value-accretive bolt-on acquisitions.
What other themes will likely come to the fore in 2023?
We believe medtech outsourcing will have a strong 2023, continuing its trajectory to grow at double-digit rates, higher than the underlying medical device markets, due to:
- Growth in in-vitro diagnostics, orthopedics, cardiovascular, and surgical devices more broadly.
- Continued M&A where private investors can keep deploying capital through the cycle.
- Significant opportunity and activity in CRO (contract research organizations), where penetration rates are particularly low and the sectors are even more fragmented.
Statements and opinions expressed herein are solely those of the author and may not coincide with those of Houlihan Lokey.