MedTech follows Pharma: The rapid growth of outsourcing in medical device manufacturing

When Henry Ford developed the modern assembly line in 1913, he sought to control all aspects of production to ensure quality and reduce costs. In 1928, he even built a city in Brazil, dubbed Fordlandia, to grow rubber trees so he could manufacture his own tires. The development of synthetic rubber made Fordlandia a monument to manufacturing hubris, and the city was abandoned without producing a single tire.

Today, the automotive industry bears little resemblance to Henry Ford’s tightly imagined supply chain. In response to technological complexity and relentless margin pressures, auto manufacturers now work collaboratively with outsourcers all over the world. The big auto makers benefit from streamlined production, reduced supply chain and labor costs, and constant innovations in processes and materials. They’re also able to devote more attention to their most value-adding functions such as design and marketing.

As manufacturing and markets become more complex, costly, and competitive, manufacturers inevitably shift an increasing portion of their processes and parts to specialized vendors and suppliers. Compared to most industries, healthcare has been late to the outsourcing game because of sacred priorities around quality, safety, and compliance. But today, the outsourcing wave that transformed the pharmaceutical manufacturing sector over the past few decades — creating whole new categories of companies in the process — shows every sign of transforming MedTech, too.

MedTech isn’t as advanced as Pharma in outsourcing. In part, this is because the product technologies are more diverse, proprietary know-how is spread across a fragmented supply chain, and the more complex products can be difficult to manufacture, requiring more specialized suppliers and service providers.

Accordingly, those outsourcing companies have been slower to expand and consolidate, and the ecosystem is not well understood by stakeholders and investors. Sponsors tend to categorize medical device manufacturing through a product lens, rather than a value chain perspective. And potential acquirers often underprice their bids, not recognizing the real value of these niche companies.

This article describes the MedTech value chain, its historical evolution, and trends that continue to shape and drive its growth. Given the size of that market, the potential profitability of innovative new devices and technologies, and pressures surrounding efficiency, speed to market, cost reduction, and regulatory risk, MedTech outsourcing presents a tremendous growth opportunity for investors, acquirers and consolidators.
 

Where Pharma has gone …

The pharmaceutical sector had a long tradition of doing everything in-house, from drug discovery to clinical trials to manufacturing and marketing. The rise of generic drugs increased pressure on profitability. The industry responded by shifting focus to developing and marketing new patent-protected blockbuster drugs.

This required a level of cost-cutting, operational flexibility, and innovation that could not be supported in-house. So, drug manufacturers examined their entire product lifecycle, from discovery through commercialization, and outsourced whatever they could. In distinct waves, manufacturers turned to three classes of product developers:

1. Preclinical contract research organizations (CROs) for clinical trials and FDA approvals
2. Contract manufacturing organizations (CMOs) for actual drug manufacturing
3. Contract development and manufacturing organizations (CDMOs), which aggregated those processes through acquisition and consolidation to become full-service providers

CDMOs are the logical outsourcing endgame. Their emergence reduces the complexity of managing multiple vendors across the product lifecycle, and has created greater opportunities for efficiency, scale, risk reduction, compliance expertise, and market intelligence. Not surprisingly, CDMOs now account for about a third of total pharma manufacturing.

Pharmaceutical companies function predominantly as discovery, R&D, and product marketing organizations. But without question, pharmaceutical outsourcing works. We’ve all benefited from accelerated innovation in drug discovery and access.

It’s now MedTech’s turn.
 

… MedTech is sure to follow

The medical device manufacturing sector develops a range of products, from the most basic (latex gloves) to an array of sophisticated, costly, and futuristic devices and technologies such as surgical robots, smart monitors, implantable microsensors, and so on. Like drug manufacturers, MedTech original equipment manufacturers (OEMs) rely on an existing product pipeline while constantly striving to bring new products to market.

Starting with well-recognized giants like Medtronic, Stryker, and Boston Scientific, there are over 6,500 OEMs in the U.S. alone, with over 4,000 different types of devices in the market.¹ Worldwide, there are over 2 million distinct medical devices in use.² Historically, the FDA approves about 35 new devices annually. Since 2020, the number of approvals has risen over 20% annually.³ In 2022, the global device market was $562.6 billion and is expected to grow at a compound annual growth rate (CAGR) of 6.2% to reach about $965.2 billion by 2031.⁴

That pace is partly fueled by growing demand — from the elderly, the chronically ill, and in emerging markets like India. But it’s also been enabled by advances in technology — ranging from 3D printing, injection molding, and sterilization to the incorporation of digital technology and remote monitoring, the rise of minimally invasive surgical (MIS) procedures, and robot-assisted surgical (RAS) operations.

Starting in the 1990s, MedTech OEMs began outsourcing electronic components and equipment to Asia and elsewhere, following the larger consumer electronic manufacturing trend. In the early 2000s, cardiology devices became more complex, with multiple technologies and specialized materials requiring advanced components that couldn’t be sourced in-house. So, those manufacturers began looking at component and subassembly outsourcing, too. Other interventional product manufacturers followed suit as their devices integrated novel materials, drugs, tissue, software, and electronics capabilities, making it difficult to maintain deep technical expertise in-house across a broad array of core technologies.

Chip Hance, the CEO of Regatta Medical, a private equity-owned partnership, witnessed that shift firsthand. “Clinical research, technology integration, and development took up an increasingly large part of the budget,” Hance recalls. “Staying on top of dozens of technology advances in diverse sectors without specialized partners became both unrealistic and unaffordable. The ROI wasn’t there.”

Steadily over the past few decades, the medical device sector has made greater use of supply chain partners that do component, subassembly, and even final assembly manufacturing to optimize specific segments on the value chain. This was in response to:

• The inability to master a wide range of cutting-edge technologies in-house that were increasingly incorporated into product development
• Rising investment costs for new-product development
• Rising regulatory risk for U.S. Food and Drug Administration (FDA) and European Medicines Agency (EMA) (European Union) approval (which are different than for pharma)
• Increasing capital expenditures involved in scaling up commercial volumes
   

Today, it takes on average $30 million to develop a Class II 510(k)-cleared device.⁵ Those costs make it hard for customers, like hospitals, to afford new devices. But outsourcing has lowered production costs by an average of 15%. It also fills gaps in know-how and specialized capabilities that OEMs lack in-house. And it reduces compliance risk at a time of increased scrutiny in the U.S. and Europe (where more than 500,000 devices will need to be recertified by 2028), even as OEMs face growing challenges in penetrating global markets.

In the U.S., the outsourcing market size was around $7.3 billion in 2020, and is projected to reach $15.1 billion by 2030, with a compound annual growth rate (CAGR) of 9.6%.⁶ Globally, the medical device outsourcing market was valued at $117.5 billion in 2022 and is expected to grow by 12.1% per year through 2030.⁶

The outsourcing value chain

The large number and broad range of companies across the value chain make MedTech outsourcing particularly challenging to understand. Many of those subsectors are nascent, highly fragmented, and rapidly expanding.

The value chain can be grouped into three segments: MedTech CROs; medical manufacturing services; and post-manufacturing services.