How mid-market medical device makers can compete with larger companies

Small and mid-market companies can thrive despite the dominance of large-cap competitors by understanding the intricacies of budget allocations, leveraging agility to adapt service models, and positioning themselves within critical niches.

Public health systems such as the UK’s NHS face economic constraints, with expectations low for real change following the October 2024 Budget. “Businesses operating within this space have to navigate these financial limitations while finding opportunities to establish viable economics from NHS contracts,” stresses Robin Senivassen, Investment Director at Inflexion.

Small and mid-market companies face significant challenges in a market dominated by large-cap competitors. These larger entities wield substantial influence, using their scale to create or acquire competitive moats that preserve their market dominance.

Understanding budgetary allocations can help smaller businesses to compete. While overarching spending may appear constrained, specific pockets of funding – targeted towards innovation or efficiency improvements – can provide opportunities for businesses to engage successfully. Understanding opex versus capex budgets is key: where capex funding may be scarce, opex-oriented service models can offer a successful alternative as they align more closely with the NHS’s immediate financial priorities.

Smaller businesses need to use their agility as a competitive advantage to outmanoeuvre larger rivals. This nimbleness allows mid-cap companies to respond rapidly to market changes with tailored solutions. This can be seen in shifting service models. Public health systems often favour opex over capex due to financial pressures, so smaller companies that can transition from capex-heavy models to opex-oriented offerings stand to gain a competitive edge. For instance, moving from selling expensive equipment outright to providing subscription-based or pay-per-use services aligns well with public sector procurement strategies.

Delays in Medical Device Regulation (MDR) approvals further complicate the situation, disproportionately impacting smaller businesses. Lengthy approval timelines slow time-to-market for new products, exacerbating the challenges of competing with large-cap companies. However, this can also create opportunity for smaller companies, where larger ones have streamlined their product portfolios and may no longer compete, or where there are de-listed products that can be acquired.

In-house vs acquisition for R&D

The medical device sector draws a distinction between research and development. While development – refining and incrementally improving existing products—is often manageable in-house, true research involves greater uncertainty and resource intensity. Consequently, larger companies frequently turn to acquisitions to bolster their research capabilities. Start-ups and mid-cap businesses that excel in disruptive innovation often become acquisition targets, allowing their breakthroughs to reach broader markets.

On the other hand, development tends to be a more iterative process that larger companies can afford to pursue internally. For example, creating updated versions of existing devices to meet new regulatory or customer requirements remains a primary focus for in-house teams. The criteria for M&A within the sector have remained relatively consistent, with an emphasis on acquiring disruptive technologies that offer long-term value.

Becoming the go-to outsourcing partner

OEMs are increasingly reliant on niche service providers to maintain their operational effectiveness. This reliance reflects a broader trend towards partnership models, which go further than traditional subcontracting. By outsourcing entire functions, OEMs can shift operational risks to their partners, freeing up resources to focus on core competencies. Whether this trend towards risk-sharing will persist remains uncertain.

A countertrend has also emerged, exemplified by acquisitions like Novo Nordisk’s purchase of Catalent. Although far from being the norm, such moves suggest the appetite from devices OEMs and big pharma to regain control over key processes. For businesses operating in this space, identifying and positioning themselves as indispensable partners will be crucial. Services that offer unique value – such as advanced materials expertise or regulatory compliance support – are likely to remain mission-critical to OEMs, regardless of broader industry trends.

It is clear there are opportunities for smaller players in the medical devices space, but operating successfully within public health systems requires a nuanced approach. “In today’s market with constrained budgets and greater operational and cost pressures, a business’ ability to adapt and innovate is more important than ever,” Robin concludes.

Inflexion has been investing in the healthcare sector for 25 years, with medical devices a key vertical within it and SteriPack in the current portfolio.