Our 2025 Q1 update from the accelerator-based sterilization precipice
One of the most-often quoted/requested charts we have created during the history of NextBeam is our projection of the North American sterilization facility landscape.
The first version of this dates from early 2022. We felt it was high time that we actually published an update to this chart marking the industry’s progress. But first, some explanation…
The General Idea
Back in 2021 / 2022 we heard somewhat consistent horror stories from customers about either losing sterilization capacity entirely or receiving price increases that in some cases trebled the historic amounts they were paying for ethylene oxide (EO) or gamma sterilization.
Around this time, the EPA’s EO mandate came into effect, causing the swift closure of 10 EO facilities across the US, and further exacerbating the supply problem.
We asked ourselves at the time: does the market have enough capacity?
The Original Chart: Our Assumptions
At the time it seemed to make sense that, roughly speaking, supply and demand were matched. If anything, we thought that the lack of capacity/large price jumps we heard about suggested that demand was outstripping supply in gamma and EO. So, our assumption was that the ~150 sterilization facilities across the US roughly corresponded to the correct amount of demand in the marketplace.
Broadly speaking, most market forecasts expect CAGR for the medical device industry to be in the >5% range (sources: KPMG, Grand View Research, Mordor Intelligence).
Where Are The Holes In This Argument?
We consider this a coarse analysis but use it mainly because better data sources are not available. Here are some of our own critiques / justifications of the method:
1) A “facility” is too vague of a measure
- Problem: there can be a huge range of capacity in any one instance. Counting facilities is too broad of a measure (explore a map of all North American contract sterilizers).
- This is true, but at the 150+ facility level, we expect that differences in the number of facilities average out.
- Accelerator-based facilities can have very large differences in kW capacity, but our analysis generally reflects that the number of facilities doubled from 2022-2025, and the announced power (kW) ratings of these new facilities tracked this doubling closely (2.2x).
2) Supply and demand were not matched in 2022, thus the analysis is incorrect. It is widely known that there is plenty of Co-60 (eg gamma supply) available at the time of this writing.
- Problem: It is difficult to cleanly separate out volume growth from price growth in the medical device space, and volume growth would ultimately drive a demand forecast.
- What we can say with a fair amount of confidence is that worldwide Co-60 supply is either not increasing or increasing very slowly (significantly below the growth rate of the overlying medical device market). To our knowledge, the single worldwide Co-60 supplier has never shared a forecast demonstrating a material amount of increased Co-60 production. We believe the current local minima in Co-60 prices is due to the consequences of a major supply chain bullwhip during peak-CoV and the unravelling of the destocking phenomenon and is further extended by the longterm (3-5y) nature of the contracts that would have been re-signed during 2021-2022.
3) EO is going to play a more significant role than you are forecasting.
- Our projections indeed do not expect that EO will shrink in North America. We project that supply will be flat over the forecast horizon (although there is reason to believe, in the wake of recent bankruptcy announcements from midsize players, etc, that it could shrink).
- What will likely happen is that EO supply will be moved – at least for a time – to countries where manufacturers believe they have a far lower risk of litigation.
4) Medical device growth is an inappropriate measure to apply as other industries also use sterilization.
- This is true: spices, cosmetics, agriculture, lab supply, and other industries do use radiation and EO to treat their products. However, broadly speaking, these industries exhibit 5-yr CAGR growth rates from 3-8%… and thus should not present much of an impact to using a 5% number.
In sum – given a lack of transparent capacity and market data, we feel this is a reasonable estimate.
At Last, The Update
Below is our original analysis with some small refinements to adjust for incorrect data. Notably, the cumulative built (or projected to be in service by end of 2025) facilities are listed below in bright pink. We project that, despite new additions, we are ~18 facilities short of meeting demand in 2025.
Why Is This Happening?
We believe the lack of supply is a function of several different factors:
- Uncertainty and higher interest rates are slowing facility construction. Geopolitical and domestic politics and supply chain transformation have been particularly uncertain in the wake of the global pandemic. Interest rates also have been at 10-year highs. The increased cost of financing coupled with uncertainty around market conditions will only slow new facility builds, given their long payback periods and non-fungibility (difficult to move one of these things once it’s in the ground).
- It is not in the interest of oligopolists to build aggressively. Steris and Sterigenics, the two largest players in the market, which together comprise 60%+ of contract sterilization, are not incented to risk overbuilding, given their favorable market positions and relatively strong geographic coverage.
- EO litigation. We doubt any significant growth will occur due to the continued risk of EO litigation.
- Co-60 supply limited. Similarly, we understand many Gamma facilities are not operating with their full complement of Co-60 given lack of supply.
What Do We Expect to Happen?
We expect that the trends in EO and Gamma will longterm increase due to the increased cost of compliance (and litigation risk management) around EO as well as the fundamental lack of Co-60 supply in the gamma market. Broadly speaking, economics dictates that increasing costs are borne most easily by larger suppliers. Thus we expect the oligopoly to benefit in a disparate way from these changes.
For these reasons, we believe that remaining committed to EO and gamma is not a great longterm strategy for customers.
How Do We Solve This?
Although we are watching the alternative gas space with great interest, we see accelerator-based modalities as the most credible solution to this problem for several reasons:
- They are sustainable. These facilities are as clean as the grid power used to run them
- They are scalable. A single E-Beam or X-ray facility can process many truckloads of product per day.
- They are mature. Accelerator-based modalities have long been considered “Established Category A” by the FDA – and equally as mature as gamma.
While not all migrations from gamma or EO are simple (or in some cases possible), it is generally possible to rapidly understand what the path looks like with a very small amount of testing. We have written extensively on this topic previously.
At NextBeam the first 5 years of our business have helped confirm our view that accelerator-based sterilization is a technology that we believe will be a central role in delivering the sterilization capacity that North America will require over the coming decades. We are excited to be part of this wave of change and always delighted to talk with customers planning for their future. Contact us today for a no-obligation conversation of how beam can work for you.
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