As competition for medical device acquisitions starts to heat up, Medtronic Inc. (NYSE:MDT) and Boston Scientific Corp. (NYSE:BSX) are essentially redeeming early bets on promising startups.
Last week, Medtronic said it would buy Ardian Inc. for up to $800 million.
The Fridley, Minn.-based medical device giant previously owned 11 percent of the startup, which is developing a catheter-based treatment for high blood pressure.
One week before Medtronic’s announcement, Boston Scientific said it would acquire Los Gatos, Calif.-based heart valve maker Sadra Medical Inc. for as much as $225 million. The Natick, Mass.-based company already controlled 14 percent of Sadra. Boston Scientific is also an investor in San Clemente, Calif.-based Cameron Health, which is developing a leadless implantable cardioverter defibrillator.
And in September, St. Jude Medical Inc. (NYSE:STJ) said it would pay $60 million to acquire a 19 percent equity stake in Atlanta, Ga.-based CardioMEMS, with an option to eventually buy the entire company for $375 million. CardioMEMS is developing wireless heart monitoring technology for heart failure.
For large medical device firms with lots of cash, an early investment in a startup normally means buying a right to eventually acquire the company at a certain price. Such an exclusive deal allows companies like Medtronic to shut out competitors as it trolls for acquisitions to boost growth.
In some ways, big corporations are replacing venture capital firms as a source for early stage funding. Medtronic currently holds minority stakes in 60 companies, a total investment of $320 million. Expect deal hungry Medtronic to pluck more companies out of its pipeline portfolio.
Equity stakes also allow big companies a chance to preview and influence the startup’s technology. After Medtronic led a $47 million financing of Ardian in 2009, Dr. Richard Kuntz, Medtronic’s top research and innovation executive, joined Ardian’s board of directors.
“We are thrilled to have attracted this strong team of investors and appreciate the confidence they have shown in funding the development of this clinically important technology,” Ardian CEO Andrew Cleeland said at the time. “We are particularly encouraged to have Medtronic as a new partner, and see their investment as a validation of our exceptional early clinical results, as well as the potential of our treatment for such a pervasive and complex disease.”
An early investment also presumably gives a Medtronic or Boston Scientific favorable financial terms for an acquisition versus buying companies on the open market.
In 2006, Boston Scientific and Oakwood Medical Ventures contributed $19 million in Sadra. Under terms of the acquisition, Boston Scientific said it would pay $225 million upfront plus potential milestone payments of up to $225 million through 2016.
However, given Boston Scientific’s previous investment in Sadra, Boston Scientific will actually pay $193 million upfront plus milestone payments up to $193 million.
Silicon Valley is emerging as the destination for medical device startups with big-bang technologies and exits. Cameron Health is one example. The startup, led by Minnesota medical device veterans, is attracting national attention to its leadless implantable cardioverter defibrillator.
California’s investment culture allows for more risk-taking, and it is backed by a robust venture capital community. These are two major assets where Minnesota — and Massachusetts — falls behind The Golden State.
For example, Medtronic acquisition Ardian was hatched in The Foundry, a well respected incubator in Menlo Park, Calif. that develops promising startups, mentors young entrepreneurs and finds investors for its companies. You will not find such a thing in Minnesota, at least not with the degree of success The Foundry enjoys.
The North Star State is creating medical device companies, but when was the last time a Minnesota startup sold itself for nearly a $1 billion? An $800 million exit attracts attention and people who want to replicate it. This is one of the reasons why entrepreneurs and investors flock to Silicon Valley.
In 1995, Boston Scientific acquired SciMed Life Systems, a Minnesota device firm, for $850 million. SciMed alumni Mike Berman, Dale Spencer and Dan Sullivan used their riches to launch dozens of companies in Minnesota and invest in countless others.
The state could look at Ardian not simply as another Medtronic acquisition but rather one more reason why Minnesota’s innovation culture is falling behind those in other parts of the country.
