In 1995, the average time to a successful exit for a medical device startup was about 3 years, according to Rotational Medical CEO Martha Shadan. Now, Shadan said, it can range from 6 to 9 years and cost as much as $50 million. Shadan suggested that the increase in exit time is probably due to risk associated with investing in medtech and a lack of venture capitalists.
“This is a real problem for the industry,” Shadan said this week at MassDevice.com’s 5th annual DeviceTalks Boston event, “and it’s only going to get worse.”
Shadan and other medtech executives discussed trends they’re seeing in the industry before a crowd of more than 300 attendees the DeviceTalks event. The panel included Dr. Omar Amirana, a senior VP at Allied Minds; Jeff Mann, senior managing counsel for Med-Surg at Boston Scientific (NYSE:BSX); Christiana Jacxsens, attorney and shareholder at Greenberg Traurig; and Patrick West, a partner at Mirus Capital. David Dykeman, patent attorney and shareholder at Greenberg Traurig, moderated the discussion.
Shadan noted that before Rotation Medical closed a $39 million Series B round in August, she faced a lot of questions about reimbursement from potential investors.
“The number 1 objection and the reason why I heard 47 ‘Nos’ was because of reimbursement risk, and we’re not unusual,” she explained. “This is a huge uncertainty for the med device industry and it’s not getting any better.”
West echoed Shadan’s concerns about the loss of VC funding, adding that mega-mergers between huge companies in the med-tech industry and the lack of R&D funding doesn’t help early-stage companies.
“What you’re seeing is valuations going higher and higher and the options out there for those companies to buy are becoming fewer and fewer. I think we’re in for some interesting times here as we look at going forward,” he said.
The largest 25 acquisitions of 2015 make up about $110 billion in transaction value, but the average transaction value for a company that’s generating revenue is around $150 million. Bigger companies are also moving towards making pre- or early-revenue transactions – acquiring companies that sometimes put up less than $1 million in revenue.
“What’s particularly interesting here is that your average transaction value, as I said, was running around $150 million for the companies with revenue. Of those 22 pre-revenue companies, the average transaction value is over $200 million,” he said.
Amirana said that a company should prepare to be flexible in times of uncertainty.
“In my mind, the number 1 goal of any leader or CEO for a company should be to maintain optionality,” he said. “If the market gets hot, you’re prepared to go public, and you want to do that, you’re capable. If the M&A opportunity presents itself, and that’s what you want to drive to, you should be prepared to do that. If you have to finance the company and drive longer, deeper, further, and build a business that actually generates cash flow, which to many of us might be a dirty word, you need to be prepared to do that.”
Although the panel dedicated much of its time to discussing M&A, they also touched upon the importance of intellectual property and changing patent laws. Amirana said that Allied Minds, a publicly traded private equity group, often looks to license breakthrough technology at universities.
“I see a real strong desire at the university level to commercialize IP, as well as technology,” Dr. Amirana noted. “That is a robust and very active process and activity at the university level.”
Patent laws have changed significantly in the past few years – the U.S. Supreme Court delivered major patent opinions and the American patent system switched to a 1st-to-file protocol, Dykeman noted. He recommended that companies file early and often for incremental improvements, and that they watch their competitors closely.
Shadan added that IP is an important part of strategy and companies should address it as early as possible.
“For instance, if we have technology and we launch in the market for a particular anatomy, but we believe it’s a platform technology, we better be talking about that very, very early, about the potential for a platform,” she explained.
When Mann is doing due diligence for Boston Scientific and investigating an acquisition, he looks at IP as a vital component.
“It’s internalizing what [intellectual property] means, because the freedom to operate and the protection of the portfolio are really the critical pieces,” he said.
Gaps in intellectual property and consumer complaints is often how Jacxsens gets involved with companies, although she would rather work proactively to prevent litigation, she said.
“Coming from my standpoint and background with litigating, it’s a lot more fun and a lot more helpful to help companies on a proactive basis than when you’re dealt with a set of documents or a set of circumstances with that lawsuit in hand,” she said.
“We are well beyond the 1 patient, 1 device malfunction type of litigation here,” she explained. In 1994, she said, there were 70 plaintiffs involved in med-tech cases, compared to 95,000 patients involved in multi-district litigation over product liability today.
A majority of those plaintiffs were involved with the well-known transvaginal mesh lawsuits, which Jacxsens says highlight another problem that companies often overlook when they consider risk.
“You can’t just look at what’s going on with your particular product, but you have to look out there at what’s going on with the product class, what’s going on with that disease state and other devices used to treat that disease or what are other devices that may have the same potential complications,” she said. “It’s thinking broader than just your 1 device and the risks related to your 1 device.”
Despite the concerns about VC funding and difficulties in exiting, the panelists remained optimistic about the future of the industry. “If the technology is breakthrough and it solves an important unmet clinical need, if there is evidence, if there is a strong management team that is executing their plan well, then the money will come in,” Shadan said.
“There are a lot of reasons to believe that this is an exciting space to be in,” West added. “In the end, not only do we hopefully get to make a living doing it, but we’re in an industry where we make a difference in people’s lives, and that’s an unusual opportunity.”