The last 4 weeks has seen a flurry of medtech M&A activity from Covidien (NYSE: COV).
Covidien has purchased 3 companies, all in allied spaces. The companies purchased are superDimension Ltd, Newport Medical Instruments, Inc. and Oridion Systems Ltd. Briefly, the acquisitions were as follows:
superDimension is to be acquired for $300 million, with future earnouts possible. superDimension is based in Israel and has annual sales of $30 million, giving a valuation multiple of 10x revenues. It has developed the “i·Logic™ System uses Electromagnetic Navigation Bronchoscopy® to provide minimally invasive access to lesions deep in the lungs as well as mediastinal lymph nodes. By extending the reach of conventional bronchoscopes, the i·Logic System facilitates more effective evaluation of lung lesions, potentially enabling safer, more effective tissue biopsies.”
Newport Medical Instruments to be acquired for $108 million. Newport is privately held, based in California, and is “is a physician-led company, focused solely on the design and manufacture of dependable, life improving ventilators that are affordable for caregivers worldwide. Newport Medical’s products are sold in the United States and more than 115 countries worldwide.”
Oridion Systems to be acquired for $300 million, net of cash acquired. The company is based in Israel, and has 2011 sales of $64 million, giving a valuation multiple of nearly 5x revenues. Oridion “develops Microstream® capnography monitors and modules, in conjunction with specialized algorithms, as well as etCO2 breath sampling lines. Together, these products monitor adequacy of ventilation and provide an early indication of airway compromise to make patient care safer and easier.”
So, are there any common features? Well, all three deals are in the space of respiratory medicine. These are divided into more specialised medical device segments within the recent 10-K filing. Specifically, superDimension would fall within Endomechanical Instruments; Newport Medical within Airway and Ventillation Products; and Oridion Systems within Oximetry and Monitoring Products.
Valuation multiples are also pretty rich, from just under 5x to 10x revenues (as can be seen from two of the transactions). Covidien’s own valuation, at the time of writing, is 2.2x revenues. And, two of the companies are from Israel (high quality engineering expertise, but in theory could come from anywhere).
The press releases do give some very general guidance as to Covidien’s acquisition strategy – for example, in the Newport release, “This acquisition is consistent with Covidien’s strategy to expand into adjacencies and invest in product categories where it can develop a global competitive advantage.” Hmm, nice corporate speak but doesn’t tell us very much.
As I thought about this some more, I came up with my own list of common features, or lessons, that would be useful to medtech entrepreneurs building innovative companies, with the plan/hope of one day exiting via a trade sale. Here it is:
1. Niche focus– Each of the companies was bought for a very specific expertise. It’s often cheaper for a big medtech to buy promising or validated technologies and products than build them in-house. There’s no monopoly on innovation and great ideas can come from anywhere (or Israel, as it seems). This also allows a big medtech to engage with and track many companies of interest, waiting until such a time where the company is either validated and it becomes a neat tuck-in acquistion, or where the competitive threat of someone else buying becomes too great. As per the title of Peter Sims excellent book, the big medtech can make lots of “Little Bets.”
2. Know your market and your buyers – Covidien didn’t just come knocking – its very likely that there was significant effort from the sellers to get noticed too. This probably included proactively engageing with potential partners, and through a combination of external validation – by clinical user uptake, peer reviewed literature, and most importantly, sales. An entrepreneur needs to have developed a company and its product(s) where there is significant need such that, as a big medtech’s strategy develops, you become an worthy target. You don’t know which medtechs will become suitors, but developing niche, high value products for areas of unmet need is a well-proven way to go. As Wayne Gretsky said, “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
3. Sales, sales, sales – This is probably one of the most important facets. Sustained and growing sales provides the highest level of validation. It means that product development is de-risked, regulatory hurdles are de-risked, market launch is de-risked, and even some market execution is derisked. Big medtechs and corporates are going to be much happier to pay for a company that’s on its way and already proved early market uptake, than an interesting idea with significant risk still baked in.
4. Growth potential – There has to be significant upside for an acquirer. Each party should focus on what it does best: the entrepreneurial medtechs develop product, achieve regulatory approval, launch the product(s) and develop early sales; a big medtech has a portfolio of businesses and product lines with extensive marketing, sales and distribution reach and can roll out product from a small medtech to its full global potential. Thus, even though superDimension already had sales of $30 million, and Oridion had 2001 sales of $64 million, it’s only worth Covidien paying the multiples it did if it strongly believes it can achieve significant growth from those starting points.
5. Know when to fold ’em– Get out while going’s good. For smaller entrepreneurial medtechs, they should focus on what they’re best at. New innovation and early market sales and validation. However, to maintain the types of healthy valuations described, such small companies would need to transform themselves into significant sales and marketing organistations, and have follow on pipeline products to maintain growth. Both of theses are fairly major tasks, would require substantial further investment, and significantly increase risk for shareholders.
6. Build a sustainable, growing company – One of the best pieces of advice I ever heard was from a medtech instrumentation entrepreneur, Mark Reid, who built up his company up from scratch, Genetix, and sold for £63 million to Danaher, in 2009. The advice was this: “Dont’ build a company with a view to just sell; build a great company, with products and sales, and the buyers will find you”. At the time of the sale, Genetix had a turnover of £28 million.
Are you an entrepreneur or investor with related experiences? Do you have any other lessons you could add, or disagree with any of the above? Comments welcome.
This post is by Raman Minhas. He is a medtech enthusiast, CEO of ATPBio, and works with entrepreneurial companies, providing partnering, licensing and financing support. He is also an investor in medtech stocks, using a value based approach.
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