The 2 most important things for medtech entrepreneurs


Last week I participated in the EuroMedtech 2012 conference in Grenoble, France. My take aways from the meeting came down to two vital things that every medtech entrepreneur should carry at their core.

The weather was beautiful and the location stunning set amidst the Rhones-Alps region. Two and a half days of networking, meetings and breakout sessions meant a lot of ground was covered and I met many fascinating companies.

These ranged from emerging medtechs and SMEs to big medtechs, VC investors and a €2billion private equity fund. I even met with the British Ambassador to France. I was also lucky enough to sample some wonderful local cuisine.

But why do I say just two take aways mean everything, and what are they?

Simply put, the two most important things are NICHE focus, and SALES. The two are inextricably linked, and no medtech company will be a success without them.

NICHE focus – define your “must have” early.

On the first morning, I chaired a panel discussing emerging medtech commercialization. We had great panelists including a medtech CEO, a VC, and a strategy consultant. Both the CEO and consultant had significant experience in big medtech marketing operations.

The CEO gave an example of a company which exhibited the power of niche focus. The company is called Somanetics and has an interesting story. Somanetics has developed and markets a cerebral oximeter. Its website states that the product:

“…has one job: to non-invasively measure changes in site-specific blood oxygen levels to help surgical and critical care teams protect their patients against brain and vital organ-area damage or even death” 

Wow. That’s a mouthful, but there’s no denying its very niche. The company was acquired by Covidien in July 2010, for a total of $250 million, net of cash. Sales in 2009 were $50 million, giving a buy-price of 5x sales. (Read more on Covidien’s recent acquisitions).

In the discussion, we also learned about some smart thinking and marketing tactics performed by Somanetics to boost its sales and attractiveness to its buyer. Here’s a graph of Somanetics sales growth (data from the 10-K SEC filings):

What was behind the hockey-stick-like sales growth?

Somanetics was originally targeting anesthesiologists in the US, a group which are contracted specialists and seen as a cost-center to hospitals. It was the wrong group to target. The company realised this after some 6-9 months, following feedback from the in-house sales team. As soon as the marketing focus switched to cardiologists, seen as a profit center based on procedures, sales growth grew rapidly. To an outsider, the distinction is subtle but knowing your market and how to sell into it can make a big difference.

Another important point from Somanetics was that it engaged with its end buyer several years before the acquisition actually took place. Early outreach to your prospective end-buyers is key – you get to build a relationship by building a dominant presence in a niche focus. Then it becomes much simpler for the acquirer to buy you, rather than compete and try to develop its own version.

SALES

Every medtech company needs to think about sales from the outset. This may seem a little like crystal-ball gazing when you’re at an early stage of developing your IP, and struggling to get the technology past initial proof of concept. But it matters. Here are 8 reasons why:

1. Technology validated by the market

When your technology is getting sales from paying customers, the validation is more valuable than any amount of navel gazing you will ever get from reports and focus groups (don’t get me wrong, these things have their place). A customer who buys your device or product has made an active choice against the competition. And if it keeps selling, this is only because it’s accepted by the market.

2. Market feedback enables a better version 2

Feedback from end users gives you hugely valuable information. What can you do to make version 2 even better? Can you improve performance criteria, or user interaction? Can you make the product simpler? This all comes from real-world feedback. The best products are designed with this iterative process going on alongside product development.

3. Acquirers want sales

Acquirers like sales – this means your product is de-risked. You’ve overcome the technological, development, clinical and regulatory hurdles to get this far. It makes an acquirers life much easier – they focus on the part they are good at – ramping up sales using the existing channels and marketing expertise they have in-house.

It may cost a little more to buy a product already approved and on the market, but from an acquirers perspective the risk is much lower. And since they have multiple bets on development stage technologies (e.g. through option or license deals), they can pick and choose the successful ones that reach market.

Acquirers also like to buy companies and technologies that add instantly to earnings. It may not be earnings accretive immediately – e.g. Somanetics which was bought at 5x sales was more expensive on an earnings basis than Covidien.  But that’s OK, the acquirer is usually looking for a technology with big growth potential and where their marketing muscle can boost sales.

Occasionally, acquirers do buy technologies or companies that are pre-market. But within medtech, this only happens where the technology is truly revolutionary or game changing. A good example is Ardian which was sold to Medtronic for $800 million upfront, plus sales milestones, in 2011.  Ardian is a developer of renal denervation catheter technology to treat uncontrolled hypertension. This is a difficult to treat patient group with limited treatment options. Is your technology really this revolutionary? (And by the way, Ardian still had a CE mark, early non-US sales and solid clinical data).

Acquirers preference for sales was also highlighted by the presence of the private equity firm – it only looks at companies with earnings (specifically EBIDTA) over $10 million.

4. How extensive should sales be?

One of the discussion points on the panel was how developed should the sales effort be? After all, most development stage medtechs have specialism in technology, product and clinical development, and getting over regulatory hurdles. Adding sales to the mix can seem like a change in a company’s DNA.

Sales should be focused yet broad enough for commercial validation. Early go-to markets for sales were suggested as: Germany (largest medtech market in EU); and UK (closest cultural fit to US, likely origin of eventual acquirer and biggest single market). But its important to be broad enough so you are selling to at least a handful of hospitals (say, 4) in each city. This means the technology is scalable and isn’t just targeted at a very small user group.

5. Direct sales or distributor model?

Many emerging medtechs perceive that since they do not have sales and marketing specialism or expertise, then this should be outsourced to a distributor. Sounds simple enough – a distributor already has the reach and relationships to exploit sales channels. This can be an effective route. However, there are challenges.

Many times a distributor can be a false economy. Firstly you give up a significant margin to the distributor (often 30-40% or more). That comes off your bottom line. Secondly, if you go to a generalist, the risk is your product pride and joy is just another pipeline product on the shelf. And if the distributor also sells its own product, yours will get second place – the margin on own products for the distributor may be 70%, while yours is just 30%. Think about the incentives.

Good distributors can be very effective. If you do use them, go for those with their own niche focus and strong incentives in selling your product. I met a Hungarian distributor led by an ex-physician which sold just into Hungary, and invests over $1million per year on end-user physician training – a strong value-add. Another specialist I’ve recently met focuses on opening sales channels into emerging markets – this provides fast sales launches and acts as a “back-door” route into more established geographies.

Coming back to our non-profitable medtech – where and how do you start with sales? The VC gave a useful insight based on experience from portfolio companies. The suggestion is to develop direct sales in the home market, and use distributors for focused international reach. A blended strategy.

If you truly want to build a great company, at some point you will need to develop your own sales force. A great example of a company that grew with its own product and salesforce is Masimo, a developer of non-invasive blood monitoring equipment.

6. Hire the right sales reps

If you’re going to sell product, get the best people to do it for you. Obvious, you may think? Not necessarily – a great sales person from a big medtech may not be a good fit for an emerging, scrappy, entrepreneurial medtech. Often times, an impressive CV with long sales history and big accounts may only suit a big-company environment. And account managers are a big no-no. The right skills-set for your entrepreneurial medtech are the hunters, lean and hungry.

A classic example I came across years ago was from Shire Pharmaceuticals, long before it was built into the $multi-billion company it is today. The then CEO hired the top quartile of Xerox sales people, and taught them what they needed to know about the company’s drug products. They turned out to be sales superstars.The strategy helped Shire build a strong foundation and international reach – sales have grown from around $130 million in 1995 to over $4 billion in 2011.

Even more critical to an entrepreneurial medtech transitioning into sales – the CEO needs to be someone who can make the transition from a development company into a sales based one. Or, as with the sales team, bring on board someone who gets it. Tough medicine but necessary if you want to win.

7. Engage early with a strong KOL network

Selling high-end medtech product is a solution sell. Your not shifting boxes, and while economics is critical, you’re not selling on price alone. So, its important to have support from the key opinion leaders (KOLs) – clinicians and end-user experts.

These become your secret sales force – through peer-reviewed journals and talking to colleagues, they evangelize your product for free. It makes their lives better and their patients lives better. Engage with them early, get feedback at product design and development stage, and stay close to them throughout launch and marketing.

It was encouraging to see two clinicians involved in the thick of the meeting. One was a general surgeon involved in clinical research for gastroenterological diseases. The other was an orthopaedic surgeon who advises on clinical trials, orthopaedics innovation and provides valuable insights from an end-user perspective.

8. Develop a sales strategy early

Much of the above was echoed in a recent meeting I had with a London VC. The VC stated that for any emerging medtech, she needs to know the team are thinking properly about a go-to-market or sales strategy. This is particularly relevant for early stage companies, where the focus is too often on a cool technology.

It’s not enough to say “yeah, we’ll get some distributors.” Your investors are backing you to execute the plan, including product launch and early sales. They want to know you can go the distance.

So, in summary, go super niche – and dominate that niche. And get used to the fact you will have to develop sales. Your competition is already doing it. Your end buyer will love you for it.

Finally, if you ever get a chance to visit Grenoble, try out the tuna tartare at L’escalier restaurant. I’m no foodie, but it was truly awesome.

This post is by Raman Minhas

Images: Claude Mansiot; Tami Hardeman

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9 thoughts on “The 2 most important things for medtech entrepreneurs

  1. Great post Raman. You summed up Euromedtech nicely – once again it was the most productive partnering meeting of the year for us. I have a question for your readers: can anyone provide an example of a medtech company that has used a distribution model in the US and achieved a >$100M exit? As we approach commercialization we are debating the pros and cons of direct vs distribution in the US. I can quickly come up with a list of recent exits, Acclarent, Oridian, Somanetics, that had direct sales in the US. Can anyone provide me with examples of distributor driven successes?

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