As a medical devices entrepreneur you have to keep your eyes on multiple balls at once. Everything from the technology, your team, market, opportunity, competition, regulatory, clinical and financing. These are all here-and-now issues for you to deal with.
But you also need to look down the road – how will you (more importantly your shareholders) exit your company. In turn this could impact the type of company you are building today.
In the last 3 weeks, I have attended two medical devices conferences – MedTech Investing (MTi) Europe, in London; and AdvaMed 2012 in Boston. As well as moderating a panel on exit strategies at MTi, I sat in on several fascinating panels at AdvaMed looking at exit strategies, funding (financial and strategic), M&A and related issues. This gave me lots of food for thought on exits.
Across both conferences, the panelists included:
- several colourful entrepreneurs including: an industry experienced first-timer entrepreneur who had raised over $60 million of super-angel money; a 6 time serial entrepreneur, leveraging his expertise in hydrogels, involved in trade sales and an IPO; a surgeon-inventor turned entrepreneur involved in trade sales and IPOs
- VCs (including several with entrepreneurial ventures behind them or industry experience)
- corporate buyers (including one from a nearly $30 billion market cap co. who had been involved in over 100 transactions).
- an ex-Wall St medical devices analyst for 28 years, who then went on to become CEO of a heart valve replacement company and later sold it for $700 million cash plus milestones
- one panel even included John Abele, the billionaire co-founder of Boston Scientific; and Thomas Fogarty, the surgeon and inventor behind the embolectomy catheter, estimated to have saved the lives or limbs of over 15 million patients
I was in seriously good company.
Most people are already familiar with the two main exit strategies – IPOs and M&A. I’d like to add a third that doesn’t get talked about enough. Let’s look at each of these in turn.
In the current market, this is a tall order. While there are some companies which get away, there’s very limited appetite unless a company is revenue generating, preferably profitable, and already of a decent size.
Institutional investors just don’t need or want to take the development stage risk or early commercialization risk with emerging medtechs. They have a whole universe of stocks to choose from and can usually find those which match fund remit from more established companies. (There are very few funds which have a remit restricting them to only medical devices).
At one of the AdvaMed panels, there was discussion about recent (last 3 yrs) IPOs in international geographies away from the main markets – namely Australia and Canada. Both of these markets have less developed VC markets, and just seem to have an appetite for earlier stage companies.
But it’s still no walk in the park – panelists, which included expert bankers who assist companies list in each market, still advised that often times they turn companies away because they’re too early.
A good rule of thumb is an expected $100 million market cap at listing – companies this small are usually called “micro-cap.” When listing a micro-cap company, there’s a very real risk you will not get the attention you need from institutional investors (they’re often restricted to cover and invest in larger cap companies).
Then you risk falling into the land of the walking-dead: listed, so you have to comply with onerous listing requirements and quarterly reporting, but not big enough to garner investor interest to create liquidity and support. (Even in my own medtech investing in listed stocks, there are often insufficient opportunities, so I sometimes invest in non-medtech value situations).
Also, if you do list abroad, expect to spend a not inconsiderable amount of management time courting investors in those locales. One CEO of a US company listed in Australia said he was over there at least 4 times a year, sometimes more.
So, for IPOs, there are limited opportunities in current markets, unless you’re willing to look further afield. And an IPO is not a full exit – it’s a partial liquidity event, and more likely a source of the next stages of funding.
Trade Sales or M&A.
This gets much more interesting.
Panels discussed that strategic buyers within medtech have low and slowing growth rates themselves, new external pressures (e.g. cost pressures from healthcare payors and the medical devices 2.3% sales tax), and limited internal innovation. Many of them are actively engaged in sourcing and acquiring new technologies and companies that can help fill the pipeline and fuel future sales.
This is good news for emerging medtechs. But what are the qualifiers? To make themselves more likely acquisition candidates, companies should have:
- Niche expert focus – this should be disruptive, and cheaper for a buyer to acquire than develop in house
- Sales –these don’t have to be so strong as to enable a conventional valuation multiple, but at least enough to demonstrate early commercial uptake and validation
- Solid data – your technology, of course, has to be better than existing products – in terms of efficacy and clinical performance. But in today’s market that’s not enough. You also need well thought-out plans for reimbursement and healthcare economics.
- Quality systems – this tip came from the entrepreneurs. You don’t need to have the best in class, most expensive systems (e.g. software). But you do need to have robust quality across your entire operation to reassure a buyer. This means everything from your clinical trial design, through to the advisors you use. One entrepreneur’s tip: often spending a little more to hire the best can get you a lot more mileage. Another entrepreneur even took his company paperless within 6 months; this was a massive boon for FDA inspections. Quality systems all help make the acquisition an easier tuck-in. What a strategic buyer does not want to do is repeat work you have already done (e.g. are your clinical trials well designed and sufficiently powered?).
- Solid IP. This is obvious, but it needs more than just a clean patent. Most likely you need broad coverage with a family of patents to protect your space, with increasing detail for the really niche, unique aspects. Again, don’t be afraid to spend to make this robust.
From more than one person, I heard the adage: “Companies don’t get sold, they get bought”.
For me this sums up perfectly the best approach to thinking about exits. Don’t go out to sell your company. Build a great company, with a defendable market position, intensely focused execution, and sales with a roadmap to profitability. The goal should be to make the company sustainable. Then, the buyers will come.
Just build it?
Finally, I’d like to add one, often overlooked, exit strategy.
I’ve just started reading the biography of medical devices company builder extraordinaire – Bill Cook, founder of Cook Medical – titled “The Bill Cook Story – Ready, Fire, Aim!” Cook Medical is the world’s second largest privately owned medical devices company, with sales in 2009 of $1.7 billion and 11,000 employees.
This exit strategy is quite simple, but by no means easy. It will not suit most people, particularly in today’s environment of the quest for returns on investor capital. But for those that may be interested, it is this: Start your company, bootstrap and grow from cash-flow (along with selective investment – strategic or financial – but that which still gives you meaningful control).
Become a sustainable company with quality innovation and marketed products. Then, just never stop building.
This post is by Raman Minhas.