The rumors of an acquisition of Auris Health Inc. by New Brunswick, N.J.-based Johnson & Johnson (J&J) have been around for a few weeks, since right around the latter's annual earnings report on Jan. 22. Now the conglomerate has confirmed that its Ethicon Inc. subsidiary will acquire Redwood City, Calif.-based Auris for $3.4 billion in cash and up to an additional $2.35 billion in undisclosed milestones.

That amounts to a huge potential return for investors who put about $733 million into Auris with institutional equity rounds that started in 2014, according to SEC filings. J&J and Auris partnered last May to enable robotic-assisted bronchoscopic ablation of lesions in the lung. That came shortly after the FDA cleared Auris' Monarch system for use in diagnostic and therapeutic bronchoscopic procedures in March.

Triple threat

J&J is hardly new to the robotic surgery space; it created emerging markets-focused joint venture Verb Surgical with Google parent company Alphabet Inc. in December 2015 and acquired startup Orthotaxy for its knee replacement robotic technology in February 2018.

Wall Street seemed to embrace the deal direction but did question the steep valuation that is a big step up from its most recent Auris financing just a scant few months ago in late November. (See BioWorld MedTech, Nov. 30, 2018.)

"The Auris acquisition is meant to be complementary to its Verb surgical robotics platform to help broaden the company's digital ecosystem. We are encouraged to see Johnson & Johnson moving more aggressively in the robotics field, which has been a gap for its medical device business with Verb, Orthotaxy and now Auris," said Wells Fargo analyst Larry Biegelsen in a note.

"We note that the $3.4 billion price tag is a meaningful premium to the $2 billion valuation from Auris' last private round of financing and is above what we would have expected for its Monarch platform alone," he added.

Cowen analyst Joshua Jennings wrote in a research note that he believes the acquisition of Auris signals to investors that JNJ is now "going on offense" in its medical device business, following a long period of portfolio optimization, including the recent divestiture of Lifescan in October 2018. "Management has highlighted digital surgery, including robotics, as a critical element of JNJ's future success in medical devices, so it is not a complete surprise that the company has opted to bolster its current capabilities in robotics," Jennings said.

Shares of Intuitive (NASDAQ:ISRG) dipped more than 1 percent early on the news, while J&J shares (NYSE:JNJ) remained flat. Still, J&J is up about 4 percent since its earnings and the initial Auris acquisition report.

Auris is co-founded and led by Frederic Moll, who also co-founded and led Intuitive Surgical Inc., which has long been the only major robotic surgery player. "Together, we will be able to dramatically accelerate our collective product innovation to develop new interventional solutions that redefine optimal patient outcomes," said Moll. "This combination is a testament to the incredible work of the Auris Health team and the innovation engine behind the Monarch Platform, which represents a huge step forward in endoluminal technology."

Moll is slated to join J&J upon the deal close, which is expected during the second quarter.

Mapping the future

Thus far, new robotic surgery entrants have positioned themselves vis-a-vis Intuitive's offerings in an effort to distinguish their offering either on the various bases such as the bodily region where it is employed, the kinds of procedures conducted or the size and cost of the system.

However, Biegelsen anticipates that Auris' Monarch will directly compete with the Ion system from Intuitive, which he expects to gain FDA approval in the first half of this year. That's likely to continue to undermine Intuitive, which has faced little competition.

J&J is focused on endoluminal, interventional applications for the Monarch system. Endoluminal surgeries are defined by techniques performed via a hollow organ – such as the lungs or stomach. Endoluminal bariatric surgery has advanced rapidly in recent years and could become the standard of care; making these surgeries robotic-assisted would enable this procedure to be a more consistent, repeatable and inexpensive treatment for obesity. The health care and consumer conglomerate is already a major player in bariatric surgery tools.

The existing partnership with J&J and Auris focused on integrating the microwave ablation technology that the former gained when it bought Neuwave Medical Inc., which it acquired in early 2016 for an undisclosed sum.

J&J underscored that the Auris acquisition doesn't diminish its interest in its other robotic surgery efforts Verb and Orthotaxy. "We are very committed to our partnership with Verily on the development of the Verb Surgical Platform. Collectively, these technologies, together with our market-leading medical implants and solutions, create the foundation of a comprehensive digital ecosystem to help support the surgeon and patient before, during and after surgery," said Ashley McEvoy, EVP and worldwide chairman of medical devices at Johnson & Johnson.

Robotic surgical systems from Orthotaxy and Verb Surgical are each slated to launch before the end of 2020. For its part, Verb aims to offer more standardized and economical surgery to a global population that otherwise would not have access to it.

Orthotaxy's technology is being developed for various orthopedic applications, which brings it close to the robotic surgery territory already inhabited by Medtronic plc. Medtronic said it would acquire the remainder of partner Mazor Robotics and its marketed spinal surgery robotic platform Mazor X in September for about $1.3 billion, after cash consideration. Medtronic recently launched the latest iteration of the system in the U.S. (See BioWorld MedTech, Jan. 29, 2019.)

Robotics investment

Med tech is often haunted by its relatively modest venture capital returns, especially as compared to biotech. So, that means this billion-dollar valuation paired with the potential for a roughly 4.5x to 8x return is likely to grab a lot of attention from investors. Auris investor ranks include some crossovers from Wall Street. It gathered cash from the likes of Wellington Management, D1 Capital Partners, Senator Investment Group, Mithril Capital, Lux Capital and Viking Global Investors.

Venture investors have become more active in the robotic surgery space in the last few years, as the number of companies with marketed robotic systems has also started to proliferate. Last June, CMR Surgical Ltd. raised a $100 million series B round to seek U.S. and EU regulatory approval for its relatively small, laparoscopic surgical robot known as Versius.

Also in 2018, San Jose, Calif.-based Restoration Robotics Inc. nabbed a $20 million loan to back its hair restoration surgical robot, while Italian startup Medical Microinstruments S.p.A. garnered a $24.5 million series A to finance the development of tiny surgical robots for open surgery in more delicate procedures such as reconstructive, lymphatic and eye surgeries.

Cambridge, Mass.-based Vicarious Surgical gained a $16.75 million series A round from prominent investors including Gates Ventures and Khosla Ventures to develop surgical robotics for minimally invasive procedures that is guided via a virtual reality interface.

With the Auris acquisition, McEvoy summed up J&J's intent in surgical robotics, "In this new era of health care, we're aiming to simplify surgery, drive efficiency, reduce complications and improve outcomes for patients, ultimately making surgery safer. We believe the combination of best-in-class robotics, advanced instrumentation and unparalleled end-to-end connectivity will make a meaningful difference in patient outcomes."