Medical Device Daily Executive Editor

SAN FRANCISCO – So you're running a smallish, start-up variety medical device firm with a single product or perhaps a line of products that can still be counted on one hand.

You're looking down the road to some form of the proverbial “liquidity event,“ but in order to get to that point – or perhaps even in lieu of it – a well-thought-out distribution deal may be the ticket to success.

During a session at last week's Frost & Sullivan Medical Technologies Executive MindXchange at the Grand Hyatt hotel, Joseph DeVivo, president and CEO of RITA Medical Systems (Fremont, California), a small-cap maker of systems for the ablation of tumors, offered distribution dealmaking tips that might be employed once that start-up progresses to the commercialization stage.

Saying the current environment for small companies is “really hard,“ DeVivo noted that there's no shortage of money for such firms. “The financial environment is very good,“ he said, “it's just that the barriers are higher.“

The initial public offering window is open again, but pretty much only to later-stage companies, and acquiring companies clearly are more risk-adverse and taking a “prove it first“ attitude toward the new technologies smaller companies are hoping to ride to an exit.

“The bar for exit for smaller companies is just set higher today,“ said DeVivo, adding that doing a distribution deal “may be a better option.“

He cited Boston Scientific (Natick, Massachusetts) as being “way ahead of the times“ several years ago when it began making milestone-driven, licensing-type deals with smaller firms. In many cases, such deals later turned into pure acquisitions by Boston Sci.

“Distribution deals may not be the first choice for a smaller company, but they can work well,“ DeVivo said.

He said direct distribution or strategic alliance-type deals are the best option, either in an arrangement whereby a larger company takes over distribution of the smaller company's product or products, or where the smaller company agrees to distribute another firm's line that may be complementary to its own products and thus is a logical add-on for its existing sales force.

“If you're going to do a distribution deal, make sure it's in line with your corporate mission,“ DeVivo said. “The key question to answer is how does it affect your corporate identity?“

By way of a branding example, he cited an agreement back when he was with Computer Motion – since acquired by and folded into Intuitive Surgical (Mountain View, California) – which signed on to have Stryker (Kalamazoo, Michigan) sell its Hermes system for use in surgical settings. Sales went well under the agreement, “but Hermes became known as a Stryker product, not a Computer Motion product,“ DeVivo said.

Doing a distribution deal makes sense for a smaller company in order to capitalize on its investment in a platform technology, “especially if it's a product application outside your core competency,“ he said.

One other basic question to ask in deciding to do a distribution deal, DeVivo said, is “Do I have the cash for direct distribution?“ If not, a distribution deal with a larger company offers a path to commercialization and revenue without the huge investment a direct sales force requires.

He cautioned, however, against doing a global distribution deal with a single partner, especially if you're a single-product company. “You can end up in a 'golden bear hug' if you hand over your product to one distribution partner.“

As to the other side of the coin, DeVivo said smaller companies should consider selling someone else's product if such a move enhances the company's strategic value and when it offers the opportunity to leverage an existing sales organization, “which is your biggest single expense of doing business.“

He strongly cautioned against doing minimum-purchase deals.

“When you agree to buy a certain number of units as part of your agreement to distribute another company's products, that equates to a three-year purchase order.“

Forcefully declaring that “minimums are horrible,“ regardless of which side of the distribution agreement a company is on, DeVivo added: “I just don't believe forcing a partner to buy a product is good business.“

The success of a distribution agreement, he said, is when “my customer buys your product,“ or vice versa.

DeVivo touted the “shared royalty“ model, saying such an agreement “creates a better partnership.“

One other key concern in setting up distribution agreements, he said, lies with what happens when such agreements expire. “You can't be too dependent on that agreement,“ he said. “If you're bigger, you need to buy them before the agreement expires.“

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