Medical Device Daily Executive Editor
SAN FRANCISCO – Dealmaking is a pervasive topic during the annual Frost & Sullivan Medical Technology Executive MindXchange, which is in its 11th edition here this week.
From the “Here's what we do“ pitches implied in the displays of exhibitors to the end-to-end networking opportunities that are a hallmark of this annual gathering, product/service suppliers and possible customers spend a lot of time in various levels of “Let's make a deal“-type talks.
Dealmaking from a larger, industry-wide perspective also occupied two main sessions of the conference program at the Grand Hyatt hotel on Monday, looking at the dynamics between large and small device companies and the liquidity options available to those who are building innovative firms.
Doug Godshall, president of the Vascular Surgery Division of Boston Scientific (Natick, Massachusetts), brought the perspective of his previous assignment in that company's business development function to a discussion of the changing nature of the relationship between smaller companies and those who acquire them.
Jeff Hoffman, managing director and head of healthcare investment banking for Piper Jaffray (Minneapolis), discussed the acronym-heavy liquidity events – initial public offerings (IPOs) or mergers-and-acquisitions (M&As) – that mark the hoped-for outcomes eyed by those who start up such companies.
Godshall, whose work on the business development side encompassed a period of time during which Boston Sci was far and away the most active acquirer among the larger industry players, cited the substantial changes in climate for both IPO and company sale “exits.“
While start-ups are still the lifeblood of innovation in the medical device industry and are being buoyed by greater availability of financing, he noted that there have been substantial changes on both sides of the buy/sell equation.
For the would-be sellers, the time between company formation and exit, via either going public or being acquired, is longer and the relationships with those providing the financing to carry the company through to that point are tending to be considerably longer.
Godshall said emerging device companies have had significantly greater access to financing, noting that while total VC investing across all industries has been flat in recent years, the proportion devoted to healthcare in general and med-tech in particular has been increasing.
But both the nature and timing of such financing is changing, he said, with many of the larger venture capital firms now not coming in until later in the company development process.
“A majority of the financings have been in later rounds,“ Godshall said, adding that some 60% of VC financings now come in “C“ and “D“ rounds.
While the number of med-tech IPOs has ratcheted up since emerging from a lengthy hibernation, such events still are relatively rare, Godshall said. But M&A activity is up, he said, setting the figure for significant M&A events at 48 last year vs. 42 in 2004.
One significant development, he said, is that the dollar volume of such deals is growing, with the majority of M&A exits in 2004 and 2005 valued at over $100 million.
Larger deals definitely are becoming the norm for the “big guys,“ with Boston Scientific taking the Goliath-sized step of committing to the $27 billion purchase of Guidant (Indianapolis) after riding a long series of smaller acquisitions en route to a spot in the upper echelon of large-cap companies.
With others such as Abbott Laboratories (Abbott Park, Illinois) becoming more active in the buyers' club, including becoming essentially a partner with Boston Sci in the Guidant deal by buying the latter firm's stent business, it's a case of bigger companies needing to make bigger deals beyond the traditional “tuck-ins“ designed to fill in gaps in a product lineup.
“As we get bigger, we will need bigger tuck-ins,“ Godshall said.
He said he expects there will be “another tier of smaller acquirers who will fill the void for $10 million-type deals.“
Godshall said exits by start-ups are occurring “either very early or much later, when the risk is out“ of the acquirer's equation.
An important factor in the company-development process now, he said, is that companies being pointed toward an exit “focus as much or more on clinical, regulatory and quality issues as on R&D.“
The architects of such companies need to build them to last, Godshall said, particularly since acquirers are looking more and more for “turnkey“ purchases rather than in the not-so-distant past, where they would look for companies with problems they presumed they could quickly fix.
He cautioned those at the helm of start-ups to be selective in signing on with financing partners, since those financiers “will be your partners for years.“
Saying that the average time to exit can be as much as six or seven years, Godshall added: “This is not an industry for the faint of heart. It is not a business where you can jump in and out of markets in 18 months.“
In his presentation, which focused heavily on company valuation in liquidity situations, Hoffman stressed the importance of gross product margins as a key measure of future success.
Acquirers “have been more aggressive“ in what they are looking for from potential fold-in companies, he said, citing the clear formula of high revenue growth multiples and high margins. That is because, as companies get bigger, “it's harder [for them] to get that growth.“
He said the criteria for successfully going public aren't much different: proprietary technology; a large, addressable market; U.S. sales; profitability; high margins; high revenue growth multiples; and reimbursement “clarity.“
“Investors are trying to be more disciplined,“ Hoffman said. “They want to take some of the risk out of it. They want revenue predictability.“
While acknowledging that the hurdles to going public are higher, he said there also are high benefits. “Once you're public, you can grow your [stock] price rapidly“ through good performance.
Building on a point made by Godshall just prior to his presentation, Hoffman said of the M&A marketplace: “We need more mid-cap companies to be consolidators.“ He said many are taking just such a stance, with “most mid-cap companies becoming buyers, not sellers.“
There are targets aplenty, he said. “At least 50% of device companies that are thinking about going public also are thinking of selling,“ Hoffman said.