Medical Device Daily Executive Editor
MINNEAPOLIS – With initial public offering (IPO) exits still far more the exception than the rule in the med-tech sector, the money men and women behind start-up and development-stage companies continue to covet acquisitions and other forms of investment by established players in the sector as the primary means to an end.
Whether that “end” is a complete exit from their venture investment or just a financing mile marker along the pathway, corporate relationships are the currency of choice.
Members of a panel discussing “Corporate Strategy: Managing Investments, Acquisitions, Alliances and Partnering” during the 4th annual Medtech Investing Conference at the Radisson Plaza Hotel in downtown Minneapolis cited a variety of approaches as they touched on both philosophies and actions.
Their discussion was not limited to mergers and acquisitions (M&A) activity, though moderator Bruce Machmeier, a partner in the Oppenheimer, Wolff & Donnelly (Minneapolis) law firm, did note that “M&A activity in the sector is very strong,” with a brand-new report indicating such activity in 1Q05 “was the highest in the last several years.”
Jack Kelley, manager of business development and ventures for Medtronic MiniMed (Northridge, California), said that company as a whole, after a few large acquisitions in the early part of the decade, is tending toward “minority investments, at present.”
Michael Bunker, director of business development for C.R. Bard (Murray Hill, New Jersey), characterized his company as “historically very conservative” when it comes to M&A activity, but with what he called “an increasing appetite” for looking at deals that do not fit that mold.
Nonetheless, with all the types of investment options available to it, Bunker said Bard is “more of a pure-play acquirer” than anything else.
Bruce KenKnight, PhD, director of business development for Cardiac Rhythm Management (St. Paul, Minnesota) of Guidant (Indianapolis), said that the company’s guiding philosophy is to “look at [any] deal structure as a tool to create value for our shareholders, so you need to develop a structure that has the most potential for creating value.”
And that doesn’t mean acquisition is the only route. “We’re finding recently that you don’t need to buy everything to create value,” he said.
(While he didn’t mention it in his comments, KenKnight could have cited the ultimate in value creation for shareholders – the pending completion of Guidant’s acquisition by Johnson & Johnson [New Brunswick, New Jersey] for $25.4 billion, which when completed will represent the largest deal ever in the med-tech sector.)
For David Milne, a general partner with SV Life Science Advisors (Boston), the key for those companies hoping to be on the receiving end of some sort of financial involvement with a larger player in the sector is to “focus on what your goal is.”
For instance, he said that some med-tech sectors – notably cardiovascular and orthopedics – have what he termed “rapid acquirers” (i.e., companies with the wherewithal to make deals and make them quickly).
“You need to do your homework on the company or companies that you may be acquired by or partner with,” Milne said. “You need to know if an M&A event is likely, or if you will have to focus on an IPO” as an exit strategy.
Asked how firms connect with one another, the panelists offered a version of real estate’s “Location, location, location” mantra: Contacts, contacts, contacts.
“Do the homework,” Kelley urged the wannabe recipient companies in the audience. “Find the touchpoints. You need an executive ‘sponsor’ at the big companies. Communicate with several executives in various divisions; we talk among ourselves.”
Bunker said that making partnerships with large players happen “takes more time than you think it’s going to.”
From the corporate end, he said research on the potential partner – or at least on the potential for the technology it is developing – is equally important. “We do a lot of homework on market size,” for example, and “try to be proactive” in lining up possible partners and determining what they might add to Bard’s stable of products.”
In making minority investments in companies, for example, “We always want to figure out what it looks like we’ll be able to do at the end.”
Kelley said, for example, that taking a minority investment in a company may not be specific to a product that company has or is developing, but perhaps to some element of technology that could be added to an existing product in the larger firm’s lineup.
From the perspective of the smaller company that is looking for a partner, he said: “Think of the products [that] company sells and how your product fits in.”
Milne warned smaller companies against having too singular a focus on a corporate alliance. “Creating a corporate partnering is not an event,” he said. “It’s a series of events that need to be coordinated.”
Look at it, he said, “as a long educational process.”
The key, agreed all the panelists, is developing strong relationships between those at each partner company responsible for making the alliance work.
For the smaller partner, Milne said, “you have to have a contact at the larger company who you can call when things don’t go well.”
And Bunker and Kelley emphasized the need to have relationships established with those responsible for managing alliances, who typically come from further down the organizational chart, rather than figurehead, higher-level executives.
In a discussion about the level of “control” an investing company might be seeking, KenKnight said Guidant’s term sheets “are pretty friendly.” Saying that “we don’t ask for much in the way of rights,” he added: “You have to be in a position to let go, even if it’s to another company.”