The good news for emerging med-tech companies is that the M&A market remains active, with the big guys still needing to look outside for innovation. The nature of these exits, though, is changing. Historically, cash upfront deals with fairly token back-ends have been common, and needless to say much appreciated by the acquired company and their (often weary) investors. Increasingly, however, pharma-style “biobucks” are making their way into device deals, e.g. generous total deal values with a good portion of the value based on years-away regulatory and commercial milestones.
For the strategics, who see growing market adoption and payment risk, structured acquisitions make a lot of sense. Having returned to the M&A scene in the last couple of years, though with a devalued currency and lower risk appetite, Boston Scientific is leading the way in back-ended deals. Two companies acquired by Boston Scientific this year, Rhythmia & Cameron Health, were both pre-commercial, and they both got heavily back-ended deals from BSC. While the eye-catching Cameron Health headline read “Boston Scientific To Acquire Cameron Health, Inc for $1.35 Billion,” only $150M of that was upfront. Sounds like biobucks to me. Rhythmia’s deal was a little less drastic, with $90M upfront and $175M in milestones, but the theme is the same.
It’s Commercial Risk, Stupid
Boston Scientific may be trailblazing these types of deals, but serial acquirer Covidien is also dabbling in this trend, as witnessed by their acquisition of Maya Medical last spring. Maya, an Ardian look-alike with a catheter-based hypertension treatment, went for $60M upfront and $170M back-ended. Speaking on a panel at the recent Advamed conference, Covidien Corporate Development VP Dennis Crowley described the “demands made on companies selling products" and "risks entrepreneurs don’t see” as driving more scrutiny of valuations and structuring of deals.
Covidien’s Crowley also repeatedly referred to the difficulty in valuing early-stage companies with lots of critical milestones still in front of them. US regulatory risk, while real, is more or less understood by the strategics and their high-priced counsel. What is increasingly hard to predict in med-tech is how the market will adopt a product once it gets launched, which is closely tied to the “who will pay for it” question. Commercialization risk is the big one companies are managing when they significantly back-end a deal. Let’s quickly revisit the BSC / Cameron Health deal and look at the payment schedule for a case-and-point:
$150 million on deal close
$150 million on FDA approval
$1,050 billion in revenue milestones over six years post-approval
Attitudes Changing in Venture Community
Traditionally not fans of structured deals, VC’s are starting to warm to the idea and their attitudes are beginning to shift. There probably isn’t enough capital in the current med-tech venture ecosystem to carry innovative companies through successful commercialization with the increasing demand by regulators, customers and payers for expensive data and the cost of launches in general. At the same Advamed Conference last month, Paul LaViolette, Partner at SV Life Sciences and former COO at Boston Scientific, conceded, “The VC community’s openness to strategic involvement coming in earlier is possible today in a way that it just wasn’t before.” To see what may be coming in the “adolescent” med-tech deal space, Paul suggests looking to grown-up Pharma where structured deals are common.
Bottom Line – Get Real and Start Talking
If you are a development stage medical device company without serious market validation, don’t expect the cash-heavy / upfront-heavy deals of yesteryear. Set realistic expectations with exit-hungry investors, get the ear of the strategics early on, and think creatively about risk-sharing deal models that help build company value while not giving away the store. Unless the US capital markets become more friendly to med-tech IPOs, expect structured deals to be the new normal.