All hardworking emerging med tech teams, and their investors, want to see the value of their companies rise over time. Listen closely and you can hear the constant valuation drumbeat; the preoccupation with achieving X, Y or Z milestone to reach the next significant value inflection point. But what exactly are those X, Y and Z milestones that truly drive company valuation? The answer can vary greatly depending on who you ask, but here’s a good rule of thumb: if your high-five-worthy achievement does not significantly de-risk the whole endeavor, it does not add significant value.
For new medical technologies, major risks-reducing milestones fall roughly into four categories:
- Technology / IP: does it work how you say it will / can you protect it
- Clinical: can you demonstrate it works in humans
- Regulatory: will regulators let you sell it
- Market: will someone want it and pay for it
Not all medical devices have the same risk profile, and the risk can be distributed very differently across these four categories. A simple construct for sorting products by risk profile is according to the anticipated US regulatory path, namely PMA vs. 510(k). While companies can sometimes get partial credit for work in process, it is generally completion of the following milestones to which investors and potential acquirers assign value:
|Key 510(k) Milestones||Key PMA Milestones|
|Technology||For true 510(k) products, technology risk is generally not top of the list. Bench validation and verification, sometimes animal data for more complex stuff, can confirm your product works reliably. Because margins can be leaner and pricing more competitive on 510(k) products, showing your device can profitable at scale is crucial.||Success in relevant animal models will give you pretty pictures, but getting into a few humans (even in Kazikturkinbul) to show your gizmo potentially does something good and not bad is what investors crave. Your ability to protect the invention also will be intensely scrutinized, so important allowed / issued patents can build big value.|
|Clinical||Demonstrating clinical and/or economic advantage over the market leaders, generally in post-market studies, drives value. Publications and acceptance into guidelines are critical milestones if the product requires a change practice or increases costs substantially.||Since structured clinical studies are required for regulatory approval, valuation reward comes with successful completion of an interventional trial with meaningful endpoints. Set the outcomes bar too low, and the prospects of gaining FDA approval, and ultimately adoption and reimbursement, are diminished.|
|Regulatory||Obtaining 510(k) clearance is most valuable when there is doubt about the regulatory path. Otherwise, it’s a helpful feather in the cap but not a tremendous value creator. There are many 510(k)-cleared products that have never seen the light of day.||Having any regulatory authority in the developed world deem your product safe, if not necessarily effective, creates value. CE mark fetches maybe 60% of what a PMA approval buys you in valuation bump, but CE mark plus IDE approval to start a US trial has been a winning recipe for many recent high-value acquisitions.|
|Market||Most 510(k) products will have to prove themselves on market to be valued by a potential acquirer or attract scale-up capital. Sales growth and especially “same store” growth (e.g. increasing utilization per customer) are the most prized metrics, but only if these customers are paying list prices. If you hit $10-20M in revenue with continued strong growth and the hopes of becoming profitable, you are golden.||For novel category-creating therapies, market risk is tied much more closely to clinical risk; prove it works and people will believe the market is there. If market risk surrounds your product after spending the $100M to get it through FDA, then no one did their homework. For “me-too”-ish PMA devices, the path to high valuation will be paved with the same market milestones as 510(k) products. You’ll have to demonstrate market traction.|
A quick comparison of two companies nicely illustrates the difference between the two risk profiles and their valuation implications; Barrx, acquired by Covidien in 2011 for $325M + $70M back end , and Asthmatx, acquired by Boston Scientific in 2010 for $194M + $250M back end . Barrx, a minimally invasive therapy for Barrett’s esophagus, actually received it’s first 510(k) clearance back in 2001, but proving market traction took many years and studies. The company finally achieved a ~$30M revenue run rate and acceptance into treatment guidelines, driving a high value exit. Asthmatx’s device, a novel treatment for severe asthma where none existed, only needed to get to US FDA approval, with prospects of achieving reimbursement, to attract a big take-out. Even CE mark in 2006 had them on the edge of an IPO priced at ~$200M.
While there are a number of steps companies can take increase their perceived valuable, such as shiny new websites and quasi-newsworthy press releases, the laser focus of time, attention and dollars should be on the true value creators.