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Three Forces Driving Med Tech To Be End-to-End Solution Providers

Three Forces Driving Med Tech To Be End-to-End Solution Providers

Unless your job involves orthopedic devices, you might have glossed over this year’s exciting news: as of April 1, 2016, the Comprehensive Care for Joint Replacement Model (CJR) is mandatory for 791 hospitals in 67 geographic areas of the United States. The headline may not have been very catchy, but really everyone in our industry should be paying attention to this first wave of emerging healthcare payment schemes. The Centers for Medicaid & Medicare Services (CMS) implemented the CJR to better manage its >$7 billion cost for the 400,000 annual hip and knee replacements performed on its beneficiaries, so CJR hospitals are now paid a capitated sum for the entire 90-day episode of care.  It will not be long before CMS bundles payment for other procedures as well (cardiac care, e.g. heart attacks and bypass surgery, is next on the docket).

This payment model shift is not just putting pressure on healthcare providers; medical device manufacturers are being asked to help customers achieve value-based care goals, too. The response by orthopedics companies is evident – they clearly got the memo that gadgets are out, solutions are in. Just as quickly as CJR was announced, Zimmer Biomet launched Signature Solutions, an array of value-enhancing services for joint replacement care, including surgical planning, patient engagement, and data analytics. Stryker saw the handwriting on the wall early, offering similar capabilities under their Performance Solutions program since 2009. Other big device companies are also planting the solution flag, such as Medtronic which since 2013 has acquired a diabetes management company and entered the cardiac care services business.  Incidentally, Medtronic also aims to compete for CJR dollars with their purchase of the low-cost implant maker Responsive Orthopedics.

This shift toward med tech offering end-to-end solutions is being driven by three powerful forces in the healthcare ecosystem that are only going to gain steam in the future:

Provider Financial Pressure

For the last decade or more, the mantra of healthcare reform has been the “triple aim” – improving the experience of care, improving the health of populations, and reducing per capita healthcare costs.  This drive is slowly bearing some fruit, and providers are expected to continue carrying the costs and risks of the value-based care mandate. This is all relatively new territory for providers, who are just starting to figure out how to calculate their costs and measure outcomes. As a result, they are scrambling to find somebody (anybody!) willing to step up and shoulder some of the burden, or at least help them understand the risks they are taking on and how they might be mitigated. Long used to selling into hospitals subject to capitated payment, and gaining ever more share of providers’ wallets through consolidation, large medical device companies are in a unique position to lend a hand.  A first step for med tech can be advising customers on how to reap the most value from products they've purchased from them. As Medtronic’s CEO Omar Ishrak put it, “…the appropriate application of technology can not only address inefficiencies in healthcare delivery but potentially drive inflection points in value creation.

Data Deluge

Whether you call it “big data” or some other buzzword, both health systems and medical devices are generating lots more of it every year. Providers need some way to make sense of all this information and harness it to measure and improve their performance on care delivery and cost.  Data integration and analytics support is where medical device companies can really shine as solution partners to their customers. As the med tech industry embraces this role, it will also become ever more entangled in clinical decision making; eventually lots of regulatory, legal and ethical boundaries will need to be reconsidered to truly realize the value of the data. New models for using clinical data to evolve toward best care will be needed to replace the gold standard approach of randomized, controlled trials. In this new model of data-driven care, medical devices could become the central hubs, driving not just procedural practices but entire care pathways. Data will also form the backbone of true risk-sharing models where payment for medical devices is tied to performance on value-based metrics.

Empowered Patients

Whether pushed by growing financial responsibility for care, or pulled by enabling digital health technologies, patients have an increasingly large role in their healthcare. In addition, payers and regulators are measuring providers on patient satisfaction and other patient-reported metrics. As with other types of risk they’ve assumed, providers are looking for allies in their effort to make and keep their patients happy. To help their customers, and also cleverly differentiate their products with means other than price, device companies are learning new ways to interact and communicate with their patient customers – a group traditionally understood in terms of anatomy, biology and physiology. Engaging patients in their own care is critical for good outcomes, and good outcomes are critical to hospitals and device companies alike, particularly in a bundled payment world. To this end, Stryker recently introduced its new web-based JointCOACH platform, which enables two-way communication between patients and care teams about things like pre-op prep, pain control, and rehab during the 90-day CJR period.

The success of the major med tech companies will increasingly hinge on their ability to demonstrate and deliver value to their customers, either by improving care or reducing costs, and hopefully both simultaneously(!). With bundled payments like the CJR emerging, the stakes are getting real now, so the choice is becoming clear – either be the solution or prepare to be commoditized, with all that entails. Medical devices are already a bargain compared to many drugs, but the bargain aisle isn’t the only place we want to live.

Smart Money in Med Tech: What it Means and Why it Matters

Smart Money in Med Tech: What it Means and Why it Matters

As the route to a successful exit in med tech has grown longer, and the pathway riskier and more expensive, many VCs have shifted attention to other sectors such as tech, biotech, and health IT. S2N’s emerging med tech clients wrestle daily with this new reality, turning over every rock to find money, tapping foreign investors, family offices, and physician-believers in the technology for cash. Pitches have taken on a more biotech-y or tech-y tone in pursuit of broader appeal and higher valuations, with Theranos as a prominent and lucrative example (until the bottom fell out).  One of the many curious / suspicious things about Theranos was always the lack of any traditional med tech investors around the star-studded BOD table.  Turns out that a number of veteran health care VCs were pitched Theranos and didn’t like what they saw.  Smart.

To define the elusive concept of "smart money" in our industry, we approached two dedicated early stage med tech investors, Aaron Sandoski, Co-Founder and Managing Director of Norwich Ventures and Joshua Phillips, Managing Partner of Catalyst Health Ventures.  Norwich and Catalyst are both relatively small funds, closing one or two deals a year from among the heaps of pitch decks they receive.  Having stuck it out through the rollercoaster ride of the last decade, Josh and Aaron have accumulated wisdom that informs their investment decisions and interactions with entrepreneurs.  So what makes these focused, experienced med tech VCs different from other sources of capital for emerging med tech companies? 

Both Josh and Aaron started off with the diligence process – a critical function of any venture investor and a good way to know if you are dealing with smart money. For Josh, it boils down to the clinical value proposition, which has to be “clear and tangible, not a me-too or a just a little different.” Josh sees many cool, futuristic technologies that don’t really change outcomes (a particular issue for diagnostics); less savvy investors can be dazzled and lose sight of this critical success factor.  Aaron goes right to the big picture math: “The main question is whether the company can get to the finish line in the right amount of time with a reasonable amount of capital.”  In med tech, defining that finish line is where smart money again can distinguish itself. Unsophisticated investors look to FDA approval as the end-game, but for Aaron “FDA is very far down the list.”  Aaron pointed out that <20% of 510(k) devices are acquired before commercialization; while that figure goes up to 60% for PMA technologies, once development costs and time are factored in, “timelines to exit and returns are not any better for 510(k) vs. PMA.”  That’s smart med tech money talking.

On the other side of the diligence gauntlet, if you are lucky enough to get funded, is the thought-partnership a smart investor can bring to their portfolio companies on complex topics, such as what evidence will generate the most incremental value (e.g. animal vs. human).  “You don’t necessarily have to get this kind of expertise from an investor, but you need it from somewhere; the entrepreneur who doesn’t believe this doesn’t understand what all is involved in med tech development,” cautions Aaron. Smart money investors also understand that med tech development is iterative by nature, and they are less likely to get spooked and run when problems arise. Josh summed it up: “When things don't go right, it’s very easy for investors to give up and leave; it might be easier to get money from a family office your uncle knows, and their valuations might be better than ours, but when things aren’t going well and you need someone to talk to, good luck.” 

Experienced med tech investors also have the benefit of seeing many technologies spanning multiple market segments, so they can “go broad” to source innovative ideas and solutions while the entrepreneurs “go deep” and focus on execution.  By Aaron’s rule book, “an entrepreneur should know 10X more than me about the companies and technologies in their specific field, but having been in the industry for a decade and seen 1,900 companies, I should know a lot more about companies outside their field.”  This panoramic view enables smart money investors to propose different ways to frame challenges and expand the solution set. Aaron cites the example of intellectual property strategy: “You can approach IP in many ways, and we know lots of tricks other med tech companies have used successfully.”  Josh has gained important insight along the way about managing burn rates by outsourcing many functions, and has built up a network of contractors with capabilities in different aspects of med tech development (manufacturing, quality systems, etc…) that can be leveraged.

Going in, I thought these investors might tout their ability to open doors with potential acquirers, but both Josh and Aaron downplayed this factor as benefit of working with them.  If the company is pursuing something valuable, it’s not that difficult to make connections with the big device companies who constantly scout for new technologies. Josh is more concerned about his entrepreneurs becoming de-focused in “trying to make Medtronic happy.”  Aaron thinks the involvement of smart money in a deal “might give strategics some comfort” and lend an edge to early interactions, but “a good product and entrepreneur will get there anyway – there is no magic Rolodex.”

Wherever emerging med techs go hunting for money, Josh and Aaron recommend conducting diligence of their own on potential investors, for example by asking other entrepreneurs who have worked with that investor about them and their relationship. “You should do reference checks on investors the same as anyone else getting involved in your business,” explains Aaron. “Would you hire a VP and not call references? Think about how long the average employee is with your company—3 years? The average investor will have more control and will be involved much longer than even your key hires.” So, med tech entrepreneurs, before you take one more dime from an investor, consider what value they bring beyond the cash, and think about going after some smart money.   

Abbott + St. Jude: What Does it Mean for Med Tech Innovators?

Abbott + St. Jude: What Does it Mean for Med Tech Innovators?

We awoke yesterday to news of yet another med tech mega-merger, with acquisitive Abbott ponying up $25B for St. Jude Medical, even before the ink is dry on Abbott’s $6B takeover of Alere (though that deal may be on the rocks). Fair to say that consolidation in med tech is firmly a trend, with this deal following a string of other big fat $1B+ global weddings:

Deal Area Deal Value Year
Medtronic+Covidien Various $50B 2015
Abbott+St. Jude Cardiovascular $25B 2016
Zimmer+Biomet Orthopedics $13B 2014
BD+CareFusion Patient Care $12.2B 2014
St. Jude+Thoratec Cardiovascular $3.4B 2015
Wright-Tournier Orthopedics $3.3B 2014
Stryker+Sage Products Patient Care $2.8B 2016
Hill-Rom+Welch Allyn Patient Care $2.0B 2015
Cardinal+Cordis (JNJ) Cardiovascular $1.9B 2015
Smith & Nephew+Arthrocare Orthopedics $1.7B 2014
Boston Scientific+AMS Urology $1.6B 2015

The rationale behind these mergers is well understood; med tech is under intense price pressure from health system all over the world, and increased scale helps both the sides of these companies’ ledgers by lowering operating costs and enhancing negotiation leverage with customers.  Then of course there are other incentives like tax inversions, though that window may be closing (see failed “Pfizergan” deal). 

In the press releases announcing these deals, there is often lip service paid to the positive impact on innovation, the story being that greater scale and efficiencies equal more money to spend on internally and externally developed new technologies. "The combined business will have a powerful pipeline ready to deliver next-generation medical technologies,” says Abbott CEO Miles White.  Omar Ishrak, Medtronic’s CEO, made a similar statement back in 2014: "Medtronic has consistently been the leading innovator and investor in U.S. medtech, and this combination will allow us to accelerate those investments.”

It is too soon to evaluate Medtronic’s follow-through on this promise; they have made a few notable early stage investments since the Covidien acquisition including Lazarus EffectTwelve and Medina Medical. The legitimate concern of emerging med tech executives, though, is the loss of one more potential acquirer out there, which lessens the chance of an earlier and/or richer competitive deal, and therefore makes the fundraising road even rougher than it already is.  In addition, these big acquisitions tend to distract organizations and slow down active discussions for several months or longer as a result of personnel changes, shifting business development strategies, and general chaos. 

While a good number of the large M&A deals have been concentrated in the cardiovascular and orthopedic segments, which have been plagued by large, heavily mature product categories, we should expect to see more consolidation generally given the forces at work in the healthcare market.  Looking across the industry, the number of now seemingly small-ish $1B+ revenue companies is striking (see below chart). In an “eat or be eaten” world, these smaller market players may be hungry for deals to enhance their own valuations; emerging med tech companies should consider casting a wider net in the search for strategic partners.  Ultimately, the established medical device companies cannot merge and synergize their way to top line growth, and will continue to look externally for innovation. 

*Most recent annual filings  Sources: company financial filings,  MDDI Top 100 Medical Device Companies of 2015

*Most recent annual filings

Sources: company financial filings, MDDI Top 100 Medical Device Companies of 2015


Five Tall Tales Emerging Med Tech Companies Tell Investors

Five Tall Tales Emerging Med Tech Companies Tell Investors

Honesty is a virtue to which we all aspire, but in the game of funding an emerging med tech company sometimes the straight story and a nickel won’t buy you a cup of coffee.  Most entrepreneurs, particularly the engineering types who tend to invent medical devices, aren’t deliberate fib-tellers. They are passionate about their innovations, confident of their capabilities, and eager to make an impact on healthcare and the market.  Their visionary tales are often compelling and credible, and may be just that - tales, unsullied by the current realities of our industry.   Here are five works of fiction commonly heard on the med tech fundraising trail:

1. The device works – we’ve tested it in our lab / in pigs / in China

Achieving market-ready performance for a new medical device, which includes not just safety and efficacy but also reliability, acceptable user pain-in-the-ass factor, and viable COGS at market pricing, is all about design iterations.  For engineers, this is fun; for investors, not so much. Not only do devices interact with a wide variety of patients in the real world, they are also going to be handled by an array of human care providers in many different settings.  Until we get into clinical trials, or even early market launch, we don’t know what we don’t know about how the device will work, or whether it really meets customer requirements. 

2. We’ll be on the market in X years [+/- in Europe]

Those timelines we put in our pitch decks to potential investors are, understandably, reflective of the most optimistically smooth sequence of events- when stars and moon align, and a gentle tailwind blows from the north.  Some glaring falsehoods include omission of crucial and time intensive steps like V&V, ordering custom tooling, contracting with clinical sites, creating a regulatory package, and so on. One of my favorites is showing full market launch virtually on the same day as regulatory approval – I have yet to see this happen.  And while Europe is still a good place to seek a faster regulatory milestone for PMA devices, many of the same time sinks apply on that side of the Atlantic (and then some).

3. We will get acquired before expensive US IDE trials / commercial launch

While a few large med tech acquisitions have occurred prior to pivotal data or commercialization, in reality they are pretty rare.  The large med tech companies are most hungry for quickly accretive transactions, and may place some cheap technology bets (Medtronic claims to be on the hunt for early tech acquisitions). Development-stage deals are increasingly heavily back-ended to account for regulatory and commercial (mainly reimbursement) risk.  Without strategic exit possibilities during development, the amount of capital and time required for a meaningful payday for investors is often well beyond what most companies estimate.  The modest opening in the med tech IPO window somewhat tempers this whopper, but the companies that went public in the last year had each raised $50-$150M+ prior to their IPOs, and most were commercial in the US or very close to it.

4. We will capture X% (e.g. >40%) of the addressable market in <5 years

The biggest hurdle to adoption for a new medical technology is getting someone to pay for it, unless it simply replaces an existing device at a similar or lower cost.  Even then, competitor contracts and bundling leverage may delay adoption. Whether it’s a battle for payer reimbursement or hand-to-hand combat with clinicians and budget-conscious administrators, market penetration takes time.  Most new medical devices, whether 510(k) or PMA regulatory path, are launched without the killer data needed to win the reimbursement battle, and that is assuming they’ve gotten the technology right on the first pass (see #1). 

5. The addressable market [or worse, revenue] opportunity is $1B+

Let us count on the fingers of one hand, other hand not required, the number of medical device product categories, much less products, to have achieved annual revenue greater than $1B.  Drug eluting stents, pacemakers, surgical robotic systems, orthopedic implants, hearing aids, someone help me here…  Sad as it is, medical devices have a rough time even breaking through the $100M revenue sound barrier- not that it isn’t possible, but it’s damned hard.  If you have anything but a therapeutic technology, it’s even harder.  Yet there is something magical about that $1B+ addressable market number, and it appears in almost every pitch deck to investors.

To some degree, this tale-telling between entrepreneurs and investors is negotiation 101; those seeking funding must be hyperbolic, knowing potential funders will haircut whatever they say. Unfortunately, our industry is missing the irrational exuberance of tech and biotech that makes fairy tales come true (Uber is worth $50B as I write this). Despite our sector's current reality, med tech investors still want and need to feel that magical high return potential, and so we liberally sprinkle the pixie dust.   The truth: there are plenty of good ROI opportunities for med tech investors if we stop telling each other stories and work together to get creative in how we finance and develop new technologies.


The Pfizer-Hospira Deal: Do Pharma and Device Companies Need Each Other?

The Pfizer-Hospira Deal: Do Pharma and Device Companies Need Each Other?

Having been at the flag-raising ceremony for Hospira when it spun out of Abbott back in 2004, the news of Pfizer’s acquisition was a bit emotional for me.  I didn’t cry or anything, but I did feel a little sad, and a little proud, and maybe a little hopeful at the end of the day.

The pride part first.  My presence at Hospira on “Spin Day” was a function of the strategy work I was doing with the newly forming entity, trying to create a cohesive plan around the bits and pieces cast off by Abbott – a mishmash of commodity products (e.g. saline bags), mid-tech stuff like drug pumps, and then there was this generic IV drug business.  No matter how we sliced and diced the market opportunity, profit, and growth potential of all these product lines, the IV drug business always came out on top (made me wonder whether Abbott overlooked that one in the spin). So I found myself posing the leading question to Hospira management, “How many more of these drugs could you add, and how fast?”  I am sure many consultants have given Hospira similar advice in the intervening decade, and apparently Hospira got the message, culminating in the recently announced Pfizer takeover.

Now the sadness part.  As someone who makes a livelihood in the device industry, who believes devices are an underestimated part of the solution to our healthcare woes, the transformation of Hospira into more or less a pharma company feels like a declaration of defeat.  Maybe the way to be successful in the device industry is to exit it, or minimize it in your portfolio, and start making drugs.  As a business consultant I have to tip my hat to Hospira’s strategy.  As a medical device professional I can’t help feeling a bit betrayed. 

Finally, the ray of hope.  Hospira didn’t abandoned devices completely on their path to the Pfizer exit; they shut down aging and failing infusion pump product lines and acquired new ones to follow the market out of the hospital and into the home.  While bio-similars are what drove most of Hospira’s valuation, their technology and know-how of drug delivery devices was attractive to Pfizer as well, particularly considering Pfizer’s avalanche of patent expirations.  Devices have the potential to breathe new life into drug IP, and often with far less investment in R&D and time.  The biopharma business may be more profitable and sexier on Wall Street right now, but some devices tucked into the portfolio might be a worthwhile insurance policy for drug companies to consider purchasing. Maybe drug and device companies need each other more than they think.

MedTech M&amp;A Tips from the Front Lines

MedTech M&A Tips from the Front Lines

S2N recently hosted an informal gathering of emerging med tech CEOs, a sort of group therapy session for people suffering from a form of temporary insanity that makes one want to be a healthcare entrepreneur. Two of the participating CEOs, Christopher von Jako, Ph.D. and Edward Kerslake, had sold their companies in 2014 for a combined $500M+. Chris and Ed kicked off a lively discussion of lessons learned from the M&A trail.  Without getting into too much detail (what happens at S2N stays at S2N), the group offered some sharable wisdom on approaching, enduring, and succeeding in the medical device M&A game.

Run a tight ship

Companies that buy emerging med techs are usually quite experienced at due diligence, and know all the rocks to look under for valuation busters.  If you see a strategic exit in your future, pay special attention to regulatory and quality documentation, as well as contracts with customers, distributors, suppliers, and so on.  You may also consider having a litigator ‘attack’ your patents so you can uncover and patch holes in your IP early on. “Everything imaginable will get scrutinized during diligence.”

Always keep your pitch book fresh

Smallco pitch decks tends to get dusted off and revised when management is gearing up for a fundraise. The exit experts recommended keeping that PowerPoint updated at all times, and taking every opportunity to practice delivering the pitch along the way.  “You might not have a lot of time to pull this together when opportunity knocks.”

Build relationships with investment banks

Even if you aren’t in selling mode, it’s good to know the who’s who of investment banks, particularly which i-banks are working with which strategics.  The experts suggested getting an investment bank involved about 6 months before you want to sell.  “A good investment bank will do a lot of work to earn the business, and their involvement can help validate the credibility of your company.”

Have a selling price in mind

While the investment banks are very motivated to do deals, they aren’t necessarily incentivized to get the best price.  Small-co’s should develop and maintain a rigorous pro forma justifying their desired acquisition price; key valuation drivers in the pro forma include revenue growth rates and synergy value for the acquirer.  “It’s best to go in a little high and get talked down.”

Keep the M&A inner circle small

It’s hard enough to run an emerging med tech company – harder still if half the employees are distracted with diligence or rumors of an acquisition.  To protect on-going operations, the experts suggest limiting the number of employees pulled into diligence activities, and keeping interactions with potential buyers low profile, e.g. hosting them at the company only after 6:30pm. “The fewer people that know and are involved, the less chance of a leak and distraction.”

Maintain the momentum

Any successful exit requires a champion (at least one) at the acquiring company who will push for the transaction and make things happen; companies don’t make acquisitions, people do. Identifying and nurturing those advocates is critical, and so is making sure the deal closes on their watch. “A key champion can move on from the company and then you are stuck.”

The meeting wrapped up with someone offering the old axiom, “Companies are bought, not sold.” Honestly not everyone in the room was nodding in vigorous agreement to that one. However, whether you think you have the power to push a sale or not, playing it cool with the strategics can be a wise bet.  “Position your interactions with them as updates, but always stay in touch.”

MDT + COV - Good or Bad for Medtech Innovation?

MDT + COV - Good or Bad for Medtech Innovation?

Let’s be honest – the headlining acquisition of Covidien by Medtronic may go down as the most boring deal of 2014, unless of course you are an international tax accountant. The swirling buzzwords are inversion, offshore cash, G&A, and hospital contracts. Please wake me up when it’s over. Yet it may be the unintended consequences of this deal that are the real story, in particular the implications for med tech innovators. The real story won’t really be known for months or even years, despite Omar Ishrak’s reassuring pronouncements that the merger will “accelerate” investments in R&D.

We at S2N decided an old-fashioned pro-con debate was in order. Question: Is the big fat marriage of MDT and COV good for Innovation? Tim took the Con position and Amy the Pro stance. Here’s blow by blow:

Cash for innovation or cash for shareholders?

Amy: You need a lot of cash to invest in disruptive innovation, and the combined “Medvidien” will be swimming in it. It’s a perfect match for gaining efficiencies in mature product categories to free up cash for real technological advances.

Tim: This deal is a perfect example of how the big companies are throwing in the towel on innovation and focusing on the bottom line. The extra cash will all go back to shareholders, which is great for them but I’m not sure how that helps innovation.

Temporary deal disruption or big investment hiatus?

Tim: Good luck getting anything done with any division of MDT or COV for the next 3 years while management is completely focused on realizing those promised “synergies”. They will have a good, long run of earnings growth that will take pressure off top-line growth for a while.

Amy: Really Tim, do you think they can afford to turn off the growth-oriented deal flow for that long? Sure, there might be a short-term disruption to early stage investments from the distraction of the merger, but pretty quickly they are going to have to put that cash to work to grow sales. Can’t cost cut your way to success forever!

Spawning of new start-ups or lifestyles of the rich and famous?

Amy: Think of all the med-tech superstars who will make big coin on the deal and then be released to the wild. Some of that money and expertise will start finding it’s way back into the emerging med-tech ecosystem.

Tim: Wishful thinking, Amy. Med-tech veterans don’t have a rich history of aggressive angel funding. Mostly likely the deal will help the yacht and island markets more than med tech start-ups.

One less acquirer in the pool or just fatter acquirers?

Tim: The number of big-time med tech acquirers is pretty small as it is, and it just got one smaller. Negotiations with the new entity will be tougher, too, because there will be less deal competition.

Amy: There is so little overlap in the business units of the two companies, except for endovascular, that it really doesn’t change the picture for most emerging med techs. The acquirer just got a bigger wallet.

Helpful scale or focus elsewhere?

Tim: After tax minimization, the other main drivers of this deal are negotiating power with hospitals and scale to sell in emerging markets. That’s where they see their growth coming from in the next couple of years. Innovation is on the back burner.

Amy: Those more effective hospital and emerging markets sales channels will benefit innovative technologies, not just mature ones, and they will need more products to pull through those channels.

The Case for Early Deals in Med Tech

The Case for Early Deals in Med Tech

To the consternation of many emerging med tech executives and their investors, the big medical device companies are much less active in the early stage deal space than their bio-pharma counterparts. Drug company leadership “gets” that future success depends on robust product pipelines infused with externally sourced innovation at every stage from Discovery clear to Phase III. Case and point: of Goldman Sachs’s 2014 list of “High Potential Drugs that could Transform the Industry”, Forbes noted that 75% of them no longer sit with the originated ownerbecause of acquisitions or in-licensing deals. Contrast this with the med tech sector, where the hurdle to acquisition or meaningful strategic investment is not so much proof of concept but proof of market traction – a very high bar indeed.

The time may be now for the big medical device companies to lift their heads out of their quarterly net earnings reports and start looking seriously at early stage investments in innovation. Here are three compelling reasons behind this logic:

1. You can’t buy revenue forever

For most of the large med tech companies, the solution to the growth dilemma has been minimally dilutive acquisitions of companies with existing, faster growing sales and better margins (or the near-term promise thereof once infrastructure “synergies” are realized) than their existing product portfolios. Makes a lot of sense – many of the technical and even market risks have already been reduced, and acquisition integration is something the big companies know how to do. The problem is that there and fewer and fewer “target” companies out there to buy, and competition for them is driving up multiples. A recent example is the December 2013 purchase of Mako Surgical by Stryker at a whopping price (for med tech) of 13X annual sales. The Wall Street Journal coverage of the deal noted that the price “…reflected the lengths that medical-device companies will go to jumpstart sales growth in the face of product commoditization and broad economic pressures…” Also given the cycle time from innovation to meaningful revenue in med tech, it is safe to assume many of the companies being acquired today were originally funded 10+ years ago. My guess is we will start hitting the nadir of available targets as a result of the tougher med tech financing climate that started back in 2008 with the financial crisis.

2. Big companies can’t innovate (enough)

With the sheer size of the large medical device companies (10 over $10B in sales in the US alone), and many existing product franchises losing ground under health care budget pressures, big med tech’s appetite for new products is voracious. The best new products are those that can contribute both to the top line with growing sales, and to profit margins with premium pricing; in other words, true innovations. Big med-tech is genetically risk-averse, bureaucratic and not the least bit scrappy, so internal R&D can’t deliver the goods. Pharma has come to terms with this fact and has outsourced most of their R&D, understanding that only about one-third of their innovation will be generated internally. Big med tech needs to follow suit both organizationally and financially, acknowledging that most“disruptive” medical technologies will be found out there in the emerging med tech community.

3. The innovation ecosystem needs strategics to step up

It is still quite challenging for emerging med tech companies to raise money, with the dollars tightest not so much at the earliest stages where a number of angels and grant-funding organizations have stepped in, but more at series B through D. A venture capitalist at a recent MassMEDIC financing conference talked about the new “valley of death” being in these later stages, when the cute little toddler technology becomes a hungry adolescent, requiring significant funding for clinical or market development depending on the regulatory path. While there has been some easing of the IPO market for med tech companies in early commercialization (see TRIV & EVAR), the public markets have not warmed to development stage medical device companies the way they have to their bigger risk, bigger reward biotech brethren. With the aging of the population and the demand for healthcare only increasing, the need for innovation is there but will go unanswered without sufficient risk capital to fund it – a lost opportunity for the large device firms.

Some big med tech executives are coming around to the idea that they need to invest earlier and take more risk to maintain healthy businesses for the long haul.We have seen some movement in med tech toward structured deals between development stage companies and the industry giants – small steps toward the pharma model of deal making, risks and all. The CEO of Medtronic Omar Ishrak gets it, boldly stating in a recent earnings call “We would have done [the Ardian] acquisition over again, based on the data that we had at that time. You do clinical trials for a reason, and every so often, you are going to get negative results. And we don’t give up on strategic opportunities based on that.” Managing a pipeline requires both an acceptance that failure is possible, and the know-how to account for the risk in the deal terms (arguably MDT missed the boat there). Pharma has long had a more comprehensive understanding of the risks within their pipeline and how to manage them through licensing and co-development structures. Big med tech should take a page from the pharma playbook and aggressively fund external innovation, or be prepared to have the financial profile of utilities. Revenue is nice, but transformational growth is nicer.

Marketing Steps Up in Med Tech

Marketing Steps Up in Med Tech

Historically, marketing has been the Rodney Dangerfield of med tech. We marketing people don’t get much respect. Sure we wear dark suits at the booth and talk to customers, but the med tech Sales & Marketing equation has generally been big “S” plus little “m” (or as one sales executive we know put it, marketing is just sales overhead). Enter the last decade and the virtual collapse of the traditional med tech sales model; gone are the days when reps can leverage chummy relationships with physicians to brute-force expensive new medical devices into the hospital. An autopsy would reveal many causes of death, but to name a few:

  • Hospitals have given financial decision makers more muscle in purchasing decisions, e.g. value-analysis committees are actually doing value analysis

  • Doctors are increasingly employed by hospitals (though surgical subspecialties are bucking this trend) and more beholden to hospital priorities

  • Increased regulation of sales interactions and hospital control on rep access have made direct selling to physicians much more difficult

This is where marketing enters the scene. Success, or even survival, in the face of all these challenges requires clever, proactive and well-executed marketing efforts, with sales as the icing on top. Big “M”, littler “s”. Highest on marketing’s current agenda are:

1. Launching the right product with the right data. The marketing imperative starts during product development, making sure that the R&D folks are creating stuff that future customers actually want / need, and doing so at COGS that leave room for some profit at market-driven ASPs. With the bar on clinical evidence continuously being raised by penny-conscious customers, the marketing voice is also critical to align study designs and endpoints with purchaser and payer requirements. Unfortunately many R&D and clinical teams take a similar view of marketing as their compatriots of sales, but this is slowly changing.

2. Offering a solution, not just a product. A great technology developed with lots of customer input is a necessary but insufficient condition for driving adoption in the current constrained healthcare environment. Device companies have to solve real problems for their customers, who are generally happy to maintain the status quo that existed before the appearance of your new gizmo. One way to become a total solution provider, and capture more value, is to combine device offerings with related services. Medtronic’s acquisition of Cardiocom for $200M is a notable move in this direction (a trend S2N predicted last year). No doubt marketing will play a vital role in coupling Cardiocom’s telehealth and chronic disease management offerings with Medtronics’ vast portfolio of devices to defend and grow share, maintain premium pricing, and create competitive barriers to entry.

3. Redefining the customer. Med tech companies need to take a more expansive view of the sales targets to include new purchase decision influencers, for example the consumers of healthcare. Americans now pick up the tab for about 13% of the US healthcare tab, spending >$400B per year out of pocket. This is a customer group that med tech sales forces rarely if ever touch, and therefore lands squarely in the domain of marketing. How patients feel about their healthcare experience is also mattering more to hospitals. The CMS Value-Based Purchasing Program is tying incentive payments to hospitals performance on the dimension of patient experience, and medical device companies are well positioned to help hospitals measure up against these metrics by engaging and “delighting” patients with their device-based care.

Consumers are also starting to take a bigger role in their own health, shelling out significant cash for health trackers like Fitbit, Nike+, Withings and other wearable technologies. These “toys” are migrating to more serious medical applications, creating a gray area that offers growth opportunities for device companies. The marketeers at Alivecor, for example, are putting home EKGmonitoring in the hands of patients; we recently heard of one doctor recommending the self-pay device to patients because it’s cheaper than copays and deductibles on traditional heart monitoring. Hopefully orthopedics companies are putting their marketing teams to work on exploiting the synergies between activity trackers and new hip implants to improve or demonstrate better outcomes.

In the old med tech model, Marketing got pulled in when Sales ran into trouble (usually when it was too late to do anything productive). One could say that Sales is now in a permanent bind, and Marketing needs to take the helm for a while. Just someone please tell me where I can find some good med tech marketing people…

It's not that Symple! The Rise (and Fall?) of Renal Denervation

It's not that Symple! The Rise (and Fall?) of Renal Denervation

When we founded S2N in 2011, the emerging medtech world was still awed, no dazzled by the uber-generous 2010 acquisition of Ardian by Medtronic for more than $800M. Last week, Medtronic unceremoniously announced the failure of Symplicity, Ardian’s renal nerve denervation technology for severe hypertension, in the US pivotal trial. The wreckage is still smoking, and the damage extends beyond Medtronic and the other device behemoths like Boston Scientific and St. Jude that joined the RDN gold rush. Emerging med tech companies will feel the ripple effects, too.

First, a little history:

  • Before the take out by Medtronic, Ardian had raised about $65M in equity (including some from MDT in Series C). By my sophisticated calculations, that’s a >10X return on capital for the VC’s. Sweet.

  • Ardian turned that $65M into a successful pilot study, CE Mark, and initiation of the randomized, controlled, multicenter HTN-2 trial with 52 patients in the active treatment arm.

  • On November 17, 2010, Ardian published 6-month data from HTN-2 in the Lancet showing that 84% of treated patients (vs. 35% of control patients) achieved a 10 mm Hg or greater drop in blood pressure. Five days later, the acquisition was announced.

  • MDT initiated the 530-subject HTN-3 US pivotal trial in 2011 and completed enrollment in May 2013.

  • Symplicity is available commercially in Europe, Asia, Africa and Australia and has been used in more than 5000 patients.

Before the Symplicity failure, the rich Ardian deal served as a big, juicy comp for med tech start-ups of all stripes defending the value of their novel gizmos. The deal also emboldened emerging med tech companies (and S2N) to point to CE mark as a critical risk-reducing milestone for potential acquirers.

Now, in the shadow of Symplicity’s demise, there will likely be some pencil sharpening on pre-FDA valuations, as well scrutiny on timelines and total investment required until exit. European regulators, left to sort out the on-market implications of the study failure, will no doubt reference the situation in support of tightening data requirements for new products.

Well before last week’s announcement, though, the Ardian acquisition was starting to qualify as an anomaly, not replicated by any company at that same stage, with structured deals and risk-sharing becoming more the norm. Symplicity’s downfall serves to remind us all that early stage technologies are just that – early. There is still significant technical risk and some products will fail when put to a scaled or real world test, regardless of whether that test is carried out by the small company or the big strategic that buys them. Safety does not equal efficacy, and efficacy is what matters in the end. Investor success is not the end of the journey (though it is for the investors!).

On the positive side, we don’t have to hear anymore “why can’t I get a deal like Ardian?” Envy isn’t generally a helpful business motivator, and every company has to carve its own path.