The combination of new CEOs at medical device firms and VC-backed companies motivated for exits will make for a lot of medtech acquisitions in 2013. Jonathan Silverstein made that prediction during a panel discussion about capitalizing in the current market in Indianapolis Tuesday.
Silverstein, a general partner at OrbiMed, listed several forces that would drive this activity.
“We’ve got the lowest cost of capital in ages, growth is 3 percent on average, current valuations versus growth-rate prospects are unsustainable and several new CEOs have been in place one year or less,” he said. “Seven of [the] top 11 device companies have new CEOs and they will be very motivated to go after exciting medtech companies across the country.”
Adele Olivia of Quaker Partners was also optimistic and said the quality and opportunity of deals is unprecedented.
“I just can’t believe the quality of teams we are seeing, and the state of assets,” she said. “This is a great time to be investing in healthcare, whether it’s VC or growth capital.”
Don’t get your hopes up too high, though. Ron Hunt, managing director of New Leaf Venture Partners, said the sector is still looking for the new normal.
“Money funding deals now was raised in 2006 or 2008,” he said. “What you’re going to see is a long period where money going into venture-funded companies will drop to historic norms. There was a period of a burst of venture funding — that is not the normal.”
Kristin Sherman was the chief financial officer at Marcadia Biotech. Silverstein asked her what made Roche willing to pay such a big number for the company.
“We did not need the transaction and we had clinical data we could shop to try to create interest from multiple parties,” she said.
The group, that also included Bernard Yancovich, a managing director at Credit Suisse, talked about funding options for medtech, pharma and biotech companies.
Hunt said his company has four deals like this in its portfolio. He described a recent deal that used this financing structure. The lead product at Trimeris failed, leaving the company with $50 million in cash and a public listing. Synageva was an early stage company in the hot area of rare disease.
“They were able to rehabilitate Trimeris under a whole new set of assets and to get public with essentially $50 million without brain damage of an IPO,” Hunt said.
Sherman recommended this option as creative to finance an area that is not in vogue. This option can generate enough cash flow to cover overhead and fund early development on another set of assets.
“You need to make sure the agreement defines what IP is in the licensing agreement and what is out of the agreement,” she said. “By licensing one asset, we were able to carve that off and use the money to fund a different set of assets.”
Sherman also advised caution about taking on nondilutive funds from the National Institutes of Health or a nonprofit foundation.
“Some of these grants come with compliance and reporting requirements, or require you to post your research at a certain time, so make sure you can comply before you take the money,” Sherman said. “Also, make sure the contract is not a convertible note in disguise.”
Hunt said VCs are moving toward niche indications and that treatments for cardiovascular conditions, diabetes and obesity were not right for VC funding.
“We have to invest in things that we can fund a phase 3 on our own,” he said. “It’s hard to feel comfortable to go into any of those areas broadly.”
Hunt said oncology has always been interesting, however.
“For our firm, that is one area where we are willing to do early stage deals because pharma is willing to form a partnership, and you are seeing less and less of that in many other therapeutic areas.”
Hunt also said public market investors are interested in rare disease companies at the moment. He attributed this in part to the regulatory tailwind that allows for small trials and almost certain U.S. Food and Drug Administration approval.
“That won’t last forever, though,” he said.