Want to know what's happening next in healthcare?

MedCityNews is the leading online news source for the business of innovation in healthcare.


“I find MedCity News a great resource for taking the pulse of the market and sourcing potential investment opportunities.”

Bernie Rudnick, Angel investor and advisor, CapGenic Advisors, LLC


Sign up for our daily newsletter


The New Normal in Medical Device Exits

12:58 pm by | 3 Comments

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, though, pharma-style “biobucks” are making their way into device deals, e.g. generous total deal values with a good portion of that 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 backended 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 leading the way in 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 venture ecosystem for med-tech 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 for early strategic involvement and structured deals to be the new norm.

Copyright 2014 MedCity News. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Tim Kofol

By Tim Kofol S2N Health

S2N Health provides emerging medical device companies with business strategy and marketing services, combining our broad industry experience and powerful, data-driven analytics to support successful fundraising, partnering, product development and commercialization. Tim has applied his analytical and financial skills to the medical device industry for over six years. Before co-founding S2N with Amy Siegel, Tim worked as a strategic marketing consultant for Seventh Sense Biosystems and as a software engineer for Aspect Medical Systems. At Aspect, Tim helped the company develop new technology for neuro applications of its core EEG platform, creating novel algorithms, leading software development and guiding product planning. Tim received his B.A. from Princeton University with a degree in Operations Research and Financial Engineering. He earned his M.B.A. and M.S. in Information Systems at Boston University School of Management, from which he graduated with honors.
Visit website | More posts by Author

3 comments
Solidcad100
Solidcad100

Piper Jaffray analyst says: "Now is a great time for medtech IPOs"

We are starting to see this in the med tech sector. More IB firms are interested in taking medical device companies public even pre-revenue. The hot sectors are obesity, diabetes, sleep apnea, ENT, womens health and ortho-spine. We believe that the M&As will continue to be strong, with valuations higher.

According one of the linked in posts: Medical device in the obesity field have gotton new recognition. Considering 30% of the world population is now overweight. Over 40Million people world wide are super obese with 2 or more co-mobidities. 1 in 6 children in the US are obese, one in 10 in developing countries is obese. The bridge is narrowing between the obese of the east and west. Obesity is a very big market with really very few players when compared to cardiovascular, orthopedics and other med tech companies.

Read more:http://medcitynews.com/2014/05/medtech-ipos-performing-investor-conference-told/#ixzz34A0xmZnt

Ron Clark MD
Ron Clark MD

Tim, Nice article.  As the co-founder of QUICK, a mobile Health Start Up, I agree with your premise of commercial risk, but I believe those with products and vision to create vital application functions for end users will have a market and a value.  The coin flips both ways: The larger company wants a realistic valuation, but so does the smaller company being acquired.  In our tech world, there are more ideas becoming reality, the trick is knowing what the seed is worth before the rose blooms.  See our recent article on MedCity News: http://medcitynews.com/2012/11/mobile-health-startup-sees-abundant-opportunities-for-salivary-diagnostic-platform/