David W.J. Smith is an expert as it relates to successful exit strategies in the medical device field. He developed Reno Wright Smith & Partners; a “biomedical business accelerator” that helps biomedical startup companies with commercialization execution and is currently President of Rheoxtech LLC.
Rheoxtech is focused on an innovative reperfusion therapy for cardiogenic shock patients. Cardiogenic shock features mortality rates of more than 40%, and those that survive suffer from expensive and debilitating complications. The Rheoxtech technology offers the opportunity to significantly reduce the mortality and morbidity rates without negatively impacting the “door to balloon” time.
Successful Exit Strategies for Medical Device Businesses
From the day a medical device business seeks external funding it creates expectations among its prospective shareholders. Investors want to know when they will realize their return, and how much it’s going to be. It’s not unusual for venture investors or angels to expect a 10x return on an early stage investment, with some fundamental steps the chances for achieving this are significantly enhanced. Throughout my start up career I have compiled a list of “Do’s and Don’ts” that have kept me on track with business development and provided excellent returns for my investors.
First, let’s review what should be avoided!
Don’t take a “We are the World” approach. You may have a ‘platform’ technology that you think can be applied to many medical marketplaces, but unless you focus your limited resource on the most lucrative ones you won’t realize full value for your shareholders.
Don’t spread yourself too thin when it comes to commercialization. An acquirer will not be impressed by the lukewarm sales you achieved on a pan-European basis in 18 different countries, They are looking for scalability. Had you focused on one market, deployed all of your commercialization efforts there and achieved sales and marketing success in one area your acquirers will do the math when it comes to what they could achieve with their marketing might, blue chip key opinion leaders and apparently unending marketing budgets!
Don’t ignore intellectual property challenges. If your patents are being disputed, resolve the issue. Acquirers will not pay full value for an enterprise that comes with a great deal of patent risk.
Don’t ‘window dress’. The companies that buy you, especially the public ones, are looking for business development deals that are accretive to their earnings. You may have a ground breaking new technology that is clinically well proven, but if you haven’t figured out how to reduce the commercialization risk and no one is buying it – you haven’t solved anything! Companies increasingly are buying a new revenue stream, not just a technology.
Fortunately, there is a much longer list of things you can do that will make you a more attractive acquisition candidate.
Be proactive about sharing your story with many potential acquirers. These companies are likely larger than you are and move slower than you do. Surprising them at a time when you think they should buy you rarely yields satisfying results. Often larger companies in our field will have a 3+ year strategic planning process. Make sure they are aware of what you are developing so they can include you in their plans. If your intellectual property is appropriately protected, you should feel comfortable sharing data under a non-disclosure agreement.
Understand what your acquirers are buying. I was told by one potential acquirer that we could do anything we wanted with clinical studies outside the US, but since they would have to live with our marketing claims inside the US, they wanted full visibility and involvement in the clinical study design. We were happy to comply since they would give us full value for our business if it was perfectly aligned with where they felt the technology could be optimally applied.
Court many suitors. You may be acquired for defensive or offensive strategic reasons. A typical company sale is a funnel process. The more companies that start doing diligence on you, the more bidders are there as you approach the finish line. This will ensure you receive full value at the time of sale. Engage some help too. Investment bankers will pay for themselves in this process – one of the sales I was involved in resulted in my device company being acquired by a pharmaceutical company with whom I had previously had not contact. In this respect investment bankers are like realtors. They know the market, they can support your valuation with recent comparable sales and they have frequent contact with many prospective buyers.
Finally, organize your data. Putting data into an online data warehouse and controlling access makes life simpler for your acquirers, implies to them that it’s a competitive process and if it’s a comprehensive data set – mitigates risk for them.
David W.J. Smith, President, Rheoxtech LLC can be reached by email here.