Amassing strong patent portfolios helps medical device companies attract interest from strategic investors and potential acquirers.
David J. Dykeman, Greenberg Traurig and Patrick West, Mirus Capital AdvisorsThe medical device industry has demonstrated strong and sustainable growth in recent years. Given the aging population, increasing incidence of chronic and lifestyle diseases, emergence of artificial intelligence (AI) and big data, and significant investments in R&D and M&A, the medtech sector appears to be in prime health. According to KPMG, the medical device industry’s global annual sales are forecast to rise more than 5% a year to reach nearly $800 billion by 2030. As the industry evolves, medtech companies are making strategic moves to stay ahead in their respective markets.
[See Dykeman discuss medtech industry investment during a panel at DeviceTalks Boston, Oct. 8–10.]
Strategic investments on the rise
The last decade has seen a dramatic rise in large life science companies creating venture funds to invest in promising early stage medical technologies that align with the larger giants. In the last few years, large medtech companies have been competing in the race to acquire private medical device companies with a particular focus on neurosurgery, orthopedics and cardiology.
Industry analysts note that large medtech players – including Johnson & Johnson, Medtronic, Boston Scientific and HMO Kaiser Permanente – made major investments in medical device startups in 2017. As of August 2017, there were more than 50 corporate deals channeling more than $833 million of investment to private medical device companies. This trend is continuing in 2018.
Some recent examples of strategic investments by major players in early stage companies include:
- In August 2018, Boston Scientific signed an agreement to acquire Veniti, which developed the Vici Venous Stent System for treating venous obstructive disease. In 2016, Boston Scientific invested in Veniti for 25% ownership of the company. The transaction price for the remaining ownership stake included $108 million up-front cash, and up to $52 million in payments contingent upon FDA approval.
- In February 2018, global orthobiologics company Bioventus invested $2.5 million in Israeli-based CartiHeal, which is developing an implant for treating joint surface lesions in traumatized and osteoarthritic knees. Johnson & Johnson also participated in the $21 million financing round.
- In two transactions in early 2018 in the personalized medicine/CRO space, Precision Therapeutics (f/k/a Skyline Medical), a company focused on applying AI to personalized medicine and drug discovery, converted a previous $500,000 loan to Helomics into a 5% equity stake, and purchased preferred stock convertible to 20% of outstanding common stock of Helomics.
Big pharma players are also involved with venture investing in medtech startups including Merck, Roche, Novartis, Eli Lilly, AstraZeneca and GlaxoSmithKline.
In addition to traditional sectors such as cardiovascular and orthopedics, medtech investments are being driven by new technologies in high demand, such as mobile health, big data, robotics and artificial intelligence. As mobile health continues to become more ubiquitous, digital and mobile health solutions are becoming increasingly important to traditional medical device companies as investment, partnership and acquisition targets.
M&A remains robust
On the M&A front, various reports suggest that strategic acquisitions of emerging medtech companies and start-up innovations have been a key catalyst driving the U.S. healthcare space, with some experts stating that medtech M&A activity surged 50% in 2017, increasing the value of aggregate M&A to more than $200 billion. The strong M&A trend in earlier stage companies is continuing in 2018, including the following examples.
- Boston Scientific was been very active this year, announcing seven acquisitions worth up to $1.4 billion through August 2018.
- In March 2018, Johnson & Johnson enhanced its surgical robotics capabilities by purchasing French software-enabled surgery technology developer Orthotaxy. The acquisition aims to help J&J create a more wide-ranging robot-assisted platform for total and partial knee replacement procedures.
- In April 2018, Medtronic acquired Israeli minimally invasive surgery provider Visionsense. The deal has been valued at $75 million with $40-50 million in cash and the remainder in milestone payments.
- In May 2018, Orthofix paid $105 million for Spinal Kinetics’ M6 cervical disc implant. The deal calls for $45 million in up-front cash, plus another $60 million in milestones related to U.S. FDA approval of the M6 cervical device and trailing 12-month sales targets.
Patents help drive deals with both strategics and private equity
An interesting emerging dynamic is the competition among strategic buyers and private equity funds for earlier-stage assets in all sectors of medtech. While the strategic giants are seeking to broaden their portfolios and/or invest in emerging technologies and areas they already serve, clever private equity investors such as Audax Private Equity and Graham Partners recognize the value smaller companies with strong protected technology and brand positions offer as platform investments.
The May 2018 acquisition of NightBalance by Philips is a perfect example of strategic positioning. NightBalance is a Netherlands-based digital health startup that has developed a sleep apnea wearable that is used to treat positional obstructive sleep apnea and positional snoring. NightBalance offered a complementary technology and a strong patent portfolio that helped Philips to expand its growing sleep and respiratory care offerings.
It would seem that with Audax’s acquisition of blood and fluid infusion provider Belmont Instrument Co. in December 2017, Audax is seeking to reproduce the significant success it had with Laborie Medical Technologies, which was sold to Patricia Industries in August 2016. Acquired in 2012, Laborie is an industry-leading manufacturer and supplier of novel patented pelvic health and gastrointestinal medical equipment and consumables. Audax completed 14 complementary acquisitions and significantly grew Laborie off of its solid foundation prior to exit.
Tips to attract strategics
Emerging medtech companies that have developed value-driven patent portfolios can maximize opportunities for potential M&A, investment and partnering deals. Below are some considerations for early stage companies to become attractive targets.
- Be an innovator: Although large medical device companies continue to have significant R&D budgets, early-stage companies can sometimes act as outsourced R&D laboratories on the leading edge of innovation. These smaller companies can bring new technologies to market quickly and often create disruptive technologies with high market potential that are appealing to traditional medical device players. Acquirers are willing to pay a premium for next-generation products that can disrupt the medtech market. If the story is compelling, acquirers will pay for the promise of what the product can deliver in the market, even if regulatory approval is still years away.
- Plan ahead and be creative: Strategic investments and acquisitions, particularly with early-stage companies, often take much longer than anyone anticipates, so companies need to plan for deals years in advance. The deal lifecycle is lengthening because the larger medical device companies are concerned about limiting unnecessary risk. Interest is often developed over years of watching a technology develop and getting comfortable with the product and management team. Investment and deal structures are often heavily dependent on meeting performance milestones.
- De-risk your technology and company: Deals at all stages are getting done, but the higher valuations tend to be companies that have less risk and are further down the patent, regulatory and commercialization paths. As an early-stage company develops its investment and exit strategies, it should take a hard look in the mirror and conduct a thorough self-assessment. No matter how promising the technology, a company needs to assess where it is now and what the hurdles are to reach the finish line. Medtech startups need to address their IP, regulatory pathway and reimbursement from the day the company is formed.
- Build a strong patent portfolio: An early-stage company’s patent portfolio is one of its strongest assets. Companies need to think strategically about their patent portfolio from the start and supplement early patent filings to cover the latest innovations and improvements. Creating a “picket fence” of patent protection around the core technology by filing additional patent applications covering incremental improvements and new innovations can lead to greater market share and higher valuations in deals.
- Show strong initial adoption: More established medtech companies need to focus on adoption and sales. Large medical device companies are looking to acquire promising companies that can benefit from a stronger sales force to accelerate the commercialization curve. Thus, showing strong initial sales and adoption in hospitals and clinics is important even if in a limited or focused market. Adoption and re-use rates within specific institutions are key to demonstrating that a new technology has real commercial potential.
The convergence of new technologies and innovations including connected health, AI and big data informatics, robotics, biologics and gene therapies are disrupting healthcare. As medtech innovations continue to enhance and shape healthcare and the way we live, early-stage medtech companies must think strategically to position themselves for strategic investments, partnerships and M&A deals. With careful planning that includes a strategic patent portfolio with worldwide patent protection, innovators can thrive in the dynamic medtech market.
[See Dykeman discuss medtech industry investment during a panel at DeviceTalks Boston, Oct. 8–10.]
David J. Dykeman is a registered patent attorney with more than 20 years of experience in patent and intellectual property law, and co-chair of Greenberg Traurig’s global Life Sciences & Medical Technology Group. David’s practice focuses on securing worldwide intellectual property protection and related business strategy for high-tech clients, with particular experience in medical devices, robotics, life sciences, and healthcare information technology.
Patrick West is a partner and leads the healthcare technology practice at Mirus Capital Advisors where he focuses on helping companies maximize enterprise and exit value. As a former medtech executive, business founder and company director, he brings the perspective of having sat on all sides of the negotiating table allowing unique insights and an informed ability to navigate the deal process. Patrick also provides angel investment and strategic direction to a portfolio of companies.