Michael Barbella, Managing Editor09.05.12
Venture-Backed Medtech Exits Increasing, but Overall Returns Remain Poor
Long live the Big Exit! Reports of its death have been greatly exaggerated.
Whispers of its premature passing have circulated throughout the medtech investment community in recent years as financial gurus and (former) happy-go-lucky venture capitalists succumbed to the global economic malaise that annihilated funding, severed reimbursements and turned gainful, free-spending corporations into penny-pinching tightwads.
The rumors regarding Big Exit’s demise began as most rumors do—from a toxic mix of assumption, exaggeration and misinterpretation of fact. Indeed, certain facts have been nearly impossible to misread—i.e., the difficult regulatory environment, the exodus of active medtech investors, the evaporation of venture capital (VC) funding, the alarming nosedive in corporate profits. Other truths, however, are not so clear-cut. Early stage focused device firms, for instance, typically are hesitant to make new investments when raising funds. That’s a fact. But their reluctance to make new investments easily could be mistaken for apathy.
Such blurred lines between fact and fiction led many venture capitalists to assume that Big Exit’s days were numbered. They weren’t, of course, but it certainly appeared that way: In 2009, as the nation wallowed in its economic doldrums, the initial public offering (IPO) market tanked, strategic
acquisitions were few and far between and once-confident financiers beat a hasty retreat from new investments. A costly, convoluted product approval process also conspired to doom the Big Exit.
Conditions truly were lethal that year—both early and late-stage companies received little, if any, new capital, and financiers that did part with their money invested overseas to bypass the costly,
convoluted U.S. regulatory system. Such a bleak environment could explain the glut of self doubt expressed by many noteworthy equity firms during the Great Recession.
“We were sitting here [in 2009] wondering if we’d ever make money again,” Douglas Roeder, general partner at Menlo Park, Calif.-based Delphi Ventures, told In Vivo magazine.
Roeder and his cohorts weren’t idle for very long. Delphi’s portfolio companies Acclarent Inc., Evalve Inc. and Ascent Healthcare Solutions Inc. all sold for premium sums to Ethicon Inc. (a Johnson & Johnson company), Abbott Laboratories and Stryker Corp., respectively, helping to give Delphi its best year ever for exits (those three sales alone netted the firm more than $1.71 billion).
So much for Big Exit’s “Big Exit.”
Calling the 2009 medtech funding landscape “challenging” clearly is an understatement. It was brutal. It was messy. And it was exasperating. But it could have been much worse without the saving graces of strategic acquirers which, in a limited fashion, stepped in for public investors and gave the industry some much-needed financial support in a down market. The move—which provided Delphi with returns on investment between three-fold and 10-fold—demonstrated the resiliency of mergers and acquisitions as an exiting path for devices. It also proved that Big Exit was indeed alive and well, a fact substantiated in a recent report from Silicon Valley Bank of Santa Clara, Calif.
“Not only has Big Exit M&A activity increased in number, but in up-front value as well,” the 18-page report stated. “This positive surge in M&A exit activity has created substantial returns to the venture community.”
Top returns came from surgical, vascular and services indications. More than $8.8 billion in life science merger and acquisition (M&A) value was generated last year—the largest since 2005. Total value, including milestone payments, topped $12.7 billion, according to the report.
The bank’s analysis, titled “Continued Rebound: Trends in Life Science M&A,” discussed the exits that created substantial value for venture capitalists through “significant realizations”—those that totaled at least $50 million for medical device companies and $75 million for biotech firms. The study, released in July, was retrofitted from a previous 2005 to 2010 data set to keep the numbers consistent.
The number of large, venture-backed M&A transactions in the medical device and biotech sectors consistently has increased over the last three years, the report concluded. Since 2009, both the upfront dollar amount of structured deals and the total deal value have increased and substantially outperformed previous life science exits between 2005 and 2008. Venture-backed M&A activity set a new record in 2011 (a “breakout year” according to the bank analysis), with Big Exits and liquidity in the device and biotech industries reaching previously unseen levels.
The medical device industry logged 18 Big Exits last year (defined in the report as venture-backed acquisitions with an up-front payment of $75 million or more), beating out biotech’s 17 exits and extending an upward trend in exit activity in the life science arena, with more than 25 per year since 2009.
“There might be a bit of perspective out in the market that deals are not happening,” Jonathan Norris, report author and managing director of Silicon Valley Bank Capital’s Venture Capital Relationship Management team, told Medical Device Daily. “But these deals are actually happening and they’re happening in good numbers. So it really sets up the industry for continued growth on the M&A side.”
The number of Big Exits and dollar volume, however, are not the only aspects of venture-backed M&A activity that rose last year. Exits also took longer, a snafu that can curtail companies’ internal rates of return, the report noted.
Biotech exits averaged slightly more than seven years in 2011, while those in the device sector took about eight-and-a-half years. Four of the 17 biotech deals conducted last year received Series A funding in 2000 or earlier (those foot-draggers were directly responsible for the inflated time to exit) but the median exit time actually was much lower, with seven deals taking five years or less from the closing of their Series A funding.
The numbers were reversed in the device sector, where just four exits occurred within five years of their Series A funding closing. Though he claims to notice signs of quicker, cost-efficient later-stage exits as well as early development-stage acquisitions, Norris notes that device exits may always take longer than their biotech counterparts due their unstructured nature and the constitution of their deal-making milestones.
“The current environment has paved the way for less structure in device M&A for two main reasons,” Norris wrote in the report. “First, the majority of these exits occur with de-risked, post-FDA [U.S. Food and Drug Administration] approved devices where there is really no reason other than commercial uncertainty to structure a transaction.”
“Second, based on the current life-science fundraising environment where distributions are at a premium and are required to raise a new fund, many device investors would prefer to get the immediate gratification of an all-deal structure paid at deal close and entirely within their control, rather than wait on potentially bigger payouts based on back-end revenue milestones,” he continued. “The milestone issue for device is different for biotech. Whereas biotech milestones are developmental from one clinical trial to another, device milestones are commercial and the acquiring companies’ emphasis on the product affects milestone achievement.”
Much of the Series A funding raised between 2005 and 2007 went to startup companies in the cardiovascular, diagnostic, orthopedic, anti-infective and oncology sectors. Big Exits have occurred relatively quickly (since 2009) in the oncology, anti-infective and cardiovascular industries but appear to have stalled in the diagnostic and orthopedic markets.
Despite its Big Exit dry spell, the diagnostic space was still a favorite among investors over the last seven years. The report concludes that diagnostic firms attracted more than $1.6 billion in capital between 2005 and 2011—the second-highest amount among the six life-science sectors that garnered more than $1 billion in venture dollars since 2005. Oncology led the pack, attracting more than $2 billion over the last seven years.
Although device deals are up, there was a slight drop in the overall dollar size compared with 2010. The report attributed the decrease to Medtronic Inc.’s $800 million purchase of privately held Ardian Inc. in November 2010. Ardian’s signature product, the Symplicity catheter system, addresses uncontrolled hypertension through renal denervation, or ablation, of the nerves lining the renal arteries.
“On the device side, the overall dollar size related went down a bit, partly because of the anomaly of Ardian, but if you just look at this year’s size and number of exits, it continues a really nice trend,” Norris told Medical Device Daily. He characterized the Ardian deal as “telling” because of the venture funding round that preceded it.
“Not only did this company get acquired for a substantial amount of money,” Norris said, “but the venture round that they did prior to that had corporate folks scrambling all over that company because they wanted to be a part of it. I think what you’re seeing in that area is when you have a minimally invasive device that can replace a drug that has significant sales, that’s a very intriguing area.”
Last year’s big device exits were concentrated on both ends of the M&A “barbell”—one side balancing faster-to-exit deals (roughly five years from the first institutional investment) with less than $30 million in venture money; against the slower-to-exit M&As (longer than a decade) with more than $60 million in capital. The barbell is heavier on the slower-to-exit side, where the deals usually are more lucrative. Two of the most recent longer exits include Stryker Corp.’s $135 million cash purchase of Mountain View, Calif.-based Concentric Medical Inc. last September and Boston Scientific Corp.’s $150 million acquisition of Cameron Health Inc. in March. The latter deal calls for an additional $150 million payment by Boston Scientific upon FDA approval of Cameron’s subcutaneous implantable cardioverter defibrillator (the S-ICD System) and another $1.05 billion of potential payments upon achievement of specified revenue-based milestones over a six-year period following FDA approval.
Stryker’s deal is not nearly as profitable for Concentric as it is for the orthopedic manufacturing behemoth—it provides the Kalamazoo, Mich.-based company with immediate access to the fast-growing stroke intervention market.
Norris’ report put a positive spin on M&A activity for the last seven years and clearly discredited the venture capitalists who were ready to eulogize the Big Exit back in 2009.
“There has been a continued rebound in life science Big Exit M&A. Last year saw an accelerated pace in the number of Big Exits and total deal value in both biotech and device, representing seven-year highs for both metrics,” the report stated. “In 2011, upfront deal values with and without milestones have increased in biotech and appear to be holding their own in device. Research into specific sector indications shows significant investment patterns over the past seven years, and analysis shows that many of these specific indications generate substantial LPI [liquidity to paid-in capital invested] performance based on Big Exits that have occurred during this timeframe. While this does not correct the poor overall returns in the sector in the last decade, these dynamics position life science as an attractive investment opportunity now and in the future.”
Long live the Big Exit.
Long live the Big Exit! Reports of its death have been greatly exaggerated.
Whispers of its premature passing have circulated throughout the medtech investment community in recent years as financial gurus and (former) happy-go-lucky venture capitalists succumbed to the global economic malaise that annihilated funding, severed reimbursements and turned gainful, free-spending corporations into penny-pinching tightwads.
The rumors regarding Big Exit’s demise began as most rumors do—from a toxic mix of assumption, exaggeration and misinterpretation of fact. Indeed, certain facts have been nearly impossible to misread—i.e., the difficult regulatory environment, the exodus of active medtech investors, the evaporation of venture capital (VC) funding, the alarming nosedive in corporate profits. Other truths, however, are not so clear-cut. Early stage focused device firms, for instance, typically are hesitant to make new investments when raising funds. That’s a fact. But their reluctance to make new investments easily could be mistaken for apathy.
Such blurred lines between fact and fiction led many venture capitalists to assume that Big Exit’s days were numbered. They weren’t, of course, but it certainly appeared that way: In 2009, as the nation wallowed in its economic doldrums, the initial public offering (IPO) market tanked, strategic
acquisitions were few and far between and once-confident financiers beat a hasty retreat from new investments. A costly, convoluted product approval process also conspired to doom the Big Exit.
Conditions truly were lethal that year—both early and late-stage companies received little, if any, new capital, and financiers that did part with their money invested overseas to bypass the costly,
convoluted U.S. regulatory system. Such a bleak environment could explain the glut of self doubt expressed by many noteworthy equity firms during the Great Recession.
“We were sitting here [in 2009] wondering if we’d ever make money again,” Douglas Roeder, general partner at Menlo Park, Calif.-based Delphi Ventures, told In Vivo magazine.
Roeder and his cohorts weren’t idle for very long. Delphi’s portfolio companies Acclarent Inc., Evalve Inc. and Ascent Healthcare Solutions Inc. all sold for premium sums to Ethicon Inc. (a Johnson & Johnson company), Abbott Laboratories and Stryker Corp., respectively, helping to give Delphi its best year ever for exits (those three sales alone netted the firm more than $1.71 billion).
So much for Big Exit’s “Big Exit.”
Calling the 2009 medtech funding landscape “challenging” clearly is an understatement. It was brutal. It was messy. And it was exasperating. But it could have been much worse without the saving graces of strategic acquirers which, in a limited fashion, stepped in for public investors and gave the industry some much-needed financial support in a down market. The move—which provided Delphi with returns on investment between three-fold and 10-fold—demonstrated the resiliency of mergers and acquisitions as an exiting path for devices. It also proved that Big Exit was indeed alive and well, a fact substantiated in a recent report from Silicon Valley Bank of Santa Clara, Calif.
“Not only has Big Exit M&A activity increased in number, but in up-front value as well,” the 18-page report stated. “This positive surge in M&A exit activity has created substantial returns to the venture community.”
Top returns came from surgical, vascular and services indications. More than $8.8 billion in life science merger and acquisition (M&A) value was generated last year—the largest since 2005. Total value, including milestone payments, topped $12.7 billion, according to the report.
The bank’s analysis, titled “Continued Rebound: Trends in Life Science M&A,” discussed the exits that created substantial value for venture capitalists through “significant realizations”—those that totaled at least $50 million for medical device companies and $75 million for biotech firms. The study, released in July, was retrofitted from a previous 2005 to 2010 data set to keep the numbers consistent.
The number of large, venture-backed M&A transactions in the medical device and biotech sectors consistently has increased over the last three years, the report concluded. Since 2009, both the upfront dollar amount of structured deals and the total deal value have increased and substantially outperformed previous life science exits between 2005 and 2008. Venture-backed M&A activity set a new record in 2011 (a “breakout year” according to the bank analysis), with Big Exits and liquidity in the device and biotech industries reaching previously unseen levels.
The medical device industry logged 18 Big Exits last year (defined in the report as venture-backed acquisitions with an up-front payment of $75 million or more), beating out biotech’s 17 exits and extending an upward trend in exit activity in the life science arena, with more than 25 per year since 2009.
“There might be a bit of perspective out in the market that deals are not happening,” Jonathan Norris, report author and managing director of Silicon Valley Bank Capital’s Venture Capital Relationship Management team, told Medical Device Daily. “But these deals are actually happening and they’re happening in good numbers. So it really sets up the industry for continued growth on the M&A side.”
The number of Big Exits and dollar volume, however, are not the only aspects of venture-backed M&A activity that rose last year. Exits also took longer, a snafu that can curtail companies’ internal rates of return, the report noted.
Biotech exits averaged slightly more than seven years in 2011, while those in the device sector took about eight-and-a-half years. Four of the 17 biotech deals conducted last year received Series A funding in 2000 or earlier (those foot-draggers were directly responsible for the inflated time to exit) but the median exit time actually was much lower, with seven deals taking five years or less from the closing of their Series A funding.
The numbers were reversed in the device sector, where just four exits occurred within five years of their Series A funding closing. Though he claims to notice signs of quicker, cost-efficient later-stage exits as well as early development-stage acquisitions, Norris notes that device exits may always take longer than their biotech counterparts due their unstructured nature and the constitution of their deal-making milestones.
“The current environment has paved the way for less structure in device M&A for two main reasons,” Norris wrote in the report. “First, the majority of these exits occur with de-risked, post-FDA [U.S. Food and Drug Administration] approved devices where there is really no reason other than commercial uncertainty to structure a transaction.”
“Second, based on the current life-science fundraising environment where distributions are at a premium and are required to raise a new fund, many device investors would prefer to get the immediate gratification of an all-deal structure paid at deal close and entirely within their control, rather than wait on potentially bigger payouts based on back-end revenue milestones,” he continued. “The milestone issue for device is different for biotech. Whereas biotech milestones are developmental from one clinical trial to another, device milestones are commercial and the acquiring companies’ emphasis on the product affects milestone achievement.”
Much of the Series A funding raised between 2005 and 2007 went to startup companies in the cardiovascular, diagnostic, orthopedic, anti-infective and oncology sectors. Big Exits have occurred relatively quickly (since 2009) in the oncology, anti-infective and cardiovascular industries but appear to have stalled in the diagnostic and orthopedic markets.
Despite its Big Exit dry spell, the diagnostic space was still a favorite among investors over the last seven years. The report concludes that diagnostic firms attracted more than $1.6 billion in capital between 2005 and 2011—the second-highest amount among the six life-science sectors that garnered more than $1 billion in venture dollars since 2005. Oncology led the pack, attracting more than $2 billion over the last seven years.
Although device deals are up, there was a slight drop in the overall dollar size compared with 2010. The report attributed the decrease to Medtronic Inc.’s $800 million purchase of privately held Ardian Inc. in November 2010. Ardian’s signature product, the Symplicity catheter system, addresses uncontrolled hypertension through renal denervation, or ablation, of the nerves lining the renal arteries.
“On the device side, the overall dollar size related went down a bit, partly because of the anomaly of Ardian, but if you just look at this year’s size and number of exits, it continues a really nice trend,” Norris told Medical Device Daily. He characterized the Ardian deal as “telling” because of the venture funding round that preceded it.
“Not only did this company get acquired for a substantial amount of money,” Norris said, “but the venture round that they did prior to that had corporate folks scrambling all over that company because they wanted to be a part of it. I think what you’re seeing in that area is when you have a minimally invasive device that can replace a drug that has significant sales, that’s a very intriguing area.”
Last year’s big device exits were concentrated on both ends of the M&A “barbell”—one side balancing faster-to-exit deals (roughly five years from the first institutional investment) with less than $30 million in venture money; against the slower-to-exit M&As (longer than a decade) with more than $60 million in capital. The barbell is heavier on the slower-to-exit side, where the deals usually are more lucrative. Two of the most recent longer exits include Stryker Corp.’s $135 million cash purchase of Mountain View, Calif.-based Concentric Medical Inc. last September and Boston Scientific Corp.’s $150 million acquisition of Cameron Health Inc. in March. The latter deal calls for an additional $150 million payment by Boston Scientific upon FDA approval of Cameron’s subcutaneous implantable cardioverter defibrillator (the S-ICD System) and another $1.05 billion of potential payments upon achievement of specified revenue-based milestones over a six-year period following FDA approval.
Stryker’s deal is not nearly as profitable for Concentric as it is for the orthopedic manufacturing behemoth—it provides the Kalamazoo, Mich.-based company with immediate access to the fast-growing stroke intervention market.
Norris’ report put a positive spin on M&A activity for the last seven years and clearly discredited the venture capitalists who were ready to eulogize the Big Exit back in 2009.
“There has been a continued rebound in life science Big Exit M&A. Last year saw an accelerated pace in the number of Big Exits and total deal value in both biotech and device, representing seven-year highs for both metrics,” the report stated. “In 2011, upfront deal values with and without milestones have increased in biotech and appear to be holding their own in device. Research into specific sector indications shows significant investment patterns over the past seven years, and analysis shows that many of these specific indications generate substantial LPI [liquidity to paid-in capital invested] performance based on Big Exits that have occurred during this timeframe. While this does not correct the poor overall returns in the sector in the last decade, these dynamics position life science as an attractive investment opportunity now and in the future.”
Long live the Big Exit.