Florence Joffroy-Black and Dave Sheppard, MedWorld Advisors10.03.22
The life sciences/medtech sector boasts untold numbers of both early-stage startup companies and more mature small- to medium-sized businesses. While the latter may likely be acquired by either private equity or a strategic industry player, the former often needs to obtain market traction before finding the right exit path.
As M&A advisors, we’re often asked to share the recipe for negotiating an exit deal with a larger strategic industry player. There are many ingredients in this recipe, but only about a half-dozen are key to sealing an agreement with a larger OEM, perhaps even a member of MPO’s Top 30 list.
This column details some of the most important points to consider in developing an early-stage company.
Research and Development: A company’s core products and/or solutions must be de-risked enough to make them attractive to other parties and potentially “ready for market” (with no additional imperilments). Although big companies are not too nimble at internal innovation, they also are unwilling to invest in outside R&D if they deem the innovation too high-risk and unlikely to get to market.
Technology in search of a solution or solution to a problem? Many times, we have seen very exciting technology be brought to market with little success because the developers failed to address a real problem. Instead, they had a core technology and went in search of an opportunity to utilize it. Often, this approach results in a “force fit” for the situation and failure in the marketplace. The best innovators understand the key to eventual commercial success is finding a real challenge in the market and creating a solution to address it. Experienced medtech/life sciences innovators know the best opportunity for product development success is to research the market’s clinical unmet needs and create a solution that adeptly tackles it. This means ensuring the solution fits within an existing clinical workflow to help ensure adoption. A new solution can be disruptive to existing products in the marketplace but it should not be disruptive to users who strive for workflow efficiency on a daily basis.
Short- and long-term competitive advantage: It’s no secret that medtech is a very competitive industry. Consequently, a solution that brings both a short- and long-term competitive advantage to potential strategic partners will win support. Actually, anything that can help strategics increase their market share is highly sought and creates tremendous value.
Market size: Generally, large entities like large markets. A bigger potential market for a solution will yield a better likelihood of the innovation gaining attention from investors. Even more helpful is a demonstration of clinical adoption in some key applications within the market possibilities outlined in the business plan. This is called commercial “de-risking.” Large companies are excellent at commercial execution if they understand the sales model and will capitalize on an opportunity if their smaller acquisition or merger target can effectively demonstrate that scalable model.
Intellectual property (IP) and/or freedom to operate (FTO): Medtech is quite a lucrative sector, but it also is an extremely litigious one as well. Therefore, it is important for companies to identify and file patents whenever practical and possible. Trade secrets are also considered IP and sometimes can be even more valuable than patents. In considering a possible commercial deal with a large strategic, smaller firms should be prepared for their IP and FTO to be scrutinized more critically than it may have been in the past. This scrutinization usually occurs because larger companies will often refrain from initiating legal claims against smaller firms until the sale or license of the possible copycat product. At that point, the larger organization will engage its legal team and “swing for the fences” in an attempt to push a potential competitor out of the market. Companies should also remember that owning a patent does not necessarily guarantee FTO; it certainly is possible to hold a patent but not have FTO due to another party’s IP. Thus, companies must pay close attention to FTO as well as IP.
Regulatory pathway: The regulatory pathway should be evident for potential partners/acquirers. It is imperative that the market possibilities stated in a company’s business plan align with a clear route to regulatory clearance. If there is not yet a 510(k) clearance in the United States, for example, organizations should—at a minimum—conduct a pre-submission meeting with the U.S. Food and Drug Administration to obtain clarity on the necessary steps for market approval. Conversely, in Europe, companies must move beyond the MDD (Medical Device Directive) CE mark and have a clear path to MDR (Medical Device Regulation) CE approval in the near future.
“Show me the money” often means reimbursement: One of the keys to success for any new product in the market is the ability for providers to be reimbursed for it. While reimbursement need not be approved upon market entry, it is crucial to have the trail to compensation clearly defined as soon as possible to entice a larger player into an exit deal.
Build a team: Potential strategic partners evaluate product development and executive teams from their first interaction. In order for the relationship to work, they need guarantees that a smaller firm’s various teams can effectively support their requirements. All teams must demonstrate they can step up and deliver requested services to their new partners.
Bringing value to a potential strategic partner means considering all the elements necessary for market success without relying on a larger player’s help. Achieving that success with or without a key “significant other” can make companies more attractive to potential partners and secure their future. Organizations that rely on their own devices for competing in the market will have the best chance for long-term prosperity. Long live self-reliance.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com or at www.medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
As M&A advisors, we’re often asked to share the recipe for negotiating an exit deal with a larger strategic industry player. There are many ingredients in this recipe, but only about a half-dozen are key to sealing an agreement with a larger OEM, perhaps even a member of MPO’s Top 30 list.
This column details some of the most important points to consider in developing an early-stage company.
Research and Development: A company’s core products and/or solutions must be de-risked enough to make them attractive to other parties and potentially “ready for market” (with no additional imperilments). Although big companies are not too nimble at internal innovation, they also are unwilling to invest in outside R&D if they deem the innovation too high-risk and unlikely to get to market.
Technology in search of a solution or solution to a problem? Many times, we have seen very exciting technology be brought to market with little success because the developers failed to address a real problem. Instead, they had a core technology and went in search of an opportunity to utilize it. Often, this approach results in a “force fit” for the situation and failure in the marketplace. The best innovators understand the key to eventual commercial success is finding a real challenge in the market and creating a solution to address it. Experienced medtech/life sciences innovators know the best opportunity for product development success is to research the market’s clinical unmet needs and create a solution that adeptly tackles it. This means ensuring the solution fits within an existing clinical workflow to help ensure adoption. A new solution can be disruptive to existing products in the marketplace but it should not be disruptive to users who strive for workflow efficiency on a daily basis.
Short- and long-term competitive advantage: It’s no secret that medtech is a very competitive industry. Consequently, a solution that brings both a short- and long-term competitive advantage to potential strategic partners will win support. Actually, anything that can help strategics increase their market share is highly sought and creates tremendous value.
Market size: Generally, large entities like large markets. A bigger potential market for a solution will yield a better likelihood of the innovation gaining attention from investors. Even more helpful is a demonstration of clinical adoption in some key applications within the market possibilities outlined in the business plan. This is called commercial “de-risking.” Large companies are excellent at commercial execution if they understand the sales model and will capitalize on an opportunity if their smaller acquisition or merger target can effectively demonstrate that scalable model.
Intellectual property (IP) and/or freedom to operate (FTO): Medtech is quite a lucrative sector, but it also is an extremely litigious one as well. Therefore, it is important for companies to identify and file patents whenever practical and possible. Trade secrets are also considered IP and sometimes can be even more valuable than patents. In considering a possible commercial deal with a large strategic, smaller firms should be prepared for their IP and FTO to be scrutinized more critically than it may have been in the past. This scrutinization usually occurs because larger companies will often refrain from initiating legal claims against smaller firms until the sale or license of the possible copycat product. At that point, the larger organization will engage its legal team and “swing for the fences” in an attempt to push a potential competitor out of the market. Companies should also remember that owning a patent does not necessarily guarantee FTO; it certainly is possible to hold a patent but not have FTO due to another party’s IP. Thus, companies must pay close attention to FTO as well as IP.
Regulatory pathway: The regulatory pathway should be evident for potential partners/acquirers. It is imperative that the market possibilities stated in a company’s business plan align with a clear route to regulatory clearance. If there is not yet a 510(k) clearance in the United States, for example, organizations should—at a minimum—conduct a pre-submission meeting with the U.S. Food and Drug Administration to obtain clarity on the necessary steps for market approval. Conversely, in Europe, companies must move beyond the MDD (Medical Device Directive) CE mark and have a clear path to MDR (Medical Device Regulation) CE approval in the near future.
“Show me the money” often means reimbursement: One of the keys to success for any new product in the market is the ability for providers to be reimbursed for it. While reimbursement need not be approved upon market entry, it is crucial to have the trail to compensation clearly defined as soon as possible to entice a larger player into an exit deal.
Build a team: Potential strategic partners evaluate product development and executive teams from their first interaction. In order for the relationship to work, they need guarantees that a smaller firm’s various teams can effectively support their requirements. All teams must demonstrate they can step up and deliver requested services to their new partners.
Bringing value to a potential strategic partner means considering all the elements necessary for market success without relying on a larger player’s help. Achieving that success with or without a key “significant other” can make companies more attractive to potential partners and secure their future. Organizations that rely on their own devices for competing in the market will have the best chance for long-term prosperity. Long live self-reliance.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com or at www.medworldadvisors.com.
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
