The last decade has been a healthy one for the medical device industry, despite the intruding recession. And M&A activities have played a pivotal role in medtech's success. So it's worth taking a look back and a cautious look forward to get calibrated. I volunteer.
What, you'd rather leave on vacation than read this now? Incredible!
|The Medtech Scene
Kevin O'Keeffe of Charles River Associates published a nice review article entitled "The Rise of Medtech" last month. It's a worthy overview of the financial, clinical and technical successes of the medical device industry along with some work-in-progress and prognostications. The article understandably focuses on only the highest-profile innovations, since covering this entire eclectic industry would be an impossible task in a single piece. I was left with four takeaway messages that I will share with you:
1. From an investor's perspective the medtech industry, as measured by the S&P 500 Healthcare Equipment Index, has outshined other measures by a large measure:
Note especially its investment performance in comparison to its peer Pharmaceuticals Index. While the medical device sector generates "only" $200+ billion in annual revenue (not counting in vitro diagnostics), it remains a weak sister in comparison to the size of the pharma industry. But its returns to shareholders, including venture capital investors, have been nice indeed.
2. O'Keeffe chronicles the industry's successes in coronary stenting and robotic surgery as high-profile examples of medtech achievements, but of course there are numerous less-publicized and smaller waves that have been created. (Consider just one - pulse oximetry - in which I was priviledged to participate.)
3. As examples of work in progress he describes developments in percutaneous aortic and mitral heart valves, peripheral stents, and drug-coated angioplasty balloons. These examples obviously omit - for instance - the great strides being made in neurostimulation to treat a wide variety of intractable conditions and continuing innovation in joint replacement and spinal surgery.
4. Then there are the warning signs of potentially impeded innovation. These have been widely recognized and highly advertised by concerned industry executives. They include a planned excise tax on medical device revenue, comparative effectiveness initiatives, pending regulatory changes, and reimbursement uncertainties. Call me an optimist, but I think these issues will be eventually worked out in a reasonable way. But the medtech industry will have to adapt to these changes to maintain its stellar financial returns.
|M&A and Due Diligence
Mergers and acquisitions have been key factors in medtech industry success. They provide scale, bring welcome innovations to healthcare delivery, and provide exit vehicles for company founders and investors. Recently, M&A has been essentially the only exit vehicle for early stage medtech investors and entrepreneurs. But acquirers have often been burned by ignoring key principles of due diligence before striking a deal.
I offered some guidance on due diligence about a year ago, both in the form of a whitepaper and a quick-look Prezi presentation. Those thoughts were general in nature, outlining 10 steps to improve your due diligence processes. In an article last month Pete Masloski and Brian Chapman of ZS Associates focused more specifically on sales synergies to consider before jumping headlong into the role of acquirer. Those hoped-for synergies are both important drivers of M&A and great big danger signals if you don't do your homework.
They make three key points on what they call go-to-market due diligence:
All very good advice, it seems to me. Don't let the spreadsheet numbers alone drive your due diligence process. Be sure you fully assess the likely new interfaces between your prospective customers and your new blended selling force.
- Study the customer buying process; know exactly who the buyer's stakeholders are and who makes the purchase decisions; will you have access to those people?
- Understand the selling process; will your blended sales force have the skills to participate?
- Design the future sales model; what will be the new sales channels, the territory breakdowns, the compensation approaches, and the real (or imagined) synergies?