Recently, Qmed Daily reported that venture-backed life science acquisitions have hit a seven-year high. Based on an analysis by Silicon Valley Bank (Santa Clara, CA) of private mergers or acquisitions involving U.S. venture capital-backed bio- and medtech companies, the article noted that there were 35 big exits since 2005 and that $12.5 billion had been invested in life science firms in the same period. Medical device technologies receiving the largest investments since 2005 included diagnostic, orthopedic, and cardiovascular devices, while sectors with the highest multiples versus dollars deployed included companies that manufacture surgical and vascular devices. In an effort to flesh out what's behind the spate of mergers and acquisitions from 2005 to 2011, MPMN spoke with Jonathan Norris, managing director of Silicon Valley Bank and author of "Continued Rebound: Trends in Life Science M&A."
While venture capital investment in innovative companies has taken a hit as a result of the uncertain economic climate, it is not dead by any stretch of the imagination, according to Norris. M&A activity and the drive to maintain the pace of innovation will continue--albeit perhaps at a different pace. Ultimately, medical device mergers and acquisitions could also have a salutary effect on suppliers and contract manufacturers as the industry's bigger fish gobble up the little fish and expand medical device commercialization efforts. --Bob Michaels
MPMN: What are some of the technology, R&D, and business drivers behind the continued flurry of medical device mergers and acquisitions?
Norris: From my perspective, there are two different factors at play here. One is cost-effectiveness. Does the merger or acquisition opportunity really reduce the overall cost of medical procedures or the medical device itself? Another huge driver is the increasing prevalence of minimally invasive surgeries. Minimally invasive devices are replacing drugs.
One good example of M&A activity that was driven by the growth of minimally invasive medical devices was Medtronic's 2010 acquisition of Ardian. Ardian manufactures the catheter-based Symplicity renal denervation system for treating hypertension. This device enables doctors and patients to reduce the use of hypertension drugs, which are not without side effects. Ardian was able to create a device for minimally invasive procedures that produced excellent results. In this fairly substantial acquisition, Medtronic agreed to pay $800 million upfront, with potential earn outs on top of that. If you can find opportunities to remove potential harmful side effects in a minimally invasive procedure, that's is a really great M&A opportunity in the medical device area.
MPMN: Aside from the Ardian acquisition, what types of M&A activities have taken place?
Norris: The Ardian acquisition was announced in 2010 and completed in January 2011. In 2011, two different types of device acquisitions occurred. One subset involved big markets in which companies took an average of more than 10 years to exit, and the venture capital level was more than $80 to $100 million in. This subset yielded a bunch of mixed exits in terms of the actual multiple that investors were returning. In addition to slow exits, there was another bucket of M&A activity involving very-quick-to-exit device companies, in which the exit time was less than five years and the amount of money involved was less than $25 million in. The multiple back to investors in those cases was around three- to fourfold. The vast majority of the quick-to-exit cases were FDA-approved companies.
The difference between these two groups was that the former represented folks going after bigger markets and dealing with premarket approvals (PMAs) while the latter were often pursuing a 510(k), quick-to-exit pathway. There is a difference in time and cost when you are approaching a PMA project, and I think that's one of the biggest issues in the market with respect to venture capital deployment.
MPMN: What types of companies have been pursuing the longer versus the shorter exits?
Norris: In terms of technology, 510(k) approvals typically pertain to iterations of already approved products versus new products and markets, which is more of a PMA opportunity. I think we are seeing people bet on both sides of the ball. Investors are really doing well in the quicker-to-exit 510(k) iteration-type opportunities. However, that doesn't necessarily mean that this cycle is going to continue for a long time. The cycle could swing back to longer-term bigger exits as soon as there is more clarity in the market about how PMA paths are put forward, the FDA's approach to that, and when prospective acquirers are going to decide to buy. The vast majority of acquirers right now are looking for deals that are already approved, in revenue, and close to or already accretive in terms of revenue to the bottom line. That's the characteristic of what buyers are looking for now.
Thus, if you have a PMA project, not only do you need to get through approval, which can involve a lengthy and quite costly clinical trial, but you often have to raise a commercialization round, which involves additional money. One of the issues that makes it challenging for PMA-type companies to continue to move forward is the sheer cost of getting the device through FDA approval and into commercialization.
MPMN: Could you give some examples of companies in each category--those pursuing PMAs and those going the 510(k) route?
Norris: Examples of companies involved in longer-to-exit acquisitions are Concentric Medical and Salient Surgical Technologies Inc. A global provider of acute ischemic stroke intervention devices, Concentric Medical was acquired by Stryker Corp. for $135 million in an all-cash transaction in August 2011. Medtronic announced that it was acquiring Salient Surgical Technologies--a manufacturer of advanced energy devices used for hemostatic sealing of soft tissue and bone in orthopedic surgery, spine, open abdominal, and thoracic procedures--in July 2011 for $525 million.
On the earlier-stage side, M&A activity in 2011 included Medtronic's $120 million acquisition of Peak Surgical, a provider of energy surgical incision technology. Also in this category were Hologic Inc.'s $125 million acquisition of Interlace Medical, a manufacturer of a hysteroscopic tissue-removal system for the removal of submucosal fibroids and polyps, and Olympus Corp.'s acquisition of Spirus Inc., an endoscope insertion device manufacturer.
MPMN: While you may not be able to predict how this M&A activity will play out in the future, could you offer any prognoses for the next 12, 18, or 24 months?
Norris: Innovation is still alive and well. However, right now, venture has been hampered by a difficult-to-read FDA environment. A large number of early-stage focused device firms are out raising new funds, and the majority of the firms that are out fundraising typically do not make many new investments. However, many of the firms that are out fundraising at this time have a proven record of getting exits over the goal line, and I think that many of them will end up raising funds. But it's just taking a lot longer than people had predicted. Because of that, many noteworthy venture firms are out of the market in terms of doing a lot of new investments. Over the next year, most of these funds will raise monies, and they'll go to the market and invest. Therefore, while innovation is going to continue to be supplied by the life science venture community, at this point, we're experiencing a temporary lull.
MPMN: Is the investment slowdown related to the continuing effects of the Great Recession? Is tight credit a factor because banks don't want to lend money?
Norris: Yes, the slowdown is a function of the recession, and economic factors are involved. The recession also translates into a reduced number of limited partnerships that invest in venture funds because these investors have reduced capital to deploy in certain situations. As a result, you're seeing fewer active investors in the market and fewer funds being raised.
But this situation does not mean that the life science sector is dead. To the contrary, what's happened is that the folks that have proven that they have been able to achieve exits over the last few years are going to be the ones that survive. And those are the folks that in the end know how to make these exits happen. Thus, they will continue to invest in innovative technologies and put the right executive teams around these technologies to find a way of getting the exit.
I do think that the economic forces that brought us to a downturn are still holding us back a little bit from returning to where we were from 2005 to 2008. But in a sense, the question is, was medical device activity from 2005 to 2008 overfunded, or was it right sized? That's a question that only time will bear out. Overall, I think we're going to see less capital flow into venture funds and thus less venture funding for life science companies. But in the end, is this trend just a case of natural selection, which will create an abundance of really excellent companies that are going to achieve a higher percentage of M&A, or is it chronic underfunding?
Only time will tell, but I think it's part of a right sizing because from 2005 to 2008, there was overfunding of capital coming into life science ventures. Funds were invested in too many companies, and now, you're still seeing an overhang of many private companies that are still out there trying to get to exit. And I think that this overfunding involves more companies than can be rationally supported in this current environment. Overall, what's happening now is continued strong M&A interest but not enough M&A interest to support all of the companies that are still private.