Often we are asked when is the best time to sell a medical device company to maximize valuation and return to investors. There is no correct answer, however there are multiple inflection points one can look at and management can weigh options based on monies raised and monies needed to move forward. It generally comes down to a risk and return trade off.
The first exit point usually comes when the prototypes are complete and they are successfully tested in animal studies. These animal studies can be acute where the animals are sacrificed immediately or chronic where the animals are kept alive for some period and follow up is done. In both cases, data is shown if the device works or not. If the animal cases go well, often an acquirer will take a first look if they believe there is minimal risk to repeating the results in human clinicals. The Cardio3 Biosciences acquisition of Corquest Medical was a great example of this. Cardio3 felt the preclinical work was enough for them to know they could progress the technology through clinicals and regulatory with minimal risk. Corquest felt the offer price was enough based on the amount of money raised to date and the risk to move forward based on the dilution they would take to raise the necessary money. Both sides were content.
Next, if regulatory approval requires clinicals, the next inflection point comes after a successful clinical trial. If clinicals are not needed, then the inflection point is after the regulatory approval. In some cases, this regulatory approval may be outside the US. Strategic acquirers are always looking for technology that has been derisked from a regulatory standpoint. Santen Pharmaceuticals acquisition of InnFocus is an excellent example. InnFocus had an ex-US regulatory approval and was getting close to US regulatory approval with strong US clinical data. Santen structured a deal with significant cash up front ($225M), but that also had milestones for the US regulatory approval as well as future commercial milestones ($475M).
Finally, additional inflection points generally relate to ramping of revenue, moving toward profitability. Companies will often be acquired after they can show initial revenue and prove there is a market. Beyond that, achieving various levels of revenue lead to successful transactions. One example was Stryker’s $1.7B acquisition of MAKO Surgical in 2013, where Stryker valued both MAKO’s $103M revenue in 2012 as well as future growth and pipeline.
Locust Walk looks to work with companies at all inflection points to help them try to maximize value in a transaction and balance the risk and return trade off. Organized outreach to a targeted group of companies is the key to success. The experienced Locust Walk team can lead this outreach as well build out the financial models and commercial work needed to show an acquirer the great potential for a company or asset. Please contact us if you would like to discuss how we can support your company: firstname.lastname@example.org
Written by Stewart Davis, MD