Medtech Firms Expand R&D Effort via Acquisitions

15 Jan

By Max Klietmann, VP of Research, LSN

Medical devices and med-tech have become an increasingly attractive space for investment over the past several years due to the relatively short time to reach the market and diminished regulatory risk vis-à-vis therapeutics. As competition amongst investors for medical device investments and acquisitions have increased, several of the major industry players such as Medtronic and Boston Scientific have begun to make decisive moves towards investing in companies at earlier stages, and often seeding emerging device companies.

For large medical device firms sitting on massive stockpiles of cash, investment in younger startups makes a lot of strategic sense, as it affords them an easy way to diversify their R&D portfolio without having to take on the full risk of building out full-scale research operations in house. Deals between emerging medical device companies and large established corporations in this space are typically structured with some form of option or warrant to acquire the company at a given price further down the line. It is precisely this type of deal structure that reflects the mentality driving many large device firms to invest in startups in the space early. It allows them to place multiple bets with a secured option to acquire the most promising technologies further down the road, effectively letting them hedge against their own R&D risk. We have seen similar activity among large pharmaceutical and biotechnology companies, and it is undeniable that the corporate venture arms of large corporations are increasingly becoming a major source for early stage funding.

This is an important trend for CEO’s in the med-tech space who may not have previously realized that their early-stage product was a candidate for investment from a major player at such an early stage. Historically, these firms made tactical M&A moves, targeting companies with either a commercialized product, or one in the late pre-market stages. This has ceased to be the case, and corporate venture is now driving a large portion of early stage investments in devices. These firms are not just secure sources of financing – they also make excellent strategic partners for a variety of reasons, including a willingness and capability to share resources & know-how, as well as their established distribution networks. Moreover, there is a long-term incentive for these firms to acquire quality companies for their portfolios – as these firms are not exit-oriented investors looking for a quick return.

These changes in the medical device and med-tech investing space represent a paradigm shift as well as a resurgence of capital for early-stage companies in the space. This trend will likely continue throughout 2013 and beyond, and CEO’s looking to raise capital should focus on raising capital from these companies due to their multiple advantages as investors and partners.

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