Medtech M&A: What are strategic investors looking for?

More and more large medtech firms are looking to strategic investments to drive R&D, fill gaps in pipelines and expand their portfolios, but what are they looking for in these partnerships?

Executives from Johnson & Johnson (NYSE:JNJ), Royal Philips (NYSE:PHG), Boston Scientific (NYSE:BSX) and Smith & Nephew (NYSE:SNN) spoke to an audience today about what they look for in strategic investments, how they  partner with startups and why the M&A market is booming in medtech. The panel spoke at the Redefining Early Stage Investments conference in Boston today.

The hot market for strategic investments makes it especially important to find the kind of partnership that will drive an increase in value for both sides. But it’s about more than money, the panelists said.

“If we invest, we’re a strategic investor. We don’t invest like a VC, where it’s a success if it’s sold 2 years later and we made 3 times our money, but it’s sold to a competitor,” Boston Scientific corporate business development veep Charlie Attlan said.

Boston Scientific’s investments have a large range, from vanilla equity investments to strategic investments with options to buy, with terms tailored to work for both parties.

Attlan said what the company really wants to do is advance the technology, and in a positive case, to buy it out. And the extra involvement as an investor means the companies end up learning about each other, easing the fit if the deal leads to a buyout.

“That’s the hope. It’s not as if we’re money and nothing else. We’d like to be the owner. But I think both sides understand that it’s a business relationship,” Attlan explained.

How do early stage companies know if they’ll be a fit for a particular investor? Jeffrey Barnes, managing director of Boston-based venture capital firm BioVentures, said that question’s gotten much easier to answer over the past 20 years, as large franchises have taken to diversifying their portfolios and expanding outside of single ventures. Still, Barnes stressed, it’s important to find the right fit.

For Philips, the most important factor in strategic investing is filling a pipeline gap. The Dutch conglomerate has a bias for later-stage investing, Philips Health Systems corporate M&A and BD senior director Jake Giannoti said. The exception comes with IT solutions that operate with multiple devices, Giannoti said, explaining that Philips is open to “earlier-stage investments that they might not have originally invested in.”

Attlan said Boston Scientific didn’t generally look at anything before a Series A and looks for targets with “major inflection points that need to be funded.” Boston isn’t above looking for partnerships with academic institutions and governments to drive new tech, he added.

For Smith & Nephew the opposite is true.

“It’s never too early to approach a strategic investment,” S&N technology manager Katherine Oates said. The British healthcare giant is always happy to hear from potential investment targets, but doesn’t look to adademia or to driving spinouts, she said.

“We want to see that organically happening on its own,” Oates said.

The panelists agreed that the easiest way to gauge the fit with a potential strategic investor is to reach out, but warned that firms that have done their homework would be better received.

“I would ask that they read through the company’s info before you send an email. It’s so much more impactful if you explain why it makes sense for your firm to partner with them. It’s going to get more attention from me,” Attlan advised. “Read up on what they do and tailor your message and you’ll get a better answer.”

Johnson & Johnson new ventures senior director Ibraheem Badejo said that even if a product doesn’t align perfectly with a company’s strategies, often there’s a way to pivot the development into a field that works for both parties.

“We look at what’s in the best interest of the partner, and how do we ensure ours and theirs. At the end of the day, we want to make it a win-win,” Badejo said. “It’s a collaboration, not, ‘Here’s $2 million, we’ll talk to you next year.'”

Setting appropriate terms is key

In terms of licensing, Badejo said Johnson & Johnson prefers to be exclusive.

“Even when we look at a platform, we ask ourselves, ‘What if another surgeon is using the same tool for an indication we have?'” he noted. “You can’t control what they’ll use it for, you can only get your clearance. I think it’s bad for us to not get exclusivity on it when we’re investing.”

At Boston Scientific, terms can run the gamut, Attlan said.

“We are very flexible with terms we offer, but clearly we view the opportunity to collaborate as 1 of the critical elements, and coming through that, with joint dev agreements and other opportunities there, we do have lots of concerns about what happens to the company,” he said.

The largest risk is that a 3rd party will swoop in and pick up a group they’ve already invested in. Attlan said Boston looks for rights and protective provisions in companies they invest in, but is flexible depending on the stage of development.

Every deal comes with its own terms and conditions, the panelists agreed, and needs to be considered independently.

“We look at every relationship individually,” Oates said. “We often work under [non-disclosure agreements]. Depending on the nature of the agreement, we can co-develop IP, or have a certain period where we have exclusivity to evaluate the data from the relationship.”

Small companies are often nervous about the agreement, worried they are giving up a lot, so it’s of major importance to find terms that everyone is comfortable with.

Firms shouldn’t be disheartened if a potential investor doesn’t ask for options. Strategics make so few investments that, if you’ve got their interest, you’ve already won, the panelists agreed.

“Even if you get $500k in an investment, that’s a big win. Just getting our org to the table is, in your shoes, a success,” Attlan said.

 

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