ONSET Ventures general partner Rob Kuhling suggests that the Guidant acquisition by Boston Scientific has impacted future venture-capital start-up investments in medical devices.
"A unique form of symbiosis has existed for over a decade between
the venture capital community and the large medical device
manufacturers," stated Kuhling. "Much of the basic R&D for new
technologies has been occurring in start-ups, where the investors and
entrepreneurs would assume the development and approvals risks, and
then depend upon one of a half-dozen or so large players to take their
product to market." This strategy, which Kuhling said has become widely
institutionalized, plays to the strengths of both constituencies: "The
start-ups provide a steady flow of turn-key new products that are able
to flow into huge, well-established manufacturing, marketing, and
distribution infrastructures, which would otherwise be impossibly
expensive -- and risky -- to fund."
So ideal has this strategy
been that entrepreneurs and VCs often begin planning from "day 1" when
-- and frequently by whom -- an acquisition will occur, said Kuhling.
"For many new ideas, there is never a thought as to creating a
self-sustaining entity. The proverbial 'back of the envelope'
inevitably contains a list of future suitors right alongside the sketch
of the new device."
But a build-for-acquisition strategy -- or
"quick flip" as insiders call it -- requires a sizeable pool of those
very suitors -- ideally competitors amongst themselves -- and that,
said Kuhling, is what is changing. "Guidant is gone, and St. Jude may
be next," he said, referring to industry speculation that the latter
may itself be in the crosshairs of Johnson & Johnson (JNJ).
Instead, said Kuhling, the entrepreneurs and VCs are going to have to
focus on building medical device businesses that can stand alone, or
that can consolidate with other similarly-situated start-ups to reduce
the market development burden. "It's back to building businesses the
old fashion way: invent the new technology, figure out the best market
fit, do all of the R&D, get the approvals, and then carry it to
market own your own."
For additional insight into the world of mergers and acquisitions, check out Mr HISTalk's interview of Jon Phillips, Managing Director of Healthcare Growth Partners. Here's another twist on the big company / little company theme:
Who will provide it?
I think it will come from the small companies. I looked back
at transaction activity over ten years in healthcare IT and
some of those that were the most successful were strategic,
but more product- or market entry-focused rather than the big,
Im going to change the world transaction.
Think of McKesson ALI. That worked out for everyone involved.
Everyone wondered why they paid those multiples, but they had
a clear strategy around it and developing it themselves would
have taken longer. They could bring ALI rapidly to market and
increase prices. That was one of their best acquisitions, in
both concept and execution. Innovation will find its way to
big companies either because theyre fast followers or because
they're doing acquisitions.
Big companies have phenomenal development talent, but its
much harder for them to keep in touch with their customers.
Small companies know if they lose a customer they're in big