Device VCs Find New Hope in Old Exit Path

Article preview from IN VIVO - July, 2010

An analysis of acquisitions of privately held venture-backed medical device companies delivers some signs of hope as well as important warnings for medical device VCs hoping to find a lucrative exit in this difficult market.

Device VCs Find New Hope in Old Exit Path

Article preview from IN VIVO - July, 2010

An analysis of acquisitions of privately held venture-backed medical device companies delivers some signs of hope as well as important warnings for medical device venture capitalists hoping to find a lucrative exit in this difficult market.

The median and average prices being paid for privately held venture-backed companies is on the rise, boosting potential returns on investments.

Corporate buyers continue to follow VCs into less traditional device therapeutics including ophthamology and pulmonology.

With the chance of an IPO increasingly remote, VCs are bringing in large medical device companies as early partners and investors.

A year ago, the malaise surrounding the deteriorating global economy even hit the optimists. Venture capitalists – a class of professional that counts optimism as a job requirement – wondered, like everyone else, when the trains would stop piling upon the already ponderous wreck. "We were sitting here last year wondering if we'd ever make money again," says Douglas Roeder, general partner at Delphi Ventures. The IPO market was long gone at that point and strategic acquirers, with the notable exception of Medtronic Inc., were sitting on their hands with everyone else. But then a funny thing happened on the way to financial ruin. Delphi Ventures had its best year ever for exits as portfolio companies Acclarent Inc., Evalve Inc. and Ascent Healthcare Solutions Inc. all sold for premium dollars to Johnson & Johnson's Ethicon Inc., Abbott Laboratories Inc. and Stryker Corp., respectively.

Public investors weren't stepping up to the plate but strategic acquirers were, at least in limited fashion, providing some of the strong returns for the medical device industry in a down market. The turnabout – which provided Delphi with returns on investment between 3x and 10x – demonstrated the resiliency of mergers and acquisitions as an exiting path for devices.

Just how true and steady has the merger and acquisition route been in recent years? An analysis of the acquisition of privately held venture-backed companies over the past five years reveals that corporate acquirers remain quite interested in what venture capitalists are selling. We looked at more than 70 venture-backed medical device companies acquired since 2005, and the data revealed a steady climb in the prices being paid for blue-chip portfolio companies as well as a growing appetite for companies operating in industries and therapeutic categories that haven't interested big players in the past. Our survey also indicates that corporate acquirers prefer to pay for performance, as noted by the rise of earn-outs in medical device deals. Overall, given the lack of an IPO market as an alternative and the fears that venture-backed medical device companies would be running out of money, the prices paid for the companies surveyed are encouraging. ( See "Medical Device Earn-Outs More Common As Buyers Hedge Bets," START-UP , April 2010) ( See Exhibits 1 and 2.)

By Tom Salemi

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