The S2N Blog

  • Top 5 Reasons Why Med Tech is Still Cool

    By: Andy
    Published: 09 Oct 2014
    Top 5 Reasons Why Med Tech is Still Cool

    In S2N’s very first blog, back when we founded our company in 2011, we shared our top 5 reasons why we like the med tech industry. Times have been challenging for emerging med tech companies, though, and the bad days can make you start to doubt your career choices. Maybe it’s time to do something sexier, like develop an app for $0.99 that 100 million people want, or a biotech drug for a really bad disease that 12 people have.

    Yet we continue to soldier on, humbly confident that medical devices are still important, and in fact things are looking up for med tech in 2014. It’s been a good year for S2N as well, so we got bold and added some youthful talent to our team. When we offered Andy the job, we weren’t sure we could compete with the glitz and glamour of biotech. Why would anyone with a million possibilities want to get into med tech now, much less work with us?

    To lay our bewilderment to rest, and shamelessly fish for complements from our vulnerable new hire, we asked Andy to refresh our top 5 List with his reasons for entering the med tech field. What attracts a young buck like Andy to join us rapidly aging folk in the pursuit of med tech nirvana?

    Here’s what Andy had to say:

    1. Have you ever heard of Facebook? Yeah, me too. Like most of my generation, I was raised by the Internet. We worshipped Mark Cuban and Mark Zuckerberg, now household names; Silicon Valley is the new Hollywood. What I see in med tech is a potential to rekindle a forgotten industry. While many of my peers flew out West like moths to a bright light, I trekked up to the land of miserable winters and unhealthy Red Sox obsessions (also known as Boston). I knew I wanted to work in an industry that was a little less glitz and a little more grit. Call me naïve, but I see med tech taking front stage in the next tech boom. I’m just getting in while it’s still under everyone else’s radar.
    2. From day one of college I knew I wanted to get into biomedical engineering. In my years of lab research I grew to love the concept of manipulating the mechanics of biological systems to create whole new technologies. But sometimes it felt like my scientific papers were just landing in the great academic abyss. Blame it on me, or blame it on the short attention span of my entire generation, but I knew I needed a little more instant gratification. Wait, what was my point again? Oh right: I wanted to work in an industry that lets you see the hard work of lab research put to use in the real world, and in real people.
    3. Biology is all about revealing the fundamental mechanism behind a process. As a biologist (-ish), I wanted to understand the process of taking knowledge learned at the lab bench and spinning it into a company. After so many years focusing on the science behind medical devices, I became increasingly curious about the businesses behind them, too. Based on my experience, the majority of scientists have only a hazy concept of everything that must happen to translate a science project into a revenue-generating product. The way I see it, this is my new mission: to reveal the mechanisms of turning science into business.
    4. I really should have put this at #1, but here it is: the problems that medical devices take on are the problems worth solving. As much as I love sharing pictures of what I had for dinner with all my Internet friends, the gains for humanity made by these trendy apps are lost on me. With med tech though, every new product launch has the potential to improve or extend a patient’s life. This business might not be the most glamorous, or the best for hitting a jackpot product, but at least the medical device industry strives to tackle real problems. And that makes going to work every day worthwhile.
    5. Deep down, everyone is a salesman, whether you are trying to sell a device, some old speakers on Craigslist, or even just sell yourself as a talented, competent professional. Growing up, I always seemed to be meddling in some “make a quick buck” scheme. Maybe it was this unquenched entrepreneurial spirit that finally drove me to the scrappy space of med tech startups. I wouldn’t be surprised if the thrill of teetering between boom and bust brought you all to this space as well. Whatever the outcome, you know that you are taking action, trying to do something that matters.

    There you have it – why I chose to go into the med tech industry in 700 words or less. Now I get to peer into the black boxes of a dozen different med tech companies, all of which are at the forefront of their space. Who knows which one is going to be the next household name?

  • IPO or Bust for Emerging Med Techs

    By: Amy
    Published: 18 Aug 2014
    IPO or Bust for Emerging Med Techs

    The recent receptivity of public equity markets to early stage biotech has encouraged more than a few emerging med tech companies to consider IPOs. The allure of the IPO, if successful, is obvious. More capital can potentially be raised on better terms from public investors than private ones to fund expensive commercialization efforts. More to the point, though, tired venture investors and management teams can achieve liquidity and returns sooner than waiting for an attractive M&A exit, which in med tech may require years of slogging it out on market for a multiple of sales deal.

    A glance at the five emerging med tech companies to go public in the last 6 months reveals reasonable success in raising money with their dazzling stories of large and growing market opportunities. Notably, all of the companies have a product on the US market, or within sniffing distance of it; contrast this with biotech where promising pipelines alone can drive successful IPOs and high market caps. Also notable is that fundraising expectations were a bit more bullish than the IPO market reality, with all five companies pricing below or at the low end of their target ranges.

    If tapping the public markets is something you are considering for that next round of capital, certainly the first step is determining whether public investors are likely to come to the table. Do you have, or are you close to, US revenues? Check. Is your product chasing large markets with big growth potential? Check. Are your VC investors tired and cranky? Check!

    An IPO, however, is not just about the day you get listed on the NASDAQ and pocket the cash. As a wise sage told me when I was pregnant with my first child, “Don’t worry about childbirth, worry about everything that comes after.” To gain some perspective on life as a public emerging medical device company, I spoke with Nassib Chamoun, former President, CEO and Founder of Aspect Medical Systems (ASPM), a brain monitoring company that went public in 2000, raising $52M in the IPO that funded the company to >$100M in sales, profitability and acquisition by Covidien in 2009.

    According to Nassib, being a public med tech company has certain advantages. “You are a somewhat more legitimate entity, especially when dealing with corporate partners,” says Nassib. Having that ticker next to your company name also raises your prestige with current and potential employees (I’m nominating T2 for the cutest ticker of 2014, by the way). Nassib also recalls fondly many of his interactions with sell-side and buy-side analysts. “They were like an outside Board – I often got more from them than they got from me.”

    The leadership of the IPO-ing emerging med tech company needs to prepare for some of new unique challenges, though, that come with being a publicly traded entity. Here are a few you can expect to encounter:

    1. The distraction factor: As we all know, being a CXO of a start-up med tech company equates to two full time jobs at a minimum. Add an IPO to the mix and you are now 300% employed. This burden repeats itself, albeit on a smaller scale, at least every quarter once you are public. Employee fixation on the company share price also adds to the distraction factor, especially when there are big swings (a common situation for emerging med techs – see point 4).

    2. The cost: According to a PWC survey, in addition to underwriting fees paid to the bank(s) taking you public, which can total as much as 5-7% of gross proceeds, companies spend an average of ~$1 million on IPO-related legal, accounting and other one-time costs, and ~$1.5M in annual recurring costs for extra staffing, legal, HR, technology and the like. These sums may not seem like much for larger companies, but for small med techs these additional expenses can have a real impact.

    3. The Full Monty every quarter: If you ever listen to a JNJ earnings call, you soon realize that you are learning absolutely nothing. Contrast that with the single product med tech company, where basically every aspect of your business, from your COGS to your installed base to your clinical trial progress, is discussed in intimate detail for the analysts plugging assumptions into their 1,000 line models so they can decide what box to put you in. You might as well send your competitors and every employee in your company your weekly management report. “One of our early competitors was also public and we knew everything about each other – it was a running joke,” said Nassib.

    4. The rollercoaster ride: Most public emerging med techs are thinly traded, which makes dramatic share price swings more likely. These swings may have little to do with your company’s results, though plenty of unanticipated things happen in early commercialization that can affect your share price. “The highs are higher and the low are lower,” recalls Nassib. “The volatility brought our organization closer together as we celebrated the successes and managed through the failures.” Small public companies are also more vulnerable to activist investors since it is easier to acquire a controlling share. “You can be forced to liquidate and give up significant future value for much smaller short-term gains,” warned Nassib.

    When I asked Nassib about Aspect’s decision to IPO, he emphasized that going public is rarely a choice. “With the amount of money and time required to develop and commercialize a novel medical device, you exhaust your angels, your VCs, your Mezzanine investors, and you still aren’t done. The exhausted investors, and employees, want some liquidity, and an IPO becomes your only option.” If it had been a choice, Aspect might have stayed a private company, though “going public is on the evolutionary path toward becoming a successful company – so live it up and enjoy the journey,” advised Nassib.

  • MDT + COV - Good or Bad for Medtech Innovation?

    By: Tim & Amy
    Published: 20 Jun 2014
    MDT + COV - Good or Bad for Medtech Innovation?

    Let’s be honest – the headlining acquisition of Covidien by Medtronic may go down as the most boring deal of 2014, unless of course you are an international tax accountant. The swirling buzzwords are inversion, offshore cash, G&A, and hospital contracts. Please wake me up when it’s over. Yet it may be the unintended consequences of this deal that are the real story, in particular the implications for med tech innovators. The real story won’t really be known for months or even years, despite Omar Ishrak’s reassuring pronouncements that the merger will “accelerate” investments in R&D.

    We at S2N decided an old-fashioned pro-con debate was in order. Question: Is the big fat marriage of MDT and COV good for Innovation? Tim took the Con position and Amy the Pro stance. Here’s blow by blow:

    Cash for innovation or cash for shareholders?

    Amy: You need a lot of cash to invest in disruptive innovation, and the combined “Medvidien” will be swimming in it. It’s a perfect match for gaining efficiencies in mature product categories to free up cash for real technological advances.

    Tim: This deal is a perfect example of how the big companies are throwing in the towel on innovation and focusing on the bottom line. The extra cash will all go back to shareholders, which is great for them but I’m not sure how that helps innovation.

    Temporary deal disruption or big investment hiatus?

    Tim: Good luck getting anything done with any division of MDT or COV for the next 3 years while management is completely focused on realizing those promised “synergies”. They will have a good, long run of earnings growth that will take pressure off top-line growth for a while.

    Amy: Really Tim, do you think they can afford to turn off the growth-oriented deal flow for that long? Sure, there might be a short-term disruption to early stage investments from the distraction of the merger, but pretty quickly they are going to have to put that cash to work to grow sales. Can’t cost cut your way to success forever!

    Spawning of new start-ups or lifestyles of the rich and famous?

    Amy: Think of all the med-tech superstars who will make big coin on the deal and then be released to the wild. Some of that money and expertise will start finding it’s way back into the emerging med-tech ecosystem.

    Tim: Wishful thinking, Amy. Med-tech veterans don’t have a rich history of aggressive angel funding. Mostly likely the deal will help the yacht and island markets more than med tech start-ups.

    One less acquirer in the pool or just fatter acquirers?

    Tim: The number of big-time med tech acquirers is pretty small as it is, and it just got one smaller. Negotiations with the new entity will be tougher, too, because there will be less deal competition.

    Amy: There is so little overlap in the business units of the two companies, except for endovascular, that it really doesn’t change the picture for most emerging med techs. The acquirer just got a bigger wallet.

    Helpful scale or focus elsewhere?

    Tim: After tax minimization, the other main drivers of this deal are negotiating power with hospitals and scale to sell in emerging markets. That’s where they see their growth coming from in the next couple of years. Innovation is on the back burner.

    Amy: Those more effective hospital and emerging markets sales channels will benefit innovative technologies, not just mature ones, and they will need more products to pull through those channels.

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