Florence Joffroy-Black and Dave Sheppard founded MedWorld Advisors in 2016 to provide industry-specific advisory services to middle market companies in the healthcare space. After many years working for and managing M&A processes for industry leaders in the medtech space, they saw a need for better guidance for mid-market sellers. “I’d often be part of acquisition teams of as many as 20 people, and we’d show up at a small company where it was just the CEO and the CFO at the table. Many times in those types of situations the seller was clearly unprepared for what was coming in doing a deal, and the large company was able to leverage that to their advantage in the final deal structure,” says Sheppard.
Medical technology is a complicated industry, and there are some critical sector-specific considerations for middle market companies embarking on a sale. Middle Market Review sat down with Florence and Dave at MedWorld Advisors to discuss four of the most important. What follows is an edited transcript of the conversation.
1) Regulatory Issues
What approvals and clearances do you need to sell your products, not only in the U.S. but also around the world? Regulatory issues are increasingly global. Even if your company is currently only selling in the United States, any acquirer will want to think about maximizing value by bringing your product or services to international markets.
Regulatory dynamics in the U.S. have actually improved in recent years, as the FDA becomes more responsive and begins to realize the importance of getting new products to market. Meanwhile, Europe — which used to be the place U.S. companies would go to start clinical studies — has made it a lot more difficult to get a product or service cleared with the new European Medical Device Regulation (EMDR). Everyone likes to talk about China as a big market opportunity, and it can be, but their regulatory body — the National Medical Products Administration (NMPA) — can be very difficult to navigate, even for Chinese companies.
In some cases, we’ll recommend that businesses engage a regulatory specialist to help them better understand the specific dynamics for their company and industry. We have enough experience in the medtech space to know that when it comes to these types of clearance issues, you need to work with someone who has extensive experience with whatever regulatory body you’re dealing with, whether it’s the FDA, the NMPA, the EU regulatory bodies, or the Japanese regulatory body.
As a seller, you don’t necessarily have to go out and get all these final clearances ahead of a deal. Instead, you want to make clear to a potential acquirer that you’re aware of what the issues are and you’re on the path to addressing them. If business owners haven’t assessed their regulatory opportunities and risks fully, they might end up having to settle for getting less for their business than they might have expected. On the other hand, thinking about and addressing these issues in advance can help maximize value.
Acquirers don’t just want to buy one product — they want to buy a company with clear potential for growth. (Private equity firms are typically looking for something that will provide returns within a five to seven year window.) This means acquirers are interested in your current offerings, but also in what’s coming down the line. This is where having a clearly articulated roadmap comes into play. In addition to new products, technology, and/or services, they’ll want to know how you’re thinking of potential roll-up strategies and other inorganic growth opportunities.
Developing a successful pipeline is not about taking one successful technology or product and finding a new application for it. That’s like a hammer in search of a nail. To be successful in medtech, it’s helpful to look for unmet clinical needs and understand how you could fit into those gaps and provide tools that make your users’ lives easier, whether that’s patients, or doctors, nurses, hospitals, or OEMs. If you’ve already done some of this deep thinking and hard work, it’s much easier for acquirers to see your company’s value.
Medtech is one of the more litigious industries when it comes to IP. Not only do you have to have your IP in place — your patents and trade secrets — but if you’re going to sell your company, acquirers will also want to know that you have freedom to operate. Sometimes you’re operating on the boundaries of another company’s intellectual property, that company might let you get away with it as a small business, but if a major corporation buys you, that corporation will be sued the first day after close.
You should be able to obtain a high level freedom to operate statement from an IP attorney for around $10,000. A full, in-depth one will usually cost around $50,000 – $100,000. In most sale processes, the former will suffice, especially since at the end of the day, a corporate acquirer will do their own assessment too. The important thing is to show acquirers that you’ve thought through this issue and done the work on your end.
If you were selling a medtech business twenty years ago, reimbursement wouldn’t have been a big deal. But in 2020 it’s a huge issue in the U.S. and most markets around the world. If you don’t have a way of getting reimbursement from insurance companies and government payors, you’re going to have a difficult time selling your product (and your company). Lack of reimbursement limits your market opportunity as well as the value of your company.
There are still legacy products out there today that have been operating under the old fee-for-service model, but that model is becoming less and less common today as the managed care system has taken hold in the U.S., as well in Europe, Japan, and other places around the world. International markets can be particularly tricky — everybody likes to talk about the 1.4 billion people in China and what a big market opportunity that is. But the reality is that reimbursement in China can be very complicated. There are upwards of 20 different regional government clearances you have to get to get your product reimbursed in China.
As a seller, if you have a legacy product that’s still getting fee-for-service reimbursement, and you have a positive sales trend, acquirers want to see you’ve thought about what’s going to happen to those reimbursements in the future and have a strategy to ensure continued growth.