Medical Device Daily Contributing Writer

MADISON, Wisconsin — With the initial public offering (IPO) window essentially nailed shut, the exit route for venture-backed healthcare companies is as clear as if it were marked in yellow highlighter: strategic investments and acquisitions by the sector's larger players.

And, although one participant in a panel discussion on "Corporate Strategic Investing & Acquisitions" during the 7th annual MidAmerica Healthcare Venture Forum at the Monona Terrace Conference Center here this week expressed some guarded optimism that the IPO market will awaken from its slumber in 2010, the reliance of the smaller firms on partnerships/acquisition by the industry behemoths is likely to continue unabated.

Mina Patel Sooch, managing partner with both Triathlon Medical Ventures (Cincinnati) and Apjohn Ventures (Kalamazoo, Michigan), shared moderating duties for the panel and said of what she termed "the exit scene" that she sees "glimmers of hope" for IPOs next year. "These things are cyclical," she said, "and 2009 was at the bottom of the cycle."

As for the M&A exit route, Sooch said she thinks the companies that have been most active as acquirers – Abbott (Abbott Park, Illinois) and Medtronic (Minneapolis) chief among them – will continue to be active.

Panelist Christopher King, senior director of corporate development at Medtronic, cited some of the rationale that company applies to its M&A activity. He said that fundamentally, each of its businesses has a core, and in pursuing recent acquisitions, "we saw opportunities to create technically differentiated positions in those spaces."

For the near term, King said, Medtronic's task will be to define whether to do "tuck-in" acquisitions that fit existing businesses, or to identify possible new areas of business activity and look for acquisitions that might provide entry. "We will continue to look at opportunities in what might be a 'white space' for us at present" he said, citing obesity and hypertension as chronic disease spaces where the company does not currently have a franchise.

In short, he said, Medtronic wants "to look at device opportunities across the board to leverage our existing technologies."

On the biopharma side, Michael Johnson, director of corporate business development for Eli Lilly & Co. (Indianapolis), said the company does look "beyond our core pharmaceutical business" when considering strategic investments and acquisitions. He cited vaccines as an example of an area where "a big acquisition" would be the necessary starting point if Lilly wanted to gain a significant foothold.

Kidded by panel moderator Jan Garfinkle, managing director of Arboretum Ventures (Ann Arbor, Michigan) with a query as to whether Eli Lilly might be considering getting back into diagnostics or medical devices – two areas which it has shed over the past two decades – he said that, for instance, the company does look at diagnostics partnerships or acquisitions that tie in with therapeutic areas within which it already has strengths.

Johnson said key areas for growth include oncology, diabetes and autoimmune diseases. "We don't pass on white space opportunities," he said, "but look at 100 to 200 molecules a year" as possible investment/acquisition opportunities, so not every potential deal gets carried through to fruition.

Adding another perspective to the corporate acquisitions question was Kevin Conroy, now president/CEO of Exact Sciences (Fitchburg, Wisconsin), who recounted his experience in the same positions at Third Wave Technologies (Madison), which he led to its mid-2008 acquisition by Hologic (Bedford, Massachusetts).

"When I joined Third Wave [in December 2005], we were in really bad shape," Conroy said. "Nobody wanted us." So, he said, "we set out on a course of action of engaging all possible companies that might be a fit for us."

That process led eventually to gathering a list of nine companies "that wanted to hear more" about Third Wave, he said. Touting the value of working diligently to develop relationship with possible acquirers, Conroy said, "It was valuable to have relationships that led to high-level talks. That eventually led to us getting a sale done in 45 days."

He told the audience to "make the M&A process a part of your overall business processes."

Asked whether he had pursued corporate partnerships rather than an outright sale of Third Wave, Conroy said, "With partnerships, you have to hand over what really is your company's entire value and depend on that partner to deliver. I felt that if we were going to do that, why not just sell the company?"

As for bringing a company through to an acquisition-based exit, he said, "you need to be sure that you have a plan. Do not get distracted – make sure everyone knows what your goals are."

Building on the relationships theme, Medtronic's King said, "We like to build relationships [with potential acquisition/partnership targets] early."

Johnson agreed, saying "early is better. We would like to know you as early as possible." He said Lilly "will follow companies and molecules for a long time."

Conroy observed that "at the end of the day, you make decisions quickly," but at that point in time, "you want as much information as you can get, and get it as quickly as possible."

Asked by Sooch what might trigger an acquiring company's interest in an acquisition target, King said, "All of our acquisitions are at the pre-FDA approval stage, but they all are very far along in the product development process."

He said Medtronic looks at the entire regulatory/reimbursement pathway. "The bar for FDA approval and for commercialization of a technology can be very different, so we look, for instance, at what the post-marketing clinical data requirements might be, as well as reimbursement issues."

From Johnson's perspective, target companies should be open in letting the potential acquirer know where things stand on regulatory matters. "We will tell you what we need in terms of clinical data in order to pull the trigger on a deal."

Asked whether the holding of a large stake in a potential acquisition target by one company precludes interest by other possible acquirers, he said, "It does give them a huge advantage, but if you have other assets in the pipeline beyond the molecule that is tied up with another company, you'll still attract interest from other possible buyers."

He added that when Lilly announces a deal, "It typically is based on a known clinical endpoint; we want to know what the end-game is."

King noted that such a situation is more likely to be found on the biopharma side of things. "On the device side, a possible deal is more likely to be based on a single therapy than on a broader pipeline of compounds or products."

The annual MidAmerican Healthcare Venture Forum is sponsored by the Mid-America Healthcare Investors Network and conference organizing firm International Business Forum (Massapequa, New York).