Medical Device Daily Executive Editor

MINNEAPOLIS – The gigantic pending Johnson & Johnson (J&J; New Brunswick, New Jersey) deal for Guidant (Indianapolis) aside, the era of the “mega-deal” in the medical technology sector is all but past.

That’s the view of members of a panel that addressed consolidation in the medical device industry during last week’s 4th annual Medtech Investing Conference at the Radisson Plaza Hotel in downtown Minneapolis.

The big players in the device field – dubbed “consolidators” by panel members – are getting bigger, said panel moderator Michael Stroup, vice president with RBC Capital Markets (San Francisco), “but with smaller bites.”

In contrast with J&J’s $25.4 billion deal for Guidant, which is moving toward a late-summer/early fall close, Stroup said most mergers-and-acquisition (M&A) activity in the sector “actually is for less than $250 million.”

Panelist Buzz Benson, managing director of Sightline Ventures (Minneapolis), said he thinks the days of deals being dominated by a double-handful of the biggest companies in the sector are moving toward the past tense. “There will continue to be consolidation in this business,” he said, “but I’m not sure it will be by the big guys.”

Instead, he and others on the panel are looking for the so-called “second-level companies,” those with market caps falling into the $1 billion to $9 billion range, to be writing more checks to get development- and early commercialization-stage companies into their fold.

Martin Emerson, CEO of one such firm, American Medical Systems (AMS; Minnetonka, Minnesota), pointed out that the buyer/seller pendulum swings both ways for a mid-sized firm such as his.

“There are days when we’re the target in the [being acquired] rumors, [and] others when we’re the subject. As you become successful, you become more of a target yourself.”

He said he doesn’t spend much time thinking about the former, being focused as he is on growing his firm through acquisitions. “There are lots of great technologies out there in the urology space,” Emerson said, “[so] we’re always looking at companies.”

With a lot of competition for acquirable firms with good technology, he said that AMS is “trying to increase the speed with which we can acquire companies.”

Robert Paulson Jr., who just joined Restore Medical (St. Paul, Minnesota) as president and CEO last month, brought both small- and large-company viewpoints to the discussion, having held management posts at Medtronic (Minneapolis), definitely a “big guy,” prior to becoming CFO and vice president-marketing at Endocardial Solutions (St. Paul, Minnesota) before that firm was acquired by St. Jude Medical (also St. Paul) in a deal that closed early this year.

Answering Stroup’s question as to whether smaller companies like Restore face problems in getting in to see potential customers for its Pillar sleep apnea product because those customers might prefer to deal with larger companies that can bundle a wider array of products to meet their needs, Paulson said, “we’re not limited in our ability to get to potential customers.”

He said Restore is hearing from payers looking for “new, effective, more cost-effective alternatives.” That, he said, “lets us play to the smaller, quicker, more innovative company thing.”

While noting that consolidators have advantages in product bundling, financial backing of clinical trials and access to hospital customers, Benson said smaller firms can overcome that “by having innovative products and high-quality sales forces.”

He cited FoxHollow Technologies (Redwood City, California), developer of the SilverHawk plaque excision system for the treatment of peripheral artery disease, as an example. “They have ‘paid-up’ their sales force,” Benson said, hiring top-quality reps who have driven a substantial presence for the company in the marketplace.

Asked by Stroup whether physician customers are looking for more access to sales people or less, Emerson answered: “Innovation will always win out; physicians will always have time for people with new technologies and approaches.”

Addressing the timetable for smaller firms to follow in attracting larger companies as prospective acquirers, Josh Baltzell, a principal with Split Rock Partners (Eden Prairie, Minnesota), said that start-up companies “need to create relationships with consolidators early, especially if [the start-up has] a new platform technology. It will take years to educate them on you and what you have.”

And, he added, “as they [the consolidators] get bigger and bigger, you need to start earlier and earlier, since it’s going to take longer and longer to get these deals done.”

One thing that can help large companies move more quickly on deals, Baltzell said, is the possibility of an acquisition target having the alternate possibility of going public in an initial public offering (IPO) market that is “somewhat more open.”

In Benson’s view, an IPO “is really still not yet the source for investor liquidity,” noting that it is “becoming more the norm” for acquisition target companies to “have talks on the sale of the company at the same time as they are pursuing an IPO.”

In the end, he said, “80% of what we do [as venture investors] we believe will end up in M&A, not IPO.”

And if the process is taking longer, he said: “You have to push the acquirers a lot harder to make decisions.”

Emerson sees that as advantage for mid-sized acquirers such as AMS. “We’re able to make a decision more quickly,” he said. Those who are involved in final acquisition decisions “all are just down the hall from one another, so we can make a potential deal happen fairly quickly.”

Another advantage, he said, is that those companies that are looking to be acquired “have comfort with us as a company to which the acquisition is important,” a feeling they don’t always get in dealing with industry behemoths.

Emerson said the key disadvantage, of course, “is that big companies can come in and make a bigger offer.”

The annual Medtech Investing Conference is produced by International Business Forum (Massapequa, New York) in conjunction with Medical Alley/MNBIO (St. Louis Park, Minnesota), a Minnesota-centered trade association focused on healthcare products and services.