5 Ways of Creating High Valuations for Your Life Science Company

5 Ways of Creating High Valuations for Your Life Science Company

1. Clinic Impact

Clinical impact is a fundamental characteristic and the most important benchmark for success of a medical device company. Almost all firms that generate premium M&A exits have products that fundamentally alter the pre-existing practice  of therapy or diagnosis. Take Perclose whose sutere catheter provides a novel method for closing a femoral access wound. Perclose fundamentally changed the clinical thinking and challenged the standard of care in the cardiac cath lab (pressure with sandbags). The improvement in patient care, comfort and clath lab efficiency were immediate. A new way of thinking emerged , creating an entirely new market.

Another recent example is Irvine, Ca based Spinofix, Inc is working on next generation posterior fixation spine technology. Spine surgeons in spine decompression surgery remove the spinous process, by doing that a segment of spinal cord is exposed. Spinofix technology replaces the spinous process and provides room for bone grafting and supposedly superior stabilization with its fixation technology. Bigger companies are looking at this technology as option to conventional parallel rod system.

2. Franchise Value, Strategic Need & Clinical Need

Franchise value implies that a company’s technology and the resulting clinical application are infact novel and clearly the best of breed. In almost all cases, companies with high franchise value are the first to market in an entirely new category. They establish dominant presence and create a new clinical franchise.

Eg; Lapband from Allergan is meeting a great unmet need in the obesity space.

Obesity is one of the biggest unmet clinical need, and there is opportunity for 20 more companies to meet the need, because they can target various methods to treat obesity.

3. The Effect of Focusing on Milestones/ Value of Execution

The company’s performance during the early stages of its development is critical to maximizing value. This explains why VCs place so much emphasis on the management team. Not only is execution important, it is controllable; an experienced team knows how to organize itself around key issues, thereby preventing situations such as program misdirection and lack of appropriate development focus from taking hold, while at the same time preserving the ability to change direction based on new information. Good start ups have good strategy.

4. Sustainability

When buying a company, models are built to justify acquisition or an IPO, placing extensive weigh on sustainable (if IPO) or predicatable sales (start up) of the acquired technology. Buyers want to know whether acquiring a company or its technology (product acquisition) is going to generate long –lasting profits.

A large market, significant clinical impact and the ability to bolster a franchise for the acquirer is critical to profit sustainability. It signifies successful management of capital and time.

5. Timing of Exit

A company with a ground breaking technology may exit too early.  It is important to monitor progress against milestones and the impact. Exiting before hitting the infliction point will result in less money and less ROI for investors. Conversely,  if the infliction point is not noticed and value is not cashed, then a opportunity to exit may be lost. Therefore timing is very important, monitoring the infliction point may bring very high return on investment or a good exit.

In the past four years the inflow of money from VCs into early start ups has affected the way exits will occur. Milestones are slower, but the key is “who stays in the game” companies who run out of money or spend it too fast to reach milestone can lose because they are not in the game.  Startups need to manage regulatory and clinical strategy to manage more complex FDA interaction.

The good news is the M&A market is very strong, large cap companies still depend on small medical device companies as a source to expand their offerings without earning dilutions, and funding will therefore continue to be available for novel, clinically relevant products that serve large and growing markets, one example is obesity market. Obesity was a condition and recently categorized as a disease, there are very few players and will continue to be the biggest market in the world as US, UK, AUSTRALIA, EU, LATIN AMERICA all reel under epidemic of obesity and its problems. This is a $200B market and growing.

The above benchmark characteristics define a successful value creation and exit.

By: Raj Nihalani, M.D., RAC(US)