Why Baird Capital is keeping a close eye on Medical Devices
There is a saying in Chicago: "If you don't like the weather, just wait a minute..."
A similar perspective exists for MedTech investing. In any given year, it may seem as if a certain healthcare sector is "out-of-favor." Baird Capital believes one advantage of focusing on multiple healthcare sectors is that while each sector demonstrates an innate cyclical dynamic, one can take advantage of this cyclicality and concentrate in areas where risks can be mitigated while capitalizing on less competitive market dynamics and more attractive valuations. In doing so, Baird Capital remains committed to investing in the healthcare sector and believes there are excellent opportunities through a thesis-driven approach of investment portfolio diversification and deal selection.
Higher risk, higher reward
MedTech investing and, in particular, medical device investing has seen a decline over the past few years due to regulatory and reimbursement risks. As a result, a number of venture firms have stopped investing in early-stage devices or have stopped investing in medical devices altogether. While it is important to stay mindful of the inherent hurdles that must be overcome, Baird Capital believes there are still opportunities for venture firms to generate attractive returns in MedTech.
In managing medical device investment risks, it is critical to have a deep understanding of how to help guide entrepreneurs to operate with capital efficient models and to constantly be in sync with the needs of potential strategic acquirers. The latter is particularly important within medical device investing given the IPO market has nearly disappeared since 2014 while strategic M&A activity has continued at a steady pace. Baird Capital's network of industry advisors and personal connections along with access to the broader Baird network allows the team to stay close to the potential buyer universe, which serves as a benefit to help hone investment strategies within the medical device sector.
Sharpen your focus
As the focus within healthcare continues to move toward providing more cost efficient and effective high-quality care, it is critically important that new medical devices are able to demonstrate a clear benefit to the patient – which usually translates into more challenging problems that need to be solved by the entrepreneurs. So it isn't a surprise that the greatest acceleration of investment into medical devices falls into areas of true innovation (i.e., not simply a new and improved version of an existing technology), which in turn require more stringent 510(k) de novo or PMA approval pathways in the United States.
The good news is that innovative PMA and de novo 510(k) devices also resonate more with strategic acquirers, if the device represents a "big idea" that can help them address a large underserved or unmet clinical need. In such cases, strategics have shown an increased willingness to acquire targets even before the company has received US FDA clearance or approval. This is where the concept of the "enabled device" – one that can leverage a service or a diagnostic test to enhance overall patient care – becomes interesting and where Baird Capital can provide a particular advantage to entrepreneur partners due to the team's deep experience across both the diagnostic and healthcare IT sectors. According to an industry report published earlier this summer by Silicon Valley Bank on Trends in Healthcare Investing and Exits, since 2015, innovative PMA and de novo 510(k) devices have seen quicker times to exit and larger returns than 510(k) pathway devices1. This is why Baird Capital remains optimistic about medical devices.
There is a defined universe of potential acquirers in healthcare and when it comes to growth, more and more of the potential acquirers are becoming very focused on the continuum of care. Those companies' plans to add value to customers and offset price pressures are not just about their devices or pills, but about the service wrapper that is involved in delivering great care along with the product.
Outlook on healthcare remains bright
The themes discussed here are consistent with those of the key strategics who will be eventual buyers of these businesses – they continue to look for innovative products that fit within their strategic areas of focus and are consistent with their patient call points. In so doing, the strategics are also focused on becoming overall healthcare solution providers and not just sellers of a device or pill product.
This focus on developing better tools to bring products to market has major implications for devices, healthcare IT, services and potentially even diagnostics. While it is true that the future for healthcare is uncertain, with swirling changes on healthcare reform and a continuing shift from fee-for-service to value-based care, Baird Capital remains committed to the asset class and believes understanding the nuances of the specific market in which one invests will lead to opportunities for outsized venture returns.
Michael Liang and Nicole J. Walker are based in the Chicago office of Baird Capital. Baird Capital's healthcare venture group invests in the core areas of medical devices, life sciences tools and diagnostics, healthcare services and healthcare IT.
1Silicon Valley Bank's Trends in Healthcare Investments and Exits: Innovation Spur Healthcare Investment & Fundraising, Mid-Year 2017