Full article reprinted from "The Gray Sheet" - February 23, 2009
Find out how Paul LaViolette has a unique perspective on the device industry, having worked with some of the biggest and most established firms as well as brand new start-ups.
Full article reprinted from "The Gray Sheet" - February 23, 2009
LaViolette recently became a venture partner in the Boston office of venture capital firm SV Lifesciences after 15 years at Boston Scientific, most recently as chief operating officer (1"The Gray Sheet" Dec. 22, 2008, p. 21).
At Boston Scientific, he played a central role in building the company's cardiovascular business, overseeing more than 20 acquisitions. Boston Scientific today is about 25 times larger than it was in 1993 when he joined the company.
Along with former Boston Scientific VP-Corporate Business Development David Milne, LaViolette leads SV Lifescience's unit that invests in and provides operational support for medical device start-ups. The firm also has health care services and biotech divisions. The company's portfolio includes ventricular assist device developer MicroMed and atrial fibrillation ablation catheter developer CardioFocus.
LaViolette talked to "The Gray Sheet" about the challenges and opportunities for both big and small device companies and their investors during the recession.
"The Gray Sheet:" How are venture investments in medical device companies different from the kind of strategic acquisitions you worked on at Boston Scientific?
Paul LaViolette: There is a lot of overlap, but I wouldn't want to underestimate the differences. The way I look at it is that good technology is good technology, and that's a critical theme whether you're a venture investor or a strategic buyer. On the other hand, a good investment does not necessarily equal a good acquisition, and vice versa.
For example, Boston Scientific could buy a company with great technology that only a company like Boston Scientific could fix - maybe put money into their sales force, maybe develop the market. That company might have been highly unattractive to a venture investor because they would have seen lots of risk, and maybe there is only one company out there for whom this could be a good fit [as an acquisition]. And if that's the case, then you don't have many exits, and that makes it a bad investment.
But sometimes you're an acquirer and say, 'I love this,' and then you put your venture head on and say because of how much money is needed and the exit opportunities, this really isn't the best investment.
When you're an acquirer, you have to build value. You own it forever, so you're trying to build sustainable value. When you're investing, you're looking for some way to get out. So you have some perspective on a terminal value, whether that's one year away or three years away.
So the length of perspective for a strategic acquirer is different, and you know you're going to build value. The venture investor is looking to extract value at some point, and that's very different.
TGS: How does the recession impact big companies, and how are those challenges different than the ones faced by start-ups?
LaViolette: It is sort of different for the big companies. For example, Boston Scientific has an acute care business, so generally speaking their revenues are not affected by this. Reimbursement hasn't changed; heart attacks haven't changed, so the core businesses of these companies haven't changed.
If you're in a consumer-based market or have a heavy capital business and capital budgets are being frozen, then certainly there's an effect. But the diversified, procedure-based medical device-based companies are not as affected. They might be soft by three to five percent, but not the 25 to 30% which is the macroeconomic impact that you think about for consumer or household goods.
For the smaller companies, I think, it's all about timing. If you're looking for money now, it is very challenging. If you have to go out to someone today and re-prove your value equation and reestablish that you've made enough progress and that you've used your cash wisely, that you've generated your milestones, and that you can defend your valuation - that's very hard for people now.
TGS: Will the decline in the market valuations of medical device companies create good opportunities for investors and big companies looking to expand through acquisition?
Certainly, the valuations of the last couple of years have been quite high, driven by arguably a surplus of money being thrown at medtech investment. We're still driving hard, but last year we were driving hard with our foot on the accelerator, and this year we're driving hard with our foot on the brake.
So if you are caught in the middle looking for funding, you can assume all of the bars are raised. There's less money available. Your own syndicate may not be able to come together to finance you internally. And it's just tougher. The G-forces are stronger than they have been in the past, so it takes more force to get through that, and the weaker companies aren't going to make it.
The valuation correction will create two outcomes. One, the smaller companies might become a bargain, and people who were hindered from looking at them before will [decide] that now that asset is more attractive. That could be an empowering event for a lot of follow-on activity and future investment and future exit. That's going to be very common and is going to be helpful.
The alternative is that the valuation is too high, and you're now at the point where you've got [a lot of money sunk into a company], but people are less optimistic about the future. The same thing is happening in medtech as is happening in the consumer world. Market outlooks are less certain. So if you have a lot of money in, your valuation is high and now you need money but people aren't too sure, then they may overreact and force a valuation that is just unacceptable. So you're starting to see companies wind down.
We haven't really seen that in the past. You could almost always keep something afloat. You could always find someone who is willing to give it another try. Now a lot of people are just willing to draw a line in the sand and say 'we shouldn't continue to provide this entity with funding.' I actually think it's going to be quite tangible that companies on the precipice could fail.
But companies above that line that are solid values that might have been overheated are going to become bargains.
The big companies' market caps have been hit, but their fundamentals haven't necessarily changed that much. They're still selling products and operating on the same gross margin as before. They're looking at themselves and saying 'I've been told that I'm sicker, but I still feel fine.'
So they're going to turn to their cash power and market power and buy interesting technologies, because some of those technologies are going to be more financially available, and companies realize that the only way to defibrillate their value back is to stimulate growth and show people that they're stronger now than before. If you can project that growth into future cash-flow, then Wall Street will value you more.
TGS: Do you expect to see more big mergers like Boston Scientific's buy of Guidant in the near future?
LaViolette: I remain optimistic. The market conditions right now represent the toughest headwind, but major corporations - unless something goes terribly wrong - are still going to look at the long-term, healthy markets that offer expansion or diversification potential. They're still going to look at picking up category leaders and consolidating. There's undeniable value there.
No major deal pays for itself in the first year or two, so you really have to look with optimism over a long period of time. It may take a little while for corporations and boards to be comfortable laying out a lot of money for a deal that is going to take X number of years.
It's going to take a little time for folks to see that the world hasn't come to an end, but when that happens, the voraciousness of large companies to consolidate and take advantage of category leadership is going to be as strong as ever.
TGS: What are some of the regulatory issues that new companies struggle with?
LaViolette: Over the past five to ten years, reimbursement displaced regulatory clearance as the hardest risk - not necessarily the biggest risk, since there's nothing more binary than FDA not approving your product.
Reimbursement continues to be a major challenge and will continue to be, or maybe with greater intensity [than FDA approval issues].That's because the reimbursement system is less transparent. It's less obvious exactly what one needs to do to gain reimbursement, and even if one does do that, it's not as black and white as regulatory approval.
With consolidation of Democratic leadership in the White House and Congress, there's clearly more talk about cleaning up FDA. FDA has been under a lot of scrutiny in the last couple of quarters, but my impression is that it has intensified, and the combination of political leadership and peanut butter scares could create a catalyst for radical change in the way that FDA does its job that could harm the pace of innovation.
There's more alignment of risks for regulatory approval than there has been in the past. That includes things like 510(k)s as a process being fundamentally questioned. That includes more talk of coordination between FDA and CMS, which have always been separated by a fairly clear wall.
Then new things like comparative effectiveness may be thrown in there as another hurdle, so that even successfully marketed products and procedures might face an incremental layer of scrutiny post-market.
I [agree] that if a product or procedure doesn't do anything, it really shouldn't be practiced, but how you decide that creates a risk that some good things will be caught in the backwash. So it does create risk, and that effects valuations.
TGS: What business opportunities might be created by federally funded or mandated comparative effectiveness research?
LaViolette: One of the biggest challenges that small companies face, and many venture-backed firms don't necessarily factor in, is market uptake. It's hard to get disorganized markets to respond to a better device or a better procedure. So if something like comparative effectiveness could show that [with certain best practices] the outcomes are completely different, then that could bring more organization to the market.
A good example is that over the past ten years, individual cardiovascular centers put together acute myocardial infarction programs, organizing ambulance drivers and emergency rooms - some have cath labs and some don't. But it has is been shown that if you can get a patient having a heart attack through that matrix and into a cath lab, you can stop a heart attack in its tracks.
It's that powerful, but no one company could have done that. And so maybe the governmental process could look at that and, say for novel stroke therapies and other things that suffer from disorganized channels, the therapies could ultimately be aided.
- Reed Miller
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