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Orthopedics’ largest players have focused much of their merger & acquisition (M&A) energy in recent years on commercialization-stage companies that boost their enabling technologies or expand market share in current or adjacent markets. Business development executives from Stryker (SYK), Smith+Nephew (SNN) and Medtronic (MDT) reiterated these paths during a panel discussion at the virtual Musculoskeletal New Ventures Conference (MNVC) in late November. The three noted that while M&A isn’t black and white, tuck-in acquisitions will be favored over large integrations or pre-revenue companies in the future. Here, we recap advice that the panel offered to smaller companies that seek to be acquired as well as their own perspective on their strategies.
When Should Startups Reach out to Large Strategics?
Gary Stevenson, Co-Founder and Managing Partner of MB Venture Funds and emcee of MNVC, asked when companies seeking to exit should begin talking with strategic.
“It’s incredibly important to start those conversations early,” said Kip Roberts, Senior Director, Strategy & Business Development at Medtronic.
Kip Roberts, Senior Director, Strategy & Business Development at Medtronic
Roberts noted that all too often, startups or emerging companies approach strategics when they foresee a cash crunch. But that tight timeline for a capital injection through acquisition often doesn’t mesh with a large company’s operations. “The reality is that we are very large, complex organizations. We would like to move the decision-making along faster, but it takes time,” Roberts said. “I would just encourage early-stage companies to reach out even if they feel it’s too early—at least begin the dialogue.”
John Speer, Senior Director of Business Development and Strategy at Stryker, reiterated the importance of early relationship building. Stryker has dozens of partnerships in distribution and development deals that are nurtured over time and could potentially become acquisitions. “That’s the hard work,” Speer said. “The partnerships that we put together are what leads us to being able to be among the top few acquirers of the industry.”
John Speer, Senior Director of Business Development and Strategy at Stryker
Roberts also noted that it’s vital for companies that ultimately seek to be acquired to try to understand the strategies of the larger companies they’re targeting. Most large orthopedic companies have demonstrated that they’re looking for acquisitions that will allow them to accelerate revenue in faster-growth segments of the market.
When asked how long it takes for a company to proceed from the term-sheet stage through due diligence to close, Roberts said that it depends upon the deal’s structure and size. He added, “That’s why it’s important for us to get in early; it allows us the time to get to know you. You get to know us; we get to socialize you among all of our leadership and the various stakeholders. It just ensures a smooth process.”
Why Might a Term Sheet Not Make it to Close?
Eric Heinz, Director Business Development at Smith+Nephew
Potential acquisitions can, of course, fall apart during the due diligence phase. When asked what often stops deals before a final commitment, Eric Heinz, Director Business Development (M&A) at Smith+Nephew, emphasized clear documentation.
He said that questions often arise about healthcare providers, reimbursement compliance, capital raises and third-party agreements, like leases and licenses.
“When we come across things where these items are not disclosed until the later stages of diligence, it really sets up some complexities because we have to unwind a lot of things,” Heinz said. “We would rather know upfront so that we could work on mitigations and have a great relationship as we go through the transaction together.”
Stevenson asked Heinz how acquirees should be prepared to handle quality issues with data files. Heinz responded that larger companies realize that smaller players do not have the same quality checks, but specific steps should be considered.
“The key thing with quality is making sure that we have good representatives on the seller side, who could answer our team’s questions, produce documents, be supportive in any audits that we end up conducting,” he said. “That way, we really understand what the situation is. We can plan for it. And we have confidence in our ability to close the deal without any unmitigated red flags, that we need to then defend when we bring this before our board or our investment committee.”
What is the Appetite to Acquire Pre-Revenue Companies?
The panel discussion and Q&A highlighted the trend that large strategics continue to acquire revenue-generating as opposed to pre-revenue companies. The appetite to purchase a pre-revenue company, especially those with more aggressive regulatory pathways like Premarket Approvals, is hindered by the amount of risk that the acquiring company carries.
According to Heinz, there are so many market opportunities for transactions that will quickly generate revenue that Smith+Nephew spends very little time considering acquisitions that would involve product development, regulatory and market access hurdles.
“[Those are] just not going to be able to rise to the top when you have so many other opportunities that are shorter-term wins,” he said.
Speer echoed that sentiment, and added that Stryker is often in dialogue with companies with novel, game-changing technology. Still, they are not interested in investing during the development stage.
“Pre-revenue,” Speer said, “is just not what we do best. We bring things to market once they’re past a certain regulatory and technology de-risking.”
How does your company think about M&A?
Kip Roberts: “We’re looking for opportunities that accelerate us in the markets where we already are, strengthen our position and enable us to take share. And there’s a culture change that’s underway at Medtronic from where we were five, 10 years ago. We’re putting ourselves much more in an offensive position.”
Eric Heinz: “I think it really starts at our strategy that we ended up rolling out in 2018, and M&A growth in our pursuit of high growth markets, and leveraging new technologies to bring enabling technologies to the operating room for some of our strategic pillars. We’ve been able to demonstrate that over the last 18 months, starting out with the deal that we did with Brainlab, acquiring their orthopedic business. … You’re going to see a shift from companies like Smith+Nephew, where we have been historically focused on metals and plastics, [we] are starting to look more into technologies like robotics and navigation.”
John Speer: “One of the things that we find where startup companies … are most attractive to us, are when they’re in a, call it, fairly narrow lane of what they’re offering. When a digital startup has an idea that they can share in 10 different procedural areas, but Stryker’s only currently in three of those procedural areas, we necessarily have a gap in valuation in terms of what the value is to Stryker, versus what that value is to a digital startup. I would just say that you can probably expect, as we’re looking towards future-facing technologies, that we would primarily be investing in companies that have a fairly focused offering rather than the digital offerings that go across the sector.”
Orthopedics’ largest players have focused much of their merger & acquisition (M&A) energy in recent years on commercialization-stage companies that boost their enabling technologies or expand market share in current or adjacent markets. Business development executives from Stryker (SYK), Smith+Nephew (SNN) and Medtronic (MDT) reiterated...
Orthopedics’ largest players have focused much of their merger & acquisition (M&A) energy in recent years on commercialization-stage companies that boost their enabling technologies or expand market share in current or adjacent markets. Business development executives from Stryker (SYK), Smith+Nephew (SNN) and Medtronic (MDT) reiterated these paths during a panel discussion at the virtual Musculoskeletal New Ventures Conference (MNVC) in late November. The three noted that while M&A isn’t black and white, tuck-in acquisitions will be favored over large integrations or pre-revenue companies in the future. Here, we recap advice that the panel offered to smaller companies that seek to be acquired as well as their own perspective on their strategies.
When Should Startups Reach out to Large Strategics?
Gary Stevenson, Co-Founder and Managing Partner of MB Venture Funds and emcee of MNVC, asked when companies seeking to exit should begin talking with strategic.
“It’s incredibly important to start those conversations early,” said Kip Roberts, Senior Director, Strategy & Business Development at Medtronic.
Kip Roberts, Senior Director, Strategy & Business Development at Medtronic
Roberts noted that all too often, startups or emerging companies approach strategics when they foresee a cash crunch. But that tight timeline for a capital injection through acquisition often doesn’t mesh with a large company’s operations. “The reality is that we are very large, complex organizations. We would like to move the decision-making along faster, but it takes time,” Roberts said. “I would just encourage early-stage companies to reach out even if they feel it’s too early—at least begin the dialogue.”
John Speer, Senior Director of Business Development and Strategy at Stryker, reiterated the importance of early relationship building. Stryker has dozens of partnerships in distribution and development deals that are nurtured over time and could potentially become acquisitions. “That’s the hard work,” Speer said. “The partnerships that we put together are what leads us to being able to be among the top few acquirers of the industry.”
John Speer, Senior Director of Business Development and Strategy at Stryker
Roberts also noted that it’s vital for companies that ultimately seek to be acquired to try to understand the strategies of the larger companies they’re targeting. Most large orthopedic companies have demonstrated that they’re looking for acquisitions that will allow them to accelerate revenue in faster-growth segments of the market.
When asked how long it takes for a company to proceed from the term-sheet stage through due diligence to close, Roberts said that it depends upon the deal’s structure and size. He added, “That’s why it’s important for us to get in early; it allows us the time to get to know you. You get to know us; we get to socialize you among all of our leadership and the various stakeholders. It just ensures a smooth process.”
Why Might a Term Sheet Not Make it to Close?
Eric Heinz, Director Business Development at Smith+Nephew
Potential acquisitions can, of course, fall apart during the due diligence phase. When asked what often stops deals before a final commitment, Eric Heinz, Director Business Development (M&A) at Smith+Nephew, emphasized clear documentation.
He said that questions often arise about healthcare providers, reimbursement compliance, capital raises and third-party agreements, like leases and licenses.
“When we come across things where these items are not disclosed until the later stages of diligence, it really sets up some complexities because we have to unwind a lot of things,” Heinz said. “We would rather know upfront so that we could work on mitigations and have a great relationship as we go through the transaction together.”
Stevenson asked Heinz how acquirees should be prepared to handle quality issues with data files. Heinz responded that larger companies realize that smaller players do not have the same quality checks, but specific steps should be considered.
“The key thing with quality is making sure that we have good representatives on the seller side, who could answer our team’s questions, produce documents, be supportive in any audits that we end up conducting,” he said. “That way, we really understand what the situation is. We can plan for it. And we have confidence in our ability to close the deal without any unmitigated red flags, that we need to then defend when we bring this before our board or our investment committee.”
What is the Appetite to Acquire Pre-Revenue Companies?
The panel discussion and Q&A highlighted the trend that large strategics continue to acquire revenue-generating as opposed to pre-revenue companies. The appetite to purchase a pre-revenue company, especially those with more aggressive regulatory pathways like Premarket Approvals, is hindered by the amount of risk that the acquiring company carries.
According to Heinz, there are so many market opportunities for transactions that will quickly generate revenue that Smith+Nephew spends very little time considering acquisitions that would involve product development, regulatory and market access hurdles.
“[Those are] just not going to be able to rise to the top when you have so many other opportunities that are shorter-term wins,” he said.
Speer echoed that sentiment, and added that Stryker is often in dialogue with companies with novel, game-changing technology. Still, they are not interested in investing during the development stage.
“Pre-revenue,” Speer said, “is just not what we do best. We bring things to market once they’re past a certain regulatory and technology de-risking.”
How does your company think about M&A?
Kip Roberts: “We’re looking for opportunities that accelerate us in the markets where we already are, strengthen our position and enable us to take share. And there’s a culture change that’s underway at Medtronic from where we were five, 10 years ago. We’re putting ourselves much more in an offensive position.”
Eric Heinz: “I think it really starts at our strategy that we ended up rolling out in 2018, and M&A growth in our pursuit of high growth markets, and leveraging new technologies to bring enabling technologies to the operating room for some of our strategic pillars. We’ve been able to demonstrate that over the last 18 months, starting out with the deal that we did with Brainlab, acquiring their orthopedic business. … You’re going to see a shift from companies like Smith+Nephew, where we have been historically focused on metals and plastics, [we] are starting to look more into technologies like robotics and navigation.”
John Speer: “One of the things that we find where startup companies … are most attractive to us, are when they’re in a, call it, fairly narrow lane of what they’re offering. When a digital startup has an idea that they can share in 10 different procedural areas, but Stryker’s only currently in three of those procedural areas, we necessarily have a gap in valuation in terms of what the value is to Stryker, versus what that value is to a digital startup. I would just say that you can probably expect, as we’re looking towards future-facing technologies, that we would primarily be investing in companies that have a fairly focused offering rather than the digital offerings that go across the sector.”
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Carolyn LaWell is ORTHOWORLD's Chief Content Officer. She joined ORTHOWORLD in 2012 to oversee its editorial and industry education. She previously served in editor roles at B2B magazines and newspapers.
