Editor’s note: Jim Mazzo is the executive chairman of Neurotech, co-founder of Octane, a local business accelerator, and serves on the boards of numerous health industry companies. Peter Robertson is the founder of Peak Financial Group, an Irvine-based wealth management firm serving executive officers and board members.
Ten years ago, Ray Cohen came up with the idea that nerve stimulation could treat incontinence and founded Axonics Inc. (NASDAQ: AXNA) in Irvine. Eventually he started generating significant revenue in 2020, becoming the fastest growing medical technology company in the country.
In January, Axonics announced it would sell itself to Boston Scientific for $3.7 billion.
That’s a great exit.
Orange County has many great success stories for investors in the healthcare industry. Edwards Lifesciences Corporation (NYSE: EW) is currently the world leader in cardiac stents with a market capitalization of $56 billion. Glaukos Corp. (NYSE: GKOS) is reaping the rewards of developing an idea that began decades ago, and now has a market capitalization of his $5 billion.
We closely follow all health industry investments, from start-ups to Series Bs, IPOs, and public companies.
I’d like to say that the investment environment hasn’t changed because these companies had great ideas that they developed over the years.
There are big changes happening that entrepreneurs should know about. Time is getting shorter.
big investment
Companies in this industry require large amounts of investor capital to succeed.
A medical device company may require an investment of approximately $500 million.
Device companies have fewer hurdles than pharmaceuticals and can get Food and Drug Administration approval much faster, but their products can have a shorter lifespan of 18 to 24 months. We are also facing a new trend in which physicians are no longer purchasing new equipment and equipment each year as medical institutions are acquired by private equity. Capital equipment purchases are slowing. Companies that do not require large capital investments from their customers are more popular among investors.
Robotics is becoming popular. Jim recently witnessed a robotic cataract surgery. Now, with robotics, a surgeon may be able to perform as many as 15 such surgeries in a day, which is twice as many as he currently does. Artificial intelligence components are also boosting ratings.
The cost of drug development is staggering: approximately $1.5 billion. Biogen and Eli Lilly each spent an estimated $3 billion on Alzheimer’s drugs, according to the Alzheimer’s Association Journal.
shortened runway
There used to be three keys to successful investing in the medical industry: a good idea, a good patent environment, and a long road to success.
2021 saw a lot of investments made in companies with great ideas that are currently not working out. Investors today are focusing more on sustainable investing and seeking products that target specific impact areas.
The company Jim was a director of recently folded after management failed to show its largest investor a faster path to profitability.
It’s even harder to succeed on Wall Street. Of the 162 biopharmaceutical companies that have gone public since 2020, about 25 are currently trading above their issue price. Approximately 232 publicly traded life sciences companies around the world currently have market capitalizations that are less than their cash reserves. What does it tell us? Investors need to see a clear path to return. Raising funds through an IPO will become even more difficult.
Traditionally, strategists (the industry term for large medical technology companies like Johnson & Johnson and Medtronic) have thought about buying small companies with ideas and then patiently waiting for years.
Shareholders don’t want to wait years for their ideas to become reality. They want a strategy for acquiring incremental business.
Companies pushing product pipelines in 4-5 years may not realize that investors are compressing timelines to 2-3 years.
This strategy could also involve acquiring companies for market share. Investors are no longer willing to settle for second place or third place in the market.
One example well known among investors is Shire’s Xiidra eye drops for dry eye treatment, promoted by actress Jennifer Aniston. After acquiring Shire, Takeda Pharmaceutical sold Xiidra to Novartis in 2019 for $3.4 billion. At the time, Novartis said Xiidra “has the potential to be a blockbuster product.”
However, Novartis was forced to withdraw its application to market Xiidra in Europe in 2020 after the European Medicines Agency raised a major objection. Xiidra’s sales in 2022 were only up 4% to $487 million, which is not a blockbuster number.
Last September, Novartis sold the Xiidra unit to Bausch & Lomb for $1.75 billion upfront, with an additional $750 million available if sales targets are met.
The product was not successful because doctors did not see a significant difference between it and competitors such as market leader Allergan’s Restasis. The message to investors was clear. 2nd place is not highly rated.
kick start
Investors are interested in finding devices and medicines that have the potential to spawn new industries.
They are considering ideas that could solve some of the world’s biggest medical problems, including Alzheimer’s disease, dementia, glaucoma, and cancer. Other popular areas that do not require as much investment include obesity and aesthetics.
The good news is that there is a lot of money out there that is looking to be invested.
Strategic companies like Merck and AbbVie own popular drugs like Keytruda and Humira and need to replace those revenue streams as their patents expire.
Last year, Pfizer paid $43 billion to acquire Seagen, which is developing many impressive cancer drugs.
Strategists are no longer interested in little guys who might have great ideas. They will pay a premium to companies that show revenue growth and FDA approval.
Entrepreneurs need to demonstrate revenue as soon as possible, even early in a Series A or B round. Revenue indicates that the product is accepted by the market.
These days, the keys to attracting investors are a great idea, a market environment, a patent environment, and a roadmap that points you closer to profitability than ever before.
Small business entrepreneurs should know that if it takes 4-7 years or more, they need to understand that it will take that long and look for investors who are willing to take the risk. Should. Some venture groups don’t invest because they don’t have the time.
There is still money for great ideas. But the bottom line is that the time to success in the pharmaceutical and medical technology industries is shorter these days.
