Editor’s Note: Jim Mazzo is executive chairman of Neurotech, co-founder of local business accelerator Octane, and sits on numerous boards of health industry companies. Peter Robertson is the founder of Peak Financial Group, an Irvine-based wealth manager serving executive officers and board members.
A decade ago, Ray Cohen had an idea that neurostimulation could treat incontinence, so he started Axonics Inc. in Irvine (Nasdaq: AXNA). It eventually began generating significant revenue in 2020, becoming the fastest-growing medtech firm in the country.
In January, Axonics announced the sale of his company for $3.7 billion to Boston Scientific.
That’s an excellent exit.
Orange County is full of wonderful success stories for investors in the health industry. Edwards Lifesciences Corp. (NYSE: EW) is now a world leader in heart stents with a $56 billion market cap. Glaukos Corp. (NYSE: GKOS) is now reaping the rewards for developing ideas that started decades ago and it now has a $5 billion market cap.
We closely follow investments in the health industry, everything from startups to Series B to IPOs to publicly traded companies.
We wish we could say the investing environment has stayed the same since these companies had their great ideas that they spent years developing.
A major change is occurring that entrepreneurs should know about—time is getting shorter.
Big Investments
It takes a lot of investor money to make a company successful in this industry.
A medical device company may need about $500 million in investments.
While device companies can get Food and Drug Administration approval much quicker because hurdles aren’t as high as pharmaceuticals, their products may have shorter life spans of 18 to 24 months. They are also facing a new trend where doctors are no longer buying new equipment or devices annually because practices are being acquired by private equity. Capital equipment purchases are slowing down. Companies that don’t require clients to make big capital investments are more in favor among investors.
Robotics are catching on. Jim recently witnessed a robotic cataract surgery. Now, robotics may help a surgeon conduct 15 such surgeries a day, double the current amount. Artificial intelligence components are also boosting valuations.
The cost to develop a drug is heart-stopping—around $1.5 billion. Biogen Inc. and Eli Lily each spent an estimated $3 billion on drugs to treat Alzheimer’s, according to the Journal of the Alzheimer’s Association.
Shorter Runway
There used to be three keys to a winning health industry investment: a great idea, a good patent landscape and a long runway to success.
In 2021, there were a slew of investments in companies with great ideas that now are not panning out. Investors nowadays are more focused on sustainable investing and seek products that target specific impact areas.
A company where Jim was a director recently folded up shop recently because the executives couldn’t show its largest investor a quicker path to revenue.
Success on Wall Street is harder to come by. About 25 out of 162 biopharma companies that have gone public since 2020 are now trading above their issue price. Some 232 publicly traded life science companies around the globe now sport market caps below their cash reserves. What does that tell us? Investors need to see a clear path to revenue. It will be more difficult to raise cash via an IPO.
Traditionally, the strategics—the industry term for big established medtech companies like Johnson & Johnson and Medtronic—would buy little guys with ideas and then be patient enough to wait years.
Shareholders don’t want to wait years for ideas to become reality. They want the strategics to buy accretive businesses.
Companies that promote a pipeline of products in four to five years may not realize that investors have shortened their timelines to two to three years.
The strategics would also buy companies for market share. Investors are no longer willing to settle for second or third in a market.
One example well known among investors was Shire’s Xiidra eyedrop to treat dry eyes, a product that was promoted by actress Jennifer Anniston. After Takeda Pharmaceutical acquired Shire, it sold Xiidra to Novartis for $3.4 billion in 2019. At that time, Novartis said Xiidra was “well positioned for blockbuster potential.”
However, Novartis in 2020 had to withdraw a marketing application for Xiidra in Europe after the European Medicines Agency raised major objections. Xiidra sales only rose 4% to $487 million in 2022, hardly blockbuster numbers.
Last September, Novartis sold Xiidra unit for $1.75 billion upfront to Bausch + Lomb with another $750 million if sales goals are met.
That product wasn’t successful because doctors didn’t see a significant difference with competitors like Allergan’s Restasis, which is the market leader. The message to investors was clear: No. 2 isn’t valued as highly.
Kick-Start
Investors are interested in finding devices or drugs that could kick-start a new industry.
They are looking at ideas that can solve the world’s biggest medical problems—think Alzheimer’s, dementia, glaucoma and cancer. Other popular areas that don’t require as much investment include obesity and aesthetics.
The good news is that there is a ton of money on the sidelines looking to make investments.
Strategics like Merck and AbbVie have popular drugs like Keytruda and Humira where their patents are ending and hence, they need to replace those revenue streams.
Last year, Pfizer paid $43 billion to acquire Seagen, which has a whole bunch of fabulous cancer drugs.
The strategics aren’t as interested anymore in the little guys who may have a fabulous idea. They will pay a premium for a company that shows revenue growth and FDA approval.
Entrepreneurs should show revenue as soon as possible, even as early as Series A or B rounds. Revenue demonstrates that the product will be accepted by the market.
Lately, the keys to attracting investors are great ideas, market environments, patent landscapes and a roadmap that shows closer to revenue than ever before.
Entrepreneurs at smaller companies should know that if they need 4 to 7 years or longer, they should look for investors who understand that it might take that long and are willing to accept the risks. Some venture groups don’t have time and won’t invest.
Money is still there for a great idea. The bottom line though is the time frame for success in pharmaceuticals and medtech industries is shorter nowadays.
