Current thoughts - March 2005
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How is investing in medtech different from investing in drugs?
I get this question quite often and it is a very pertinent one. First of all, there is a lot of difference. Secondly, a lot of people do not understand this.
The development of a compound from the early target to a finished drug takes 10 years and costs upwards of a billion USD. There are few blockbusters, but when you hit one it pays off handsomely. When a VC feels that they are backing a potential drug blockbuster, they are often ready to invest substantial amounts of money.
In medtech - in contrast - there are few blockbusters. As I wrote in my last posting, 60% of all medtech trade sales happen at prices lower than USD 250 million. If you are going to get a return in the range of a EUR 100 million and you are looking for a typical 5 times money back, then you and your syndication partners are only going to be ready to invest around EUR 20 million in the company over its life time. This amount of money does not leave much room for mistakes.
Inexperienced medtech start-ups often brush off questions regarding market-related issues such as reimbursement and sales-strategy, as issues that a trade buyer can deal with later. But this is simply not good enough. An early-stage medtech start-up needs to know ahead of time exactly what regulatory strategy it will pursue (in particular in the USA), what reimbursement strategy it will pursue in the USA and the major countries in EU, etc. Early decisions can have a huge impact on these things and they need to be thought out ahead of time. The limited available capital means that it is difficult to restart a medtech if things go wrong.
Experienced business management is consequently extremely important in medtech start-ups. There is simply not room for experimentation and the project plan has to be solid from the beginning. If you have not tried the process before, you will be at a great disadvantage.
March 27, 2005 07:20 PM