By Larry Haimovitch

Medical Device Daily Contributing Writer

June 30, 2016

SAN FRANCISCO — With the increasingly difficult fund raising environment for medical technology companies over the past several years, it was no surprise that several sessions of this year’s annual Medical Device Conference, sponsored by the Palo Alto, California-based law firm of Wilson Sonsini Goodrich & Rosati were devoted to that vital topic.

This "granddaddy" of venture capital (VC) oriented gathering began nearly a quarter of a century ago. It draws from a variety of groups, including VCs, medical device entrepreneurs, patent attorneys, accounting firms and other service providers to the medical device industry.

The topic of funding was addressed in a session titled “New Corporate Deal Models,” which moderator Steve Levin creatively renamed “Creative Ways to Deal with the Financing Crunch.” This session provided an opportunity for startup CEO Thierry Thaure to discuss an innovative financing transaction that occurred about nine months ago between Cephea Valve Technologies of San Jose, California and Abbott Laboratories of Abbott Park, Illinois. Thaure, also a founder of Cephea, is a med-tech industry veteran with about 30 years of experience in the space.

Thaure noted that the initial $10 million funding he raised for his company came from about 80 angel investors. After completing that impressive raise he pondered, “What is the next step for our funding.”  He was loath to absorb the massive dilution that would have certainly resulted from a venture capital or institutional round and conversely indicated that he was enthusiastic about “early corporate involvement.” So, he began discussions with potential strategic partners and after some lengthy negotiations, Abbott agreed to a deal that he described as a “dream situation” for Cephea.

The key features of this deal are: (1) It provided Cephea with enough cash to fund the company for three years; (2) The cash investment did not give Abbott any equity in Cephea, therefore it was completely non-dilutive; (3) Abbott did not get a board seat.

In exchange for ceding a board seat and any equity ownership Abbott acquired an option to buy the company at a predetermined price after certain milestones are met in the three years post-investment. Cephea has the right to walk away from the deal after certain milestones are met and no transaction follows.

From Thaure’s vantage point, the deal made great sense, even though he admitted that by agreeing to a capped purchase price he gave up a potentially “huge home run” if Cephea’s clinical data was stellar.

A similar non-equity investment deal was announced in April, when Fort Worth, Texas based Alcon invested an undisclosed amount to acquire an option to buy the Belmont, California-based accommodating IOL company PowerVision, Inc. Alcon is a wholly-owned division of the Basel, Switzerland based Novartis.

Cephea’s technology addresses mitral valve regurgitation (MR), which many med-tech industry pundits believe could be the next big frontier and major market opportunity in the med-tech space. MR is the most common type of heart valve insufficiency and an estimated four million people in the U.S. suffer from this condition. Approximately 250,000 new diagnoses are made each year.

A recent report written by BMO Capital Markets of New York City stated that the “transcatheter mitral valve replacement (TMVR) might be the next multi-billion dollar med-tech opportunity . . . one that is potentially 4.5 times larger than the transcatheter aortic valve replacement (TAVR) market.” BMO projects that the annual global TVMR market, currently less than $5 million, will burgeon to over $400 million by 2021.

The mitral space has generated huge corporate interest recently. To wit, in the second half of 2015, both Edwards Lifesciences Corp. of Irvine California and Medtronic plc (Dublin, Ireland) purchased early stage minimally invasive mitral valve system companies. The former acquired CardiAQ Valve Technologies of Irvine for $350 million upfront (plus potential milestone payments of $50 million) while the latter bought Twelve of Redwood City, California for $408 million plus another $50 million in potential earnouts.

Abbott’s initial move in the mitral arena occurred nearly seven years with the $320 million (plus milestones) purchase of Evalve Technologies, a global leader in the development of devices for minimally invasive repair of cardiac mitral valves. By entering into a financing agreement with Cephea, Abbott was able to keep pace with its rival and increase its bet in the MR space.

Panelist Hansen Gifford, managing partner of The Foundry LLC of Menlo Park, California, stated that the steep decline in early stage venture capital investing has represented an opportunity for corporate investors to enter the investing fray much earlier.

“They are very aware that early stage venture capital investing has declined and that there is an opportunity here,” said Hansen. He went on to say that corporate strategic investors recognize their need to bring new and differentiated products to the market and that early stage investments can help them achieve that goal.

Bruce Roberts, a managing director of RM Global Partners LLC, based in New York City, provided the grim statistics of dwindling early stage VC investing. Specifically, he noted that there was a 50% plunge in Series A round investments from the VC community between 2012 and 2015. Conversely, he noted that corporate investments in that same period more than tripled, growing from $9 million in 2012 to $32 million in 2015.

Roberts, whose firm is an investment banking and strategic advisory firm dedicated to creating unique value for its clients and investors, has had notable successes in recent years raising money from so-called “family offices,” i.e., wealthy individuals or foundations.

Roberts noted that this type of investor typically has “ a passion for the disease or technology” that they are funding. He further indicated that they do not need a “seal of approval” from others as long as good corporate governance, which is typically derived from VC investors, is present. Further, Roberts said that “these investors typically bet more than other investors on the entrepreneur skills of the CEO or founder.”

Accessing these family offices, who are typically far less visible can be a challenge Roberts indicated but he added that financial advisors can be a good source for this type of investor

2016 Wilson Sonsini Conference

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