Getting ready for a strategic: a toolkit for medtech startups

Large medtech companies often grow by buying businesses that complement what they already sell. These tuck-in acquisitions, or deals that sit close to a buyer’s core products and customers, were a theme at AdvaMed’s The MedTech Conference last week. To read in more detail, check out MedTech Dive, who covered the panels.

For a startup, a strategic, meaning a large operating company in your space, can become a partner, an investor or an eventual acquirer. You do not need an exit plan finalized to benefit from being ready for that conversation, but you do need to be prepared.

To help build that flight plan, we’ve outlined what strategics typically look for and how to prepare if these conversations are in your future.

1. Know which of their problems you solve

What strategics look for: Strategics often start with a gap in their own portfolio or a problem their customers want solved, then look at the financial case. A product pitched only on its technology can be hard for them to place.

How to prepare:

• Write the problem you solve, and for whom, in one sentence. Test it on two people outside your team
• List the three to five companies that already sell to your customer
• For each one, note which gap your product could fill, such as a missing product, a procedure they want to support or an outcome their customers ask for
• Note how your product would likely be paid for, such as through an existing billing code, a hospital supply or capital budget or a new code you may need

2. Put your regulatory strategy in writing

What strategics look for: Strategics want to see a clear regulatory pathway, the reasoning behind it and how far along you are. A pathway decision with no written rationale can raise questions about timeline and cost.

How to prepare:

• Write a one-page memo on your intended pathway and why you chose it
• If you expect a 510(k), name your likely predicate device. If none fits, note whether De Novo or another pathway may apply, and list the testing your choice implies. Not sure of your pathway? Learn more in our article: FDA pathways, simplified
• Consider an FDA Pre-Submission meeting to get written feedback on your pathway or test plan

3. Keep design and test records traceable

What strategics look for: Document evidence that the device was developed under design controls once it moved past early feasibility, with requirements, risks, tests and results that connect. Records created after the fact can be a red flag.

How to prepare:

• Keep an index of your design records with the status of each
• Build a table that links each requirement and each identified risk to the test that checks it
• Record design decisions when you make them, not months later

4. Size your quality system to your stage

What strategics look for: You need a quality system that fits where you are today and can grow with you. A pre-clinical team may not need a full commercial system, but buyers often want to see the foundations in place. Now that FDA’s Quality Management System Regulation is in effect, buyers may also ask how your system maps to ISO 13485.

How to prepare:

• Start with the procedures your current work depends on, such as document control, risk management and supplier controls
• Note what is in place, what is in progress and what has not started
• Plan when each remaining piece needs to be ready relative to your regulatory milestones

5. Confirm you own your IP

What strategics look for: Strategics need to see clear ownership of patents, know-how and software. Gaps often come from work by founders, contractors or universities that was never formally assigned to the company.

How to prepare:

• Confirm every founder, employee and contractor has signed an IP assignment that also covers work done before the company was formed
• If a founder did related work at a university, check whether its IP policy gives it a claim
• Review any university license terms, including field of use and what happens if the company is sold
• Keep a simple list of your patents, filings and key trade secrets
• Note any competitor patents close to your product. A formal freedom-to-operate opinion may come later, but buyers may ask whether you have looked

6. Pick milestones that answer a buyer’s questions

What strategics look for: A milestone that answers a question about safety, performance, regulatory path or market can make a startup easier to evaluate.

How to prepare:

• Write each planned milestone next to the question it answers for a buyer or funder
• If you cannot name the question, reconsider whether the milestone is worth the runway
• Favor milestones buyers often ask about, such as bench verification data, early clinical or user evidence and a site willing to run a pilot

7. Explore a partnership before an acquisition

What strategics look for: A partnership is a lower-risk way to learn your product and team. Many strategics invest through venture arms or use co-development, licensing or distribution deals before, or instead of, an acquisition.

How to prepare:

• Find out which of your target companies have venture arms or partnering programs
• Decide what you want from a partner, such as capital, validation, distribution or clinical access
• Before you sign, ask your attorney to flag exclusivity, a right of first refusal, ownership of jointly developed IP and anything triggered if the company is sold

Start before anyone asks

Each of these steps can also help when you raise money or sign a partner, whether or not a buyer ever calls.

Reach out to talk through how we can help you be ready for takeoff if strategics come calling.

FAQ

What is tuck-in M&A in medtech?

A tuck-in acquisition is typically a smaller deal in which a larger company buys a business or technology that fits an area it already operates in. Buyers may favor tuck-ins because they already know the market and the customer.

What is a strategic buyer in medtech?

A strategic buyer is an operating company that acquires a business because it fits its own products, customers or technology. A device maker, for example, may buy a company that fills a gap in its existing portfolio.

What do acquirers review in medtech due diligence?

Requirements vary by buyer and deal. Acquirers often review regulatory status and strategy, quality system records, design and test documentation, intellectual property, clinical or performance data and commercial traction.

How can a medtech startup work with a large company before an acquisition?

Options can include venture investment, co-development, licensing and distribution agreements. These can provide capital, validation or market access. Terms such as exclusivity or a right of first refusal may limit future options, so they deserve careful review.

When should a medtech startup start preparing for due diligence?

Preparation can start as soon as development begins. Documenting regulatory decisions, design controls and test data as you go is usually easier than rebuilding records later under a deal deadline.