Medical Devices Innovation in India: Kapil Khandelwal, EquNev Capital,


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Kapil Khandelwal
EquNev Capital

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Medical Devices Innovation in India: Kapil Khandelwal, EquNev Capital,

  1. 1. 48 May-June 2010   Medical Equipment & Automation Medical Innovation Medical Devices In India, an average of 5.5% of GDP is spent on health. Of this figure, 8% goes to medical technology. Worldwide, it is accepted that this expenditure does deliver an exceptional return on investment. Part of the problem for the medical technology industry is not the capability of innovation itself, but the difficulty in bringing the fruits of that innovation to the patient and the Indian economy. O n a global scale, the medical device sector contains more than 400,000 products, divided into more than 8,000 different product families which can be broadly classified in twelve key segments. •• Active implantable devices •• Anaesthetic and respiratory devices •• Dental devices •• Electro mechanical medical devices •• Hospital hardware •• In-vitro diagnostic devices •• Non-active implantable devices •• Opthalmic and optical devices •• Reusable instruments •• Single use devices •• Technical aids for disabled persons •• Diagnostic and therapeutic radiation devices The uniqueness of the medical device sector in India is that it is very fragmented and more than 60% of it resides with the Small and Medium Enterprises (SME) category with its enormous diversity and its innovativeness. Generally, the sector’s products are based on mechanical, electrical and/ or materials engineering, where an average product lifecycle Medical Devices Innovation Funding, Partnering and Consolidation Activity in India
  2. 2. Medical Innovation 49Medical Equipment & Automation   May-June 2010 (and investment recovery) is around 18 to 24 months before an improved product becomes available. For the sake of clarity, four issues can be singled out having major impact on Indian medical device sector’s SMEs innovation development. These are notably- •• health care systems growth in India •• funding and partnering with the players and •• Technology convergence with biotech and ICT solutions and ongoing concentration among the biggest firms dominating the industry and its current consolidation through Mergers and Acquisitions – M&A activity. •• Outsourcing of innovation and manufacturing to India as a cost haven. From above points, it is certain that Indian healthcare system will grow over 15% per annum in the near future. This article addresses the issues relating to funding, partnering, M&A and outsourcing activity in Indian medical devices sector. Some of the lessons learnt from the other sectors for medical devices sector include: •• Increasing number of companies were emerging in India in medical devices sector, without the full resources to take the product through to full- scale development and global commercialisation •• Investors and global devices demand for evidence for continued growth and endorsement of technologies •• Labour cost arbitrage for scientific and clinical talent to reduce the cost of innovation and incubation to launch •• Different segments offering huge potential for out partnering with large devices manufacturers to including out- licensing •• Collaborative development financing (CDF), where an investor provides capital and clinical expertise in exchange for licensing of the innovation and •• Non-profit foundations have adopted a more investor- like approach—early-stage funding for proof of concept and concept validation, as well as project management support and access to their network of scientific experts and incubation centers critical in translating innovation into reality. Funding and Partnering Trends The last calendar year witnessed a contraction of financing in the sector globally. Overall, there was over 15% contraction in the funding activity in the sector globally. When we look at the merger and acquisition (M&A) and partnering deals, the industry witnessed a decrease of over 50% in the deal value in 2009 compared to 2008. The decrease in investments can primarily be attributed to the concentration of medical equipment companies on organic growth opportunities because of the uncertain economic outlook. Growing economic concern also led to a decrease in investments in 2009, after high business consolidation activity in 2008. The situation for the Indian medical equipment sector was no better or worst. SMEs in the medical devices sector with limited earnings in the early stages of development, and the medical device sector is particularly reliant on incubation capital funding. Private equity and venture capitalists need a predictable system in order to assessrisk,andwhenuncertainties prevent access to funds, there tends to be a fall-off in innovative activity. The downturn in the India economy, which accelerated in 2008, took a toll on the valuation of medical device start-ups seeking injections of capital. A number of venture capital firms, including some long time investors, began withdrawing from early-stage investing as the economic slump deepened, choosing instead to hold on to capital until higher levels of certainty asset valuations return. While the medical device sector fared somewhat better than others during the economic downturn of 2009 reports have been mixed. Some of the key transactions that the sector witnessed over the last cycle of boom and downturn are as under. Convergence with Biotech and ICT, Consolidation and Outsourcing trends In the medical device sectors SMEs faced with devoting significant resources to innovations often merge with larger firms with the financial resources necessary to bring products to market. The results was mutually beneficial - Company Funding/Investor/Acquirer Neurosynaptic Communications Ventureast TeNet Fund, APIDC Biotech Fund RFCL ICICI Venture Trivitron Medical Systems HSBC Private Equity, ePlanet Ventures Perfint Engineering IDG Ventures, Accel Partners Opto Circuits QIP Sutures India Evolvence Life Sciences Morepen Laboratories Avenue Capital Group/ Avenue Asia Capital Management, LLC, Standard Chartered Private Equity Source: EquNev Capital Industry Analysis
  3. 3. 50 May-June 2010   Medical Equipment & Automation Medical Innovation larger firms receive the benefit of the new technology and, therefore, maintain market share; small firms can afford to continue to produce and get the benefit of the large firms devoting resources to continued incremental improvements that are crucial in the industry. This trend has continued in part due to economic realities in 2009, and led to further consolidation in the medicaldevicesector,bothinterms of company mergers, companies combining profit centers and companies outsourcing for greater efficiencies. International joint venture designed to develop health care technologies and establishing local research and development capabilities have also grown in size and significance. Asia – notably China and Korea – have been the site of a number of collaborations with U.S. firms. Some firms are also gravitating toward a launch in Europe followed by a move to the U.S. or perhaps a move to China or India. It definitely adds a level of complexity to the development process. Some of the activity in the sector includes: Deal Negotiation Strategy Building sustainable businesses in the absence of eager investors has meant that many of Indian medical devices SMEs become integrated into Company Target Acquired Opto Circuits EuroCor (invasive cardiology), Ormed Medical Technologies, Devon Innovations, Criticare Systems, Poly Medicure US Safety Syringes Essel Propack Tacpro & Avalon Medical and other acquisitions in the US to enter different segments RFCL Godrej Medical Diagnostic Business, Wipro Biomed Siemens Medical Solutions Dade Behring Diagnostics Trivitron Medical Systems Vision Engineering TTK Healthcare Invicta Medicals (ortho implants business) Philips Healthcare Meditronics, Alpha X-Ray Technologies Source: EquNev Capital Industry Analysis Makven Capital : Deal Making in a Box Clause Description Parties to agreement The companies, organisation and individuals entering into the agreement Definitions Ensure clarity and avoid risk of the same word being used for more than one purpose of meaning Grant Subject matter Field of use Territory Exclusivity Defines in broad terms the scope and nature of the license and formally states that a funding/ license is granted The scope of the grant in terms of the IPR The scope of grant in terms of technology and device applications The scope of the grant in terms of the regions or countries in the world to which the agreement applies The extent to which the IP is given to one or more entities for exploitation in the field and territory Development Obligation on the parties, as the developing party, to use appropriate endeavours to take the prelaunch products to approval and launch and thereafter to market the product Regulatory Specifies which party has overall control of regulatory strategy Commercialisation Specifies which parties is going to be responsible for sales and marketing of the products and the standards expected Manufacturing and supply Obligations to manufacture, package and supply the product, whether for clinical trial supplies or full-scale manufacturing after the product has obtained a marketing authorisation IP: Ownership of existing Ownership of improvements Ownership of IPRs Patent maintenance and enforcement The ownership of each of the parties to the agreement of the intellectual property that they possessed at the date of the agreement Ownership of the results of the collaboration The parties obligation to maintain the IPRs Dealing with and funding claims by third parties alleging that the licensed IPRs have infringed their rights and how the damages are to be retained Funding structures and milestones How the parties pay for the rights will obviously vary according to the nature of the deal Monitoring and audit Obligations of the parties to provide regular reports covering matters such as the development, manufacture and sale of licensed product Sub licensing The terms under which the parties may extent the rights to third parties Project management Definition of roles and responsibilities of each party in relation to the collaboration Control of project/ milestones Definition of which party has overall control of the project and the project objectives and whether they have been achieved Confidentiality and publication Know-how is protected under the law of confidentiality, which generally gives its owners the right to prevent its unauthorised use or disclosure Change of control Change of ownership clauses are gaining importance with the increasing numbers of M&A. On the one hand, the contract may be a tangible part of the business that makes it attractive to a potential purchaser. On the other hand, the licensor may not want its technology to be in the hands of a competitor Warranties Warranties by the parties in relation to the funds/grants Product liability In addition to the obligations of the supplier where defective products have been supplied (and no damage occurred), one or both parties may also seek warranties in relation to circumstances where the product has caused injury or death to a third party. This is known as product liability Dispute and choice of law As most deals have an international aspect, the parties should agree a choice of law to be applied to interpretation of the contract and settlement of dispute, as well as specifying the country where the dispute hearing will take place Term Commonly stated to last until expiry of all licensed patients and relevant supplementary protection certificates Termination rights to IPRs The contract should attempt as far as is possible to assign potential rights in the event of termination Valuation Pre-money and post money valuation of IP or company Payment Options Different options are suitable for different needs. The payment strategy determines the payment options, timing and tied to milestones Other provisions and precedent conditions There are other incidental clauses that may be included based on the scientific and business due diligence that would need to be complied for the validity of the agreement
  4. 4. Medical Innovation 53Medical Equipment & Automation   May-June 2010 other companies through trade sales. Limited access to seasoned life sciences entrepreneurs is yet another constraint to growth in the Indian medical device sector. Contrary to the US—where there is a high availability of biopharma and device CEOs who have managed two or three companies—most medical device and medical technology executives at start- ups in India are first-timers. A shortage of experienced leaders made it difficult in the past to find managers who know how to build device companies with real value chains and integrated processes from product development to customer invoicing. Feedback from most investors and alliance managers has been that most of the leadership in Indian SMEs medical devices failed in defining the right negotiation strategy for their company and focus on term sheet points for negotiation. Some of the clauses would be pointers for building the overall deal negotiation strategy on several key points to be noted. To Be or not to Be With the increasing competition and a highly demanding market, it is essential for Indian SME medical device companies to innovate to stay competitive. Developments in medical device sector hinges upon inter-disciplinary efforts that include- •• Innovation research & development tie-ups with Indian and international research institutes, •• Licensing, joint ventures and collaborations with international major for innovation and outsourcing contracts, •• Acquisitions (M&A) in Indian and international markets, •• Or perish!  Kapil Khandelwal is a leading heathcare, life sciences and information c o m m u n i c a t i o n technology (ICT) business leader in Asia Pacific and Emerging Markets. He is Director of EquNev Capital, a niche investment banking and advisory services company, operating in multiple sectors Kapil Khandelwal