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How to Make Medtech M&A Pay Getting Go-to-Market Due Diligence Right June, 2011 This presentation may not be circulated, quoted or reproduced for distribution without prior written approval of ZS Associates. Agenda Opportunities and challenges of M&A for medical products industry ZS perspective on M&A due diligence Case studies Conclusion © 2011 ZS Associates 1 Today’s Presenters Pete Masloski Brian Chapman Principal Evanston, IL Associate Principal, Zurich, Switzerland Phone: +1 847.492.3474 Email: pete.masloski@zsassociates.com Phone: +41 44.254.6429 Email: brian.chapman@zsassociates.com Pete Masloski is a Principal in ZS Associates’ Evanston office and is the leader of ZS’ Medical Products and Services practice. He has been helping medical technology companies improve the effectiveness of their sales and marketing efforts for 15 years. Pete holds a BSE in chemical engineering from Princeton University and an M.B.A. with honors from Northwestern University's Kellogg Graduate School of Management. © 2011 ZS Associates Brian Chapman is an Associate Principal in ZS’s Zurich office and the leader of ZS’ Medical Products and Services practice in Europe. For more than seven years at ZS, he has worked with medical technology companies on a range of sales and marketing issues, including opportunity assessment, org design, channel optimization and launch strategy. Brian has a B.S. in chemical engineering from Michigan Technological University and an M.B.A with distinction from the University of Michigan’s Ross School of Business. 2 ZS Associates is a global leader in sales and marketing consulting, capability building and outsourcing With more than 1,700 professionals in 20 offices around the world, we can help companies at any stage, whether they are a new firm launching their first product or a global enterprise expanding into new markets. BARCELONA • BOSTON • CHICAGO • EVANSTON • FRANKFURT • LONDON • LOS ANGELES • MILAN • NEW DELHI • NEW YORK PARIS • PHILADELPHIA • PRINCETON • PUNE • SAN DIEGO • SAN FRANCISCO • SHANGHAI • TOKYO • TORONTO • ZURICH © 2011 ZS Associates Agenda slide Opportunities and challenges of M&A for medical products industry ZS perspective on M&A due diligence Case studies Conclusion © 2011 ZS Associates 4 M&A is a frequent growth strategy in the medtech industry Number of Medtech Deals (Jan – Nov 2010) $300M+: 7 $100 - $300M: 9 Burkhardt, Clyde A., Buyer’s Market Prevails for Medtech Firms, Medical Device and Diagnostics Industry, November, 2010 © 2011 ZS Associates 5 Less than $100M: 200+ M&A is a frequent growth strategy in the medtech industry Number of Medtech Deals (Jan – Nov 2010) $300M+: 7 $100M - $300M: 9 Less than $100M: 200+ Of the >$20B in M&A activity, the majority would qualify as an “acquisition” Burkhardt, Clyde A., Buyer’s Market Prevails for Medtech Firms, Medical Device and Diagnostics Industry, November, 2010 © 2011 ZS Associates 6 Example: A Medtech organization identifies an acquisition opportunity that seems to offer high growth potential Current Situation: Potential Opportunity: Cardiovascular device company looking to increase portfolio © 2011 ZS Associates Both products used by cardiovascular surgeons – can leverage existing relationships Acquisition: Cross-selling opportunities will accelerate sales of both products Producer of capital equipment used to monitor patients in lengthy and complex surgical interventions Despite the high price, forecasts look promising (“Only requires a couple of additional units sold per rep”) 7 18 months later, the acquisition has not met expectations… 1 Sales trail projections The most experienced and effective salespeople leave 2 3 Sales further decline 4 Pressure to further cut sales force The GM and head of sales were looking for new jobs What went wrong? © 2011 ZS Associates 8 On closer inspection, many of the assumptions around synergies did not hold up Customers and decision-makers were different Primary decision-makers were the administrators, not Selling capital equipment is very different from selling devices Long selling cycle for the new products Intense clinical service required during trials Complex interdepartmental process to gain hospital approval Organizational changes alienated existing sales force Integration created discontent among existing sales force, © 2011 ZS Associates cardiovascular surgeons, and there was no existing relationship who were not happy with new territories Compensation plan based on unachievable sales targets, resulting in unacceptable bonuses and turnover among the experienced reps 9 There are several sales and marketing strategy issues that we have observed when considering an acquisition… Inadequate understanding of how the product is purchased Lack of familiarity with how product is sold Unrealistic expectations for the integration of the new product © 2011 ZS Associates 10 There are several sales and marketing strategy issues that we have observed when considering an acquisition… Inadequate understanding of how the product is purchased Fail to understand the role of all stakeholders who exert influence purchasing decisions Underestimate the complexity or length of the purchasing process Over-estimate value of a new attribute or product feature Lack of familiarity with how product is sold Unrealistic expectations for the integration of the new product © 2011 ZS Associates 11 There are several sales and marketing strategy issues that we have observed when considering an acquisition… Inadequate understanding of how the product is purchased Fail to understand the role of all stakeholders who exert influence purchasing decisions Underestimate the complexity or length of the purchasing process Over-estimate value of a new attribute or product feature Lack of familiarity with how product is sold Assume the clinical end users will be the primary decision maker and sales target Fail to identify key steps in the selling process Under-estimate the level or complexity of resources required from sales force Unrealistic expectations for the integration of the new product © 2011 ZS Associates 12 There are several sales and marketing strategy issues that we have observed when considering an acquisition… Inadequate understanding of how the product is purchased Fail to understand the role of all stakeholders who exert influence purchasing decisions Underestimate the complexity or length of the purchasing process Over-estimate value of a new attribute or product feature Lack of familiarity with how product is sold Assume the clinical end users will be the primary decision maker and sales target Fail to identify key steps in the selling process Under-estimate the level or complexity of resources required from sales force Unrealistic expectations for the integration of the new product Discover that current sales force does not have the skills required to be successful in the new selling environment Under-estimate value of existing relationships Over-estimate synergy to be found in combined portfolio Under-estimate organizational change required to promote the combined portfolio These issues lead to overpaying and saddling the post-merger organization with unrealistic expectations © 2011 ZS Associates 13 Agenda Opportunities and challenges of M&A for medical products industry ZS perspective on M&A due diligence Case studies Conclusion © 2011 ZS Associates 14 At ZS, we apply a broad go-to-market framework in organizing our thinking around sales and marketing issues Customer Focus & Growth Strategy Go-to-Market Strategy Competency Model Customer Insight Sales Process (How) Segmentation & Targeting Competitor Insight Value Proposition (What) Hiring, Training & Coaching Success Measures Sizing & Deployment Sales Channels Strategy (How) Compensation & Motivation Programs Performance Management Information & Tools Marketing Mix Strategy © 2011 ZS Associates Marketing & Sales Operations Marketing & Sales Analytics Execution 15 In the focused context of M&A, ZS recommends a three-step approach to M&A go to market due diligence Study the customer buying process Understand the selling process Design the future sales model Reasonable expectations and valuation, faster integration, and better value from the acquisition © 2011 ZS Associates 16 In-depth understanding the customer buying process is critical for assessing and validating forecast assumptions for the product Study the customer buying process © 2011 ZS Associates Understand the selling process 17 Design the future sales model In-depth understanding the customer buying process is critical for assessing and validating forecast assumptions for the product Study the customer buying process Usage Opportunities Understand the selling process Competitive Landscape What external market trends affect usage occasions? What role does referral play in product usage? © 2011 ZS Associates 18 Drivers of Product Selection Design the future sales model Key Stakeholders In-depth understanding the customer buying process is critical for assessing and validating forecast assumptions for the product Study the customer buying process Usage Opportunities What external market trends affect usage occasions? What role does referral play in product usage? © 2011 ZS Associates Understand the selling process Competitive Landscape Is there a perception of clinical differentiation? How do physicians perceive the relative advantages of the product? 19 Drivers of Product Selection Design the future sales model Key Stakeholders In-depth understanding the customer buying process is critical for assessing and validating forecast assumptions for the product Study the customer buying process Usage Opportunities What external market trends affect usage occasions? What role does referral play in product usage? Understand the selling process Competitive Landscape Is there a perception of Drivers of Product Selection What factors influence clinical differentiation? customer behavior? How do physicians What level of influence perceive the relative advantages of the product? does the sales force have? How compelling is the value proposition? © 2011 ZS Associates 20 Design the future sales model In-depth understanding the customer buying process is critical for assessing and validating forecast assumptions for the product Study the customer buying process Usage Opportunities What external market trends affect usage occasions? What role does referral play in product usage? Understand the selling process Competitive Landscape Is there a perception of Drivers of Product Selection What factors influence clinical differentiation? How do physicians perceive the relative advantages of the product? Who makes the purchasing decision? What level of influence What role do others play does the sales force have? How compelling is the 21 Key Stakeholders customer behavior? value proposition? © 2011 ZS Associates Design the future sales model in influencing the decision? Understanding the selling process for the potential acquisition will help validate key assumptions around promotional synergies Study the customer buying process Sales Reps © 2011 ZS Associates Understand the selling process Clinical Educators / Trainers Reimbursement Specialists 22 Design the future sales model Customer Service Personnel Understanding the selling process for the potential acquisition will help validate key assumptions around promotional synergies Study the customer buying process Call Points for Sales Force Understand the selling process Selling & Support Activities Design the future sales model Current Sales Force Structure Who does the sales force call on? What type / level of expertise do these activities require from the sales force? Sales Reps © 2011 ZS Associates Clinical Educators / Trainers Reimbursement Specialists 23 Customer Service Personnel Understanding the selling process for the potential acquisition will help validate key assumptions around promotional synergies Study the customer buying process Call Points for Sales Force Who does the sales force call on? What type / level of expertise do these activities require from the sales force? Sales Reps © 2011 ZS Associates Understand the selling process Selling & Support Activities Design the future sales model Current Sales Force Structure What are the activities required to sell the product? What level / type of service do these call points expect? Clinical Educators / Trainers Reimbursement Specialists 24 Customer Service Personnel Understanding the selling process for the potential acquisition will help validate key assumptions around promotional synergies Study the customer buying process Call Points for Sales Force Who does the sales force call on? What type / level of expertise do these activities require from the sales force? Understand the selling process Design the future sales model Selling & Support Activities What are the activities required to sell the product? Current Organization How is the product sold today? How important are sales force What level / type of service do these call points expect? relationships? Would customers see a change in activities or support? Sales Reps © 2011 ZS Associates Clinical Educators / Trainers Reimbursement Specialists 25 Customer Service Personnel A basic understanding of the future sales model is important both for valuation as well as kick-starting integration Study the customer buying process Understand the selling process Design the future sales model Hospital Rep NSM Manager Hospital Rep Hospital Rep © 2011 ZS Associates 26 Customers Specialist A basic understanding of the future sales model is important both for valuation as well as kick-starting integration Study the customer buying process Resources Required Understand the selling process Organization Changes Design the future sales model Disruption Risks What types of resources would be required to support the new portfolio? How many resources will be required for the new portfolio Hospital Rep NSM Manager Hospital Rep Hospital Rep © 2011 ZS Associates 27 Customers Specialist Value of Synergies A basic understanding of the future sales model is important both for valuation as well as kick-starting integration Study the customer buying process Resources Required What types of resources would be required to support the new portfolio? How many resources will be required for the new portfolio Understand the selling process Organization Changes Design the future sales model Disruption Risks How would the current organizations need to change in order to support the combined portfolio? Do the sales people have enough bandwidth? Hospital Rep NSM Manager Hospital Rep Hospital Rep © 2011 ZS Associates 28 Customers Specialist Value of Synergies A basic understanding of the future sales model is important both for valuation as well as kick-starting integration Study the customer buying process Resources Required What types of resources would be required to support the new portfolio? How many resources will be required for the new portfolio Understand the selling process Organization Changes Design the future sales model Disruption Risks How would the current Would implementation organizations need to change in order to support the combined portfolio? affect sales results? Can relationship disruption risks be minimized? Do the sales people have enough bandwidth? How would the existing cultures match? Hospital Rep NSM Manager Hospital Rep Hospital Rep © 2011 ZS Associates 29 Customers Specialist Value of Synergies A basic understanding of the future sales model is important both for valuation as well as kick-starting integration Study the customer buying process Resources Required What types of resources would be required to support the new portfolio? How many resources will be required for the new portfolio Understand the selling process Organization Changes Design the future sales model Disruption Risks How would the current Would implementation organizations need to change in order to support the combined portfolio? affect sales results? Can relationship disruption risks be minimized? Do the sales people have enough bandwidth? How would the existing cultures match? Hospital Rep NSM Manager Hospital Rep Hospital Rep © 2011 ZS Associates 30 Customers Specialist Value of Synergies How does combined promotion enhance the opportunity of the individual products? Agenda Opportunities and challenges of M&A for medical products industry ZS perspective on M&A due diligence Case studies Conclusion © 2011 ZS Associates 31 Case #1- Understanding the key stakeholder Situation Company: Medtech company with portfolio of products targeted to anesthesiologists Potential acquisition: Competitive bid for company with pain management device Objectives for acquisition: Leverage existing relationships with anesthesiologists to win additional share within pain management market © 2011 ZS Associates 32 Case #1- Understanding the key stakeholder Situation Company: Medtech company with portfolio of products targeted to anesthesiologists Potential acquisition: Competitive bid for company with pain management device Assessment Examination of the buying process showed that anesthesiologists do not play role in pain device selection; surgeons should be primary target Surgeon recognizes need for therapy Surgeon selects therapy Objectives for acquisition: Leverage existing relationships with anesthesiologists to win additional share within pain management market © 2011 ZS Associates Anesthesiologist implements device 33 Hospital purchasing The implication of the buying process was that a combined sales force would offer little synergistic value Adding another call point to the existing reps NSM would likely be too much for a team already at the limit of their bandwidth with 6 different specialties to manage Manager The deal did not actually meet stated business Surgeon reps objectives of expanding relationship with anesthesiologists General and Anesthesia reps With more realistic assessment of selling costs, the acquisition no longer made sense at a higher price point Outcome: Company decided not to raise bid, and began to look for other growth options © 2011 ZS Associates 34 Case #2 – Understanding the current selling environment Situation Company: Medtech company with one product used in spine surgeries Potential acquisition: New product to be used in the same spine surgeries Objectives for acquisition: Develop portfolio of spinal offerings and strengthen relationship with ortho and neuro surgeons © 2011 ZS Associates 35 Case #2 – Understanding the current selling environment Situation Assessment Company: Medtech company with one product used in spine surgeries Examination of the selling process showed that the current selling environment was based on distributor relationships Economic Compliers Clinical Believers Relationship Buyers Prevalence 20% 35% 45% Risk Low Low High Minimal Minimal Significant Ensure continuity in approval status Maintain current surgeon perceptions Convert to clinical believers Potential acquisition: New product to be used in the same spine surgeries Objectives for acquisition: Develop portfolio of spinal offerings and strengthen relationship with ortho and neuro surgeons Sales at Risk Mitigation Strategy Paradigm Shift © 2011 ZS Associates 36 Outcome: Company moved forward with acquisition but with a 2–3 year phased integration plan to minimize disruption Current = Current = Transition = Future Clinical Selling Case Coverage Relationship Selling Distributors Direct Account Management Future (2–3 Years) Clinical Focus Support the Distributors Clinical Selling Account Management Case Coverage ? ? Clinical Specialist Sales Force Outcome: The deal continued with confidence in an approach to manage the transition, along with updated forecast expectations © 2011 ZS Associates 37 Agenda Opportunities and challenges of M&A for medical products industry ZS perspective on M&A due diligence Case studies Conclusion © 2011 ZS Associates 38 We believe that go-to-market due diligence should be conducted on the any potential acquisition prior to any initial offer Study the customer buying process Understand the selling process Design the future sales model Reasonable expectations and valuation, faster integration, and better value from the acquisition © 2011 ZS Associates 39 When evaluating a deal, the process should never be constrained by internal limitations of capacity, experience or perspective Extra resources can be brought from another division or from outside but capacity and timing is never a good reason to compromise quality Capacity The unbiased perspective is best introduced using participation from members of another division or an external party © 2011 ZS Associates Unbiased Perspective Experience 40 The best practice is to involve the leader of the new sales organization for input and buy-in; occasionally additional experience is needed if the market is unfamiliar Pete Masloski Principal in Evanston, IL Phone: +1.847.492.3474 Email: pete.masloski@zsassociates.com Brian Chapman Associate Principal in Zurich, CH Questions? © 2011 ZS Associates Phone: +41.044.254.6429 Email: brian.chapman@zsassociates.com 41
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