An informative weekly newsletter that shares insights into building a medical device business in women’s health.

In this week’s newsletter, I reflect on the value drivers behind our exit, 10 years after our device entered the market. Looking back, there were several reasons we were able to position ourselves for a successful exit.

We were determined to create a market for our device, build adoption globally, and never stray from our overarching mission to make childbirth safer for all mothers and babies.

If we were successful, this could create an opportunity for a strategic acquirer to accelerate growth and differentiate itself with a unique and innovative product within women’s health.

I’ll talk through the specific value drivers related to our business (Safe Obstetric Systems). I hope you take something away that both educates and inspires you.

First commercialized medical device to address an unmet need

In 2006, Dr. Rajiv Varma, an obstetrician with over 40 years of experience, invented an innovative medical device to improve the safety of cesarean sections, which would be called Fetal Pillow (see issue one for the full background story).

This device was the first solution to a clinical problem that had not previously been addressed. Previously, these difficult deliveries could only be managed with manual techniques, often leading to complications for the mother, and sometimes for the baby too.

When our product was brought to market in 2011, this would be the first commercialised medical device of its kind, and that meant no direct competition (often, new medical devices are improvements on existing technology).

This created its own challenges - we had to convince clinicians to change their practice and move from manual techniques used throughout their careers to consider using a device which might improve outcomes (clinical data was of course limited early on, but fortunately several studies would be published over the years).

Intellectual property protection underpinned this commercial advantage - with patents filed across major geographies (notably the US), we would have a head start on any major players considering entering this niche market.

Ultimately, IP protection would become a focal point in any future exit negotiations and due diligence. An acquirer would need to ensure their investment was protected from any competitive threats.

In addition to no direct competition and strong IP protection, our device was a single use, simple to use product, and commanded a premium price in the market.

The value proposition supported our pricing structure and substantial margins (see below), which could certainly attract the attention of a strategic partner when reviewing our business from a financial perspective.

If you’re developing a medical device, consider the timing of filing patents (to maximise the length of protection), review manufacturing options to reduce your cost base, and perform detailed research on the market to develop your pricing structure (which can be a challenge to change once you enter the market).

Clinical data is critical to success

As with any medical device (notably those new to the market), clinical evidence is a crucial part of the story. What claims can you make on the efficacy of your device, and what published literature is available to support these claims?

Several independent studies were published over the years which demonstrated that Fetal Pillow was clinically proven to reduce maternal and fetal morbidity during difficult second stage cesarean sections.

One of the most important studies published in 2020, a few years after FDA clearance (2017) was a double-blind randomized controlled trial by the Brigham & Women’s Hospital (affiliate of Harvard) - for those interested, you can access the study here. The study found that use of Fetal Pillow decreases time to delivery after hysterotomy by 23 seconds.

This publication provided strong evidence for use of our device in a clinical setting and would form the basis of many conversations with clinicians in the US market. It would also be an important value driver for a potential acquirer as it would be the first US study on our device.

Improved clinical outcomes would also highlight potential capacity and resource savings for a hospital introducing the device (important when working through Value Analysis Committees).

Large & growing global addressable market

At the time of acquisition, we estimated a current addressable market size of c.$80m, with growth driven by highly supportive dynamics in the US market (reach out if you want details behind the estimates).

We also believe the addressable market could be significantly larger in later years, if the indications for use of Fetal Pillow could be expanded (very likely) and if we entered into additional international markets (where we were limited in resources).

With a small UK based team, a lean business model, and limited funding - without building a large US sales force, it would always be a challenge to capture significant market share ourselves.

But what if we could prove our business model in the US market, build adoption in key territories, and retain a lean cost base? This would undoubtedly have a potential acquirer excited at the prospect of simply dropping the new product into their national sales force to continue the momentum we had already started.

And that’s exactly what we did. We used an independent distributor model to gain coverage across the US market and retained a few key territories as direct - notably New York where I sold directly and implemented Fetal Pillow at all major institutions in the city.

The detailed customer analytics also proved that adoption rates were growing in many hospitals who had been using the product regularly. A potential acquirer could use this and all the above to determine a potential return on their investment if an acquisition took place.

Financial Metrics - Strong growth, profit margins & high cash conversion

Clearly there is a strategic element to many acquisitions, but if the numbers don’t stack up, it’s unlikely to progress any further than due diligence.

Without delving into the numbers behind our transaction, I can share that due diligence was a rigorous process - in fact, the acquirer analysed customer level sales data (broken down monthly) for the previous 3 years, to gain a deep understanding of adoption progression by hospitals over time. I would therefore suggest maintaining relevant customer-level data for your business, so that you can paint a clear picture of the customer journey, supported by the numbers.

At the company level, two financial metrics were important in our case, and from the acquirer’s perspective.

• Revenue growth - increase in revenue, year over year. We needed to demonstrate that our businesses was growing each year in terms of units sold, but more importantly that revenue growth was accelerating each year. Given we had a new innovative technology with recent approval for the US market, sales growth continued to accelerate, driven by implementation into new hospitals, but also increased utilisation at existing accounts. Both were critical from an acquirer’s perspective, to prove they would be investing into a growing business, with plenty of market share still to capture. Sales of our device would immediately be integrated into their business, without a substantial increase in the cost base (a national sales force already in place), with the exception of marketing/ launch costs. My advice here - always focus on business objectives of increasing sales of your product (especially when you enter into an acquisition discussion), as there are so many other distractions in non-core areas which can veer you off track.

• Profit margins - how much of this revenue growth would feed into the bottom line (i.e. profit for the acquirer). Within this context, one key metric is gross profit margins - end user sales price less any direct costs (such as production). An acquirer would be interested in this metric as they could quickly determine the financial value of each unit sold and understand their return on investment. Operating costs would then be used to arrive at an operating profit margin, which are more relevant to the acquirer’s business - post acquisition/ integration they would be able to apply the relevant operating costs in their business (such as salaries, marketing etc) to derive the bottom line impact.

Medical devices that add significant value in the form of clinical outcomes and financial savings for the hospital system, can often command a premium price, which in turn can lead to substantial margins per unit.

If the ultimate goal is an exit, you’ll need to consider the financial picture around your business. Is your pricing structure correct to derive the best possible margin? Are your manufacturing costs competitive, to drive gross margins? Are you spending too much on marketing, salaries etc, which might be impacting your operating margins?

Significant opportunity for an acquirer to accelerate growth

In our case, the above factors provided an opportunity for a trade acquirer to accelerate growth through an existing sales force and distribution channels within their network. They would also be able to capture additional margin by selling direct to customers (vs. the independent distributor model we had in place). There would also be a strategic incentive for for a women’s health medical device business to differentiate itself with a unique and innovative product.

Many start-ups see an exit as the ultimate goal - interestingly, we never chased after that end result. We believed if we were able to make an impact with our device, build a market, and do all the right things as a company - maybe a larger player would take an interest, otherwise we would go it alone.

In the end, it made sense for a strategic acquirer to take it off our hands. As a small team, we could not do it justice and get the device out to as many mothers and babies as we wanted to (our mission was to make childbirth safer globally).

How can I help you and your business?

If there’s anything you would like to discuss further on this topic or others shared in a previous newsletter, drop me an email and let’s set up a call. Maybe there’s an opportunity to collaborate or share learnings!

OBG Access is my consulting business that provides strategic support for early stage medical device companies in the women’s health space.

I provide support for commercialisation and international expansion. This includes access to a large network of key clinicians, decision makers, opinion leaders, hospital systems, and distribution partners throughout the US market.

Engagements include developing strategic plans for US market entry and building a corporate infrastructure for non-US companies entering the market.

I can also help with an objective view on company valuation, preparing your business for a future exit, and access to potential buyers or strategic partners.

[email protected]

A brief note on the author - Nish Varma

After several years working in finance, I partnered with my father, an obstetrician who invented a medical device (Fetal Pillow) to solve an important clinical problem in his field (detailed in issue one).

After initially launching into the UK market in 2011, several years later, Fetal Pillow was cleared by the FDA in 2017. We then focused our efforts on bringing Fetal Pillow to the US market.

I spent the next few years building our US business and in early 2021, our company (Safe Obstetric Systems) was acquired by CooperSurgical, a leading global player in Women’s Health. I spent one year post completion working for the company during an earnout period to support the national launch strategy.

It was a 10 year journey to commercialise and bring the product to market - we were able to prove our business model in the US and that garnered interest from some of the key industry players.

Since the company sale, my father and I have started developing a new obstetric product and hope to bring this to market in the near future. I also consult for early stage medical device companies looking to expand their operations internationally.

This newsletter is a passion project to share some of our journey with others who might be on a similar path.

I appreciate you taking the time to read this week’s newsletter. Any questions, comments or feedback, please feel free to email me.

Have a great weekend!

Nish Varma

[email protected]

Consulting Services - OBG Access

Co-Founder - OBSolve