Early investments start to pay off for Medtronic, Boston Scientific

Wanna buy a medical device startup? A down payment would be nice.

As competition for medical device acquisitions start to heat up, Medtronic Inc. and Boston Scientific Corp. are essentially redeeming early bets on promising startups.

Last week, Medtronic, based in Fridley, said it would buy Ardian Inc. for up to $800 million. Medtronic previously owned 11 percent of the startup, which is developing a catheter-based treatment for high blood pressure.

A week earlier, Boston Scientific said it would acquire heart valve maker Sadra Medical Inc. for as much as $225 million. The company, based in Natick, Mass., with major operations in Arden Hills, already controlled 14 percent of Sadra.

Boston Scientific is also an investor in Cameron Health, which is developing a leadless implantable cardioverter defibrillator.

And in September, St. Jude Medical Inc. said it would pay $60 million to acquire a 19 percent equity stake in CardioMEMS, with an option to eventually buy the entire company for $375 million. CardioMEMS is developing wireless heart monitoring technology for heart failure.

For large medical device firms with lots of cash, an early investment in a startup normally means buying a right to eventually acquire the company at a certain price. Such an exclusive deal allows companies like Medtronic to shut out competitors as it trolls for acquisitions to boost growth.

In some ways, big corporations are replacing venture capital firms as a source for early stage funding. Medtronic currently holds minority stakes in 60 companies ’ a total investment of $320 million. Expect deal hungry Medtronic to pluck more companies out of its pipeline portfolio.

Equity stakes also allow big companies a chance to preview and influence the startup’s technology. After Medtronic led a $47 million financing of Ardian in 2009, Dr. Richard Kuntz, Medtronic’s top research and innovation executive, joined Ardian’s board of directors.

“We are thrilled to have attracted this strong team of investors and appreciate the confidence they have shown in funding the development of this clinically important technology,” Ardian CEO Andrew Cleeland said at the time. “We are particularly encouraged to have Medtronic as a new partner, and see their investment as a validation of our exceptional early clinical results, as well as the potential of our treatment for such a pervasive and complex disease.”

An early investment also presumably gives a Medtronic or Boston Scientific favorable financial terms for an acquisition versus buying companies on the open market.

In 2006, Boston Scientific and Oakwood Medical Ventures contributed $19 million in Sadra. Under terms of the acquisition, Boston Scientific said it would pay $225 million upfront plus potential milestone payments of up to $225 million through 2016.

However, given Boston Scientific’s previous investment in Sadra, Boston Scientific will actually pay $193 million upfront plus milestone payments up to $193 million.

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