Auris acquisition could prompt more mega VC rounds

The acquisition of surgical robotics group Auris Health for a total of $5.8bn by Johnson & Johnson last week is not the biggest deal concerning a privately-held medtech in history – that honour goes to Zimmer’s $15bn merger with Biomet. It is, however, the biggest of a venture-backed company.

In fact, it is the only venture funded target among the top 10 largest acquisitions of private device makers. And an acquisition of this size will do nothing to discourage the monster VC rounds that have been seen in the sector in recent years.

Auris has itself been the recipient of several such rounds. Since August 2017 it has raised two rounds each worth more than $200m, and the investors that administered those huge cash injections will be in line for a significant payday when the J&J deal closes.

Mithril Capital Management, the investment firm founded by PayPal billionaire Peter Thiel, is believed to have the largest stake in Auris, according to the Wall Street Journal, with a stake of around 15%. Lux Capital has invested around $50m in all, according to its co-founder Peter Hébert, the largest investment Lux has made in a single company. Both Mithril and Lux could see returns of hundreds of millions of dollars.

Only 11 medtech groups have raised rounds worth more than $200m, and the vast majority of these massive deals were done within the last two years. Two of the exceptions to this rule, Liberty Dialysis and Devicor Medical, blazed a trail for Auris: they were bought by Fresenius Medical Care and Leica, respectively.

Fresenius paid $1.7bn for Liberty Dialysis in 2014, and though the value of the Devicor acquisition was not disclosed this too was probably in excess of $1bn. Both will be put in the shade by the $3.4bn upfront portion of the J&J-Auris deal, let alone the full price if subsequent milestones are hit (J&J’s Auris buy looks like a Verb swerve, February 13, 2019).

Seven of the top 10 largest acquisitions of private medical technology companies were purchases from private equity companies. Biomet was taken private in 2007 by Blackstone, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts and TPG Capital for $11.3bn; Biomet's $14bn Zimmer merger seven years later was then the fourth largest M&A deal in the history of medtech.

Swedish private equity shop EQT has a particularly strong tradition of selling its portfolio companies to big medtech, with three sales in the $2-3bn range since 2012.

For a venture-backed company to find itself in this cohort is a step-change in the medtech industry. Industry watchers can expect an increase in nine-figure venture rounds as VCs aim to emulate Auris’s success with their own portfolios.