Super-Sized Obesity

Medical Device Market Ready for M&A and IPO Transaction

March 8, 2014

American Medical Association recognized Obesity as a Disease. This triggered all countries to explore obesity treatment options as a front line treatment for obesity. Obesity is no more a stigma. Its a everyday concern. Obesity is the route cause of Diabetes and Heart disease and is associated with 29 known medical conditions including cancer and infertility. The new disease cost countries like US over $150 Billion. 
Question is, despite of this unmet need why were the device makers and investors sitting on the side lines?
#1 Reason: Companies were worried about FDA approvals. Recently, FDA has changed its tone to make it priority to expedite approvals for obesity and products addressing unmet needs
#2 Reason: Some technologies had large profile devices which would perform the function of stapling or sewing the gi tract, these were associated with greater risks than benefits, there were concepts that would  anchor large balloons in the abdomen which were hard to adopt from a clinical perspective resulting in failures. Also, some of these technologies  were focusing on endoscopic interventions or procedures which involve extensive gastroenterology training which is a sub-specialty training or program. Bariatric surgeons are not GI doctors, they are very good with laparoscopic techniques, general surgery and not extensively trained in  gastroenterology specific endoscopic procedures.

Obesity is a multi-hundred billion dollar market ready and waiting for device developers to catch up to fill an enormous unmet need. Between the low risk, low benefit drug options for overweight patients, and the high risk, high benefit surgeries for the morbidly obese, there's a huge gap in terms of therapies. 

This sweet spot covers a segment of over 70 million patient in the US and about the over 100 million obese patients outside US without weight loss options. Companies with devices like Apollo Lap Band, J&J (Realize band), Enteromedics (waiting FDA approval), Reshape (Duo), Onciomed (GVS), Obalon, Gi Dynamics (endobarrier) are some of the players to watch out in the near future. 

US spends $160 B in direct cost to obesity treatments. See image above. The $56 B medical device market for obesity in the US has now expanded  to become a $120 B worldwide, companies today, don't have to wait for FDA to be successful they do very well if they will serve the obese population in EU and emerging countries like Brazil, India, Turkey, Mexico, Australia, Russia, Korea and Eastern EU countries; the market is existing and under-served, reimbursement risk is eliminated since many patients will pay out of pocket to have weight loss procedures so the remaining risk revolves around technology.

Cost of Lap-band  procedures in US ranges from $1500.
Outside US the band procedure cost anywhere from $8000 to 12,000 
Gastric surgery cost up to $20000-35000 in the US. Outside gastric surgery cost varies from $12,000 to $18,000. 

Intra-gastric balloons can cost anywhere between $8000 to $16000 the problem is that these balloons have to be removed in 3 to 6 months. Patient then have to explore surgical treatments or alternative long term implants like lap band.

Exit strategies are tremendous for young device makers in this space. Large device makers are exploring to get into the space and ready to pay premium for the right technology. Experts believe that once one medical device deal happens, it will trigger a acquisition spree.

 Allergan acquired Inamed maker of lap band for over $3 Billion in late 2005 early 2006. The stock jumped to ~$114 from ~$90 with company like Allergan with 300M outstanding shares it appears like it was a great deal. Lap band was number 1 seller in obesity products until more aggressive treatments like sleeve gastrectomy came along.
Lap band is a portion restriction device only and with its limited mode of action it did very well.
In late 2013, Allergan announced sale of lapband. After  announcing the deal its stock  jumped from ~$90s to ~$113 to $127 highest in years. With outstanding Shares of approx~300 M.

Allergan  made a very smart deal with Apollo to make the best of the tail end of lap-bands life cycle. Some experts look at this transaction one of the smartest strategic transactions in medical device industry.
 


As surgical procedures get adopted worldwide and more staplers and suturing devices will be used by general surgeons,more evidence of  adverse events like leaks and bleeding will occur which will entice surgeons to use minimally invasive and reversible procedures. Some of the new minimally invasive and reversible technologies  look very promising, one of these next gen technologies is Onciomed's GVS a long term implant which was presented at Cleveland Clinic Medical Innovation Summit, Gi Dynamic's endobarrier which is a sleeve inserted by a GI doctor in the intestine for diabetes resolution, the device is placed for 6-9 months and removed. Reshape's Duo balloon which is a short term implant to promote feeling of fullness and Obalon's balloon which has a gas filled balloon in the stomach to promote satiety recently commercialized in UK.