September 14, 2012

Medical Device Venture Council

Going Overseas: 14 hours to a board meeting in Australia

“Toto, I’ve a feeling we’re not in Kansas anymore.”  These immortal words were echoed by Dorothy in the 1939 acclaimed film The Wizard of Oz.  I found myself ushering forth these same words during a recent trip to the real Land of Oz:  Australia.  I traveled south of the equator for a GI Dynamics Annual General Meeting (AGM) and Board Meeting; a trip necessitated by the company’s successful public listing on the Australian exchange (ASX) last September.  What used to be a twenty minute car ride had now become a 14 hour flight.  Ouch.

Why, you ask?

The reasons for going public in Australia were simple.  GI Dynamics (ASX: GID) is pursuing a novel, new device for the treatment of Type II Diabetes and Obesity.  It is not a project for the faint of heart.  The pay-off could be tremendous, but so are the capital needs.  Australia, unlike the US, offered a potential source of capital.  Two companies, Heartware (NASDAQ: HTWR) and Reva Medical (ASX: RVA), had previously completed such offerings.  GI Dynamics chose to follow suit.  The outcome was nothing short of transformational for the company.  Last fall, GID raised a little more than $80 million and currently has a market capitalization of approximately $250 million. More importantly, the company has secured the necessary capital to go forth and execute on its strategy.

At the risk of generalizing, the Australian market was open to GID, in part, because investors who seek out ASX-listed companies have a different investment philosophy than most NASDAQ oriented investors.  They tend to be longer term investors who are investing with a three to four year view, not a three to four month view.  Equally important, they are receptive to healthcare technology companies, particularly those going after big, well-known markets addressing significant unmet clinical needs.  There is a spirit of entrepreneurship that recognizes value can be created outside of the Facebook’s of the world.

Not a panacea.

With that said, an Australian listing should not be viewed as a cure-all.  It did provide much needed capital to the company, but it also brought added cost and complexity.  Increased reporting and governance requirements have added to the workload of the management team and the Board.  As with any public company, the team needs to have the necessary skills to handle these increased needs.

Similarly, there are limitations from the venture capitalist point of view.  Trading levels on the ASX tend be to lower than on comparable US exchanges.  These lower levels, in turn, limit the liquidity that venture capitalists can generate from such an offering.  This is not to say there is no liquidity, but venture capitalists need to recognize that it will take time to efficiently and effectively work out of the stock.

Hidden benefits.

Clearly, the Australian listing has opened up additional sources of capital to GI Dynamics.  What is likely less clear; however, are the added benefits which accompanied the listing.  The company has become much more global in its world view.  Commercialization activities are taking place, not only in Australia, but in other geographies outside of the US as well.  Similarly, as a venture capitalist, I am taking a much keener interest in the Land Down Under.  During my trip, I spent additional time meeting with the Australian medical device ecosystem:  entrepreneurs, investment bankers, service providers, government officials and other local venture capitalists.  These meetings reinforced my view that Australia not only provides an interesting alternative to the US for an IPO, but that it also provides an interesting alternative as a source for new investments.  Proximity to Asia, R&D tax credits, a favorable regulatory climate, world-class clinicians, and a culture of risk-taking, all add to the allure of Australia as a home for medical device start-ups.

The Greek philosopher Plato is credited to have said, “Necessity is the mother of invention.”  As we look at the challenges of currently building a medical device company in the US, a 14 hour plane ride may not be so bad.  Besides, who wouldn’t want the miles?