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Strategic alliance with MWE China Law Offices (Shanghai)© 2016 McDermott Will & Emery. The following legal entities are collectively referred to as “McDermott Will & Emery,” “McDermott" or “the Firm”:  McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP.  These entities coordinate their activities through service agreements.  McDermott has a strategic alliance with MWE China Law Offices, a separate law firm.  This communication may be considered attorney advertising.  Prior results do not guarantee a similar outcome.

2016 MedTech Conference

Head for the Exit: How to Structure, Negotiate and Close the Sale of your MedTech Company

Krist WerlingPartner, McDermott Will & Emery

Todd HalesPartner, McDermott Will & Emery

June 1, 2016

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3 Steps to Successfully Exit1. Navigate the Due Diligence Process2. Structure the Payments So You Get Paid3. Avoid Indemnification Obligations and Having to Give

Back the Cash

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4 Critical Due Diligence Issues in a Sale Process

1. Ownership Structure2. Employees and Contractors3. Regulatory and Compliance Issues4. IP, IP, IP…..and more IP

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Ownership Structure▪ Ownership structure will drive deal structure▪ Merger necessary if many owners/won’t all sign purchase agreement▪ Can the buyer get a “basis step up” in the assets that are being acquired?

– Asset acquisition– Stock acquisition with Section 338(h)(10) election– Acquisition of partnership of LLC interests

▪ If buyer can get a “basis step up” then more value may be on the table because the buyer will be able to accelerate depreciation of certain assets

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Employees and Contractors▪ IRS focus on employee classification issues

– Sale force classifications present risk▪ Have all employees and contractors assigned rights to

IP to the company?

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Regulatory and Compliance Issues▪ Relationships with referral sources

– Importance of “fair market value”– Compliance with Physician Payment Sunshine Act

▪ FDA and EMA regulatory authority communications▪ Adverse event reporting▪ Reimbursement guidance▪ Sales and marketing practices

– Off label promotion [See separate breakout session!]

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IP, IP, IP…..and more IPThree core questions that Buyers will seek to confirm during IP due diligence:1. Do we own it?

2. Can we sell it?

3. Can we protect it?

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IP, IP, IP…..and more IPDo we own it?1. Employees

A. Agreements (obligations to assign; prior obligations)B. Assignments (executed and recorded; correct inventorship)

2. ConsultantsA. NDA (ownership expressly identified)B. Conflicting obligations (e.g., Universities)

3. Funding (Govt. funding?)4. Licenses

A. Exclusive/nonexclusiveB. Royalty obligations

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IP, IP, IP…..and more IPCan we sell it?1. Searches (Freedom to operate/market clearance)

Conduct when near commercialized design2. Written/Verbal communication

Careful treatment of such communication3. FDA Clearance—510(k)

Predicate device indicates likelihood patents exist to find4. Design changes

The changes may require updated searches

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IP, IP, IP…..and more IPCan we protect it?1. Patentability inquiry

A. Has searching/examination been conducted or initiated?B. Linking FDA - commercial product - patent claims

2. Alice Corp. v. CLS Bank decisionIs this the end of software or just a pendulum?

3. Trademarks, Copyrights, and Trade SecretsHow else can we protect?

4. TimeframeHow can we expedite the process?

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Potential Payment Structures▪ All cash deal▪ All stock deal▪ Cash and stock combination▪ Cash deal with contingent payments

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Cash deals in MedTech▪ Cash is cheap – cheaper for large medtech companies to get debt financing

than it is to pay with equity▪ A large percentage of medtech exit transactions involve contingent cash:

– Development milestone payment – paid upon achievement of a development goal (ie, completion of clinical trial)

– Commercial milestone payment – paid upon achievement of a sales goal– Regulatory milestone payment – paid upon achieving marketing authorization– Royalty payment – percentage of sales

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Special thanks to SRS Acquiom for the data and graphics on the following four slides. To find out more about SRS Acquiom and their services as well as the full M&A Life Science Study, go to: http://srsacquiom.com

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Earn-out Achievement Rates

40%5%4%

51%Paid Delayed, plan to hit

Delayed, plan to miss Missed

41%

10%14%

35% 38%

9%12%

41%

Milestones Come Due – All128 events – outer circle

$3.7B – inner circle27 of 56 (48%) deals with earnouts have had at least one payment made.

Actual payments range widely from 1% to 100% of contract amounts.

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Earn-out Achievement Rates by Industry

40%5%4%

51%Paid Delayed, plan to hit

Delayed, plan to miss Missed

36%

11%15%

38%34%

13%11%

42%

Biotech Milestones (55, $2.5B)

45%

8%13%

34% 41%

6%12%

41%

Medtech Milestones (73, $1.2B)

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Earn-out Achievement Rates by Stage

40%5%4%

51%Paid Delayed, plan to hit

Delayed, plan to miss Missed

37%

13%16%

34% 38%

12%14%

36%

Development Milestones (77, $2.9B)

48%

5%9%

38% 39%

4%8%

49%

Commercial Milestones (51, $800M)

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Earnout Terms: Diligence RequirementsNote: Because milestones can be subject to more than one diligence requirement*, totals exceed 100%

* Ex: Commercially Reasonable Efforts for two years after Closing, and Express Buyer Discretion thereafter.** Ex: Development or marketing plan, specified expenditures, etc.

28%

68%

1%

17% 15% 13%18%

51%

7%

27%20%

34%

Developmental/Regulatory Milestones Commercial/Sales Milestones

8% of deals give shareholders a right to buy back certain assets if the program is halted; most involve a secondary, rather than the lead, program

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Outward facing definition

“Commercially Reasonable Efforts” means the efforts consistent with the past practice of similarly situated medical device companies with respect to similarly situated medical device products.

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Inward facing definition

“Commercially Reasonable Efforts” means efforts consistent with the past practice of Buyer related to research and development, regulatory approval, commercialization, sales and marketing of similar medical device products with similar market potential at a similar stage in its development.

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Correlation of Diligence Requirements and Actual Payouts

• According to the SRS Study, almost all of the $1.5B in milestones that have been paid to date have been associated with a diligence requirement on the Buyer to use commercially reasonable efforts, or a more specific requirement, to achieve the milestone.

• In 17 deals with less stringent diligence requirements on the Buyer:• Three (18%) have seen at least one payment, compared to 48%

across all deals.• $156M* has been paid out of $536M (29%) in milestones come due to

date, compared to 41% across all deals.* $100M of this is one product approval from an older deal, when CRE was less commonly negotiated. If we exclude this milestone, the payment rate drops from 29% to 10%.

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Keeping the Money – Avoiding Indemnification Liabilities

• Representations and Warranties• Focus on IP rep

• Indemnification Packages

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As an Example…. IP Rep for Sellers to Avoid(a) The Company owns, licenses or otherwise possesses sufficient legal rights to all of the Company’s material Intellectual Property without any conflict with, or infringement of, the rights of any other Person. All of the Intellectual Property owned by the Company is owned free and clear of all Liens.

(b) The patents and patent applications of the Company are valid and enforceable and have not been challenged, cancelled, expired or abandoned.

(c) No product or service marketed or sold (or currently proposed to be marketed or sold) by the Company infringes any intellectual property rights of any other party.

(d) There are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the Company’s Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other Person.

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As an Example…. Seller-Friendly IP Rep(a) The Company owns, licenses or otherwise possesses sufficient legal rights to all of the Company’s material Intellectual Property without any known conflict with, or known infringement of, the rights of any other Person. To the Knowledge of the Sellers, all of the Intellectual Property owned by the Company is owned free and clear of all Liens.

(b) To the Knowledge of the Sellers, the patents and patent applications of the Company have not been challenged, cancelled, expired or abandoned and are valid and enforceable.

(c) To the Sellers’ Knowledge, no product or service marketed or sold (or currently proposed to be marketed or sold) by the Company violates or will violate any license granted to the Group Companies or infringes any intellectual property rights of any other party. Other than with respect to commercially available software products under standard end-user object code license agreements, there are no outstanding options, licenses, agreements, claims, encumbrances or shared ownership interests of any kind relating to the Company’s Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other Person.

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Indemnification Packages

• Escrow (how much cash do you get at closing?• Median escrow size = Approximately 10% of transaction value• Medial holding period = Approximately 18 months

• Survival Periods for Representations and Warranties (how long is money at risk?)

• Median survival period = 18 months• Fundamental representations = statute of limitations

Disclaimer: These terms represent averages based on review of a variety

of deal summaries available in the market – each deal is different and just because a median is reported

does not mean that it is the right fit for every deal.

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Indemnification Packages

• Cap (how much is at risk?)• Median cap = 10%• Note: wide variation in cap sizes

• Basket (limit on individual claims)• .5% of transaction value

• Carve-Outs (exceptions to the limitations)• Fraud, fundamental representations, willful misconduct, tax

Disclaimer: These terms represent averages based on review of a variety of deal summaries available in the market – each deal is different and just because a median is reported does not mean that it

is the right fit for every deal.

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About McDermott Will & Emery’s MedTech Transactional Practice

▪ Comprehensive transactional experience that integrates world class specialized disciplines and leverages our Tier One Health practice:

– M&A, Licensing/Collaboration, Finance, Healthcare Royalty Stream Financing.– Preeminent Tax, IP, Antitrust, Executive Compensation, Reimbursement, and Regulatory

practices with industry experience.

▪ Global Reach and Savvy:– Integrated international practice in centers of Life Sciences commerce– China practice with significant Life Sciences deal expertise and Seoul office serving Korean

company outbound needs.

▪ McDermott Value Proposition:– Tools and approaches redefining our service delivery.– Philosophy driven by voice of the customer.

www.mwe.com

Boston Brussels Chicago Dallas Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C.

Strategic alliance with MWE China Law Offices (Shanghai)© 2016 McDermott Will & Emery. The following legal entities are collectively referred to as “McDermott Will & Emery,” “McDermott" or “the Firm”:  McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP.  These entities coordinate their activities through service agreements.  McDermott has a strategic alliance with MWE China Law Offices, a separate law firm.  This communication may be considered attorney advertising.  Prior results do not guarantee a similar outcome.

2016 MedTech Conference

Q&A

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Speaker Biography: Krist WerlingKristian (Krist) Werling is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. He focuses his practice on representing medical device and pharmaceutical manufacturers in a wide variety of transactional matters. Concomitant with his practice in the contemporary landscape of healthcare and life sciences is a related depth of experience in representing private equity and venture capital investors. In this capacity he works with cross-disciplinary teams to conduct legal due diligence and execute acquisitions, add-on acquisitions and divestitures, as well as provide ongoing legal services to portfolio companies. In the healthcare services space. Krist provides transactional and regulatory counseling to a wide variety of medical device clients including Baxter International, Varian Medical Systems, C.R. Bard, Amsino International, Medical Specialties Distributors, Hill-Rom and Breg.

From 2005-2006, Kristian served as in-house counsel to Hospira, Inc., a generic specialty pharmaceutical and medical device manufacturer in Lake Forest, Ill. He regularly counsels life sciences clients in transactional and regulatory issues, particularly in negotiating licensing and partnership agreements, clinical research agreements (including clinical trial and CRO agreements), contract manufacturing agreements and distribution agreements. Krist currently serves as the Chair of the Life Science Practice Group of the American Health Lawyers Association. Additionally, Krist co-authored The Fundamentals of Life Sciences Law: Drugs, Devices, and Biotech, serving as Editor-in-Chief for the American Health Lawyers Association’s second edition of the publication.

PartnerMcDermott Will & Emery LLP kwerling@mwe.com+1 312 984 2157

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Speaker Biography: Todd HalesM. Todd Hales is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Orange County office. He focuses his practice on all aspects of intellectual property (IP) law with a concentration on strategic intellectual property portfolio management and counseling.

Todd works closely with clients in the development and management of their IP portfolios, helping them identify and protect key technologies and innovations through careful selection of domestic and foreign protection and enforcement strategies. He also conducts due diligence investigations in connection with funding, acquisition and merger transactions, prepares legal opinions on patent validity, infringement and non-infringement, and handles portfolio and landscape evaluations and pre-litigation analyses. Todd advises clients on employment agreements and invention ownership, non-disclosure agreements, assignment and licensing of IP rights, and joint development agreements.

Todd has represented clients in a wide range of technologies. In medical device and life sciences, his technical experience includes opthalmology, cardiology, urology, gastroenterology, neurology, pulmonology, radiology and otolaryngology. His experience also includes computer hardware systems, software systems and architecture, networking technologies, environmental technologies, aerospace, sports equipment, construction systems and tools, mechanical and electro-mechanical devices and systems, and optical technologies.

PartnerMcDermott Will & Emery LLP thales@mwe.com+1 949 757 7126

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