The business model for medical device startups is said to be in jeopardy, and it’s the topic du jour at conferences everywhere, as entrepreneurs are complaining bitterly about arbitrary FDA regulators and tight-fisted insurers. Much of this industry’s spirit of innovation and entrepreneurship is migrating overseas, it is often said.
Yesterday, I heard all that and more when I stopped by a conference that featured a couple of big names—Beckie Robertson, a veteran med device investor and managing director with Menlo Park, CA-based Versant Ventures, and Rob Michiels, the former president of CoreValve, the Irvine, CA-based maker of an aortic valve device that was acquired by Medtronic for $700 million two years ago. These two talked about the pros and cons of commercializing new medical technologies overseas first, at a conference in Bothell, WA organized by the Washington Biotechnology & Biomedical Association.
One of Robertson’s slides in particular caught my attention, about four new business models she sees in which entrepreneurs can find a way forward during this turbulent stretch for medical device companies. Here are thumbnail sketches of the models she described:
1. Non-regulated medical technology. This is pretty much an end-run around the FDA, which determines which medical devices are fit for sale in the U.S. But not every piece of equipment that helps people is actually a medical device. One example Robertson cited, which Versant invested in, is a Fremont, CA-based company called Alter-G. It makes a treadmill that reduces pressure on joints of people who are undergoing rehab from knee or hip surgery. This treadmill works for people who are struggling to regain their balance, which also makes it useful for, say, Parkinson’s patients who are trying to regain strength. While this isn’t really a medical device that falls under regulatory purview, it is having a “tremendous impact” on patients, Robertson says. She adds: “We’ll continue to see more companies fit this category.”
2. “Small ball” med device companies. These are the kind of companies that don’t really require the deep pockets of venture capitalists, and therefore, can provide pretty successful returns for entrepreneurs who achieve an otherwise modest-looking acquisition. It usually involves a passionate engineer, paired up with a physician who really understands the needs of patients, Robertson said. One recent example she cited was Ross Creek Medical, a company that developed an implant for shoulder surgeries. The device required less than $10 million to develop and the company was ultimately sold to a large buyer—she didn’t say who—for $35 million. It was “a very nice outcome,” Robertson said. “These kinds of businesses have been historically overlooked,” she said. She added: “In this marketplace, you either need to think very big, or very small and incremental, or go home,” she said.
One more example of “small ball” medical devices I’ve seen lately in Seattle—Mirador Biomedical, which raised a little over $1 million and won FDA approval for a new device designed to prevent dangerous hospital catheter injection errors.
3. Outside-the-U.S. opportunities. The challenges with getting clinical trials going in the U.S. and dealing with the FDA have created an opening for entrepreneurs to think about going to other countries, especially in Europe, first with new devices. There were plenty of words of caution about this, as Michiels noted that Europe isn’t one single market but actually 27 separate countries with different languages, policies, and cultures that need to be considered. But Robertson says there is opportunity here, noting that Versant has recently paired up with Sofinnova Partners, Sorin Group, and Medtronic (NYSE: MDT) to support an incubator in Switzerland called MD Start.
4. Late-Stage recapitalizations. This is a jargony way of saying medtech investors can sometimes “make lemonade out of lemons,” Robertson says. Often, this happens with medical device companies that were founded before healthcare reform, and before the economy tanked, and have hit the wall. “These are companies that have terrific products, but they don’t have enough money to go through the FDA or to get reimbursed,” Robertson said. Companies in this situation can either wither away and die, or get re-financed (I’m guessing at terms that make early investors gnash their teeth).
The take-home message was a sobering one. Medical device companies used to be able to succeed if they could show in clinical trials that they offered a benefit to patients, but that’s not enough anymore, Robertson said. Companies now have to do that, while also showing they can save the healthcare system money, not just add new costs. This isn’t the kind of thing that venture investors really asked about in the past, and didn’t used to be part of their due diligence process before making investments. Now, it definitely is, Robertson said.
“If you aren’t taking costs out of the system, it’s not going to fly,” Robertson said.
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