Abbott + St. Jude: What Does it Mean for Med Tech Innovators?

Abbott + St. Jude: What Does it Mean for Med Tech Innovators?

We awoke yesterday to news of yet another med tech mega-merger, with acquisitive Abbott ponying up $25B for St. Jude Medical, even before the ink is dry on Abbott’s $6B takeover of Alere (though that deal may be on the rocks). Fair to say that consolidation in med tech is firmly a trend, with this deal following a string of other big fat $1B+ global weddings:

Deal Area Deal Value Year
Medtronic+Covidien Various $50B 2015
Abbott+St. Jude Cardiovascular $25B 2016
Zimmer+Biomet Orthopedics $13B 2014
BD+CareFusion Patient Care $12.2B 2014
St. Jude+Thoratec Cardiovascular $3.4B 2015
Wright-Tournier Orthopedics $3.3B 2014
Stryker+Sage Products Patient Care $2.8B 2016
Hill-Rom+Welch Allyn Patient Care $2.0B 2015
Cardinal+Cordis (JNJ) Cardiovascular $1.9B 2015
Smith & Nephew+Arthrocare Orthopedics $1.7B 2014
Boston Scientific+AMS Urology $1.6B 2015

The rationale behind these mergers is well understood; med tech is under intense price pressure from health system all over the world, and increased scale helps both the sides of these companies’ ledgers by lowering operating costs and enhancing negotiation leverage with customers.  Then of course there are other incentives like tax inversions, though that window may be closing (see failed “Pfizergan” deal). 

In the press releases announcing these deals, there is often lip service paid to the positive impact on innovation, the story being that greater scale and efficiencies equal more money to spend on internally and externally developed new technologies. "The combined business will have a powerful pipeline ready to deliver next-generation medical technologies,” says Abbott CEO Miles White.  Omar Ishrak, Medtronic’s CEO, made a similar statement back in 2014: "Medtronic has consistently been the leading innovator and investor in U.S. medtech, and this combination will allow us to accelerate those investments.”

It is too soon to evaluate Medtronic’s follow-through on this promise; they have made a few notable early stage investments since the Covidien acquisition including Lazarus EffectTwelve and Medina Medical. The legitimate concern of emerging med tech executives, though, is the loss of one more potential acquirer out there, which lessens the chance of an earlier and/or richer competitive deal, and therefore makes the fundraising road even rougher than it already is.  In addition, these big acquisitions tend to distract organizations and slow down active discussions for several months or longer as a result of personnel changes, shifting business development strategies, and general chaos. 

While a good number of the large M&A deals have been concentrated in the cardiovascular and orthopedic segments, which have been plagued by large, heavily mature product categories, we should expect to see more consolidation generally given the forces at work in the healthcare market.  Looking across the industry, the number of now seemingly small-ish $1B+ revenue companies is striking (see below chart). In an “eat or be eaten” world, these smaller market players may be hungry for deals to enhance their own valuations; emerging med tech companies should consider casting a wider net in the search for strategic partners.  Ultimately, the established medical device companies cannot merge and synergize their way to top line growth, and will continue to look externally for innovation. 

*Most recent annual filings Sources: company financial filings, MDDI Top 100 Medical Device Companies of 2015

*Most recent annual filings

Sources: company financial filings, MDDI Top 100 Medical Device Companies of 2015


So You Want to Lead an Emerging Med Tech Company? Seventeen CEOs Have Some Advice for You.

So You Want to Lead an Emerging Med Tech Company? Seventeen CEOs Have Some Advice for You.

The CEOs of emerging med tech companies are among the hardest working people I know.  There are a multitude of things to worry about, with several on the edge of cataclysm at any given point – keeping money in the bank, getting the damn technology to work, the FDA, building out the human and capital infrastructure, managing the burn rate, filing IP, gearing up clinical trials, manufacturing, commercialization, engaging KOLs, generating “buzz”, meeting with strategic partners, managing the BOD, and so on.  Just writing that sentence exhausted me.  For a new CEO of a small med tech company, all this can be quite overwhelming, so I turned to my road-tested CEO clients and friends and asked them a simple question:

What's the single most important piece of advice you would give to someone about to start their first emerging med tech CEO job? 

At press time I had 17 responses from current or very recent CEOs of small med tech companies, ranging from development stage (6) to early commercial (11) and publicly traded (2). All but one of their companies are in the greater Boston area, not that I would expect much geographic bias – the wisdom they shared seems quite universal. The vast majority of respondents were not the founding CEO, so they inherited existing teams and operations (and problems). Most have had only one CEO role, so are close to the experience of being a first-time CEO.  I was happy to get replies from so many of these busy people, who seemed eager to share insights from their hard-won experiences that might benefit others on the same path.

In rough order of number of mentions, here is what the CEOs had to say:

1.     Get the right team in place, and fast

While it seems obvious that a good team is crucial to success – a platitude, really - the “need for speed” in building a solid senior team came through loud and clear.

  • The sum total of one CEO’s advice was, “Make your people decisions quickly,” echoed by “make sure you have a solid management team in place, and if not act quickly in creating one.”
  • Rapid action needs to follow rapid intel, but not judgment; “Gather as much information as you can in a short period of time – don’t assign blame to the people there who are there and have been working hard, but make sure they are capable and you can trust them.
  • Great people aren’t enough, though - you also need everyone on the same page in terms of objectives and roles. “If you have great people, all aligned behind the goals and how to operate together, you can accomplish anything,” offered the most upbeat CEO of the bunch. 
  • Another CEO emphasized this point; Pay attention to how the team works together - individual genius can save a company but dysfunctional teams can disable progress.”
  • If key people aren’t working out, don’t delay addressing personnel issues” and “be willing and prepared to make changes to the team as the business develops.”
  • The CEO’s role is captain of company culture, and according to one CEO a good culture “…allows people to give their best, removes obstacles, and facilitates the great results the team can achieve.”
  • Singing Kumbaya with your team isn’t the only means to success, though, as one CEO observed.You cannot gauge progress by measuring satisfaction.  Teams are often closest to a breakthrough at the height of their frustration. Revolutionary change is inertial and nearly everyone who is threatened will resist until the facts are undeniable or they have incentive to change.”    

2.     Investors / Board of Directors (BOD) – pick and manage carefully

One CEO described his relationship with the Board in marital terms, which pretty much says it all. “The board determines the fate of your company and the CEO, and they will require you to alter your vision and compromise, as in any good marriage.“

  • Boards, like spouses, just want to be heard. “Listen to what’s important to your board members.  Understand what the Board considers to be the most important things for the CEO to get done,” offered one CEO.
  • Consider carefully with whom you climb into that figurative marital bed, assuming that decision is in your control. “Find a team of financiers who believe in your vision and especially in you.”
  • Another CEO described what they look for in their funders;The best investors want us to create value, and want to be there to back us, and grow their investment with the firm as long as their capacity to do so permits.”
  • The right investors for an early stage company might not be the best fit as commercialization nears, and managing that transition thoughtfully is important. “It is natural that the appropriate mix of investors change as a firm grows and matures, and it is important to help facilitate fair rewards to your early backers.”
  • Misalignment between management and the BOD is a big concern -If the Board members don’t share your values or don’t have the resources to continue investing until you reach an exit favorable to them, your interests will diverge.”
  • Managing investors’ (and others’) expectations of the team and company progress is clearly challenging, especially when a new CEO is brought in to “fix” things; “Typically people’s expectations are out whack, especially when it involves turnarounds.”
  • Several CEOs advised a strong, proactive approach to managing these expectations. Be firm with your Board as to what their expectations should be, and then communicate like crazy to keep them aligned with you,” advised one CEO.
  • Getting on top of expectations quickly and for all stakeholders is key; "Set and communicate the correct expectations early to the investors, the company, and customers.”
  • How you communicate with the BOD is critical – honesty is important, within limits that is.Be as transparent as practical with your board - lead when possible by offering solutions but don’t hide problems,” suggested one CEO.  
  • Fundamental to a good BOD-CEO relationship is gaining a clear picture of investors’ assumptions and motivations.  One CEO with a big company background shared his surprise at learning “…the different meanings of value creation to different investors in a startup” and advised new CEOs to “...know your investors and Board - understand what matters to them, what a good return looks like to them, what their timing expectations are, and try to be sure that they know you have their interests in mind in all you do.”  

3.     You don’t know everything – have strong outside advisors

Perhaps because many of the responding CEOs are fairly new to CEO-hood, several mentioned the need for experienced external business advisors, specifically who are not members of the Board of Directors.

  • “Find someone, a mentor or trusted former colleague, who you can level with – you can’t always be completely frank with your BOD.  It is crucial to have independent perspective and find someone who can challenge you.”
  • Another CEO was even more to the point. “As a first time CEO you don't know what you are doing. You can’t admit to your team how much you don’t know, but if you pretend you know everything you will be ‘royally buggered’. Surround yourself with people who have done it before and listen to them. Don't put them on your Board.”
  • Commiseration with other CEOs in a similar boat seems to be helpful, too (and was the inspiration for this blog, by the way).Seek out advisors who have experience as a first-time CEOs and know what you are about to go through, and learn from them,” suggested one CEO.
  • Another offered, “Stay humble, don’t think you know it all, surround yourself with advisors/mentors who were in your shoes before and who know the land mines.”

4.     Market - pursue good opportunities, and get out there

I was a little disappointed but not shocked that only 3 of the 17 CEOs mentioned anything about their market opportunities (a.k.a. their reason for existing) in their top-of-mind advice to new CEOs. Not complaining, though – their preoccupation with so many other priorities, like staying solvent, keeps S2N busy!

  • One CEO emphasized the need to personally immerse yourself in the market; “Listen to your customers - get out into the trenches, early and often, and hear what patients are saying about the technology if it is already commercialized, or what the customers need for technology in development.”
  •  The other market-related advice centered on pursuing the right market opportunities. “Be as certain as possible the problem is really worth solving: that there is a real need that someone will pay to address,” offered one CEO.
  • Another CEO suggested, “Ensure you have picked a relatively large market with a very real unmet need to give yourself the best chance that what you build will be embraced by the market.”

5.     Stay funded

Two of the CEOs felt it most important to remind new CEOs that their primary responsibility is to keep the money tap flowing. My guess is that all of the CEOs would agree with this point, and maybe thought it too obvious to mention – no funds, no company, no CEO job.

  • “Remember your #1 reason for existence is to ensure the company has the money it needs to execute its strategy,” advised one CEO. 
  • Another CEO made his point in all caps, for emphasis; “KEEP THE COMPANY FUNDED. That is the single most important role of a CEO. You need to look at all funding options. When you have few options, you lose your negotiating leverage.”

Many thanks to these CEOs for contributing their time and insights to this blog:

Manny Avila, Bill Floyd, Chris Hutchinson, Edward Kerslake, Doug Lawrence, John McDonough, Jon McGrath, Maria Palasis, Amar Sawhney, Martha Shadan, Ellen Sheets, Jan Skvarka, Samuel Straface, Howard Weisman, Amy Winslow, Chris von Jako, and Marc Zemel

A 2016 Proposal for Med Tech: Build the Brand

A 2016 Proposal for Med Tech: Build the Brand

For the past few years, med tech entrepreneurs have seemed practically apologetic for being in med tech. True, there are many reasons, or maybe excuses, to have had ears down and tail between legs.  Venture capital has generally favored biotech and health IT over med tech.  The large medical device companies have been more focused on merging, cutting costs and doing accretive deals than growing their pipelines, although in certain hot areas (e.g. mitral valves) some earlier stage deals are happening. Payers and health systems remained stunned by all the changes to their ecosystem and are categorically wary of anything that might cost more. Oh, and the attractive regulatory shortcuts for med tech are either gone or irrelevant as market risk has become what everyone really fears.

But that was so 2015, or more like 2008-2015, which is how med tech has ended up with a “meh” brand in the financial and health care markets.  My proposal for 2016 is simple: stop whining, stop attaching biotech to your company names or disguising yourselves as a tech company (how’s that working for you now, Theranos?), and own the med tech title like a badge of honor.  Here are some suggestions for infusing a little “sizzle” in the med tech brand:

  1. Med tech solutions are simple, elegant and effective.  Med tech innovators are, by and large, very practical problem solvers.  Our technologies don’t always involve high science (sometimes they do), but they are usually clever and everyone can get their heads around them. There may be very few true med-tech platforms with $10 billion revenue potential, but there are a lot of great singles and doubles out there to be found. CRISPR sounds great, I think, but will knocking out and replacing genes really work and not kill people or turn them into flesh-eating zombies? Not sure I’m signing up for that clinical trial (I’ve clearly watched too much Walking Dead).  With patients and administrators ever more involved in health care purchase decisions, this simplicity can work to our advantage once a product enters the market.

  2. Health care providers need med tech innovation.  Yes, the bar is much higher for adoption of new medical technologies, especially if they are associated with a higher direct cost, and the burden of proof on small med tech companies can seem prohibitively costly and long.  If you step back, though, you’ll see that the dynamics in the provider market create exciting opportunities for truly innovative and valuable technologies. Silos between inpatient and outpatient costs are breaking down and many hospitals are in effect insuring large populations, opening the door to longer-term cost savings arguments. The increasing availability data is enabling hospitals to be measured on quality of care and patient satisfaction, which can in turn impact their reimbursement and market share. There is an emerging bottom-line argument for new devices that can improve care on these dimensions.

  3. Big med tech needs innovation, too. The large medical device companies are running out of late stage and non-dilutive stuff to buy, need to innovate, and generally can’t get out of their own way to do it efficiently in-house.  Behind the scenes, we see a lot of early stage and technology deals happening that don't get announced because they aren’t "material".  We also have noted the trend toward deals involving more back-ended pay-outs, co-development, and other ways of de-risking before owning. These types of partnerships aren’t the favorite of traditional venture capital, but are keeping many innovative med tech companies afloat and attracting alternative sources of capital.

  4. The FDA climate for devices is improving.  While certain medical devices are getting more regulatory scrutiny now, for example vaginal mesh just got PMA’ed, overall FDA approval times for both 510(k) and PMA devices have been quietly coming down. It also seems that the FDA has finally figured out their own de Novo 510(k) process, designed with the good intent of providing a streamlined pathway for relatively safe devices without clear predicates. The use of the de Novo pathway has been increasing across a range of device categories; while still far from perfect and potentially requiring extensive clinical data, a functional de Novo option can be very helpful to innovators, saving money and time especially if design iterations are necessary (as they often are!).

  5. Med tech is a port in the biotech storm. While the biotech industry has made a big gamble on being able to astronomically price drugs for niche, or even micro-niche, diseases, med tech hasn’t lost its focus on addressing common and chronic conditions.  The market may shift between surgical and interventional, inpatient and outpatient, fixed site and wearable, but the demand for our knees, pacemakers, IV pumps and diagnostic tests is not going away, and if anything will grow with the aging of the population. While there is price pressure on devices, these forces aren’t catastrophic and underscore big med tech’s need for continued innovation (see #3).

Making the most of these favorable trends requires med tech innovators to think creatively about how to develop technologies, fund companies, approach and define strategic partners, staff teams, and commercialize new products. We also need our industry organizations to stop fighting last year’s war and start selling some med tech futures.  Med tech is the new black!  Clearly need to work on the tagline...


The Drug Pricing Backlash – Should Med Tech Pay Attention?

The Drug Pricing Backlash – Should Med Tech Pay Attention?

Admittedly, the biotech boom of the past few years has left some of us in med tech feeling a bit inferior, maybe even jealous.  Those huge funding rounds, heady IPOs and rich pre-revenue M&A deals can be hard to swallow, especially when investors keep asking you why you can’t be more biotech-y.  Even though the Turing Pharmaceuticals debacle tarnished all healthcare stocks a bit, it's hard not to feel a little Schadenfreude for the high-flying biotech sector.  Maybe now cooler heads will prevail and med tech won’t look so dismal by comparison.

In mulling the actual substance of the Turing debacle, though, it would be unwise for med tech to believe itself immune to pharma's recent pricing struggles.  The Turing CEO made a very logical business move based on supply and demand for a niche drug - a decision any of us might have made given the apparent facts on the ground.  What Shkreli greatly misjudged was the power of the consumer and, in this situation, the energized AIDS advocates that represent them.  In retrospect, this response should have been foreseen by Shkreli, given that these same activists have pressured big Pharma before and won.  Which raises the question - how well do any of us in med tech really know the end-consumer of our devices and understand their points of pain, financial or otherwise?  We spend so much time, effort and money courting doctors, hospitals and payers that we, too, may have major blind spots for our patient customers and what we might do to send them grabbing for torches and pitchforks.

This elevated position of healthcare consumers should come as no surprise; the myriad micro changes to US healthcare financing have given rise to a macro trend of healthcare consumers asserting their influence in purchase decisions.  Patients are being asked to pay more out of pocket for all but a handful of preventative services, and the many earnest efforts to induce consumer rationality are resulting in unprecedented public availability of data about the cost, quality and benefits of prescribed care.  Add viral media to the mix, and you've got all the basic ingredients for a consumer flash mob in the face of perceived price gouging.

This populist force, now an official “thing” thanks to copays, deductibles, data, and Shkreli, could well be unleashed on the med tech industry, but may take a different form. The pressure is largely hitting our hospital and physician intermediaries, who are under increasing scrutiny for over-charging and over-providing care to the detriment of patients' pocketbooks. Websites such as New Choice Health and Castlight Health are arming consumers to comparison shop procedures and save on out-of-pocket expenses, and consumers advocates are advising their constituents to question the need for certain healthcare services (check out AARP’s advice on “10 Medical Tests to Avoid”). You can bet that these trends are driving tougher price negotiations between hospital purchasing and med tech companies.  

Increasing consumer engagement in healthcare purchase decisions also creates new opportunities for medical devices that perform comparable functions at a lower price.  AliveCor has gained traction with its smartphone ECG device by pricing it to compete with the cost of copays for traditional ambulatory cardiac monitoring.  Companies like NovaSom have transitioned sleep apnea testing to the home, saving payers money and sparing consumers large copays and a night in a strange bed.  Telemedicine and apps have the potential to displace expensive skilled providers and office visits by enabling patient self-directed care in areas such physical therapy and mental health counseling.

It is within the device industry's power to be part of the solution for cash-strapped healthcare consumers, and in our own long-term interest to do so. A successful, consumer-oriented strategy requires that we know our customers, collaborate with our intermediaries to encourage good business practices, and pursue new technologies that enable lower cost care alternatives. In the short term there may be disruption, but the white-hot spotlight of public shaming is pretty disruptive, too.

Commercializing Med Tech Innovations: When Scaling Sales Makes Sense

Commercializing Med Tech Innovations: When Scaling Sales Makes Sense

Mark Andreessen, the founder of Netscape and regarded investor/entrepreneur, coined the term “Product/Market (P/M) Fit”, which simply means “…being in a good market with a product that can satisfy that market."  According to Andreessen, this state of commercial Nirvana is achieved by iterating on your product, messaging, and targeting until something really clicks.  Then, and only then, do you flip the switch to “Scale”.  In med tech (vs. tech), there are usually two or more markets to satisfy, namely users of the technology (e.g. doctors, nurses, patients) and those paying for it (e.g. hospitals, health insurers, maybe patients again).  There are often two products, too – the gizmo, app or service being sold, and the evidence demonstrating that the product is worth the payers' money or the users' effort. You could say that in med tech a “Product/Evidence/Markets (P/E/M) fit is the gateway to scalable commerce.  

In our industry, we have become very creative in hitting that all-important “on market” milestone as quickly as possible, making good on long-standing promises to investors (often longer than planned) and sparking celebration among long-suffering employees. For PMA devices we go to Europe, we pursue humanitarian device exemptions, and find first applications with the fastest clinical pathway no matter how small the opportunity or insignificant the benefit.  For 510(k) devices, the possibilities for fast-tracking to launch are even more plentiful. But this cleverness and scrambling increases the likelihood P/E/M fit has been bypassed, delayed, or just ignored.  This can lead to the Commercialization Doom Loop:

Here are four steps emerging med tech companies can take to find their P/E/M and avoid market purgatory:

1.     Gain P/E/M insight as early as possible - learn what you can about product performance and evidence requirements for both user and payer market majorities well before submitting that FDA or CE filing. This early feedback could affect everything if you listen carefully: clinical study plans, product designs, regulatory pathways, financing requirements, even what talent you need.  While engaging S2N to help gather all this data is great (shameless plug), most critical is sending all the company leaders into the field to interact with target customers and opinion leaders. This gets everyone on the same page, and helps the company build loyal future customers who will bear with you through early mistakes.  In our experience these first accounts are often your best ones for many years to come.

2.     Clearly set investor expectations that regulatory approvals and clearances don’t translate into immediate hockey stick sales growth.  Initial launch is not the time to hire the seasoned commercial CEO and replace all of your engineers with glossy reps. Use different language to describe your first 6-18 months post approval – deploy terms like “limited launch” and make an overt distinction between that and “full launch”.  While not the ticket to instant riches, the first regulatory approvals do drive value in that they reduce the cost of evidence development and provide irreplaceable real-world use experience. Product and study iterations are challenging in our regulated industry, but a window of relative efficiency can open after regulatory approval and before locking down scaled manufacturing.

3.     Once “on market”, start small. Limit the size of your initial sales and marketing organization so that you can iterate on messaging and targeting, and ultimately find that repeatable, scalable sales process (assuming you have P/E/M fit). Starting small has a number of benefits – you learn from the market while managing not just your commercial spend, but also containing the costs for your clunky, sub-scale first-gen devices, and minimizing the likelihood and scope of any initial safety or performance issues.  If you make the most of the limited launch period, and don't exit it prematurely, you will be much better positioned for success at commercial scale up (look for our next blog on sales metrics and knowing when to hit the gas).

4.     Consider a longer, more meaningful regulatory path. Heresy, right?  Regulatory approvals are so seductive and satisfying, but no matter how much you try to contain investor expectations, or how ready your team may feel to progress to the next chapter, the shortest path to market may not be the wisest.  Consider alternative regulatory strategies that may take longer initially but provide you with more claims or “E” at launch, such as a de Novo 510(k) vs. a traditional 510(k).  The timeframe to meaningful sales could end up being no longer, and even shorter, than Plan A, and the additional market risk reduction could be attractive to commercial stage investors or acquirers.

The road to P/E/M fit is never clear, easy or short in med tech, but the destination can be well worth the trip.

Five Tall Tales Emerging Med Tech Companies Tell Investors

Five Tall Tales Emerging Med Tech Companies Tell Investors

Honesty is a virtue to which we all aspire, but in the game of funding an emerging med tech company sometimes the straight story and a nickel won’t buy you a cup of coffee.  Most entrepreneurs, particularly the engineering types who tend to invent medical devices, aren’t deliberate fib-tellers. They are passionate about their innovations, confident of their capabilities, and eager to make an impact on healthcare and the market.  Their visionary tales are often compelling and credible, and may be just that - tales, unsullied by the current realities of our industry.   Here are five works of fiction commonly heard on the med tech fundraising trail:

1. The device works – we’ve tested it in our lab / in pigs / in China

Achieving market-ready performance for a new medical device, which includes not just safety and efficacy but also reliability, acceptable user pain-in-the-ass factor, and viable COGS at market pricing, is all about design iterations.  For engineers, this is fun; for investors, not so much. Not only do devices interact with a wide variety of patients in the real world, they are also going to be handled by an array of human care providers in many different settings.  Until we get into clinical trials, or even early market launch, we don’t know what we don’t know about how the device will work, or whether it really meets customer requirements. 

2. We’ll be on the market in X years [+/- in Europe]

Those timelines we put in our pitch decks to potential investors are, understandably, reflective of the most optimistically smooth sequence of events- when stars and moon align, and a gentle tailwind blows from the north.  Some glaring falsehoods include omission of crucial and time intensive steps like V&V, ordering custom tooling, contracting with clinical sites, creating a regulatory package, and so on. One of my favorites is showing full market launch virtually on the same day as regulatory approval – I have yet to see this happen.  And while Europe is still a good place to seek a faster regulatory milestone for PMA devices, many of the same time sinks apply on that side of the Atlantic (and then some).

3. We will get acquired before expensive US IDE trials / commercial launch

While a few large med tech acquisitions have occurred prior to pivotal data or commercialization, in reality they are pretty rare.  The large med tech companies are most hungry for quickly accretive transactions, and may place some cheap technology bets (Medtronic claims to be on the hunt for early tech acquisitions). Development-stage deals are increasingly heavily back-ended to account for regulatory and commercial (mainly reimbursement) risk.  Without strategic exit possibilities during development, the amount of capital and time required for a meaningful payday for investors is often well beyond what most companies estimate.  The modest opening in the med tech IPO window somewhat tempers this whopper, but the companies that went public in the last year had each raised $50-$150M+ prior to their IPOs, and most were commercial in the US or very close to it.

4. We will capture X% (e.g. >40%) of the addressable market in <5 years

The biggest hurdle to adoption for a new medical technology is getting someone to pay for it, unless it simply replaces an existing device at a similar or lower cost.  Even then, competitor contracts and bundling leverage may delay adoption. Whether it’s a battle for payer reimbursement or hand-to-hand combat with clinicians and budget-conscious administrators, market penetration takes time.  Most new medical devices, whether 510(k) or PMA regulatory path, are launched without the killer data needed to win the reimbursement battle, and that is assuming they’ve gotten the technology right on the first pass (see #1). 

5. The addressable market [or worse, revenue] opportunity is $1B+

Let us count on the fingers of one hand, other hand not required, the number of medical device product categories, much less products, to have achieved annual revenue greater than $1B.  Drug eluting stents, pacemakers, surgical robotic systems, orthopedic implants, hearing aids, someone help me here…  Sad as it is, medical devices have a rough time even breaking through the $100M revenue sound barrier- not that it isn’t possible, but it’s damned hard.  If you have anything but a therapeutic technology, it’s even harder.  Yet there is something magical about that $1B+ addressable market number, and it appears in almost every pitch deck to investors.

To some degree, this tale-telling between entrepreneurs and investors is negotiation 101; those seeking funding must be hyperbolic, knowing potential funders will haircut whatever they say. Unfortunately, our industry is missing the irrational exuberance of tech and biotech that makes fairy tales come true (Uber is worth $50B as I write this). Despite our sector's current reality, med tech investors still want and need to feel that magical high return potential, and so we liberally sprinkle the pixie dust.   The truth: there are plenty of good ROI opportunities for med tech investors if we stop telling each other stories and work together to get creative in how we finance and develop new technologies.


Skin in the Game: Can Risk Sharing Energize Med Tech?

Skin in the Game: Can Risk Sharing Energize Med Tech?

Everyone wants advances in medical technology, but getting paid for innovation is tough even with the most convincing story about improving care and saving costs. Hospitals are understandably skeptical; can these magical benefits be realized in our institution, or will we just get stuck with the bill?  Better to keep doing what we do now, right?  As advisors to companies attempting to create and grow markets for new medical technologies, usually without killer data or labeling out the gate, S2N is keenly aware of the current economic realities in healthcare. But we also believe there is measurable value in many med tech innovations.  So how do innovators persuade customers, particularly early ones, to take that leap of faith to gain a foothold, or even a toehold, in the market?  Overstating claims is generally frowned upon by the authorities (sorry Acclarent executives), so maybe the answer lies in risk sharing - putting some skin in the game against the demonstration of realized benefits with actual use of new technology.

If it sounds a bit scary, it is. The conditions are perfect, though, for risk sharing to emerge as standard course of business between health care providers or payers and technology companies: increasing availability of data related to every facet of healthcare delivery, intense budget pressure from the facility to the national level, and a growing demand for more value per healthcare dollar spent. Seeing these forces in the market, big med tech companies are starting to explore various risk-sharing arrangements, although the specifics are a bit murky.

“[We are] ...transforming ourselves from a device business to a healthcare solutions business around our therapies by starting to make partnerships and alliances with our hospital customers around specific disease areas or big departments, which we can manage together, with some levels of risk sharing.” -Omar Ishrak, Goldman Sachs Conference, 2013

There are three basic approaches to risk sharing path that emerged from the pioneering experiences of pharmaceutical companies over the last 10-15 years; many of these early risk sharing deals were between pharma companies and payers, and primarily in Europe where governments are the primary healthcare payers and providers. For med tech, the negotiating counter-party is more likely to be a hospital, healthcare system or ACO (looking forward), but despite these differences, the structures of risk-sharing arrangements come in three basic flavors:

  1. Conditional use:  This is similar to the concept of "Coverage with Evidence Development" which CMS has embraced for everything from paying for devices in clinical trials to pulling reimbursement for budget-busting products or applications lacking sufficient evidence of efficacy. In the positive med tech case, though, the goal of conditional use would be to receive "provisional" payment for innovative products from customers or payers while the benefits are being validated with real-world use.The goal of conditional use risk sharing arrangements is to receive "provisional" payment for innovative products while the benefits are being validated with real-world use. One could say that med tech companies engage in this form of risk-sharing routinely, otherwise known as the “eval”. However, current medical device evals are often conducted in a non-rigorous fashion – if the evaluation site likes the technology, finds it easy to use, helpful and economical, they agree to continue to buy it or buy more; if not, it goes back. With conditional use under a risk-sharing agreement, the hospital or health system agrees to purchase if clinical benefits or cost savings hit certain pre-determined performance benchmarks during the assessment period. Success here is all about how to define and measure performance, which is likely to require more extensive use of the technology than a typical eval process (one benefit of risk-sharing for the company).  
  2. Warranties/rebates: This type of risk-sharing agreement, which offers downside protection for hospitals if specified performance expectations are not met, can be linked to device-related disappointments or non-delivery of anticipated clinical or cost-saving benefits.  The latter has already made an appearance in med tech, for example St. Jude Medical is currently offering to pay hospitals a 45% rebate on the price for cardiac resynchronization therapies if a lead revision is needed within the first year. Offering rebates or warrantees for failure to meet clinical or economic benefit benchmarks is a space where med tech has yet to play in a meaningful way, but pharmaceutical companies have been trying to make this work with mixed success. The pharma side of J&J cut a deal with UK’s NICE for a cancer drug called Velcade, offering to rebate the cost for patients who didn’t experience clinical benefit defined as a 25%+ reduction in serum M protein, a validated biomarker of treatment response.  In actuality, it turned out to be quite difficult to track treatment response as proposed, and the analysis of the data was delayed year after year.
  3. Upside sharing: Going into business with healthcare customers and "splitting the profits" generated by new technologies is certainly a radical departure from current med tech business practices, and is fraught with regulatory peril, but this type of risk sharing may ultimately be the way forward if we believe our own cost-effectiveness stories. As big med tech companies add services to their device offerings to provide customers with turn-key solutions (see the timely news of Boston Scientific adding value-based offerings to its Cardiovascular line), the stage is being set for sharing the financial gains from quality and cost improvements.  For upside sharing to work, however, there must be strong compliance with use of the products and services involved, particularly if the gains are to be quantified at a systems or population level. Timeframes need to work for both parties, too, requiring some balance between upfront and back end payments.  

While risk sharing is still in its infancy, particularly in med tech, it could represent a significant source of competitive differentiation and revenue growth in the future. In a recent Ernst & Young survey of 162 healthcare institution purchasers in the US and Europe, risk sharing, along with related factors such as demonstrating value and outcomes, are emerging as critical decision factors beyond straight-up price. How to structure and implement risk sharing – especially in the US legal context – still needs to be sorted out, but conceptually risk sharing should be a win for manufacturers, providers, patients and payers.

The Pfizer-Hospira Deal: Do Pharma and Device Companies Need Each Other?

The Pfizer-Hospira Deal: Do Pharma and Device Companies Need Each Other?

Having been at the flag-raising ceremony for Hospira when it spun out of Abbott back in 2004, the news of Pfizer’s acquisition was a bit emotional for me.  I didn’t cry or anything, but I did feel a little sad, and a little proud, and maybe a little hopeful at the end of the day.

The pride part first.  My presence at Hospira on “Spin Day” was a function of the strategy work I was doing with the newly forming entity, trying to create a cohesive plan around the bits and pieces cast off by Abbott – a mishmash of commodity products (e.g. saline bags), mid-tech stuff like drug pumps, and then there was this generic IV drug business.  No matter how we sliced and diced the market opportunity, profit, and growth potential of all these product lines, the IV drug business always came out on top (made me wonder whether Abbott overlooked that one in the spin). So I found myself posing the leading question to Hospira management, “How many more of these drugs could you add, and how fast?”  I am sure many consultants have given Hospira similar advice in the intervening decade, and apparently Hospira got the message, culminating in the recently announced Pfizer takeover.

Now the sadness part.  As someone who makes a livelihood in the device industry, who believes devices are an underestimated part of the solution to our healthcare woes, the transformation of Hospira into more or less a pharma company feels like a declaration of defeat.  Maybe the way to be successful in the device industry is to exit it, or minimize it in your portfolio, and start making drugs.  As a business consultant I have to tip my hat to Hospira’s strategy.  As a medical device professional I can’t help feeling a bit betrayed. 

Finally, the ray of hope.  Hospira didn’t abandoned devices completely on their path to the Pfizer exit; they shut down aging and failing infusion pump product lines and acquired new ones to follow the market out of the hospital and into the home.  While bio-similars are what drove most of Hospira’s valuation, their technology and know-how of drug delivery devices was attractive to Pfizer as well, particularly considering Pfizer’s avalanche of patent expirations.  Devices have the potential to breathe new life into drug IP, and often with far less investment in R&D and time.  The biopharma business may be more profitable and sexier on Wall Street right now, but some devices tucked into the portfolio might be a worthwhile insurance policy for drug companies to consider purchasing. Maybe drug and device companies need each other more than they think.

MedTech M&A Tips from the Front Lines

MedTech M&A Tips from the Front Lines

S2N recently hosted an informal gathering of emerging med tech CEOs, a sort of group therapy session for people suffering from a form of temporary insanity that makes one want to be a healthcare entrepreneur. Two of the participating CEOs, Christopher von Jako, Ph.D. and Edward Kerslake, had sold their companies in 2014 for a combined $500M+. Chris and Ed kicked off a lively discussion of lessons learned from the M&A trail.  Without getting into too much detail (what happens at S2N stays at S2N), the group offered some sharable wisdom on approaching, enduring, and succeeding in the medical device M&A game.

Run a tight ship

Companies that buy emerging med techs are usually quite experienced at due diligence, and know all the rocks to look under for valuation busters.  If you see a strategic exit in your future, pay special attention to regulatory and quality documentation, as well as contracts with customers, distributors, suppliers, and so on.  You may also consider having a litigator ‘attack’ your patents so you can uncover and patch holes in your IP early on. “Everything imaginable will get scrutinized during diligence.”

Always keep your pitch book fresh

Smallco pitch decks tends to get dusted off and revised when management is gearing up for a fundraise. The exit experts recommended keeping that PowerPoint updated at all times, and taking every opportunity to practice delivering the pitch along the way.  “You might not have a lot of time to pull this together when opportunity knocks.”

Build relationships with investment banks

Even if you aren’t in selling mode, it’s good to know the who’s who of investment banks, particularly which i-banks are working with which strategics.  The experts suggested getting an investment bank involved about 6 months before you want to sell.  “A good investment bank will do a lot of work to earn the business, and their involvement can help validate the credibility of your company.”

Have a selling price in mind

While the investment banks are very motivated to do deals, they aren’t necessarily incentivized to get the best price.  Small-co’s should develop and maintain a rigorous pro forma justifying their desired acquisition price; key valuation drivers in the pro forma include revenue growth rates and synergy value for the acquirer.  “It’s best to go in a little high and get talked down.”

Keep the M&A inner circle small

It’s hard enough to run an emerging med tech company – harder still if half the employees are distracted with diligence or rumors of an acquisition.  To protect on-going operations, the experts suggest limiting the number of employees pulled into diligence activities, and keeping interactions with potential buyers low profile, e.g. hosting them at the company only after 6:30pm. “The fewer people that know and are involved, the less chance of a leak and distraction.”

Maintain the momentum

Any successful exit requires a champion (at least one) at the acquiring company who will push for the transaction and make things happen; companies don’t make acquisitions, people do. Identifying and nurturing those advocates is critical, and so is making sure the deal closes on their watch. “A key champion can move on from the company and then you are stuck.”

The meeting wrapped up with someone offering the old axiom, “Companies are bought, not sold.” Honestly not everyone in the room was nodding in vigorous agreement to that one. However, whether you think you have the power to push a sale or not, playing it cool with the strategics can be a wise bet.  “Position your interactions with them as updates, but always stay in touch.”

The Importance of Being Scrappy: Tips from a Med Tech Entrepreneur

The Importance of Being Scrappy: Tips from a Med Tech Entrepreneur

One thing medical device investors love to see in their portfolio companies is “capital efficiency”, or getting from point A to value-creating milestone B with the least dilutive dollars possible.  To achieve capital efficiency, entrepreneurs need to be a little bit "scrappy" in how they develop their innovative technologies. Certainly increased regulatory and evidence requirements have upped the scrappiness benchmarks in the last few years, but globalization and technological advances are providing new avenues for getting things done cheaper and faster.  In any case, we’ve observed a wide range of performance on the “scrappy scale” among emerging med tech companies, so we decided to seek out some best practices from one of the most capital efficient entrepreneurs we know: Amar Sawhney, President & CEO of Ocular Therapeutix.

First let’s establish Amar’s scrappiness street cred.  In 2006, Amar sold Confluent Surgical to Covidien (then Tyco Healthcare) for $245M, having raised only $60M to gain PMA approval on its lead DuraSeal product (CE mark was achieved earlier with about $10M). Amar’s current company, Ocular Therapeutix, a biopharmaceutical company focused on opthalmics, turned $66M of venture money into compelling clinical data on four exciting sustained drug delivery programs and PMA approval on its ocular sealant, enabling a $75M IPO in Q3 2014.  His other company, Augmenix, launched two CE marked products and a US 510(k) cleared one with less than $30M in strategic and venture funds.  Contrast these numbers with the average of ~$94M to get to PMA approval - very scrappy, indeed.

Amar offered many words of advice for emerging med tech companies looking to minimize venture financing and dilution on their way to success, but three struck me as particularly wise and possibly counter-intuitive:   

1. Pursue mastery first: Focus is an importance concept for would-be scrappy med tech entrepreneurs (S2N is practically a missionary of it), however Amar has a very specific sense of what it means to focus. “You have to go deep and master one thing,” advises Amar. “If your solution doesn’t get it right 99% of the time, you won’t be successful commercially.”  Once you hone your capabilities in that first product, then consider where else the technology might have relevance, but don’t spread yourself too thin too early.  Amar would also prioritize mastery over market size. “Don’t worry that the first market you go after isn’t the biggest” counsels Amar, “Just be the best solution for that particular problem.”  

2. Hire carefully: Amar’s hiring philosophy is to do it only when nearing the point of pain. “There should be a very clear mandate for every new hire, and no idle hands around,” says Amar.  Augmenix launched its first CE marked product with a full-time staff of 11 people, and that included some in-house manufacturing - way leaner than many emerging companies we’ve seen. Amar’s hiring advice runs counter to conventional wisdom that you should hire good people when you can get them; Amar is not so concerned with finding the right people when he needs them (but then again his companies are in Boston). I’ve also noticed that Amar has worked with many of his senior people for many years and across multiple companies, which must help communication and efficiency.

3. File IP intelligently:  Really a subset of point #1, unfocused pursuit of IP is a rabbit hole that Amar sees companies falling down all the time.  According to Amar's philosophy, IP should only be filed when something truly novel has been identified and needs to be protected. As we all know, IP-related expenses grow exponentially with number of filings, adding up to a significant line item for small med tech companies. In Amar’s view, “The real protection comes from having the best product on the market.” Focus not only saves IP costs, but can also breed more discovery.  “One of the benefits of going deep in one area is that you uncover more novel, patentable inventions the deeper you go,” concludes Amar.  

Staying lean and mean in emerging med tech is really about survival in the current investment and healthcare climate. Even the smallest bit of bloat can mean not hitting promised milestones with dollars raised, or not having the financial flexibility to iterate and pivot along the predictably unpredictable development pathway. Worst of all, over-spending can force financing under terms that create a "preference stack" penalizing common stockholders (employees and founders), even in some winning exits.  A little scrappiness today can buy entrepreneurs a little happiness tomorrow.