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.

Realizing the Value of Med Tech Innovations

Realizing the Value of Med Tech Innovations

I recently attended a workshop hosted by the National Institute for Health and Care Excellence (NICE), the UK agency that reigns over new technology assessment and drives reimbursement decisions within and sometimes beyond its jurisdictional borders.  Having girded myself for a sermon on British-style healthcare frugality, I was surprised to learn that Solvadi, Gilead’s $94,500 per course Hepatitis C drug, has been recommended by NICE for use in the UK. While Solvadi’s high price tag is controversial to say the least, NICE’s thumbs up got me thinking that medical technology companies are probably too timid when it comes to pricing breakthrough innovations. By leaving too much money on the table, are we crippling the whole med tech innovation ecosystem and dooming ourselves to commoditization and mega-mergers?

There are many examples of medical devices that arguably are priced well below their value.  One of my favorites is Mirena, the levonorgestrel-releasing intra-uterine device from Bayer. Mirena provides 5 years of reversible birth control without many of the risks of dual-hormone oral contraceptives, including the risk of not remembering to take them. So why was it priced lower than the 5-year cost of market-leading birth control pills? The humble pacemaker is another good example; pacemakers can vastly increase the length and quality of life, sometimes for decades, yet they cost less than $5,000.  The list goes on of truly game-changing technologies whose sticker price — even factoring in procedures, tests and device-related complications — doesn’t come close to accounting for the quantifiable direct savings much less the gain in Quality-Adjusted Life years (QALYs) that the health economist wonks at NICE used to justify Solvadi.

Why have med tech innovators been hesitant to bust through conventional device price ceilings and really go after the money they are worth? And more importantly, what can be done to change the paradigm?

Overcoming incrementalism

Most med tech innovations represent incremental advances, building off of existing technology that was revolutionary in its day.  The first coronary stents were unequivocally a breakthrough because they offered a therapy for coronary artery disease without requiring hugely invasive and dangerous open-heart surgery. Drug-eluting stents came along and finished the job, achieving sufficient efficacy to convert a large share of the surgery market (with the help of aggressive interventional cardiologists), and became a rare $4B+ device category. Since then, new stent iterations have made unexciting gains, and both stent prices and reimbursement have come down.  Many other device categories, from orthopedics to vascular to ophthalmics, have also seen a parade of line extensions focused on defending shares and justifying modest price increases to health system purchasers. Incremental medical device advances are crucial to the engineered solutions we develop, and appropriately supported by the FDA 510(k) regulatory pathway, but they rarely change the conversation from the purchaser or payer perspective.

Generating the evidence

Even when a medical technology represents a revolutionary step forward in treatment, device companies often don’t spend the money and time that biopharma does to demonstrate the efficacy and cost-effectiveness of their solutions. Asthmatx received US regulatory approval for their severe asthma treatment Alair with a 300 patient study, and many payors still consider it investigational over four years later.  By contrast, when NICE reviewed Xolair, a leading drug for severe asthma, the agency could draw from 11 randomized trials with data from more than 2,300 patients. Ultimately NICE gave its blessing to Xolair, which can cost up to $40,000 per year and generates $1.3B in revenue for Roche and Novartis. Granted, it can be tough to conduct randomized controlled trials with many devices (creating sham controls for devices is truly an art form), but payers don’t really make that distinction. The clinical development necessary to achieve clinical acceptance and additional reimbursement can be too much for traditional med tech companies and their VCs to stomach, but it’s precisely this evidence that enables pricing to value vs. pricing to existing competition.

Fighting the good fight

Even if we had the evidence we need to justify new reimbursement and get fair value for our innovations, it is just way easier to find a way to fit into current reimbursement than confront the hellish slog to new code. Short-term focused investors even insist on it, having grown allergic to both regulatory and reimbursement risk.  To put medical devices on par with drugs in monetizing demonstrated value, some companies will have to step up and get into the ring with CMS. The manufacturers of transcutaneous aortic valves are going for it, having developed a technology that can avoid major open-heart surgery as stents once succeeded in doing.  Edwards et al are charging more than $30,000 per device, and are building the evidence to demonstrate not just efficacy but also cost effectiveness and yes, QALY gains.  CMS is slowly coming along with a National Coverage Determination that has more conditions than a Hollywood pre-nup, but it’s a start.

Clearly not all new medical devices will, or should be, disruptive innovations that warrant significant allocation of scarce healthcare dollars, and plenty of new drugs are incremental, too (how many erectile dysfunction drugs do we really need?).  However, we med tech people have to resist our inherent urge to endlessly tinker and make some big bets.  We, too, know how to modify disease, though we may not call it that enough, or aim that high often enough. 

Note: Amy Siegel from S2N will be hosting a panel on these topics this Friday, November 7th at the MassMedic MedTech Showcase, featuring Medtech-Biotech crossover executives and investors.

Top 5 Reasons Why Med Tech is Still Cool

Top 5 Reasons Why Med Tech is Still Cool

In S2N’s very first blog, back when we founded our company in 2011, we shared our top 5 reasons why we like the med tech industry. Times have been challenging for emerging med tech companies, though, and the bad days can make you start to doubt your career choices. Maybe it’s time to do something sexier, like develop an app for $0.99 that 100 million people want, or a biotech drug for a really bad disease that 12 people have.

Yet we continue to soldier on, humbly confident that medical devices are still important, and in fact things are looking up for med tech in 2014. It’s been a good year for S2N as well, so we got bold and added some youthful talent to our team. When we offered Andy the job, we weren’t sure we could compete with the glitz and glamour of biotech. Why would anyone with a million possibilities want to get into med tech now, much less work with us?

To lay our bewilderment to rest, and shamelessly fish for compliments from our vulnerable new hire, we asked Andy to refresh our top 5 List with his reasons for entering the med tech field. What attracts a young buck like Andy to join us rapidly aging folk in the pursuit of med tech nirvana?

Here’s what Andy had to say:

  1. Have you ever heard of Facebook? Yeah, me too. Like most of my generation, I was raised by the Internet. We worshipped Mark Cuban and Mark Zuckerberg, now household names; Silicon Valley is the new Hollywood. What I see in med tech is a potential to rekindle a forgotten industry. While many of my peers flew out West like moths to a bright light, I trekked up to the land of miserable winters and unhealthy Red Sox obsessions (also known as Boston). I knew I wanted to work in an industry that was a little less glitz and a little more grit. Call me naïve, but I see med tech taking front stage in the next tech boom. I’m just getting in while it’s still under everyone else’s radar.
  2. From day one of college I knew I wanted to get into biomedical engineering. In my years of lab research I grew to love the concept of manipulating the mechanics of biological systems to create whole new technologies. But sometimes it felt like my scientific papers were just landing in the great academic abyss. Blame it on me, or blame it on the short attention span of my entire generation, but I knew I needed a little more instant gratification. Wait, what was my point again? Oh right: I wanted to work in an industry that lets you see the hard work of lab research put to use in the real world, and in real people.
  3. Biology is all about revealing the fundamental mechanism behind a process. As a biologist (-ish), I wanted to understand the process of taking knowledge learned at the lab bench and spinning it into a company. After so many years focusing on the science behind medical devices, I became increasingly curious about the businesses behind them, too. Based on my experience, the majority of scientists have only a hazy concept of everything that must happen to translate a science project into a revenue-generating product. The way I see it, this is my new mission: to reveal the mechanisms of turning science into business.
  4. I really should have put this at #1, but here it is: the problems that medical devices take on are the problems worth solving. As much as I love sharing pictures of what I had for dinner with all my Internet friends, the gains for humanity made by these trendy apps are lost on me. With med tech though, every new product launch has the potential to improve or extend a patient’s life. This business might not be the most glamorous, or the best for hitting a jackpot product, but at least the medical device industry strives to tackle real problems. And that makes going to work every day worthwhile.
  5. Deep down, everyone is a salesman, whether you are trying to sell a device, some old speakers on Craigslist, or even just sell yourself as a talented, competent professional. Growing up, I always seemed to be meddling in some “make a quick buck” scheme. Maybe it was this unquenched entrepreneurial spirit that finally drove me to the scrappy space of med tech startups. I wouldn’t be surprised if the thrill of teetering between boom and bust brought you all to this space as well. Whatever the outcome, you know that you are taking action, trying to do something that matters.

There you have it – why I chose to go into the med tech industry in 700 words or less. Now I get to peer into the black boxes of a dozen different med tech companies, all of which are at the forefront of their space. Who knows which one is going to be the next household name?

IPO or Bust for Emerging Med Techs

IPO or Bust for Emerging Med Techs

The recent receptivity of public equity markets to early stage biotech has encouraged more than a few emerging med tech companies to consider IPOs. The allure of the IPO, if successful, is obvious. More capital can potentially be raised on better terms from public investors than private ones to fund expensive commercialization efforts. More to the point, though, tired venture investors and management teams can achieve liquidity and returns sooner than waiting for an attractive M&A exit, which in med tech may require years of slogging it out on market for a multiple of sales deal.

A glance at the five emerging med tech companies to go public in the last 6 months reveals reasonable success in raising money with their dazzling stories of large and growing market opportunities. Notably, all of the companies have a product on the US market, or within sniffing distance of it; contrast this with biotech where promising pipelines alone can drive successful IPOs and high market caps. Also notable is that fundraising expectations were a bit more bullish than the IPO market reality, with all five companies pricing below or at the low end of their target ranges.

If tapping the public markets is something you are considering for that next round of capital, certainly the first step is determining whether public investors are likely to come to the table. Do you have, or are you close to, US revenues? Check. Is your product chasing large markets with big growth potential? Check. Are your VC investors tired and cranky? Check!

An IPO, however, is not just about the day you get listed on the NASDAQ and pocket the cash. As a wise sage told me when I was pregnant with my first child, “Don’t worry about childbirth, worry about everything that comes after.” To gain some perspective on life as a public emerging medical device company, I spoke with Nassib Chamoun, former President, CEO and Founder of Aspect Medical Systems (ASPM), a brain monitoring company that went public in 2000, raising $52M in the IPO that funded the company to >$100M in sales, profitability and acquisition by Covidien in 2009.

According to Nassib, being a public med tech company has certain advantages. “You are a somewhat more legitimate entity, especially when dealing with corporate partners,” says Nassib. Having that ticker next to your company name also raises your prestige with current and potential employees (I’m nominating T2 for the cutest ticker of 2014, by the way). Nassib also recalls fondly many of his interactions with sell-side and buy-side analysts. “They were like an outside Board – I often got more from them than they got from me.”

The leadership of the IPO-ing emerging med tech company needs to prepare for some of new unique challenges, though, that come with being a publicly traded entity. Here are a few you can expect to encounter:

1. The distraction factor: As we all know, being a CXO of a start-up med tech company equates to two full time jobs at a minimum. Add an IPO to the mix and you are now 300% employed. This burden repeats itself, albeit on a smaller scale, at least every quarter once you are public. Employee fixation on the company share price also adds to the distraction factor, especially when there are big swings (a common situation for emerging med techs – see point 4).

2. The cost: According to a PWC survey, in addition to underwriting fees paid to the bank(s) taking you public, which can total as much as 5-7% of gross proceeds, companies spend an average of ~$1 million on IPO-related legal, accounting and other one-time costs, and ~$1.5M in annual recurring costs for extra staffing, legal, HR, technology and the like. These sums may not seem like much for larger companies, but for small med techs these additional expenses can have a real impact.

3. The Full Monty every quarter: If you ever listen to a JNJ earnings call, you soon realize that you are learning absolutely nothing. Contrast that with the single product med tech company, where basically every aspect of your business, from your COGS to your installed base to your clinical trial progress, is discussed in intimate detail for the analysts plugging assumptions into their 1,000 line models so they can decide what box to put you in. You might as well send your competitors and every employee in your company your weekly management report. “One of our early competitors was also public and we knew everything about each other – it was a running joke,” said Nassib.

4. The rollercoaster ride: Most public emerging med techs are thinly traded, which makes dramatic share price swings more likely. These swings may have little to do with your company’s results, though plenty of unanticipated things happen in early commercialization that can affect your share price. “The highs are higher and the low are lower,” recalls Nassib. “The volatility brought our organization closer together as we celebrated the successes and managed through the failures.” Small public companies are also more vulnerable to activist investors since it is easier to acquire a controlling share. “You can be forced to liquidate and give up significant future value for much smaller short-term gains,” warned Nassib.

When I asked Nassib about Aspect’s decision to IPO, he emphasized that going public is rarely a choice. “With the amount of money and time required to develop and commercialize a novel medical device, you exhaust your angels, your VCs, your Mezzanine investors, and you still aren’t done. The exhausted investors, and employees, want some liquidity, and an IPO becomes your only option.” If it had been a choice, Aspect might have stayed a private company, though “going public is on the evolutionary path toward becoming a successful company – so live it up and enjoy the journey,” advised Nassib.

MDT + COV - Good or Bad for Medtech Innovation?

MDT + COV - Good or Bad for Medtech Innovation?

Let’s be honest – the headlining acquisition of Covidien by Medtronic may go down as the most boring deal of 2014, unless of course you are an international tax accountant. The swirling buzzwords are inversion, offshore cash, G&A, and hospital contracts. Please wake me up when it’s over. Yet it may be the unintended consequences of this deal that are the real story, in particular the implications for med tech innovators. The real story won’t really be known for months or even years, despite Omar Ishrak’s reassuring pronouncements that the merger will “accelerate” investments in R&D.

We at S2N decided an old-fashioned pro-con debate was in order. Question: Is the big fat marriage of MDT and COV good for Innovation? Tim took the Con position and Amy the Pro stance. Here’s blow by blow:

Cash for innovation or cash for shareholders?

Amy: You need a lot of cash to invest in disruptive innovation, and the combined “Medvidien” will be swimming in it. It’s a perfect match for gaining efficiencies in mature product categories to free up cash for real technological advances.

Tim: This deal is a perfect example of how the big companies are throwing in the towel on innovation and focusing on the bottom line. The extra cash will all go back to shareholders, which is great for them but I’m not sure how that helps innovation.

Temporary deal disruption or big investment hiatus?

Tim: Good luck getting anything done with any division of MDT or COV for the next 3 years while management is completely focused on realizing those promised “synergies”. They will have a good, long run of earnings growth that will take pressure off top-line growth for a while.

Amy: Really Tim, do you think they can afford to turn off the growth-oriented deal flow for that long? Sure, there might be a short-term disruption to early stage investments from the distraction of the merger, but pretty quickly they are going to have to put that cash to work to grow sales. Can’t cost cut your way to success forever!

Spawning of new start-ups or lifestyles of the rich and famous?

Amy: Think of all the med-tech superstars who will make big coin on the deal and then be released to the wild. Some of that money and expertise will start finding it’s way back into the emerging med-tech ecosystem.

Tim: Wishful thinking, Amy. Med-tech veterans don’t have a rich history of aggressive angel funding. Mostly likely the deal will help the yacht and island markets more than med tech start-ups.

One less acquirer in the pool or just fatter acquirers?

Tim: The number of big-time med tech acquirers is pretty small as it is, and it just got one smaller. Negotiations with the new entity will be tougher, too, because there will be less deal competition.

Amy: There is so little overlap in the business units of the two companies, except for endovascular, that it really doesn’t change the picture for most emerging med techs. The acquirer just got a bigger wallet.

Helpful scale or focus elsewhere?

Tim: After tax minimization, the other main drivers of this deal are negotiating power with hospitals and scale to sell in emerging markets. That’s where they see their growth coming from in the next couple of years. Innovation is on the back burner.

Amy: Those more effective hospital and emerging markets sales channels will benefit innovative technologies, not just mature ones, and they will need more products to pull through those channels.

The Case for Early Deals in Med Tech

The Case for Early Deals in Med Tech

To the consternation of many emerging med tech executives and their investors, the big medical device companies are much less active in the early stage deal space than their bio-pharma counterparts. Drug company leadership “gets” that future success depends on robust product pipelines infused with externally sourced innovation at every stage from Discovery clear to Phase III. Case and point: of Goldman Sachs’s 2014 list of “High Potential Drugs that could Transform the Industry”, Forbes noted that 75% of them no longer sit with the originated ownerbecause of acquisitions or in-licensing deals. Contrast this with the med tech sector, where the hurdle to acquisition or meaningful strategic investment is not so much proof of concept but proof of market traction – a very high bar indeed.

The time may be now for the big medical device companies to lift their heads out of their quarterly net earnings reports and start looking seriously at early stage investments in innovation. Here are three compelling reasons behind this logic:

1. You can’t buy revenue forever

For most of the large med tech companies, the solution to the growth dilemma has been minimally dilutive acquisitions of companies with existing, faster growing sales and better margins (or the near-term promise thereof once infrastructure “synergies” are realized) than their existing product portfolios. Makes a lot of sense – many of the technical and even market risks have already been reduced, and acquisition integration is something the big companies know how to do. The problem is that there and fewer and fewer “target” companies out there to buy, and competition for them is driving up multiples. A recent example is the December 2013 purchase of Mako Surgical by Stryker at a whopping price (for med tech) of 13X annual sales. The Wall Street Journal coverage of the deal noted that the price “…reflected the lengths that medical-device companies will go to jumpstart sales growth in the face of product commoditization and broad economic pressures…” Also given the cycle time from innovation to meaningful revenue in med tech, it is safe to assume many of the companies being acquired today were originally funded 10+ years ago. My guess is we will start hitting the nadir of available targets as a result of the tougher med tech financing climate that started back in 2008 with the financial crisis.

2. Big companies can’t innovate (enough)

With the sheer size of the large medical device companies (10 over $10B in sales in the US alone), and many existing product franchises losing ground under health care budget pressures, big med tech’s appetite for new products is voracious. The best new products are those that can contribute both to the top line with growing sales, and to profit margins with premium pricing; in other words, true innovations. Big med-tech is genetically risk-averse, bureaucratic and not the least bit scrappy, so internal R&D can’t deliver the goods. Pharma has come to terms with this fact and has outsourced most of their R&D, understanding that only about one-third of their innovation will be generated internally. Big med tech needs to follow suit both organizationally and financially, acknowledging that most“disruptive” medical technologies will be found out there in the emerging med tech community.

3. The innovation ecosystem needs strategics to step up

It is still quite challenging for emerging med tech companies to raise money, with the dollars tightest not so much at the earliest stages where a number of angels and grant-funding organizations have stepped in, but more at series B through D. A venture capitalist at a recent MassMEDIC financing conference talked about the new “valley of death” being in these later stages, when the cute little toddler technology becomes a hungry adolescent, requiring significant funding for clinical or market development depending on the regulatory path. While there has been some easing of the IPO market for med tech companies in early commercialization (see TRIV & EVAR), the public markets have not warmed to development stage medical device companies the way they have to their bigger risk, bigger reward biotech brethren. With the aging of the population and the demand for healthcare only increasing, the need for innovation is there but will go unanswered without sufficient risk capital to fund it – a lost opportunity for the large device firms.

Some big med tech executives are coming around to the idea that they need to invest earlier and take more risk to maintain healthy businesses for the long haul.We have seen some movement in med tech toward structured deals between development stage companies and the industry giants – small steps toward the pharma model of deal making, risks and all. The CEO of Medtronic Omar Ishrak gets it, boldly stating in a recent earnings call “We would have done [the Ardian] acquisition over again, based on the data that we had at that time. You do clinical trials for a reason, and every so often, you are going to get negative results. And we don’t give up on strategic opportunities based on that.” Managing a pipeline requires both an acceptance that failure is possible, and the know-how to account for the risk in the deal terms (arguably MDT missed the boat there). Pharma has long had a more comprehensive understanding of the risks within their pipeline and how to manage them through licensing and co-development structures. Big med tech should take a page from the pharma playbook and aggressively fund external innovation, or be prepared to have the financial profile of utilities. Revenue is nice, but transformational growth is nicer.

Emerging Med Tech Margins - Don't Think Price, Think COGS

Emerging Med Tech Margins - Don't Think Price, Think COGS

Fact: the prices of medical devices, whether innovative or commodity, are under significant pressure from all corners and in all parts of the globe, and will continue to be for the foreseeable future. Fact: whether seeking to please public shareholders or angel investors, medical device companies need their products to carry healthy profit margins (or at least the promise of them) atmarket ASPs. So if pricing is tight and margins aren’t to be sacrificed, the spotlight turns to costs. In this health care climate, low COGS are replacing premium pricing as the key to profitability. The large, established medical device companies rely on their vast manufacturing teams to pull dollars (or Yuan) out of production costs to maintain gross margins that range from 32% (HSP) to 58% (COV) on the low- to mid-tech end, and 67% (BSX) to 75% (MDT) for the high rollers.

For emerging med tech companies developing “innovative products to address significant unmet medical needs” (quoting every investor deck we’ve ever seen), the aspirational gross margins demanded by investors generally hover around 75-80%. In reality, decent margins aren’t usually achieved until ~$50 million in revenue and 3-5 years on market, and profitability can be an important milestone for strategics keen on non-dilutive acquisitions. All of these forces are moving COGS up that management priority list even in the earliest stages of development.

To get the inside scoop on how emerging med tech companies can get a handle on COGS as they design their first products, we talked to Rev1 Engineering, an outsourced medical device product development house that specializes in working with development stage medical technologies. The Rev 1 folks gave us three tips for managing product costs both at initial launch and scaled production.

1. COGS are not just about material cost

Speed and efficiency in manufacturing can equate to significant margin dollars gained. Design for Manufacturability (DFM) is the best approach for minimizing costs over the life of the product. The goal of DFM is to achieve higher manufacturing yields and greater throughput via process development. Once a design is locked in, regulatory hurdles can limit flexibility and make product changes very expensive and time consuming, so teams should really consider delaying design freeze until all processes and COGS are vetted. If you don’t invest the time and effort up front, then you can pretty much plan on absorbing high manufacturing costs until the next sensible opportunity for regulatory re-filing.

2. Shelf life is critical

Many devices are launched with short shelf lives that get extended over time as the testing data rolls in. With hospitals tightly controlling inventories and many first devices sales happening outside the home country, a customer- and shipping-friendly shelf life is ever more important. Begin shelf life extension efforts as early as possible to facilitate early commercial sales. Also be sure to keep an eye on, and minimize where possible, disposal, retrieval, swap-out and freight costs. These are all non-value-added, expensive activities that can really impact margins in an unanticipated way.

3. Select suppliers carefully

Get an early start on developing supplier strategies to optimize capacity, production capabilities, and pricing leverage with suppliers. Often the quick-turn prototype supplier of development materials is not able to compete at volume and will bring risk to the commercial ramp if transitions to scale suppliers aren’t made in a timely manner. Avoid development delays by using quick-turn component suppliers for prototypes (or even print them yourself with a 3D printer), and in parallel qualifying prospective suppliers of key materials for commercial scale manufacturing way ahead of the anticipated sales ramp.

The ultimate goal, and balancing act, is to have functional product asap for testing, piloting and fundraising, while preparing for longer-term commercial success. “Management teams need to make smart trade-offs between speed to prototype and future profitability at scale,” says Rev 1. “You have to spend some money to save money, and sometimes the right call is to pace development to implement the right production and sourcing strategies for the long haul.”

Marketing Steps Up in Med Tech

Marketing Steps Up in Med Tech

Historically, marketing has been the Rodney Dangerfield of med tech. We marketing people don’t get much respect. Sure we wear dark suits at the booth and talk to customers, but the med tech Sales & Marketing equation has generally been big “S” plus little “m” (or as one sales executive we know put it, marketing is just sales overhead). Enter the last decade and the virtual collapse of the traditional med tech sales model; gone are the days when reps can leverage chummy relationships with physicians to brute-force expensive new medical devices into the hospital. An autopsy would reveal many causes of death, but to name a few:

  • Hospitals have given financial decision makers more muscle in purchasing decisions, e.g. value-analysis committees are actually doing value analysis
  • Doctors are increasingly employed by hospitals (though surgical subspecialties are bucking this trend) and more beholden to hospital priorities
  • Increased regulation of sales interactions and hospital control on rep access have made direct selling to physicians much more difficult

This is where marketing enters the scene. Success, or even survival, in the face of all these challenges requires clever, proactive and well-executed marketing efforts, with sales as the icing on top. Big “M”, littler “s”. Highest on marketing’s current agenda are:

1. Launching the right product with the right data. The marketing imperative starts during product development, making sure that the R&D folks are creating stuff that future customers actually want / need, and doing so at COGS that leave room for some profit at market-driven ASPs. With the bar on clinical evidence continuously being raised by penny-conscious customers, the marketing voice is also critical to align study designs and endpoints with purchaser and payer requirements. Unfortunately many R&D and clinical teams take a similar view of marketing as their compatriots of sales, but this is slowly changing.

2. Offering a solution, not just a product. A great technology developed with lots of customer input is a necessary but insufficient condition for driving adoption in the current constrained healthcare environment. Device companies have to solve real problems for their customers, who are generally happy to maintain the status quo that existed before the appearance of your new gizmo. One way to become a total solution provider, and capture more value, is to combine device offerings with related services. Medtronic’s acquisition of Cardiocom for $200M is a notable move in this direction (a trend S2N predicted last year). No doubt marketing will play a vital role in coupling Cardiocom’s telehealth and chronic disease management offerings with Medtronics’ vast portfolio of devices to defend and grow share, maintain premium pricing, and create competitive barriers to entry.

3. Redefining the customer. Med tech companies need to take a more expansive view of the sales targets to include new purchase decision influencers, for example the consumers of healthcare. Americans now pick up the tab for about 13% of the US healthcare tab, spending >$400B per year out of pocket. This is a customer group that med tech sales forces rarely if ever touch, and therefore lands squarely in the domain of marketing. How patients feel about their healthcare experience is also mattering more to hospitals. The CMS Value-Based Purchasing Program is tying incentive payments to hospitals performance on the dimension of patient experience, and medical device companies are well positioned to help hospitals measure up against these metrics by engaging and “delighting” patients with their device-based care.

Consumers are also starting to take a bigger role in their own health, shelling out significant cash for health trackers like Fitbit, Nike+, Withings and other wearable technologies. These “toys” are migrating to more serious medical applications, creating a gray area that offers growth opportunities for device companies. The marketeers at Alivecor, for example, are putting home EKGmonitoring in the hands of patients; we recently heard of one doctor recommending the self-pay device to patients because it’s cheaper than copays and deductibles on traditional heart monitoring. Hopefully orthopedics companies are putting their marketing teams to work on exploiting the synergies between activity trackers and new hip implants to improve or demonstrate better outcomes.

In the old med tech model, Marketing got pulled in when Sales ran into trouble (usually when it was too late to do anything productive). One could say that Sales is now in a permanent bind, and Marketing needs to take the helm for a while. Just someone please tell me where I can find some good med tech marketing people…

It's not that Symple! The Rise (and Fall?) of Renal Denervation

It's not that Symple! The Rise (and Fall?) of Renal Denervation

When we founded S2N in 2011, the emerging medtech world was still awed, no dazzled by the uber-generous 2010 acquisition of Ardian by Medtronic for more than $800M. Last week, Medtronic unceremoniously announced the failure of Symplicity, Ardian’s renal nerve denervation technology for severe hypertension, in the US pivotal trial. The wreckage is still smoking, and the damage extends beyond Medtronic and the other device behemoths like Boston Scientific and St. Jude that joined the RDN gold rush. Emerging med tech companies will feel the ripple effects, too.

First, a little history:

  • Before the take out by Medtronic, Ardian had raised about $65M in equity (including some from MDT in Series C). By my sophisticated calculations, that’s a >10X return on capital for the VC’s. Sweet.
  • Ardian turned that $65M into a successful pilot study, CE Mark, and initiation of the randomized, controlled, multicenter HTN-2 trial with 52 patients in the active treatment arm.
  • On November 17, 2010, Ardian published 6-month data from HTN-2 in the Lancet showing that 84% of treated patients (vs. 35% of control patients) achieved a 10 mm Hg or greater drop in blood pressure. Five days later, the acquisition was announced.
  • MDT initiated the 530-subject HTN-3 US pivotal trial in 2011 and completed enrollment in May 2013.
  • Symplicity is available commercially in Europe, Asia, Africa and Australia and has been used in more than 5000 patients.

Before the Symplicity failure, the rich Ardian deal served as a big, juicy comp for med tech start-ups of all stripes defending the value of their novel gizmos. The deal also emboldened emerging med tech companies (and S2N) to point to CE mark as a critical risk-reducing milestone for potential acquirers.

Now, in the shadow of Symplicity’s demise, there will likely be some pencil sharpening on pre-FDA valuations, as well scrutiny on timelines and total investment required until exit. European regulators, left to sort out the on-market implications of the study failure, will no doubt reference the situation in support of tightening data requirements for new products.

Well before last week’s announcement, though, the Ardian acquisition was starting to qualify as an anomaly, not replicated by any company at that same stage, with structured deals and risk-sharing becoming more the norm. Symplicity’s downfall serves to remind us all that early stage technologies are just that – early. There is still significant technical risk and some products will fail when put to a scaled or real world test, regardless of whether that test is carried out by the small company or the big strategic that buys them. Safety does not equal efficacy, and efficacy is what matters in the end. Investor success is not the end of the journey (though it is for the investors!).

On the positive side, we don’t have to hear anymore “why can’t I get a deal like Ardian?” Envy isn’t generally a helpful business motivator, and every company has to carve its own path.

New Year’s Resolutions for Medtech Companies

New Year’s Resolutions for Medtech Companies

As I sit here reaching for one more stale holiday cookie, mulling the merits of spiked eggnog vs. spiked hot cider, I realize it’s time to make some New Year’s resolutions. Ugh. I much prefer hiding under the covers in blissful denial, but activation is required before the situation turns dire. Similarly, the medical device industry, still a bit complacent and bloated from the good old days, needs to confront the new reality of the lean, mean healthcare marketplace and take action.

So here are my New Year’s Resolutions for medtech companies, big and small; a little menu of aspirations for the 2014 company plan (if you don’t have a 2014 company plan, getting one should be resolution 1a):

1. Stop whining

Last I checked, the U.S. spends over $7 trillion on healthcare every year, and this vast sum is only going up, albeit at a slower but still unsustainable rate of growth. The global regulatory environment, while tightening up, is also becoming more transparent and predictable. Investors that never had the stomach or appropriate time horizons for healthcare are getting out, but others are stepping into the breach and M&A deals are still happening. Things could be a lot worse – remember 2008?

2. Truly disrupt, even yourself

Leaps in processing power, unprecedented data capture, and globalization of R&D should all be catalyzing the innovation revolution required to truly bend the cost curve of health care. The device industry should be leading the charge for technology- and information-based solutions to address the biggest cost juggernauts in healthcare – labor and infrastructure. Incremental improvements and defense of the status quo are ultimately failing strategies.

3. Invest in the data

Increasingly, there are no shortcuts to market adoption for new technologies, and existing devices are far from secure if they don’t demonstrate a clear benefit in terms of outcomes and/or economic savings. Unfortunately not much has come along to disrupt the cost of clinical trials (and we’ve been looking), but no amount of modeling and hypothesizing can replace rigorous human data when making the case to health systems, payers and clinicians who are increasingly employees of health systems. Patients, who are bearing more and more of the cost of healthcare, are “Googling” for evidence, too.

4. Know your customer better

Medtech companies traditionally excel in engineering, and also in roll-up-sleeves sales. Between invention and commercialization, though, there is often too little customer input into product and clinical development; a surefire recipe for an anemic market launch. As difficult as it may be to raise that extra money and/or spend that extra time to get solid feedback from the real world during development, it is even harder to do once a product is commercial and not hitting the mark.

5. Inspire and train the next generation

Anyone who has lingered in the medtech industry as long as I have will agree that it’s a small, almost incestuous little community, and (let’s admit it) an aging one as well. In many skill areas much needed by medtech, such as manufacturing, quality systems, regulatory affairs, clinical development, and yes even marketing, the pool of experienced professionals is often insufficient to fill our org charts. Medtech companies need to take an active role in enticing smart people to enter our industry, which has all the makings of a rewarding career (challenging, multifaceted, global, opportunity to impact on many lives). We also should commit resources to training promising talent in the specialized skills necessary for our long-term success.

Dismounting from my high horse now, a hearty pat on the back to all of the medtech companies out there confidently riding the waves of change and gearing up for a spectacular 2014!