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Pricing and Market Access

Why the Pursuit of Value in Health Care is Important – Especially for Innovators

Why the Pursuit of Value in Health Care is Important – Especially for Innovators

A change in the US leadership, especially one as significant as we will experience this month, naturally generates uncertainty about the future of health care policy and finance.  A few things are certain, though (and this is not fake news):

·      The US devotes nearly 18% of its GDP to healthcare, spending >$9,000 per capitamore than any other country in the world

·      US healthcare costs are expected to grow another 6.5% next year, far outpacing inflation, and these cost increases will hit providers, insurers, and consumers

·      By pretty much any metric (except cancer survival), the US is the least healthy of the major developed countries, despite spending so much of our money on health care

This economic predicament has energized a drive toward value-based vs. volume-based payment for health care, led by the US government, which carries ~42% of US health care costs, mostly through Medicare. Other healthcare stakeholders such as commercial insurers, hospital systems, and patient advocacy groups also support value-based payment in the hopes of improving quality while containing costs.  Medical device companies have certainly gotten the value imperative memo from their health system customers, who are increasingly on the hook for delivering outcomes and at risk of losing revenue if they don’t. In medical technology purchase decisions, Value Analysis Committees have been gaining power over physician preferences for several years now, helped by the rapid growth of employed physician models

It seems like simple logic to allocate more resources to services, products, and providers that deliver the most bang for the health care buck, right?  Unfortunately, value-based healthcare is not simple at all. There are three big, highly complex questions that must be answered to build a system that rewards outcomes vs. activities:

1.     What does value mean?

2.     How is value assessed?

3.     Who determines value?

What Value Means

The business guru Michael Porter defines value in health care simply as “outcomes achieved per dollar spent.”  Outcomes can mean many different things, though.  Historically, the gold standard measurement of outcomes was survival – whether the patient lived or died, and how long they lived.  Even in the context of terminal illness, though, the definition of outcomes has expanded to include more consumer-oriented metrics such as quality of life and patient satisfaction, and to factor these metrics into CMS reimbursement calculations. We recently spoke with an administrator of a large academic health system who described the ideal measure of healthcare value as “Appropriateness*(Quality + Patient Experience)/Cost” to contextualize the cost-benefit equation for each patient's situation. For example, the surgical approach to hip fracture might be different in a relatively younger, active patient vs. an older, more frail one if remaining life span, ability to rehab and functional goals are taken into account. For medical device innovators, the need to demonstrate not just performance but also value raises the bar overall, but the broader definition of value also presents opportunities to make a case beyond traditional clinical outcomes.

How Value is Assessed

In order to know which technologies and services deliver value, and how much value they deliver, there has to be a clear understanding of both the cost and benefits during some measurable period of time. Historically, purchasers and payers of innovative medical devices have relied on randomized, controlled trials and published studies for evidence of clinical and health economic impact, particularly when the new technology comes with a high price tag. With the definition of value expanding both in terms of metrics and timeframe, new approaches to assessing “real world” value are emerging. Electronic health records, combined with the integration of provider networks, are enabling more sophisticated and powered evaluation of clinical and economic benefits of health interventions in actual patients. The cleverer med tech innovators are taking advantage of these new data collection possibilities and are collaborating with health systems in novel risk-sharing arrangements to build evidence of a positive cost-benefit balance.

Who Determines Value

In the good old days of health care, the main arbiter of value for a health care product or service was the physician.  Patients listened, hospitals complied (and made money, too), and payers paid. When health care expenditures inevitably spiraled out of control, the value decision shifted to payers under the banner of managed care, assisted by gatekeeper primary care physicians who were supposed to control access to expensive specialists, advanced diagnostics, and procedures. Now hospitals and health systems are being drawn into the value determination as they take increasing financial risk for patients in and outside of the hospital, such as under CMS’s Comprehensive Joint Replacement bundled reimbursement model. Even though access to data for basing these decisions has improved, there are still huge gaps and silos, and few areas of consensus on what constitutes the best care. Hospitals are grappling with these decisions to stay solvent while balancing the competitive demands of the marketplace for patients and providers seeking all the latest and greatest technology.  Medical technology innovators are learning how to partner with health systems to create solutions that help hospitals manage their payment risks and keep their customers happy, too.

The message to our new US government leadership is this: We haven’t yet cracked the code on this value-based health care thing, but we are finally asking the right questions. As the biggest funder of health care, and therefore the keeper of the most comprehensive data set on health care spending and outcomes in the country, please continue to support data collection and access so we can advance our understanding of value and make informed choices as insurers, providers, and consumers (all of us taxpayers, too). And while I have your attention, some more funding for early stage medical technology innovation would be nice, too…  

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.

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.

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.”

Reimbursement Fundamentals for Disruptive Medical Technologies

Reimbursement Fundamentals for Disruptive Medical Technologies

Many new medical technologies, particularly the low- or mid-tech ones, fit more or less neatly into an existing reimbursement code. For the companies developing such devices, de-risking involves demonstrating 1) it works and won’t kill anyone, 2) the path through FDA is efficient, 3) the company can manufacture it at attractive margins, and 4) enough people will want to buy to imagine profitability.

For most “disruptive” medical technologies, however, it is the market adoption risk that often generates the most worry starting around Series B and escalating to a fever pitch in the quarters leading up to launch. Providers generally want to get paid more for using expensive new technology, and additional reimbursement typically lags years behind product approval if it ever happens at all. Compared to the payers of the world, the medical device regulatory bodies are virtual pussycats. You did one study for FDA? We need three. You studied patients out 6 months? We want two years. And we still might not pay extra for your devices, no guarantees.

The high hurdle to new reimbursement will, and is meant to, discourage all but the most confident in the value of their novel therapy or diagnostic. Those brave companies that do forge ahead to slay the reimbursement beast need to be armed appropriately. To learn more about how emerging medtech companies can pave the way toward reimbursement for disruptive new devices, I spoke with Kelly Shriner, Director of Health Economics and Reimbursement for Boston Scientific (by way of Asthmatx). In 2010, BSC acquired Athmatx, with its novel Alair Bronchial Thermoplasty treatment for severe asthma, for $193.5M up front and up to $250M more on the back end. Bronchial Thermoplasty was awarded a rare new Category 1 CPT reimbursement code in 2012, a major milestone long in the making.

For the edification of our emerging medtech clientele, I asked Kelly what she was glad she did early on at Asthmatx to position the technology for reimbursement down the road. “I can’t overemphasize the importance of a strong clinical strategy,” said Kelly. “We followed a scientifically sound path that helped us gain ground along the way, which was crucial for a technology as novel as ours.” What made Asthmatx’s clinical program so rigorous? Three randomized, controlled trials, including a robust sham control arm and tracking of healthcare utilization data in both arms to facilitate economic comparisons. “If we didn’t have that data, we’d be dead in the water with payers,” said Kelly.

Building relationships with the relevant clinical societies, and building them early, is also important groundwork for future reimbursement. “Payers seek the input of these societies on all their decisions,” said Kelly. Asthmatx started reaching out to societies in 2005, a full seven years before receiving their Category 1 code. “The societies are the ones that push for appropriate coding with the American Medical Association (AMA), and as a company you can’t own that process,” said Kelly. “The persistence of the societies helped us go from a temporary Category III code to a Category 1 code in one year.” Trust me, this is lightening speed.

Once on the market with a new CPT code, the reimbursement effort is far from over. Individual payers still have to agree to actually cover the assigned code (a.k.a. send money) when the procedure is performed. Payers can do this on a case-by-case basis, necessitating much paperwork and fortitude on the part of providers, or they can issue a coverage policy so the reimbursement flows with appropriate use. “The Catch 22 is that payers’ coverage policies don’t flip until payers see demand from market, but demand is driven by reimbursement,” says Kelly. In the meantime, companies need to be prepared to offer users “an intense level of support” through the one-off reimbursement appeals.

Companies also need to intensively educate the payers, for example about the rigors of the PMA regulatory process. “I found myself having to explain the difference between a 510(k) and a PMA, and the level of evidence required for a PMA device like Alair,” said Kelly. Feeding into this misperception is the fact that the FDA has access to all of the company’s data, whereas payers tend to only look at published, peer reviewed articles – a naturally self-limited dataset. Given the opportunity to explain how similar a PMA is to an NDA, though, payers got it. “As an industry, we need to do a better job of bringing payers up to speed on the FDAprocess, particularly for PMA-approved medical devices”, suggested Kelly.

Kelly continues to negotiate with payers around the world as part of the BSC team. Reflecting on the acquisition, Kelly proudly recalls, “Our early payer strategy helped BSC get comfortable with Asthmatx; the reimbursement strategy, as well as the strong clinical strategy and compelling data, helped get BSC over the hurdle of taking on an earlier stage technology.”

Defining Disruption in Emerging Medtech

Defining Disruption in Emerging Medtech

In our line of work, we come across many innovative medical technologies appended with the adjective “disruptive”. Some uses of the term require more squinting to imagine than others. The disruptive label is enticing because big ideas are associated with big funding and big exits in the emerging medtech landscape. Alas, there is no objective measure of a device’s potential disruptiveness; like pornography, to paraphrase a former Supreme Court justice, “you know it when you see it.”  Renal nerve denervation for refractory hypertension – now that’s disruptive.  Fully implantable artificial heart – disruptive.  Transcranial magnetic stimulation for depression – disruptive.  RF ablation for severe asthma – disruptive. Of course, to really disrupt the market, these technologies need to be widely adopted, and it so happens none of these have quite reached that stage yet, but at least the potential is there to fundamentally change treatment paradigms.

High “disruptivity” is not essential for new medical technologies to attain success. There are perfectly clever, fundable innovations out there that don’t rock the healthcare world or get published in NEJM. What is important, though, is ensuring a proper balance between the two fundamental dimensions of disruption, namely Care Disruption and Cost Disruption.

Care Disruption can be created by:

  • A new device-based treatment where only drugs (or nothing) existed before

  • Enabling a much broader group of patients to be treated

  • A completely new setting of care, e.g. new home treatment or monitoring

Cost Disruption can be created by:

  • Being significantly cheaper than existing solutions (e.g. 5-10X cheaper)

  • Adding significant costs to the healthcare system

  • Massively shifting costs associated with a certain condition from one category or payer to another

To lay this out visually, if your technology is both a Care and a Cost disrupter, then it is in the “Maximally Disruptive” box on the above classic 2×2 chart. For technologies that significantly change care and also increase or shift costs substantially, the key to market creation is the development of compelling clinical data. The reward for successfully demonstrating value may be keen interest by the big medical device companies looking for entirely new verticals (consider the $800M purchase of Ardian by Medtronic).  Medical technologies that are able to disrupt care at a significantly lower cost, for example by leveraging advances in processing power (Moore’s law), are equally exciting but are just starting to emerge.

On the other end of the spectrum is the “Market Share Battle” quadrant, where incrementally better new products with a comparable or slightly lower price tag fight entrenched competitors for a piece of an existing market. The battlefront here is often in purchasing departments of health systems, and the sales channels are likely through distribution. Exits for products in this category tend to be later stage and based on multiples of revenue; prove you can gain share on the market and there will be interest.

If your technology involves a significant change in care but not necessarily in cost, for example a shift in the site of care or a less invasive, easier procedure, then the focus of the company should be on Market Education. Products in this category, even if money-saving, can encounter referral pattern problems where clinicians who “own” the patients may be disincentivized to offer a less expensive solution, especially if it is provided elsewhere. In this case, direct-to-consumer marketing and advocacy may be required to gain traction and prove demand for the new technology. Companies offering endometrial ablation solutions, as an alternative to hysterectomy, could tell you first hand about the referral pattern problem. Proving cost-neutrality or savings with post-market economic studies may also be required to realize a shift in care patterns.

Where you don’t want to land is in the upper left box, unless your technology is on the cheap end of cost disruption. No entrepreneur will admit that the innovation they’ve nurtured is an incremental improvement at a higher cost. Unfortunately, until the clinical benefits and/or economic savings of more expensive innovations are credibly demonstrated in studies or even better with real-life use, skeptical clinicians, payors, hospitals and patients will likely place it in this box. The trick is moving as quickly and efficiently as you can to a better zip code.

S2N Whitepaper - Marketing for Emerging Medtech: A Stage by Stage Guide

S2N Whitepaper - Marketing for Emerging Medtech: A Stage by Stage Guide

Early stage medtech companies have a need for marketing well before having a first product on market. This S2N Whitepaper identifies the critical marketing needs at each stage of progress to lay the groundwork for a successful product launch:

  • Concept Stage – Defining the product, the market and the business case

  • Development Stage – Understanding your customer and building relationships

  • Pre-Commercial – Preparing for launch and gaining early adopter feedback

Fill out my online form.

Valuation Drivers for Emerging Medical Device Companies

Valuation Drivers for Emerging Medical Device Companies

All hardworking emerging med tech teams, and their investors, want to see the value of their companies rise over time. Listen closely and you can hear the constant valuation drumbeat; the preoccupation with achieving X, Y or Z milestone to reach the next significant value inflection point. But what exactly are those X, Y and Z milestones that truly drive company valuation? The answer can vary greatly depending on who you ask, but here’s a good rule of thumb: if your high-five-worthy achievement does not significantly de-risk the whole endeavor, it does not add significant value.

For new medical technologies, major risks-reducing milestones fall roughly into four categories:

  • Technology / IP: does it work how you say it will / can you protect it

  • Clinical: can you demonstrate it works in humans

  • Regulatory: will regulators let you sell it

  • Market: will someone want it and pay for it

Not all medical devices have the same risk profile, and the risk can be distributed very differently across these four categories. A simple construct for sorting products by risk profile is according to the anticipated US regulatory path, namely PMA vs. 510(k). While companies can sometimes get partial credit for work in process, it is generally completion of the following milestones to which investors and potential acquirers assign value:


Key 510(k) Milestones Key PMA Milestones
Technology For true 510(k) products, technology risk is generally not top of the list. Bench validation and verification, sometimes animal data for more complex stuff, can confirm your product works reliably. Because margins can be leaner and pricing more competitive on 510(k) products, showing your device can profitable at scale is crucial. Success in relevant animal models will give you pretty pictures, but getting into a few humans (even in Kazikturkinbul) to show your gizmo potentially does something good and not bad is what investors crave. Your ability to protect the invention also will be intensely scrutinized, so important allowed / issued patents can build big value.
Clinical Demonstrating clinical and/or economic advantage over the market leaders, generally in post-market studies, drives value. Publications and acceptance into guidelines are critical milestones if the product requires a change practice or increases costs substantially. Since structured clinical studies are required for regulatory approval, valuation reward comes with successful completion of an interventional trial with meaningful endpoints. Set the outcomes bar too low, and the prospects of gaining FDA approval, and ultimately adoption and reimbursement, are diminished.
Regulatory Obtaining 510(k) clearance is most valuable when there is doubt about the regulatory path. Otherwise, it’s a helpful feather in the cap but not a tremendous value creator. There are many 510(k)-cleared products that have never seen the light of day. Having any regulatory authority in the developed world deem your product safe, if not necessarily effective, creates value. CE mark fetches maybe 60% of what a PMA approval buys you in valuation bump, but CE mark plus IDE approval to start a US trial has been a winning recipe for many recent high-value acquisitions.
Market Most 510(k) products will have to prove themselves on market to be valued by a potential acquirer or attract scale-up capital. Sales growth and especially “same store” growth (e.g. increasing utilization per customer) are the most prized metrics, but only if these customers are paying list prices. If you hit $10-20M in revenue with continued strong growth and the hopes of becoming profitable, you are golden. For novel category-creating therapies, market risk is tied much more closely to clinical risk; prove it works and people will believe the market is there. If market risk surrounds your product after spending the $100M to get it through FDA, then no one did their homework. For “me-too”-ish PMA devices, the path to high valuation will be paved with the same market milestones as 510(k) products. You’ll have to demonstrate market traction.

A quick comparison of two companies nicely illustrates the difference between the two risk profiles and their valuation implications; Barrx, acquired by Covidien in 2011 for $325M + $70M back end , and Asthmatx, acquired by Boston Scientific in 2010 for $194M + $250M back end . Barrx, a minimally invasive therapy for Barrett’s esophagus, actually received it’s first 510(k) clearance back in 2001, but proving market traction took many years and studies. The company finally achieved a ~$30M revenue run rate and acceptance into treatment guidelines, driving a high value exit. Asthmatx’s device, a novel treatment for severe asthma where none existed, only needed to get to US FDA approval, with prospects of achieving reimbursement, to attract a big take-out. Even CE mark in 2006 had them on the edge of an IPO priced at ~$200M.

While there are a number of steps companies can take increase their perceived valuable, such as shiny new websites and quasi-newsworthy press releases, the laser focus of time, attention and dollars should be on the true value creators.

Five Marketing Essentials for Emerging Medical Technology Companies

Five Marketing Essentials for Emerging Medical Technology Companies

Early stage med tech companies often have little time, money or resources to commit to marketing activities, especially when their exciting new technologies may be months or years away from commercialization. The whole concept of marketing can be downright daunting when you barely have a product.

The absolute marketing fundamental, and where most companies start (or should) back in series A, is the compelling market story, e.g. why your product is a “must-have” solution to a major unmet need. The entire company down to the lab techs should be able to recite some version of this story if woken up in the middle of the night; you never know when you might run into an investor at a bar or a potential hire at Comic-Con.

Beyond the good story, companies need just a few marketing essentials to carry them to, and even through, commercial launch:

1. Animate Your Technology

A 30-second animation showcasing your technology is one of the best investments you can make to explain how your gizmo works well before it’s actually working. For the many med tech products that are difficult to visualize in action, there is really no substitute; most people need this kind of handholding to “get it” when seeing a new medical device for the first time (remember that many folks simply don’t have the stomach for gory videos that we do). Animations make it easy to educate anyone, from future investors to potential customers and even your kids, and you will use it over and over on your laptop, tablet and phone. It shouldn’t cost a fortune; professional looking animations can be had for as little as $10-12K.

2. Take a Few Photos

If you have a reasonable prototype of your device, even if it’s held together by duct tape, snap some quality, high resolution, photographs of it (just make sure the tape isn’t too prominent). Product images on neutral backgrounds will come in handy for investor presentations, scientific presentations, your website and sell sheet (see #4). Unfortunately, that great photographer you used for your wedding just won’t cut it for medical device shots. Definitely seek out a photographer with medical technology experience or at least something similar. This person can probably grab a few headshots of the management team, the spectacular lab space and a few hard-at-work employees while they are at it.

3. Enhance Your Brand

Assuming you’ve named your company (a good place to start), you don’t want to take too long before also naming your product, even if it feels barely product-y. Like hurricanes, it’s not a product unless it has a name. An accompanying logo helps create a professional corporate identity and style things up a bit. Working with cost-conscious emerging med tech companies, we have discovered some quick and inexpensive web-based resources for logo designs, such as 99 Designs. These services set up a competition among designers from across the globe (our last winner was from the Philippines) to create a custom logo based on your description of the company or technology. You can give feedback about what you like and don’t like, enabling the designers to refine their logos to match your preferences.

4. Create a “Sell Sheet”

A one-page product overview, known as the “Sell Sheet,” is a classic piece of marketing collateral that still works today. Just the process of creating this one-pager helps get the team clear on how to describe and position the technology. When building the content, begin with value proposition; catchy tag lines can be helpful here (e.g. “fixing broken backs one vertebrae at a time”). At all costs, resist the urge to cram in more highly informative copy by going to 8-point font. Even on a short Sell Sheet, images are a great way to fill space and generate visual interest. And in the age when printed materials are lining birdcages, remember to make sure your one-pager looks good as a PDF version.

5. Pull it All Together in Your Website

Now that you have a logo, animation, high quality product photos and a 1 page Sell Sheet, creating your website should be a breeze. You don’t need a big expensive firm to build your website for you; independent website designers can put together a high quality website in a couple of weeks at a fraction of the cost. Be careful in your website content not to make claims about your technology that you can’t back up with data; assume the FDA will be among your early web visitors. If your product is not approved for human use yet, a disclaimer to that effect at the bottom of your home and/or product page is a good idea. In any case, it’s worth having your regulatory counsel take a quick peek at your new site and give it the thumbs up. FYI: Website hosting should cost you no more than $20 a month (see www.squarespace.com and other sites like it).

These few marketing essentials will help make your technology look and feel like the real deal. If only product development, clinicals and regulatory were that easy!