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Theranos Whistleblower’s Inside Scoop at DeviceTalks: What We Learned

Theranos Whistleblower’s Inside Scoop at DeviceTalks: What We Learned

DeviceTalks Boston finished off their conference last week with a bang –an interview with Theranos Whistleblower Tyler Shultz, who spilled the beans to the Wall Street Journal about the lack of science and surfeit of lying at the infamous company. We hoped to get the inside scoop on this big con that has spawned numerous articles, a podcast, an HBO documentary, and an upcoming feature film (we’re going with Zac Efron to play Tyler), and he did not disappoint. Tyler started off by describing how the aging, powerful Theranos Board members, including his grandpa and former US Secretary of State, George Shultz, were creepily charmed into Elizabeth Holmes’ orbit by her “big blue eyes” (according to Tyler, Theranos Board member Henry Kissinger wrote Holmes a limerick more or less saying dead Steve Jobs was pre-imitating her, not the other way around – no comment…).

Beyond the shock factor, Tyler’s stories left us with some clues for how to identify potential Theranosing (yes, we are making this a verb) in our midst. Here is a helpful guide so you can recognize when a company might be Theranosing and nip it in the bud, or stay far, far away:

·       Ill-Suited Boards/Weak Oversight: Theranos loaded the board literally with top brass, including General “Mad Dog” Mattis, who knows little about healthcare and even less about diagnostics. Kissinger may have changed our relationship with China, but what does he know about quality systems or CLIA? Avoiding traditional healthcare VC financing may be a necessity in medical devices where few VCs are still active; it may also be a way to avoid management accountability or maintain unwarranted valuations.

·       Impossible Financials: According to Tyler, Theranos investors never saw, or demanded, audited financial statements for the company. He claimed that grandpa George only turned on Elizabeth quite recently after seeing in black and white in an SEC document how Theranos claimed to have $100M in revenue when they only had $100K. But what’s a few zeros among (mesmerized) friends?

·       Internal Secret-Keeping: A story Tyler used to illustrate how Theranos leadership kept their own people in the dark, was a visit by an electrician to fix a ceiling light. Up on that high ladder, the electrician could easily view the Edison “lab in a box” devices that were kept hidden from most of the employees. While unphased by this electrician, reporters, or regulators, Elizabeth went to great measures to ensure that her own scientists were unable to put the pieces together and uncover the truth. Companies with nothing to hide will foster cross-functional communication and learning.

·       Fake Apartments: This was just too good a share from Tyler to leave out… If the CEO rents a staged apartment with only a mattress on the floor, black turtlenecks in the closet, and bottled water in the fridge to demonstrate their ascetic corporate devotion, all the while living in a luxurious mansion in Atherton, proceed with caution.

We all would like to believe that another Theranos couldn’t happen, or that we’d see right through the scam if we encountered it. The desire to believe can be intoxicating, though. If we didn’t think we could achieve great things in the face of daunting risks and skepticism, none of us would be in this business. It is easy to characterize Elizabeth Holmes as a misanthropic villain driven by ego and greed, but where does one cross the line from optimistic exuberance to deliberate deception? The healthcare industry needs visionaries who are not discouraged by the doubters or constrained by the current state of the world. What we don’t need are liars and criminals who would sacrifice patient safety for their own aggrandizement, no matter how big their blue eyes are.

Photo Credit: Wall Street Journal


A Consumer’s Perspective on Medical Devices: Why We Need Each Other

A Consumer’s Perspective on Medical Devices: Why We Need Each Other

Recently, S2N mentored some med tech start-ups preparing for competitions, helping them refine their pitches before taking the podium (and doing our part for the innovation ecosystem). Among this crop of companies, several have technologies with “high consumer touch,” meaning that consumers are the primary users of the devices for self-care or dependent care. At the same time, though, these entrepreneurs seemed to shy away from directly engaging consumers, instead preferring to rely on physician marketing channels, at least initially, as the safer, less costly bet. 

Certainly, for the vast majority of FDA-regulated devices, clinicians have a firm place along the pathway to revenue – for establishing credibility, generating data, and ultimately writing a prescription, although this landscape is changing. With the device-consumer relationship becoming ever more intimate, practically and financially, our industry is slowly getting religion on the need for direct consumer engagement, and not just in the traditional sense of stimulating demand (e.g. “ask your doctor” campaigns). 

There are several reasons why device companies need to establish direct relationships with the end-users of their technologies. To articulate these consumer imperatives, we spoke with a woman (let’s call her Kate since that’s her name) who has bilateral cochlear implants. Kate and her cochlear implants help demonstrate the power of, and need for, direct consumer engagement:

  • Consumers Increasingly Control Purchase Decisions: A perfect storm of increased patient cost-sharing and access to information is requiring consumers to be front and center in any medical device marketing strategy.

I chose my implant brand based on the company’s customer service. It remains very impressive more than 15 years after my initial decision. For someone with a cochlear implant, downtime can be devastating. A breakdown for a month or two means that people lose speech, not to mention their ability to go to work or school and participate in everyday social interactions.” - Kate

  • Patients Eventually Need Other Stuff: A lot of patients with long-term medical devices go on to need other devices or ancillary services. Kate started with one cochlear implant and then received a second one several years later, choosing to go with the same brand. Companies are now offering a variety of self-pay accessories to their patients, such as waterproof cases that allow recipients to keep their cochlear implant processors on while they swim as well as assistive listening devices, and Kate’s implant company would like her to buy these things from them.

Recently the company emailed me to invite me to a user’s group for patients to talk and ask questions. I was pleasantly surprised. At the user’s group, they told us about their assistive listening devices which could be really helpful to me.” - Kate

  • Patient Communities Foster Clinical Success: Demonstrating the benefit of a medical technology often relies on consumers doing their part, whether simply using a device correctly or creating the conditions for successful outcomes (e.g. engaging in rehab following total joint replacement). The responsibility landing on patients’ shoulders can be substantial, and they need support to stick with the plan. Kate, for example, has joined Facebook groups to connect with other cochlear implant users.

“These communities are especially helpful to less tech savvy people, maybe older people, who are managing their devices, but it’s also really nice to be able to connect and share ideas with others who know the experience first hand. It’s fine if these forums are created by the device companies, as long as they aren’t too commercialized. It’s important that people can express their thoughts openly. Mostly the Facebook pages are positive – people are grateful to be able to hear.” - Kate

Not all of Kate’s experiences with her cochlear implant company have been positive, though.  Ironically, the company initially declined her request for CART (Communication Access Realtime Translation) at the users' group meeting; CART is a very helpful accommodation for people with hearing impairments trying to listen and understand in a large group setting. With this experience in mind, Kate has a suggestion for medical device companies:

“It was obvious to me that the very company making my cochlear implants was pretty clueless about the needs of the community they intend to serve. I would encourage companies to hire people who use their devices, if possible.  There is no one better than an actual user to provide real feedback and answer customer questions!” - Kate

Three Forces Driving Med Tech To Be End-to-End Solution Providers

Three Forces Driving Med Tech To Be End-to-End Solution Providers

Unless your job involves orthopedic devices, you might have glossed over this year’s exciting news: as of April 1, 2016, the Comprehensive Care for Joint Replacement Model (CJR) is mandatory for 791 hospitals in 67 geographic areas of the United States. The headline may not have been very catchy, but really everyone in our industry should be paying attention to this first wave of emerging healthcare payment schemes. The Centers for Medicaid & Medicare Services (CMS) implemented the CJR to better manage its >$7 billion cost for the 400,000 annual hip and knee replacements performed on its beneficiaries, so CJR hospitals are now paid a capitated sum for the entire 90-day episode of care.  It will not be long before CMS bundles payment for other procedures as well (cardiac care, e.g. heart attacks and bypass surgery, is next on the docket).

This payment model shift is not just putting pressure on healthcare providers; medical device manufacturers are being asked to help customers achieve value-based care goals, too. The response by orthopedics companies is evident – they clearly got the memo that gadgets are out, solutions are in. Just as quickly as CJR was announced, Zimmer Biomet launched Signature Solutions, an array of value-enhancing services for joint replacement care, including surgical planning, patient engagement, and data analytics. Stryker saw the handwriting on the wall early, offering similar capabilities under their Performance Solutions program since 2009. Other big device companies are also planting the solution flag, such as Medtronic which since 2013 has acquired a diabetes management company and entered the cardiac care services business.  Incidentally, Medtronic also aims to compete for CJR dollars with their purchase of the low-cost implant maker Responsive Orthopedics.

This shift toward med tech offering end-to-end solutions is being driven by three powerful forces in the healthcare ecosystem that are only going to gain steam in the future:

Provider Financial Pressure

For the last decade or more, the mantra of healthcare reform has been the “triple aim” – improving the experience of care, improving the health of populations, and reducing per capita healthcare costs.  This drive is slowly bearing some fruit, and providers are expected to continue carrying the costs and risks of the value-based care mandate. This is all relatively new territory for providers, who are just starting to figure out how to calculate their costs and measure outcomes. As a result, they are scrambling to find somebody (anybody!) willing to step up and shoulder some of the burden, or at least help them understand the risks they are taking on and how they might be mitigated. Long used to selling into hospitals subject to capitated payment, and gaining ever more share of providers’ wallets through consolidation, large medical device companies are in a unique position to lend a hand.  A first step for med tech can be advising customers on how to reap the most value from products they've purchased from them. As Medtronic’s CEO Omar Ishrak put it, “…the appropriate application of technology can not only address inefficiencies in healthcare delivery but potentially drive inflection points in value creation.

Data Deluge

Whether you call it “big data” or some other buzzword, both health systems and medical devices are generating lots more of it every year. Providers need some way to make sense of all this information and harness it to measure and improve their performance on care delivery and cost.  Data integration and analytics support is where medical device companies can really shine as solution partners to their customers. As the med tech industry embraces this role, it will also become ever more entangled in clinical decision making; eventually lots of regulatory, legal and ethical boundaries will need to be reconsidered to truly realize the value of the data. New models for using clinical data to evolve toward best care will be needed to replace the gold standard approach of randomized, controlled trials. In this new model of data-driven care, medical devices could become the central hubs, driving not just procedural practices but entire care pathways. Data will also form the backbone of true risk-sharing models where payment for medical devices is tied to performance on value-based metrics.

Empowered Patients

Whether pushed by growing financial responsibility for care, or pulled by enabling digital health technologies, patients have an increasingly large role in their healthcare. In addition, payers and regulators are measuring providers on patient satisfaction and other patient-reported metrics. As with other types of risk they’ve assumed, providers are looking for allies in their effort to make and keep their patients happy. To help their customers, and also cleverly differentiate their products with means other than price, device companies are learning new ways to interact and communicate with their patient customers – a group traditionally understood in terms of anatomy, biology and physiology. Engaging patients in their own care is critical for good outcomes, and good outcomes are critical to hospitals and device companies alike, particularly in a bundled payment world. To this end, Stryker recently introduced its new web-based JointCOACH platform, which enables two-way communication between patients and care teams about things like pre-op prep, pain control, and rehab during the 90-day CJR period.

The success of the major med tech companies will increasingly hinge on their ability to demonstrate and deliver value to their customers, either by improving care or reducing costs, and hopefully both simultaneously(!). With bundled payments like the CJR emerging, the stakes are getting real now, so the choice is becoming clear – either be the solution or prepare to be commoditized, with all that entails. Medical devices are already a bargain compared to many drugs, but the bargain aisle isn’t the only place we want to live.

Smart Money in Med Tech: What it Means and Why it Matters

Smart Money in Med Tech: What it Means and Why it Matters

As the route to a successful exit in med tech has grown longer, and the pathway riskier and more expensive, many VCs have shifted attention to other sectors such as tech, biotech, and health IT. S2N’s emerging med tech clients wrestle daily with this new reality, turning over every rock to find money, tapping foreign investors, family offices, and physician-believers in the technology for cash. Pitches have taken on a more biotech-y or tech-y tone in pursuit of broader appeal and higher valuations, with Theranos as a prominent and lucrative example (until the bottom fell out).  One of the many curious / suspicious things about Theranos was always the lack of any traditional med tech investors around the star-studded BOD table.  Turns out that a number of veteran health care VCs were pitched Theranos and didn’t like what they saw.  Smart.

To define the elusive concept of "smart money" in our industry, we approached two dedicated early stage med tech investors, Aaron Sandoski, Co-Founder and Managing Director of Norwich Ventures and Joshua Phillips, Managing Partner of Catalyst Health Ventures.  Norwich and Catalyst are both relatively small funds, closing one or two deals a year from among the heaps of pitch decks they receive.  Having stuck it out through the rollercoaster ride of the last decade, Josh and Aaron have accumulated wisdom that informs their investment decisions and interactions with entrepreneurs.  So what makes these focused, experienced med tech VCs different from other sources of capital for emerging med tech companies? 

Both Josh and Aaron started off with the diligence process – a critical function of any venture investor and a good way to know if you are dealing with smart money. For Josh, it boils down to the clinical value proposition, which has to be “clear and tangible, not a me-too or a just a little different.” Josh sees many cool, futuristic technologies that don’t really change outcomes (a particular issue for diagnostics); less savvy investors can be dazzled and lose sight of this critical success factor.  Aaron goes right to the big picture math: “The main question is whether the company can get to the finish line in the right amount of time with a reasonable amount of capital.”  In med tech, defining that finish line is where smart money again can distinguish itself. Unsophisticated investors look to FDA approval as the end-game, but for Aaron “FDA is very far down the list.”  Aaron pointed out that <20% of 510(k) devices are acquired before commercialization; while that figure goes up to 60% for PMA technologies, once development costs and time are factored in, “timelines to exit and returns are not any better for 510(k) vs. PMA.”  That’s smart med tech money talking.

On the other side of the diligence gauntlet, if you are lucky enough to get funded, is the thought-partnership a smart investor can bring to their portfolio companies on complex topics, such as what evidence will generate the most incremental value (e.g. animal vs. human).  “You don’t necessarily have to get this kind of expertise from an investor, but you need it from somewhere; the entrepreneur who doesn’t believe this doesn’t understand what all is involved in med tech development,” cautions Aaron. Smart money investors also understand that med tech development is iterative by nature, and they are less likely to get spooked and run when problems arise. Josh summed it up: “When things don't go right, it’s very easy for investors to give up and leave; it might be easier to get money from a family office your uncle knows, and their valuations might be better than ours, but when things aren’t going well and you need someone to talk to, good luck.” 

Experienced med tech investors also have the benefit of seeing many technologies spanning multiple market segments, so they can “go broad” to source innovative ideas and solutions while the entrepreneurs “go deep” and focus on execution.  By Aaron’s rule book, “an entrepreneur should know 10X more than me about the companies and technologies in their specific field, but having been in the industry for a decade and seen 1,900 companies, I should know a lot more about companies outside their field.”  This panoramic view enables smart money investors to propose different ways to frame challenges and expand the solution set. Aaron cites the example of intellectual property strategy: “You can approach IP in many ways, and we know lots of tricks other med tech companies have used successfully.”  Josh has gained important insight along the way about managing burn rates by outsourcing many functions, and has built up a network of contractors with capabilities in different aspects of med tech development (manufacturing, quality systems, etc…) that can be leveraged.

Going in, I thought these investors might tout their ability to open doors with potential acquirers, but both Josh and Aaron downplayed this factor as benefit of working with them.  If the company is pursuing something valuable, it’s not that difficult to make connections with the big device companies who constantly scout for new technologies. Josh is more concerned about his entrepreneurs becoming de-focused in “trying to make Medtronic happy.”  Aaron thinks the involvement of smart money in a deal “might give strategics some comfort” and lend an edge to early interactions, but “a good product and entrepreneur will get there anyway – there is no magic Rolodex.”

Wherever emerging med techs go hunting for money, Josh and Aaron recommend conducting diligence of their own on potential investors, for example by asking other entrepreneurs who have worked with that investor about them and their relationship. “You should do reference checks on investors the same as anyone else getting involved in your business,” explains Aaron. “Would you hire a VP and not call references? Think about how long the average employee is with your company—3 years? The average investor will have more control and will be involved much longer than even your key hires.” So, med tech entrepreneurs, before you take one more dime from an investor, consider what value they bring beyond the cash, and think about going after some smart money.   

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

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

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

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

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

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

1.     Get the right team in place, and fast

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

  • The sum total of one CEO’s advice was, “Make your people decisions quickly,” echoed by “make sure you have a solid management team in place, and if not act quickly in creating one.”

  • Rapid action needs to follow rapid intel, but not judgment; “Gather as much information as you can in a short period of time – don’t assign blame to the people there who are there and have been working hard, but make sure they are capable and you can trust them.”

  • Great people aren’t enough, though - you also need everyone on the same page in terms of objectives and roles. “If you have great people, all aligned behind the goals and how to operate together, you can accomplish anything,” offered the most upbeat CEO of the bunch.

  • Another CEO emphasized this point; “Pay attention to how the team works together - individual genius can save a company but dysfunctional teams can disable progress.”

  • If key people aren’t working out, “don’t delay addressing personnel issues” and “be willing and prepared to make changes to the team as the business develops.”

  • The CEO’s role is captain of company culture, and according to one CEO a good culture “…allows people to give their best, removes obstacles, and facilitates the great results the team can achieve.”

  • Singing Kumbaya with your team isn’t the only means to success, though, as one CEO observed. “You cannot gauge progress by measuring satisfaction. Teams are often closest to a breakthrough at the height of their frustration. Revolutionary change is inertial and nearly everyone who is threatened will resist until the facts are undeniable or they have incentive to change.”

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

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

  • Boards, like spouses, just want to be heard. “Listen to what’s important to your board members. Understand what the Board considers to be the most important things for the CEO to get done,” offered one CEO.

  • Consider carefully with whom you climb into that figurative marital bed, assuming that decision is in your control. “Find a team of financiers who believe in your vision and especially in you.”

  • Another CEO described what they look for in their funders; “The best investors want us to create value, and want to be there to back us, and grow their investment with the firm as long as their capacity to do so permits.”

  • The right investors for an early stage company might not be the best fit as commercialization nears, and managing that transition thoughtfully is important. “It is natural that the appropriate mix of investors change as a firm grows and matures, and it is important to help facilitate fair rewards to your early backers.”

  • Misalignment between management and the BOD is a big concern - “If the Board members don’t share your values or don’t have the resources to continue investing until you reach an exit favorable to them, your interests will diverge.”

  • Managing investors’ (and others’) expectations of the team and company progress is clearly challenging, especially when a new CEO is brought in to “fix” things; “Typically people’s expectations are out whack, especially when it involves turnarounds.”

  • Several CEOs advised a strong, proactive approach to managing these expectations. “Be firm with your Board as to what their expectations should be, and then communicate like crazy to keep them aligned with you,” advised one CEO.

  • Getting on top of expectations quickly and for all stakeholders is key; "Set and communicate the correct expectations early to the investors, the company, and customers.”

  • How you communicate with the BOD is critical – honesty is important, within limits that is. “Be as transparent as practical with your board - lead when possible by offering solutions but don’t hide problems,” suggested one CEO.

  • Fundamental to a good BOD-CEO relationship is gaining a clear picture of investors’ assumptions and motivations. One CEO with a big company background shared his surprise at learning “…the different meanings of value creation to different investors in a startup” and advised new CEOs to “...know your investors and Board - understand what matters to them, what a good return looks like to them, what their timing expectations are, and try to be sure that they know you have their interests in mind in all you do.”

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

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

  • “Find someone, a mentor or trusted former colleague, who you can level with – you can’t always be completely frank with your BOD. It is crucial to have independent perspective and find someone who can challenge you.”

  • Another CEO was even more to the point. “As a first time CEO you don't know what you are doing. You can’t admit to your team how much you don’t know, but if you pretend you know everything you will be ‘royally buggered’. Surround yourself with people who have done it before and listen to them. Don't put them on your Board.”

  • Commiseration with other CEOs in a similar boat seems to be helpful, too (and was the inspiration for this blog, by the way). “Seek out advisors who have experience as a first-time CEOs and know what you are about to go through, and learn from them,” suggested one CEO.

  • Another offered, “Stay humble, don’t think you know it all, surround yourself with advisors/mentors who were in your shoes before and who know the land mines.”

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

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

  • One CEO emphasized the need to personally immerse yourself in the market; “Listen to your customers - get out into the trenches, early and often, and hear what patients are saying about the technology if it is already commercialized, or what the customers need for technology in development.”

  • The other market-related advice centered on pursuing the right market opportunities. “Be as certain as possible the problem is really worth solving: that there is a real need that someone will pay to address,” offered one CEO.

  • Another CEO suggested, “Ensure you have picked a relatively large market with a very real unmet need to give yourself the best chance that what you build will be embraced by the market.”

5.     Stay funded

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

  • “Remember your #1 reason for existence is to ensure the company has the money it needs to execute its strategy,” advised one CEO.

  • Another CEO made his point in all caps, for emphasis; “KEEP THE COMPANY FUNDED. That is the single most important role of a CEO. You need to look at all funding options. When you have few options, you lose your negotiating leverage.”

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

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

A 2016 Proposal for Med Tech: Build the Brand

A 2016 Proposal for Med Tech: Build the Brand

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

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

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

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

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

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

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

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


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.

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

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

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

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

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

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

  1. Conditional use: This is similar to the concept of "Coverage with Evidence Development" which CMS has embraced for everything from paying for devices in clinical trials to pulling reimbursement for budget-busting products or applications lacking sufficient evidence of efficacy. In the positive med tech case, though, the goal of conditional use would be to receive "provisional" payment for innovative products from customers or payers while the benefits are being validated with real-world use.The goal of conditional use risk sharing arrangements is to receive "provisional" payment for innovative products while the benefits are being validated with real-world use. One could say that med tech companies engage in this form of risk-sharing routinely, otherwise known as the “eval”. However, current medical device evals are often conducted in a non-rigorous fashion – if the evaluation site likes the technology, finds it easy to use, helpful and economical, they agree to continue to buy it or buy more; if not, it goes back. With conditional use under a risk-sharing agreement, the hospital or health system agrees to purchase if clinical benefits or cost savings hit certain pre-determined performance benchmarks during the assessment period. Success here is all about how to define and measure performance, which is likely to require more extensive use of the technology than a typical eval process (one benefit of risk-sharing for the company).

  2. Warranties/rebates: This type of risk-sharing agreement, which offers downside protection for hospitals if specified performance expectations are not met, can be linked to device-related disappointments or non-delivery of anticipated clinical or cost-saving benefits. The latter has already made an appearance in med tech, for example St. Jude Medical is currently offering to pay hospitals a 45% rebate on the price for cardiac resynchronization therapies if a lead revision is needed within the first year. Offering rebates or warrantees for failure to meet clinical or economic benefit benchmarks is a space where med tech has yet to play in a meaningful way, but pharmaceutical companies have been trying to make this work with mixed success. The pharma side of J&J cut a deal with UK’s NICE for a cancer drug called Velcade, offering to rebate the cost for patients who didn’t experience clinical benefit defined as a 25%+ reduction in serum M protein, a validated biomarker of treatment response. In actuality, it turned out to be quite difficult to track treatment response as proposed, and the analysis of the data was delayed year after year.

  3. Upside sharing: Going into business with healthcare customers and "splitting the profits" generated by new technologies is certainly a radical departure from current med tech business practices, and is fraught with regulatory peril, but this type of risk sharing may ultimately be the way forward if we believe our own cost-effectiveness stories. As big med tech companies add services to their device offerings to provide customers with turn-key solutions (see the timely news of Boston Scientific adding value-based offerings to its Cardiovascular line), the stage is being set for sharing the financial gains from quality and cost improvements. For upside sharing to work, however, there must be strong compliance with use of the products and services involved, particularly if the gains are to be quantified at a systems or population level. Timeframes need to work for both parties, too, requiring some balance between upfront and back end payments.

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

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

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

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

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

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

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

MedTech M&amp;A Tips from the Front Lines

MedTech M&A Tips from the Front Lines

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

Run a tight ship

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

Always keep your pitch book fresh

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

Build relationships with investment banks

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

Have a selling price in mind

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

Keep the M&A inner circle small

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

Maintain the momentum

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

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