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Market Opp Assessment

The Mythical Emerging Medical Device “Platform” Company

The Mythical Emerging Medical Device “Platform” Company

What do unicorns, fairies and medical device platform plays all have in common? They would be delightful to see, but sadly don’t exist. “Wait a minute,” you say, “My incredible new medical technology has so many potential applications that it may ultimately be used on every patient to ever enter a hospital.” The reality is that most emerging medical device companies succeed not because they have an expansive platform technology, but because they have a lead product that works and doesn’t kill anybody. Most med tech investors don’t fund platforms, they fund products. Of course, the business plans of development stage device companies have to expound on the platform potential to look like they have multiple shots on goal, but having one really good shot is what drives valuations.

To be clear, we believe there are really cool technologies out there with lots of exciting medical applications all over the body, but upon deeper examination all those applications often have few development or market synergies (apologies for the overused s word). In all likelihood, it will take almost as much money, time and senior attention to get your second product approved as your first one, because most of that expense is demonstrating clinical safety and efficacy in the specific application. So all the development effort for your nifty erectile dysfunction device is going to help you precious little in clinically advancing, much less commercializing, the incontinence version. And good luck asking your investor to double their investment into your company to get two products simultaneously through development, much less to market.

“Okay,” you say. “I will find rich strategic partners to provide non-dilutive funding for these other applications, and then there is only upside! We get money, validation, and access to all their expertise! I will be a hero!” Don’t kid yourself; finding, sealing, and feeding that little partnership beast will take up precious R&D and management bandwidth that would otherwise go to progressing your lead product. And really the most you can hope for out of these side deals is more credibility as a platform, which might up your valuation by maybe 25%, but this has to be weighed against the distraction factor and added cost (as the partners never pick up the whole tab). Another consideration is that many potential big device company partners are well diversified (and growing ever more unwieldy through acquisition), so that carving distinct, partnerable fields without risking the ultimate acquisition value of the company is a challenge.

There is definitely a bright side for emerging medical device companies in deflating the platform myth, though. If you aren’t going to be viewed or valued as a true platform technology, then you don’t have to waste time and energy chasing down little detour deals to leverage your platform. The real job of a medical device startup is to use scarce capital resources to prove the product hypothesis somewhere, as quickly and efficiently as possible. Arm-waving at other exciting opportunities is allowed and expected; if plan A doesn’t pan out, nice to have a plan B around which to reinvent the company. Our admitted bias at S2N is that we like focus, as you can read about in several of our previous blog posts and particularly this one about the hidden cost to medical device companies of non-dilutive funding. If what floats your boat is lots of development stage dealmaking, you might be disappointed in emerging med tech land. If it feels good to create something you can see and touch, then you are in the right place.

First Stop, Third World: Emerging Markets for MedTech

First Stop, Third World: Emerging Markets for MedTech

For several years now, with the FDA moving ever more like molasses (especially for small companies, see this insightful survey from Northwestern University), device companies are going outside of the US to study and initially commercialize their products. The geography of choice has long been Europe, with its world-class medical institutions and researchers, direct flights from the US East Coast, infinite fine food and beverage options, and a more predictable, less onerous regulatory framework. Reasonably demonstrate safety, and you can get a CE mark (getting nationalized healthcare systems to pay for your novel technology is a whole different story; we’ll save that for another blog post).

US Investors have come to expect their device portfolio companies to launch in Europe first, with CE mark as a major value-creating milestone; the high-value takeout dream company Ardian was purchased by Medtronic for $800 million with only a CE mark under its belt and US approval years away. The investment and risk of a US regulatory process for truly new technologies practically require the deep pockets and clinical/regulatory infrastructure of a big company (emerging med tech CEO note to self: better get bought before we have to raise the $$ to do this ourselves). But a CE mark seems alluringly achievable for a capital efficient, VC-backed company.

Alas, the European back door to market validation and early revenues may be closing. The disparities between US and EU regulation, and among the various Notified Bodies within Europe, have received significant attention of late. A publication in the European Heart Journal this May, picked up extensively in the lay press, featured a call by European cardiologists for tougher device regulations.Change is coming, that’s for sure.

So maybe it is time to lift our transatlantic heads up and take in the view of the rest of the planet. While we run back and forth to Europe, clogging our arteries with triple-cream brie, a whole developing world chock full o’ unmet medical needs and experiencing enviable GDP growth goes largely untapped by emerging med tech companies.

The big medical device companies, by the way, already have seen the developed-world = flat-growth handwriting on the wall and can’t acquire assets in China, India, Brazil and elsewhere fast enough. For Medtronic, emerging markets account for nearly 10% of company sales and sales there are growing at an annual clip above 20% (vs. < 5% for total company revenue). St. Jude’s CEO paid a personal visit to India this year, unfortunately packing some unwelcome ammo through airport security. As the big companies build their distribution channels in the developing world, they undoubtedly will be seeking additional products to put in those knock-off Gucci sales bags.

To explore the strategy of going first to emerging markets, S2N turned to Dr. Bill Rodriguez, CEO of the development-stage diagnostics company Daktari. Daktari is trailblazing by building a U.S.-based, for-profit medical technology company with an Africa-first market strategy. Daktari’s lead product, a portable CD4 counting system, is critical in the care of people with HIV/AIDS, so going to Africa makes sense and Bill’s two decades of global health experience give him the passion, connections and moxie to get it done.

So what makes an emerging markets strategy possible, or dare we say even attractive, for a small med tech company? In Daktari’s case, it’s:

1. The right product

Gone are the days of the developing world being the dumping ground for obsolete first world devices or an afterthought for growth when all other geographies have been exhausted. To succeed, companies need to develop products designed to meet the specific needs of the target market, meaning not just price point but also use environment, transportation, power supply, and so on. Daktari’s system trades off certain features that would not be valued in Africa, even some diagnostic sensitivity, to keep the product low-cost. The device can be up-featured later for developed country markets. Worth mentioning, though, that stripping out COGS is a globally admired skill.

2. The right investors

Not every mainstream med tech VC will have the appetite for emerging market risk, mostly because they don’t have the knowledge to properly assess it. Daktari has found VC investors that were willing to conduct the due diligence, e.g. make calls to Africa, as well as tapping an assortment of angels, hedge funds and other investors (42 entities on the cap table in all) to fund his company through clinical trials and market launch.

No doubt, these investors appreciate Daktari’s extreme capital efficiency – how many med tech companies can even aspire to gain regulatory approval in 2.5 years start to finish with $7 million? Sweet.

Companies creating products for emerging markets might also have access to alternative sources of capital such as local sovereign wealth funds (Brazil just set one up in 2008, South Africa is getting in the game, too) and socially oriented VCs such as the Acumen Fund.

3. One-Stop Selling

Part of Daktari’s capital efficiency story is the concentration of purchasers, namely the national government entities in the African countries where the company will study and first launch their system. Bill figures they can get to $10 million in sales with his first four customers, so Daktari will need only a small local sales organization to get started. This is absolutely NOT the case in all developing countries, with China and India representing two very fragmented markets with many intermediaries.

Having central governments as purchasers also provides somewhat of a hedge against IP violations, since according to Bill it is “harder for government customers to buy fakes.” But the real protection comes from making the product difficult to copy from a manufacturing standpoint, and also by fostering brand loyalty by showing a corporate commitment to the market. The involvement of NGOs, particularly in global AIDS initiatives, also means that money flows are being closely monitored, keeping somewhat of a lid on corruption.

So whether borne of social mission, business vision, or process of elimination, an emerging markets strategy can make sense, even for the little guys. Personally, I’d take a good Vindaloo over foie gras any day.