Medical Device Venture Investment Spikes; Trends in 2015

Medical device, diagnostic venture investment at $2.7B, highest since 2008

See article above: Excited to see that medical device venture investment is picking up. It has been a big month for the space after the end of the JP Morgan Healthcare Conference and a number of new Lifescience investments have been announced (ex: Obalon Therapeutics $20M, Apama Medical $11M; and of course Moderna Therapeutics’ historic $450M financing).

One area that I think is exciting is the neuromodulator space. It has been growing, and in my time in VC, I saw a company working on a diaphragmatic stimulator for ALS, just last year the FDA approved the Inspire device for stimulating the hypoglossal nerve for sleep apnea, and recently the FDA approved a neurostimulator device for obesity, the Maestro system.

What is interesting to me is the market and physicians are willing to utilize implants for increasingly less dangerous diseases. No one batted an eye at pacemakers because they are a life-saving device. When the lap-band debuted there was market hesitation because it was an implant for a purely lifestyle disease, but it gained acceptance quickly, and I think part of what sold consumers is that it is an easy to understand mechanical device that works by limiting gastric expansion. What is different about the Inspire hypoglossal nerve stimulator device for sleep apnea, and the recently approved Maestro obesity neuromodulator device, is that they act electronically on significant nerves and alter neurophysiology in complex and not fully understood ways. Also, this is for diseases that can otherwise typically be cured by lifestyle modifications. This suggests that device makers assume consumers are interested in tech implants that don’t just save their life, but make it better, and I think this is related to the trend towards wearables.

The development of these devices signals that the technology for biologically compatible electrodes/sensors is rapidly improving. A clear example are electrodes in the cochlear implant space; where we could once only fit a handfull of implants into the tiny human cochlea, now we can fit in 20 and a 50 electrode model is in the works

The implications of this are twofold: 1) entrepreneurs are increasingly less limited by technology, and instead can focus more on finding/solving significant clinical needs 2) the lines between tech innovation, wearables, and medical device innovation are increasingly blurred. Entrepreneurs will need to diversify their teams accordingly, and more and more software and hardware backgrounds are relevant to life sciences and this is supported by Google X making large inroads into medical device.

NYT Covers VC returns to Science Start-ups; Ignores Life-Sci

The NYT ran a cover story today that posited that VC’s are ‘returning’ to science-based start-up’s, but there was nearly no mention of life-science or biotech companies. Regardless, it was nice to see a headline about venture that didn’t include the words ‘tech’ or ‘social.’ Truthfully, VC’s never stopped investing in science-based start-up’s in the biotech/life-sci space, albeit they have had a smaller appetite of late.

The one stat that hit home was 2014 investment in biotech rose 26% to $2.93B, which is great, but that tech attracted $11.2B. Ultimately, this shows there is a growing interest in the space, which should be encouraging. Link to article below:

Venture Capitalists Return to Backing Science Start-Ups

Suggested Reading: Why you are having trouble testing your health app

Linked below is a concise but strong post that addresses key issues HealthIT entrepreneurs face when trying to validate their innovation.

Because many health apps incorporate HIPAA protected data, it makes even basic studies tedious. The incredibly slow pace of IRB committees further complicates this. Finally, the specter of the FDA studies scares even the most passionate founders away.

Ultimately, until there is some type of reform or alternate pathway for more technology oriented healthcare innovation, we will continue to see major companies avoiding the healthcare space. We saw this recently with the Google co-founders mentioning that they are not interested in healthcare, and disappointingly, yesterday as we saw Apple, after much hype, shy away from any significant healthcare foray with its watch reveal. Until then, we have to keep fighting the good/painful fight knowing that despite these hurdles, affecting patient health is worth it.

Why you are having trouble testing your health app

Suggested Reading: How Design Patents Strengthen a Medical Device IP Portfolio

While the topic of patents is currently controversial in the entrepreneurial community at large, for medical device companies, it is crucial that you utilize patents fully to protect and capture the value of your intellectual property. Filing for utility patents to protect how your device works is obvious, but as this article notes, even the major players do not always understand the potential value of design patents. There is no reason to leave value on the table, and I think the article below is a great read.

(Full disclosure: I am related to one of the authors, but I think it is a great summary of the topic)

How Design Patents Strengthen a Medical Device IP Portfolio

One key point discussed is how the look and feel of a device can subtly drive brand loyalty. The obvious example of this is how many consumers just prefer the user interface of Apple products over Android products, despite the many benefits that android offers. In the medical realm, I can attest that surgeons are creatures of habit; once they are comfortable with the outcomes they can achieve with a device, they will be hesitant to switch, even to a device that is very similar or even better.

Initial Steps for Physician Entrepreneurs

Screen Shot 2015-08-11 at 10.51.08 PM

Originally posted on Kevinmd.com

Every time I see a GlideScope, I can’t help but lament, “why didn’t I think of that?” To me, the GlideScope exemplifies how physicians can apply their practical knowledge of medicine to create technology that improves patient outcomes.

I had a front-row seat to physician-designed technology prior to my residency, when I worked at an early-stage venture capital fund advising on health care investments. We invested in a number of physician-founded companies, and the physicians I met were both inspiring and visionary.

Unfortunately, despite their medical expertise, most of these physicians had never been educated on the initial steps towards building a concept into a company. Nothing frustrated me more than seeing promising technology, which may have actually helped patients, stall due to simple, avoidable pitfalls. When we met with physicians who hoped to commercialize their innovations, many sought advice on buzzwords like market size, regulatory pathways, or the reimbursement landscape.

Instead, before considering any of these more complex topics, we ensured they could answer four vital questions to confirm that the foundational idea was solid and that all of these other paths were even worth pursuing. I think of it as the Mr. Miyagi approach: get your basics down first. I have listed these four, initial considerations below in hopes of helping others avoid some of the most common pitfalls. I have a surgical bias, so I focus my explanations on medical devices, but these principles can apply to any healthcare innovation.

1. Does it already exist? It seems obvious, but ensure that a comparable device is not already available. Start with a thorough Google search, check catalogs of major companies, exhaust PubMed, and without disclosing your idea, canvas your colleagues, scrub techs, and members of your hospital purchasing committee about similar technologies already available or in trial. Next, use either Google Patents or visit the U.S. Patent and Trademark Office website to assess the novelty of your concept. When searching, try a multitude of different keywords describing not just the device itself, but also outcomes achieved via the device, to see if a similar idea is already patented. Even if you do not understand the legal jargon, scroll through the figures of your search results to gain a sense of what exists. If there are similar devices available, ensure that your device is different enough or better enough to warrant the time and cost of commercialization.

2. Is it actually your idea? If you are employed by an academic institution, research facility, or hospital, your contract may include language stating that your employer has rights to any innovations you create within the scope of your employment. Even if you created your technology on your own time, this can become an issue if your employer feels you used their resources to develop it. If your institution claims certain rights to your innovations, this should not discourage you. Most institutions will encourage monetization of employee innovations through licensing in order to profit from them. The key is to speak with the relevant parties early on and to be aware that you may need to involve other entities when moving your product forward. This is also true for inventions created in collaboration with others. One way to clarify ownership in collaborations is to have all inventors assign their rights to a single company. This avoids having co-inventors potentially compete. Either way, figuring out those relationships early on will save you a lot of hassle down the line. I saw more than a few inventors who later realized they did not exclusively own their technology. If you are unsure, many academic centers have technology transfer offices that you can speak with, or you can ask human resources at your workplace to point you in the right direction.

3. Is your idea protectable? In the health care space, often it is the ideas that are valuable, and patents will help to capture the most value from them. Until you protect your innovation, do not publish any information related to your product concept and do not openly discuss it with anyone who is not part of your company. Publishing a manuscript in a journal, discussing the research behind your innovation at a conference, or even brainstorming with a colleague, can constitute what lawyers call a “disclosure” and may jeopardize your ability to protect your innovation. If you decide to pursue your idea, invest in a reputable patent attorney who has experience in the relevant field of technology. With recent changes in U.S. patent law to a “first to file” system, timing is important.

For a device, two types of patents apply. You can file for a utility patent to protect the device itself or a method of using a device, or you can file a design patent to protect the outward appearance of the device. You do not need to initially file a full patent application, but rather, many inventors will file a provisional application first. This protects the date of your invention for one year, but costs less and buys you time to determine whether you will move ahead fully with your technology.

4. Does your product save time, money, or lives? Before committing your time and energy to pursuing a concept, be sure you can easily articulate the economic argument for developing it. This is the most common mistake physician entrepreneurs make. Many physician entrepreneurs are able to define the clinical benefit of their innovation, but cannot explain how they will get paid for it. You do not need to have detailed business plans or Excel spreadsheets, but you must have a general concept of how the device will generate profit. For some products, you may need to consider issues like cost to manufacture and produce the item, or the cost to obtain FDA approval, but before even addressing these issues, you must have a clear clinical and economic argument. Before considering commercialization, ask yourself questions like: does your product save enough time to allow for an extra procedure per day? Is it more cost-effective than your competitor’s technology? Or, does it provide such a meaningful impact on patient outcomes, such as preventing readmissions, that it can command a higher price? In general, with the current environment of decreasing reimbursement and constrained budgets, technologies that provide cost savings will be favored by physicians and purchasing committees alike.

Once you have clear answers for these questions, you can move onto more complex topics like the optimal regulatory pathways, what types of trials may be required, and reimbursement strategies, but addressing these initial questions first will often inform these later considerations.

-Manan Shah MD
-Arlen Meyers is a professor of otolaryngology, University of Colorado, Aurora, CA and founding president and CEO, Society of Physician Entrepreneurs, @ArlenMD

More Recommended Reading

1) Bruce Booth: Ten Tips for Raising Startup Capital in Biotech

Great blog overall, but a solid post and relevant to med tech as well.

2) The Impact of VCs in Seed Rounds in Seven Charts

Worth reading to understand how the landscape for seed investments is changing.

3)Lifting the veil on private biotech valuations | biotechvk

Interesting overview of a complex process. Please note that these are also affected by ‘the phases of the moon, voodoo and the weather’ (to paraphrase Brad Feld).

Interview with Med Device VC

Good read by Shiv Gaglani (@shivgaglani): Investing in Medical Devices: Interview with Venture Capitalist Dave Eichler of Psilos

Dave Eichler mentions a few key points that are worth keeping in mind:

1) Investors in the medical device space are increasingly looking for later-stage deals.

2) Liquidity events for medical device companies are most frequently driven by strategic acquirers, which now tend to wait until companies have meaningful revenue. This makes an FDA inflection point more of a midpoint than a close-to-the-end point.

3) This significantly alters how attractive a medical device company will look to a venture investor’s portfolio, and thus pre-money valuations, especially if the fund looks for returns on the standard 5-8 year cycle.

4) Lastly, he echoes a sentiment I have heard from a number of partners from east-coast life-science funds: “our customers (large hospitals/insurers) cannot afford to worry about tech that is simply better, which worked previously; the new priority is ‘cost effective care.'”

Ultimately, I hope this new paradigm does not adversely affect innovation, which is often cost-ineffective at first before it is able to evolve to produce cost savings (e.g., what we hope will be the case with Tesla).