Published: 07 May 2013
The Luck Factor for New Medical Devices
If all a startup medtech company needed to succeed were a clever invention, a smart plan and competent execution, the odds of a big payday would be far better than they are today. But life is a non-linear, unpredictable adventure, and so is the development of new medical technologies. Whether we humans want to admit it or not, luck is an omnipresent factor in determining winners and losers in med tech innovation.
Luck (at least the good kind) is defined as “success apparently brought by chance rather than through one’s own actions.” Our personal stories are filled with chance events that helped us land a job, meet a mate, or get out of a self-inflicted jam. In the emerging medtech world, luck often takes one of three forms, as illustrated by stories from some of our veteran medtech compatriots:
A start-up company executive we’ve been working with met his future angel investor on a plane; it turns out that said investor has a deep connection to the disease area relevant to the company’s technology. I’m willing to bet that every successful medtech start-up has at least one fortune-changing tale of a chance meeting. This fairy godperson type of luck can also take the form of a reasonable, experienced FDA reviewer, but the odds of the in-flight scenario may be better.
You wouldn’t think a fortunate timing story would start with the big tsunami of 2011 in Japan. For 3-D Matrix, an MIT-founded drug delivery and regenerative medicine company in the final stages of an IPO in Japan right in the thick of it, the economic fallout seemed like bad luck at the time. But the natural disaster delayed the IPO to the following fall, when the Tsunami bolstered the economy and currency to decade highs. 3-D Matrix’s shares are now valued at over 10X the IPO price and have been the best performing in the biotech/medtech sector since then. More commonly in medtech, companies benefit from catastrophes such as influenza outbreaks, or famous people famously struck by a health problem addressed by a new device.
Boston Scientific’s Taxus drug-eluting stent, one of the most successful medical devices in history, was launched at a time when its arch-rival’s product, the J&J Cypher stent, was suffering supply problems. As a superior product with strong data entering an undersupplied marketplace, Taxus quickly capture significant share from J&J. Sometimes bungling competitors can sour an entire market (that would be bad luck), but in this case demand was strong and going unsatisfied – a perfect situation for a new entrant.
But luck is never really all luck, is it?
Case #1 – chance plane meeting. This particular entrepreneur is not only passionate about his product, but has his medical technology’s story down and ready for airing at a moment’s notice in a compelling and concise manner. And he clearly forgoes heavy drinking on planes, always keeping an eye out for networking opportunities.
Case #2 – tsunami-delayed IPO. According to 3-D Matrix co-founder Zen Chu the company was able to hang on for a better-timed IPO with smart rainy day planning and quick reflexes. “We had enough capital to weather the storm and 18 month aftermath, and we were able to throttle down when we needed to,” reminisced Zen. Thoughtful planning with strategic partners and capital sources allowed the company to survive unforeseen events and capitalize on better market timing.
Case #3 – competitor supply problem.
Boston Scientific’s then CEO, Jim Tobin, is adamant that BSC’s success was no lucky break. BSC became aware of J&J’s supply chain problems and customer frustrations, and aggressively invested in manufacturing capacity and a top-notch sales force. “We put our company in the perfect position to exploit J&J’s weaknesses,” said Tobin.
In the end, good luck happens to those who are seeking it, can recognize it when it happens, and know how to make the most of it. Or as med tech start-up veteran Amar Sawhney said when I posed this philosophical topic to him, “Life presents you with situations. Some may seem lucky on the surface, while others seem tough. The tenacity to turn a tough situation in their favor is what distinguishes successful entrepreneurs.”
Published: 03 May 2013
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
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Published: 21 Mar 2013
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.
- 07 May 2013: The Luck Factor for New Medical Devices
- 03 May 2013: S2N Whitepaper - Marketing for Emerging Medtech: A Stage by Stage Guide
- 21 Mar 2013: Valuation Drivers for Emerging Medical Device Companies
- 27 Feb 2013: The Rise of Robotics in Med Tech
- 14 Feb 2013: Five Marketing Essentials for Emerging Medical Technology Companies
- 31 Jan 2013: Is The Medical Device Industry Ready for Big Data?
- 11 Jan 2013: Europe Ups the Post-Market Ante for New Medical Devices
- 28 Nov 2012: KOL Matchmaking – Four Key Considerations for Medical Device Companies
- 09 Nov 2012: Election Lesson for Emerging Med-Techs - It's All About the Ground Game
- 31 Oct 2012: The New Normal in Medical Device Exits
- 27 Sep 2012: The Next Big Niche? Emerging Med-Tech in Transplant.
- 19 Sep 2012: The Three Greatest Pivots in Medtech
- 12 Sep 2012: Driving Early Market Adoption for your New Medical Device
- 30 Aug 2012: S2N Summer 2012 Newsletter
- 19 Jul 2012: The Affordable Care Act - Implications for Emerging Med Tech Companies
- 17 Jul 2012: Six Ways Through the Valley of Death for Emerging Medical Device Companies
- 26 Jun 2012: When Medical Devices go Quiet - Managing End of Life
- 14 May 2012: The Mythical Emerging Medical Device “Platform” Company
- 07 May 2012: What specialty distributors need to know about medical device start-ups
- 24 Apr 2012: Top 5 Anxiety-Provoking Med-Tech Acronyms
- 19 Mar 2012: Pulling Together: Aligning Stakeholders in Emerging Med Tech Companies
- 06 Feb 2012: How Low Can You Go? The Value of Developing Cheap Medical Devices
- 12 Dec 2011: The Legacy of Boston Scientific for MedTech Entrepreneurs
- 26 Sep 2011: Emerging Med Tech Execs: The 10 C’s You Need to Lead
- 08 Aug 2011: Back to Basics: The Surgical Segment Heats Up
- 28 Jun 2011: First Stop, Third World: Emerging Markets for MedTech
- 06 Jun 2011: Successfully Naming your MedTech Company (hint: add beer)
- 16 May 2011: The Squeeze of the VCs - Four Conspiring Trends
- 25 Apr 2011: Who Will Win in the New Healthcare Economy?
- 08 Apr 2011: Corporate Venture Funds – What’s the Deal?
- 23 Mar 2011: Medical Device Exits - Part 2
- 09 Mar 2011: Medical Device Exits - Part 1
- 01 Mar 2011: The Hidden Cost of Non-Dilutive Funding
- 22 Feb 2011: How Virtual Can You Go in Emerging Medtech?
- 01 Feb 2011: Top 5 Reasons Why We Like The Medical Device Industry