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.

What specialty distributors need to know about medical device start-ups

S2N’s Amy Siegel was interviewed by our friends at IMDA – (original)

This probably won’t come as a surprise to most IMDA members, but many entrepreneurs – the engineers, scientists and clinicians who develop innovative medical devices — secretly (or not so secretly) hope they’ll get acquired before they have to figure out the messy details of actually mass-producing and selling their devices. When that doesn’t happen, IMDA members have an opportunity.

“You have to catch companies at the point where they have accepted the fact that they have to sell their own product, that they won’t get bought out before they have to,” says Amy Siegel, co-founder of S2N Health. “But you have to sell your value proposition.”

S2N positions itself as an outsourced business and marketing team for medical device start-ups. “We were founded on the principle that pre-revenue, emerging medical technology companies don’t have or need full-time marketing and strategic resources,” says Siegel. “They need that support periodically or on a part-time basis.” The company was founded by Siegel, Erin Warner and Tim Kofol, who worked together in emerging device companies.

Great idea, but can you sell it?

Many medical device companies are founded by technical people on what they believe is a great idea for a great product that will help a lot of people, explains Siegel. "They raise a little bit of seed money from family, friends, public resources, grants. But at some point, when they need to raise real money, they start getting asked questions they can’t answer, about the commercial opportunities of the product.

“They’re thinking, ‘This is great new technology for patients, why isn’t that the most important thing?’ Instead, they get hit with, ‘How will you price it? ’What’s your competition?’ ‘How will you sell it?’ They’re not in a great position to speak to that.

“For some, it’s a rude awakening. They are asked for market proof of concept, not just clinical proof.”

Nor can these innovators expect much help from investors. “It’s the rare investor who can contribute to the discussion on how to commercialize a product,” says Siegel. "Many investors hope to realize the return on their money before they have to worry about commercialization. Often, they are more concerned about who’s looking to acquire the young company than asking, “How big of a sales force will you need?”

“When it becomes clear that a client needs to prepare to launch their product independently, we often guide them to, ’What’s your foot-in-the-door strategy?’” says Siegel. “‘How will you target a segment that must have your technology, that’s small and manageable?’”

Entrepreneurs who do ultimately confront the realities of commercialization are often unprepared and uninformed of what’s involved, she says. “There’s a whole lack of awareness of the efforts it will take to sell a product, to train people how to sell it, and to train users on how to use it.” As a result, innovators often underestimate the cost it will take to do so. “We always put in a pretty hefty line item for distribution costs, scale-up of a sales force, or marketing efforts, and clients’ instincts are often to cut the number by two-thirds,” says Siegel, only half joking.

The task for distributors

For all these reasons, distributors have several tasks before them if they hope to gain access to innovative technologies, says Siegel. For starters, they must convince the start-up company that even though distributors may carry several other lines, they will dig in, they will get to the right people, and they will tell the story. Second, they should quantify for the entrepreneur the costs that the entrepreneur will face if his or her company has to field its own sales force. “Most of the companies we deal with have no idea of what they’re going to confront trying to see customers,” she says. Distributors should make that clear to them.

Distributors must be sensitive to the entrepreneur’s concerns, says Siegel. This is their baby, and they’re wondering, “Will [distributors] represent my product in such a way that it retains its value?” “Are they willing to knock on all the doors?” “Will it be a priority in their bag?”

Introducing innovative medical devices is tougher today than ever before, says Siegel. “The bar has been raised insofar as the acceptance of new technologies, mostly because we’re hitting budget ceilings.” Regulatory hurdles are high, the path to reimbursement is longer, and investors are more anxious than ever to see a return on their investment.

“Entrepreneurs today have to be a lot smarter about their value proposition — not just the clinical value proposition, but the economic value proposition. If not, they’ll make a great device that no one will pay for.”

Specialty distributors can help them, she says, but only if they successfully present their value proposition, reassure entrepreneurs that distribution is a successful strategy to market, and catch that entrepreneur at just the right moment, that is, when he or she has come to realize it’s time to figure out how to bring their technology to market.

Top 5 Anxiety-Provoking Med-Tech Acronyms

Every industry has its three-letter acronyms (TLAs), and certainly med tech is no exception. If you work for a big device company, you practically qualify as bilingual with the extent and array of acronyms forced into your personal lexicon. At one point I may have actually said a sentence like, “The CMO called the PI about the IRB process to estimate dates for FPI and CE mark in the PDP.”

Acronyms are popular because they serve the useful purpose of expediting communication, creating a tribal sense of community for those in the know, and conveying the (sometimes false) perception of vast expertise to the uninitiated. There are certain acronyms, however, that strike fear into the heart of the med-tech entrepreneur. Upon mention of these TLAs, the tension in the room is palpable as brains silently begin to revise development timelines, budgets and cash out dates.

Our nominations for the Top 5 Anxiety Provoking Med-Tech Acronyms (APMAs):

FDA
The only US executive branch agency more groan-worthy than the IRS is the Food & Drug Administration, particularly among med-tech entrepreneurs. At least taxation (like death) is predictable; not so with device regulation under the FDA. The length and tortuosity of an emerging med-tech company’s journey through CDRH can vary greatly by branch, division and reviewer (many of whose badges are still warm from the laminator). The US regulatory process is macabre enough for run-of-the-mill devices, let alone 21st century technologies like medical smart phone apps. Sorry, Shuren, your Innovation Pathway program just sounds vague and scary.

PMA
Back in the good old days of plentiful big-market medical devices with capital-efficient 510(k) regulatory paths, med-tech investing was a pretty good bet. But some companies pushed the boundaries of this regulatory shortcut and a few high-profile safety issues emerged (this New England Journal editorial from last fall singles out metal-on-metal hip implants). Whatever the ultimate fate of the 510(k) program, more companies will be forced down the Pre-Market Approval path, with its higher approval hurdles (safety and efficacy vs. substantial equivalence), longer timeframes, and therefore greater costs. Silver lining: more frequent flier miles from all the international travel! C’est la vie.

SAE
News of a clinical trial patient suffering a Serious Adverse Event is upsetting for emerging med tech companies, whether or not the SAE is attributable to the company’s device (and proving it’s not can be complicated). Of course, the first concern is for the patient with the SAE and their families. Shortly thereafter, though, thoughts go to the just-barely-enough money that was raised for the trial, the timeline-busting impact of halting recruitment, possibly needing to redesign the product or retest in animals, and even scarier corporate doomsday scenarios. As a clinical consulting friend once said, “If you are going to have any adverse events, get it out of the way early.”

V&V
When I first heard this shorthand for Verification and Validation, I thought it sounded kind of mysterious and even remotely sexy, even if usually uttered by a nerdy engineering type (a.k.a. our favorite clients). It wasn’t long before I realized V&V is actually a Yiddish term: “Vait! Vait!” Explaining to your investors the time and dollars required for V&V so that your QMS is ISO-compliant is just no fun. If they look puzzled, just refer them to IEC 60601-1, 3rd edition and it should all become clear.

CPT
You may have heard of a CPT code, but here’s a pop quiz for you – do you know what CPT stands for (without Googling it)? Answer: Common Procedural Terminology. Second question: what organization issues CPT codes, the all-important keys to the physician reimbursement castle? If you said CMS, you are wrong. Why, it’s the American Medical Association! And while you’d think that the premier US physician lobbying organization might be loose and generous with the codes, this is definitely not the case. If you are unlucky enough to have a technology requiring a brand new CPT, get ready for a long, arduous and likely doomed process, and start counting your RVUs.

As fear-inspiring as these and many other acronyms can be, let us not forget that med-tech entrepreneurs are a hardy bunch and not easily intimidated. Otherwise they’d be developing frivolous, benign things like Instagram. Rats.

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