Reinventing Life Science Startups: Medical Devices And Digital Health

What if we could increase productivity and stave the capital flight by helping Life Sciences startups
build their companies more efficiently?

Were going to test this hypothesis by teaching a Lean LaunchPad class for Life Sciences
(therapeutics, diagnostics, devices and digital health) this October at UCSF with a team of veteran
venture capitalists.

Part 1 of this series described the issues in drug discovery. This post covers medical devices and
digital health. Part 3 will be what were going to do about it.

Medical devices prevent, treat, mitigate, or cure disease by physical, mechanical, or thermal means
(in contrast to drugs, which act on the body through pharmacological, metabolic or immunological
means). They span they gamut from tongue depressors and bedpans to complex programmable
pacemakers and laser surgical devices. They also diagnostic products, test kits, ultrasound products,
x-ray machines and medical lasers.

Incremental advances are driven by the existing medical device companies, while truly innovative
devices often come from doctors and academia. One would think that designing a medical device
would be a simple engineering problem, and startups would be emerging right and left. The truth is
that today its tough to get a medical device startup funded.

Medical Devices

Regulatory Issues

In the U.S. the FDA Center for Devices and Radiologic Health (CDRH) regulates medical devices and
puts them into three classes based on their risks.

Class I devices are low risk and have the least regulatory controls. For example, dental floss, tongue
depressors, arm slings, and hand-held surgical instruments are classified as Class I devices. Most
Class I devices are exempt Premarket Notification 510(k).

Class II devices are higher risk devices and have more regulations to prove the devices safety and
effectiveness. For example, condoms, x-ray systems, gas analyzers, pumps, and surgical drapes are
classified as Class II devices.

Manufacturers introducing Class II medical devices must submit whats called a 510(k) to the FDA.
The 510(k) identifies your medical device and compares it to an existing medical device (which the
FDA calls a predicate device) to demonstrate that your device is substantially equivalent and at
least as safe and effective.

Class III devices are generally the highest risk devices and must be approved by the FDA before they
are marketed. For example, implantable devices (devices made to replace/support or enhance part
of your body) such as defibrillators, pacemakers, artificial hips, knees, and replacement heart valves
are classified as Class III devices. Class III medical devices that are high risk or novel devices for which
no predicate device exist require clinical trials of the medical device a PMA (Pre-Market Approval).
The FDA is tougher about approving innovative new medical devices. The number of 510(k)s being
required to supply additional information has doubled in the last decade.

The number of PMAs that have received a major deficiency letter has also doubled.

An FDA delay or clinical challenge is increasingly fatal to Life Science startups, where investors now
choose to walk away rather than escalate the effort required to reach approval.

Business Model Issues

Cost pressures are unrelenting in every sector, with pressure on prices and margins continuing to
increase.

Devices are a five-sided market: patient, physician, provider, payer and regulator. Startups need to
understand all sides of the market long before they ever consider selling a product.

In the last decade, most device startups took their devices overseas for clinical trials and first getting
EU versus FDA approval

Recently, the financing of innovation in medical devices has collapsed even further with most Class
III devices simply unfundable.

Companies must pay a medical device excise tax of 2.3% on medical device revenues, regardless of
profitability delays or cash-flow breakeven.

The U.S. government is the leading payer for most of health care, and under ObamaCare the
governments role in reimbursing for medical technology will increase. Yet two-thirds of all requests
for reimbursement are denied today, and what gets reimbursed, for how much, and in what
timeframe, are big unknowns for new device companies.

Venture Capital Issues

Early stage Venture Capital for medical device startups has dried up. The amount of capital being
invested in new device companies is at an 11 year low.

Because device IPOs are rare, and M&A is much tougher, liquidity for investors is hard to find.

Exits have remained within about the same, while the cost and time to exit have doubled.

Life Sciences III The Rise Of Digital Health

Over the last five years a series of applications that fall under the category of Digital Health has
emerged. Examples of these applications include: remote patient monitoring, analytics/big data
(aggregation and analysis of clinical, administrative or economic data), hospital administration
(software tools to run a hospital), electronic health records (clinical data capture), and wellness
(improve/monitor health of individuals). A good number of these applications are using
Smartphones as their platform.

Business Model Issues

A good percentage of these startups are founded by teams with strong technical experience but
without healthcare experience. Yet healthcare has its own unique regulatory and reimbursement
issues and business model issues that must be understood

Most of these startups are in a multisided market, and a few have the same five-sided complexity as
medical devices: patient, physician, provider, payer and regulator.

Reimbursement for digital health interventions is still a work in progress

Some startups in this field are actually beginning with Customer Development while others struggle
with the classic execution versus search problem

Regulatory Issues

Digital Health covers a broad spectrum of products, unless the founders have domain experience
startups in this area usually discover the FDA and the 510(k) process later than they should.

Venture Capital

Seed funding is still scarce for Digital Health, but a number of startups (particularly those making
physical personal heath tracking devices) are turning to crowdfunding.

Moreover, the absence of recent IPOs and public companies benchmarks creates uncertainty for VCs
evaluating later investments too

Try Something New

The fact that the status quo for Life Sciences is not working is not a new revelation. Lots of smart
people are running experiments in search of ways to commercialize basic research more efficiently.

Universities have set up translational R&D centers; (basically university/company partnerships to

commercialize research). The National Institute of Health (NIH) is also setting up translational
centers through its NCATS program. Drug companies have tried to take research directly out of
university labs by licensing patents, but once inside Pharmas research labs, these projects get lost in
the bureaucracy. Realizing that this is not optimal, drug companies are trying to incubate projects
directly with universities and the researchers who invented the technology, such as the
recentJanssen Labs program.

But while these are all great programs, they are likely to fail to deliver on their promise. The
assumption that the pursuit of drugs, diagnostics, devices and digital health is all about the
execution of the science is a mistake.

The gap between the development of intriguing but unproven innovations, and the investment to
commercialize those innovations is characterized as the Valley of Death.

We believe we need a new model to attract private investment capital to fuel the commercialization
of clinical solutions to today's major healthcare problems that is in many ways technology agnostic.
We need a Needs Driven/Business Model Driven approach to solving the problems facing all the
stakeholders in the vast healthcare system.
We believe we can reduce the technological, regulatory and market risks for early-stage life science
and healthcare ventures, and we can do it by teaching founding teams how to build new ventures
with Evidence-Based Entrepreneurship.

Source: forbes.com

Recommended by : ROBERT M. CASE

President / C-Suite Executive

Medical Device / Diagnostics / Pharma / Consumer

Strategy / P&L / Innovation / Restructuring / M&A / Commercialization

Palm Beach Gardens, FL

rcase31@aim.com

https://www.linkedin.com/in/rcase1/

Brady Corp / Precision Dynamics / Lifescan Inc.