Launching & Funding a Healthcare Innovation: Legal & Business Considerations

Thursday January 23, 2015, the Boston Health Innovators hosted a conference to educate healthcare professionals on the current legal and financing considerations for undertaking a healthcare technology startup. The three speakers John Hession, Partner at Cooley LLP; David Harlow; Principal at Harlow Group LLC; Stephen Altieri, Patent attorney at Morgan Lewis & Bockius LLP discussed venture capital, health data security and intellectual property respectively. An outline of the event is below.

Venture Capital and Angel Investment Facts

• Biotech companies need 4–5 minimum rounds of funding before an IPO.
• The cost of capital for software companies is cheap so software startups may only need 1–2 rounds of financing before an IPO.
• For every ten investments by a venture capitalist, only two companies make the portfolio. The three at the bottom fail within two years and the rest of the companies are stagnant. The top two companies pay for the other eight.
• Angels are looking for doubles and triples, not unicorns.
• For every four hundred plans investors receive, they only back two plans.
• West coast investors pay on average 10–20% more pre-money valuations than east coast investors.

The Current Landscape of Venture Capital and Angel Investments

• Series A investments are the largest percentage of the deal breakdown from 2013–2014.
• The annual sources of startup funding are venture capital = 0.3B, state funds = 0.5B, and angel investors = 20B.
• The percentage of up rounds for all deal stages in Q3 of 2014 has reached more than 83% of deals.
• The median pre-money valuation for an early stage diagnostic company looking for series A funding is about 4MM.
• The percentage of deals structured in tranches (an “option on the company”) rose in Q3 of 2014, but is still down lower than Q2 of 2013. Tranched deals are more typically seen in biotech investments than in software investments because cost of capital is so cheap for software companies.
• 35% of Angel Group Investments are in Information Technology.

Opportunities in Healthcare for Innovation

• Pharmaceutical products are a huge opportunity because Pharma’s IP pipelines are drying up.
• Wellness companies are hot right now, but if you create a startup you need to prove measurable results.
• There are still significant inefficiencies in healthcare and therefore many opportunities.
• Healthcare IT companies are getting funded more in today’s environment due to ACA and HITECH. Investors are less afraid of the regulation associated with healthcare.
• There is a lot of demand for improved outcomes technology that allow for reimbursement from a payer.

What Investors are Looking for in a Startup

• Liquidity, the ability to exit the investment via IPO or acquisition within 7–10 years
• Proven channels for revenue
• The ability for the technology to be reimbursed by hospital payers
• The Buyer is the problem for healthcare informatics companies because of the sales and payment cycles of hospitals.
• Addresses an unmet need
• Intellectual property
• Most patents are claims and not companies. Although many companies do not patent their software, the implementation of a function of the software can be patented. You need to know the current patents in your field and if you are infringing upon them.
• If you are a medical device company to get funding you will likely need an FDA approval because the investment needed is around 10–15 MM
• Investors like to work with people they like on a personal level and have the following qualities:
• Open to suggestions from investors Have a strong professional network Know their weaknesses and have strong self-awareness Passionate about their product
• The product needs to have a viable business model along with a strong sales strategy in a growing market
• The startup needs a wide range of exit opportunities, not just assuming to IPO in five years.

Healthcare Information Security

• 95% of e-patients do not care if their PHI is shared and two-thirds to three-fourths of those patients expect to be discriminated in housing, insurance and employment based on that data
• It is important to determine whether your product is a medical device or app
• Low risk device guidance was just released this week

• If your product is a medical device you need to go through the 510 clearances.
• Common Healthcare Information Security Acronyms
• PHI-Protected Health Information CEs — Covered Entities
• Healthcare Providers and Payers
• BAs — Business Associates
• Touching data on behalf of covered entities
• TPO — Treatment, Payment and Operations
• Do not need additional consent from patient
• NPP — Notice of Privacy Practices
• Lets the patient know how the provider is going to handle their PHI
• BAA — Business Associate Agreement
• The Privacy rule contains the minimum necessary rule, which states that you do not share all patient information that you have. You just share the minimum amount that is necessary
• Patients should have full access to their health data
• If you hold PHI you need to have physical, technical and administrative controls around the data to keep it secure and need to perform an annual risk assessment
• BAs have primary liability under the HITECH act
• If you are involved in a healthcare data beach affecting more than 500 individuals, you will end up on the federal government’s “Wall of Shame”
• https://ocrportal.hhs.gov/ocr/breach/breach_report.jsf
• If you do not disclose healthcare data breaches, you can end up with criminal penalties.
• For secondary uses of PHI, you do not need consent if the data is de-identified.
• theDataMap.org provides a great overview sources of PHI and how it used.
• Health data is worth a lot more on the black market than bank records are.
• The FTC regulates personal health records (PHR), health records that are not electronic.
• healthcare privacy laws are different at the state and federal level

Intellectual Property

• The four types of intellectual property are patents, copyright, trademarks & trade secrets
• To get a patent on a combination of medications, one needs to prove it is a novel combination with unexpected synergies

Originally published at healthitmhealth.com on January 26, 2015.