By: Natasha Azar
When Osage University Partners (OUP) first decided to host a conversation between venture investors on a specific industry sector, one topic clearly presented itself through suggestions from several of our academic partners: venture investment in the medical device sector. Recurring questions included: Where is investment occurring in the area of med tech? When should I talk with investors? Who should I reach out to at venture firms?
Our guest panelists for the webinar were Managing Partner Mike Carusi from VC firm Lightstone Ventures and Partner Hanson Gifford of The Foundry, a medical device incubator with years of experience working with technologies developed at universities. Mike focuses on investments in the biopharmaceutical and medical device sectors in Lightstone’s Menlo Park office, where he also serves as a General Partner at Advanced Technology Ventures (ATV). Since its founding in 1998, Hanson has helped The Foundry form, finance, and staff 20 therapeutics and med tech companies. Combined, Mike and Hanson have extensive experience in the development, commercialization and acquisition of, as well as the investment in, early stage medical device startups. Their portfolios include some of the largest exits the sector has seen.
The webinar was attended by approximately 170 participants who provided questions during the presentation.
To kick off the conversation, Matt Cohen, Principal on OUP’s life science investment team, presented the following chart:
Bill Harrington, Managing Partner on OUP’s life science team, then led a discussion where Mike and Hanson used many of their own investment examples to describe the state of medical device investing and its challenges.
- Investors have not made outsized returns in med tech during the 2000–2010 decade, with on average single-digits IRRs. Many medical device technologies brought to the market in the past 10–15 years have been incremental, partly a reaction to tightening by the FDA and a more challenging market.
- The FDA had become more rigid over the past 20 years. To get approval, any new technology needed to be exceedingly better than existing technology. This created a demand for better trials and higher quality data with an eye towards payers and clinicians to prove the product is improving healthcare. Fortunately, the FDA has made a concerted effort to be more balanced in its review process over the past three years. However, even if a product gets approved by the FDA, there’s no guarantee that it will be reimbursed and adopted by the market.
- In evaluating digital health, and particularly wearables, the ability to analyze data in the cloud and manage it is valuable and can bring measurable economic health benefits. Unfortunately, some of the ideas in the space are not very novel or patentable.
- VCs and entrepreneurs are becoming more creative on deal structure in the med tech venture industry, emulating how startups have worked with big pharma. Large medical device firms are investing in device companies in earlier rounds, providing key support for the industry.
- Some of the areas in med tech today receiving the most investor attention include peripheral neurostimulation, neuromodulation, interventional neuro-radiology, and catheter-based structural heart valve therapies.
- Overall takeaway: Venture investment in medical devices is a smaller sector than ten years ago, but there are many promising signs. While the number of med tech startups has diminished, acquisition numbers in med tech have remained the same, largely due to a steady appetite from strategic acquirers. Even though venture investment is down, the confidence strategics are showing in early stage device innovation could eventually catalyze VC interest in med tech in the coming years.
On the state of med tech venture investing:
Mike: “There’s a scarcity in the industry. There’s a recognition by the major players that it’s probably being underfunded, that they continue to need innovation, and they’re knocking on our doors earlier to see what’s in our pipelines. I think we’re going see this all shift back and hopefully establish a healthy balance. Until then, there’s less investing going on, and the capital is coming from non-traditional investors: Europe, Asia, and Strategics. So although the numbers haven’t fallen off a cliff, the household names that you and I know are gone and replaced with a new group of players.”
Hanson: “While we’ve seen a significant drop in the number of med tech startups, acquisition numbers have stayed the same. Big strategics have abandoned advanced R&D internally and are leaning forward and buying med tech companies earlier. So the medical device space is smaller than it was, but it’s much healthier than it’s been in 10 years.”
On assessing the reimbursement risk/challenge when confronted with an early stage idea:
Mike: “It’s hard. If you [look at] the clinical data, the FDA wants to see a comparison to a sham. Payers don’t care about this — they want a comparison to standard of care. Is the new product you’re bringing to market better as far as safety, efficacy, and cost, compared to what they’re using today? You have to compare these two answers. Trying to assess data needs early on, and assessing payer view and physician views at the same time is very difficult.”
On how far along a med tech idea should be before reaching out for funding:
Hanson: “I would reach out early and often and in all directions… Our key focus is figuring out if this is a really big opportunity as far as clinical need and potential market, and will it make a dramatic change as far as healthcare is practiced? As far as The Foundry is concerned, we need some indication that the promise of a dramatic change is there in order for the health system to adopt it.”
On what to do if you don’t have an entrepreneur or expert attached to an idea:
Hanson: “The medical device community is small… I would reach out to any [medical device] entrepreneurs in your community and ask them who to go to. There are a number of groups like The Foundry around the country.”
Mike: “You need somebody to translate the unmet need piece. We often see a technology looking for an application, and that’s hard for venture investors to sort through… It will be hard to get traction from venture capitalists if it’s a tech looking for an application.”
Hanson: “Med tech is alive and well, and a more exciting space than it has been in a long time. Changes in the IP world provide the ability to file provisional patents very inexpensively, which should make it easier to get out and test the waters with an idea in a safe way, so reach out!”
Mike: “The earlier you can have a conversation with folks — whether if it’s VCs or entrepreneurial mentors, the better. By and large across the industry and particularly with institutions, people are going to want to put a ‘reasonable’ deal in place. Of course, there are benchmarks, and knowing what the benchmarks and typical terms are is helpful.”
Our academic partners can request a link to the webinar by contacting Natasha Azar at firstname.lastname@example.org.