WSGR presenters are hot and cold on med-tech funding

By Larry Haimovitch

Medical Device Daily Contributing Writer

June 29, 2010

SAN JOSE, California — The 18th annual Medical Device Conference sponsored by the influential law firm of Wilson Sonsini Goodrich & Rosati (WSG&R; Palo Alto, California) was held here late last week at its usual venue, the downtown Fairmont Hotel.

As always, the meeting drew from a variety of groups, including venture capitalists (VCs), medical device entrepreneurs, patent attorneys, accounting firms and other service providers to the medical device industry. A bit surprisingly given the current environment, attendance was at record levels, with more than 600 attendees,

The conference organizer, Casey McGlynn, who is a partner and a member of the board of directors of WSG&R, kicked off the conference, pointing out that several negative factors are having a major impact on venture capital funding of the medical device industry.

These issues include the global economic recession, the steep decline in VC returns, healthcare reform, uncertainties and approval delays at the FDA, the reimbursement "maze" and finally, the concerns about physician and industry alliances.

"The combination of all these factors is having a profound impact on the medical device industry," McGlynn said, adding that this conference was focused on helping the industry and the VC community to navigate through these issues and develop successful businesses.

That VC funding of the medical device sector has declined from previous levels is no secret, but the magnitude of the decrease is notable. At the recent MedTech Investing Conference held in Minneapolis, it was disclosed that the percentage of medical device-related venture deals nationally during the first quarter of 2010 dropped from about 14% to 11%.

Appropriately, the very first panel discussion here, titled "Evolving Venture Fund Strategies," delved into the changing world of VC medical device investments. One of the major themes that bubbled up from this discussion and others during the program is that VCs have not only cut their medical device investing but have slashed funding earlier stage deals and are concentrating on the later stages of the company's life cycle.

Specifically, according to data presented at the Minneapolis conference, the percentage of VC dollars going into Series A (first round) investments in 2009 was 13%, compared to 27% in 1997. Conversely, the percentage of late stage investments surged from just 9% in 1997 to a whopping 32% in 2009.

The panelists cited several reasons for this powerful trend, noting that the virtual absence of a medical device IPO market in the past couple of years has meant that portfolio companies could not access public funds to further their growth. In the absence of an acquisition, which has also seen a steep decline, they have remained heavily or completely reliant on VC funding.

Additionally, a new issue, which was dubbed "syndicate risk" by Allan May, a managing director of Emergent Medical Partners (Portola Valley, California) was presented. According to May, some device companies and the VCs are fearful that their syndicates, or co-investors, will not participate in the next round (s) of financing, leaving the investment of the remaining VCs and the company in serious jeopardy.

"This has become a significant concern in the VC world," said May. "We are seeing some device companies fail because the earlier syndicates are not continuing with their investment funds support."

As a result of this new and disturbing development, May further added that "prior to making an investment, we try to carefully assess the long term staying power of the VC investors we may be co-investing with."

One of the best panel discussions, which was titled "European Commercialization Strategies," occurred during a breakout session and attendance was very strong.

In response to the lengthy and arduous FDA process, several VC-backed medical device companies have launched aggressive European commercialization programs. One of the most successful has been Spinal Kinetics (Sunnyvale, California), whose CEO Tom Afzal was one of the panel participants.

Spinal Kinetics has developed and markets the M6 artificial disc, a non-fusion motion preservation product intended to replicate the anatomic and biomechanical attributes of a natural intervertebral disc.

In early 2006, Afzal said that his board was undecided about commercializing in Europe. After considerable debate, the board eventually decided to move forward with a targeted European selling effort, which would occur in parallel with its domestic clinical trial.

After almost four years of European operations, Spinal Kinetics is nearing profitability and is expected to be cash flow positive in the near future. Its sales are growing rapidly and are estimated by Medical Device Daily to be in excess of $10 million.

Afzal's strongly advised that "if you go to Europe, get it right the first time, because if you launch poorly, it will be hard to recover." Further, Afzal said that it is best to be very targeted in a European effort, suggesting that "first succeed in one country and then move on to others."

This was precisely Spinal Kinetics' strategy, as it first entered Germany at the beginning of 2007 with a distributor and then gradually expanded its reach to add other countries, which now includes the UK, Belgium, Holland, Switzerland, Italy Spain, Portugal and South Africa. In late-2009, the company began a direct selling effort in Germany.

Spinal Kinetics recently received FDA approval to begin its pivotal trial for the cervical disc, which Afzal estimated would normally require raising about $22 million. However, because of the tremendous progress it has made outside the U.S., Afzal estimated that an $8-10 million raise would be sufficient to fund the trial. This will be obviously far less dilutive and risky for its existing VC shareholders and clearly vindicates the strategy of entering Europe prior to a U.S. approval.

Another panelist, Kathleen Marshall, president and founder of Maxis LLC (San Jose, California), heartily agreed with Afzal's comments, noting that "while it has not been fashionable to enter markets outside the U.S., it makes great strategic sense to do so."

An outstanding slide presentation, titled "Successfully Commercializing Your Technology in Europe," was given by Martin Jordan, founder and managing director of HTSS (Barcelona, Spain). He provided a comprehensive overview of the latest tends in European reimbursement and made the following key points.

First, disruptive and potentially paradigm-shifting technologies face a more complicated commercialization and reimbursement path.

Second, medical device manufacturers are increasingly being asked to demonstrate evidence of "value for money" (VFM) by non-clinician stakeholders.

In regard to the latter point, Jordan said that "every new drug marketed in the European Union must show evidence of robust health economics. While this has not happened yet with devices, it seems very likely that it will."

Jordan's third key point is that while policy makers would like to develop a VFM model for devices, this is no easy task. Supporting this opinion, he cited a June 2008 Eucomed health technology assessment (HTA) position paper that "the application of HTA to medical devices is challenging . . . a device specific assessment must be recognized."

He concluded his talk with several very insightful comments and recommendations, which are provided in the table below.

EU Medical Device Reimbursement Advice

  1. Getting a CE Mark approval does not mean there will be a market for your product as clinicians are increasingly losing decision making power to payers

  2. For payers, your CE Mark clinical trial is "essentially worthless." You will need more comprehensive trials to establish clinical efficacy and attractive health care economics to the payers.

  3. Healthcare funding is tight and getting tighter as all EU countries face a budget crunch

  4. Modifying existing systems or payment rates is "very heavy lifting." That is, try to fit under an existing code if possible

  5. Regarding local EU distributors, they will not see gaining reimbursement as their responsibility. realize that it must be handled by the manufacturer

  6. Be realistic about the quality of your clinical data and what you can afford to spend on additional studies.

  7. If you decide to sell the company, be aware that any potential acquirer will make reimbursement a key piece of their due diligence

  8. Be wary of spending a lot of time and money to promote your product in the absence of solid clinical data

  9. Source: Martin Jordan at Wilson Sonsini Conference

2010 Wilson Sonsini Conference

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