Medical device fundraising garners spotlight at meeting

By Larry Haimovitch

Medical Device Daily Contributing Writer

June 27, 2013

SAN FRANCISCO — The 21st annual Medical Device Conference, sponsored by the law firm of Wilson Sonsini Goodrich & Rosati  (WSG&R; Palo Alto, California), is the “granddaddy” of venture capital (VC) oriented gatherings, and draws from a variety of groups, including VCs, medical device entrepreneurs, patent attorneys, accounting firms and other service providers to the medical device industry.

Considering the treacherous and highly challenging environment for medical device fund raising, especially the earlier stages, it is not a surprise that this topic was the center of attention in one form or the other throughout the day.

Casey McGlynn, longtime WSG & R partner and a key player in the medical device funding world, moderated the first session, aptly titled “Funding Strategies for Entrepreneurs. McGlynn’s key theme was “finding capital today is difficult no matter what the stage of the company” and he invited four entrepreneurs who have dealt with this daunting issue to share their varied experiences.

Fred Khosravi, the founder and managing director of Incept  (Mountain View, California) has been an enormously successful entrepreneur. His company, essentially an incubator for new ideas, has started a total of 13 companies since 1999 and has had several very lucrative exits. The most prominent include Embolic Protection Inc. (EPI) and Sadra Medical, acquired by Boston Scientific  (BSC; Natick, Massachusetts) in 2001 and 2010 respectively, and Maya Medical, acquired by Covidien  (Dublin, Ireland) in 2012.

His poster child is EPI, which raised a total of $7 million in venture money. It was sold to BSC only 18 months after its formation for $75 million up front, with an additional milestone payment of $30 million. While marveling at how well the EPI story turned out, he said “it would be difficult in today’s environment to finance EPI with venture capital.”

Khosravi elaborated that “the uncertainties of reimbursement and the need for randomized clinical data would have likely scared off venture capitalists from investing.”

As a result, Khosravi now typically relies on private funding with individuals and initially raises somewhere between $0.5 and $1.0 million to get the company funded. He said that his past relationships and successes are “very important and help tremendously but that raising money is still clunky.” This initial amount can be the foundation for either a “structured corporate deal,” fundraising from VCs or possibly a very early exit.

Other panelists, which included Richard Lotti, CEO of PQ Bypass (Sunnyvale, California), Michael Ackermann, CEO of Oculeve  (San Francisco) and Scott Wolf, founder and chairman of Aerin Medical  (Santa Clara, California) all essentially agreed with Khosravi’s point of view. Lotti noted that he has successfully raised money from European venture funds (Italy, Ireland, and the Netherlands), who he said are “all eager to invest as a means to create much-needed jobs in their country, especially in R & D and manufacturing.

While recognizing that corporate investors generally prefer the mid-to-late stage opportunities, the panelists all agreed that it is important to begin discussions with potential investors “early.” Lotti noted that it helps VCs to ”feel better” when they see that corporate investors are interested and, conversely, corporate investors will occasionally make a seed investment if they see that VCs are already involved.

In response to McGlynn’s last question of the session “what advice would you have for entrepreneurs?” all participants agreed that “tenacity” is crucial to long term fund raising success.

A new wrinkle to this year’s meeting was an entertaining and lively afternoon session titled “Medtech Idol.” Patterned after the highly successful TV show, “American Idol,” whose concept is to find new solo recording artists where the winner is determined by the viewers in America, Medtech Idol’s goal was to select the most attractive med-tech startup amongst an initial group of 65 aspiring companies. All had submitted a business plan that was evaluated by a screening committee and were hoping to gain some positive exposure at this conference.

The field was initially narrowed to ten semi-finalists and then further winnowed to just four remaining companies. These included Yolia Health  (San Diego), an ophthalmic company targeting presbyopia, Somnarus  (Mountain View, California), which has developed a novel device for the diagnosis at home of sleep apnea, Endeau  (San Diego), which has developed a new way to perform gastrointestinal (GI) endoscopic procedures using water instead of air or carbon dioxide and LIM Innovations  (San Francisco), which is targeting the design and manufacture of prosthetic limbs for the amputee market.

Each of these companies has raised a modest amount of capital to date, conforming to the “new world” concept that early stage med-tech companies should minimize their capital raise and capital burn in order to maximize their investors’ returns. In addition, all of these companies will have a minimal regulatory burden (i.e., 510(k)s) to gain access to the U.S. market.

Yolia Health CEO Alberto Osio described his company’s approach to presbyopia, as “braces for the eyes.” He said it is a safe, non-invasive and fully reversible procedure that is self- administered by the patient at home. Called, True Vision Teatment (TVT), it employs a combination of personalized gas-permeable contact lenses and specially formulated eye drops, which, when used together, safely modifies the sphericity of the patient’s cornea leading to superior vision.

Osio also indicated that TVT was approved for commercial use in Mexico in 2008 and has been administered to 236 presbyopic patients to-date. Clinical data so far appears to be quite good, 92% of the patients can read newsprint and 91% increased their distance vision at the same time.

John Lyon, CEO of Endeau presented on his company’s Water Aided Endoscopy (WAE), a creative approach to improve and enhance interventional GI applications and screening procedures. Lyon enumerated a myriad of advantages of this concept, which as noted earlier uses water instead of air or carbon dioxide for colonic insufflation. The advantages include significantly less pain and thus less sedation for the patient, which means shortened recovery time and fewer sedation related adverse events. All these factors will contribute to a decline in overall costs for the procedure. The pioneer of this approach is Ken Binmoeller, MD,  who practices at California Pacific Medical Center  (San Francisco). His work on hundreds of patients suggests that because of improved visualization, adenoma detection and removal rates are superior to conventional GI endoscopy.

Lyon said that Endeau is now in the midst of raising a seed round of $1 .5 million to finance development and preparation for commercialization, which he predicted will take about 12-18 months.

Somnarus CEO Maria Merchant discussed her company’s Somnapatch, a band-aid like product which is placed over the bridge of the nose  and is worn overnight to collect data for the detection of sleep apnea. It has been used in pilot clinical trials and according to Merchant, it is accurate, easy to use and will fit within two existing reimbursement codes in the apnea home testing market, which is where more and more patients are initially tested.

Merchant expects the regulatory path to be a 510(k) and after a successful round of angel financing is currently looking to do a Series A financing.

LIM Innovations CEO Andrew Pedtkee, MD, an orthopedic surgeon, discussed a technology that addresses the challenges of locomotion with improved prosthetic devices for amputees. The company believes that its novel amputee sockets and limb salvage surgical technology will help the amputee recipients move more comfortably and efficiently.

Pedtke said in his presentation that “the blending optimized design, materials and streamlined fabrication will change the field and the future.” The company expects very low regulatory challenges and a tight-knit community of knowledgeable users.

Following a small angel round, LIM is seeking $1.3 million in financing to develop our first scalable product. Following final “pitches” by the four finalists, in voting by the audience, LIM Innovations was selected as the most fundable and most likely to succeed.

2013 Wilson Sonsini Conference

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