Medical Device Opportunities

A venture perspectiveRoger Kitterman

Partners Healthcare

Personal Background

• Managing Partner of the Innovation Fund at Partners HealthCare

• Started VC career in 1994• Started several venture-backed companies

Venture Environment

• Declining VC investment in life sciences– $$ invested in startups down 64% 2007-2012– Only 11 new healthcare funds raised in 2012 (39 in

2006)– Q1 2013 had the fewest initial investments in life

sciences since 1995 – down 75% since the 2007 peak

• Strategics stepping in earlier – but mainly for therapeutics

• IPO market strong – leading indicator4

Life Sciences Losing Share of Venture Dollars

Fewer life science venture funds being raised

Corporate investors increasingly active early – in biotech

Exits are coming back – still an M&A market

How to identify commercial potential

• It depends• Start at the end – what is the market need• Market size• Unmet medical need• Competition• Better faster cheaper is hard• Path to market – cost to get there• Need to have versus nice to have• If you can’t understand the need, chances are

the opportunity is limited

Patenting

• Biomedical products require large investment to bring to market• Public domain: what belongs to everyone belongs to no one• Provisional patent filings act as placeholders for 1 year• First utility filings typically run $25,000 legal fees• Foreign filing typically $150,000 fees• “Prophetic” patents generally not valued as much as reduction to practice• Only a tiny fraction of patents issued ever generate revenue

Patent value•Composition is better than method of use

• Breadth versus depth• Product margin• Stacking

•What do the claims really allow• How developed is the underlying technology

• Freedom to operate versus patentability

How VCs value a startup• Too early stage for traditional valuation methods like

discounted cash flow• Use multiple methods• Comparables• Skip to the exit point and work backwards

• How much are later stage companies worth• How much capital and in what form does it take to get

there• Must fit general guidelines• Competing term sheets exist but are rare

What is Due Diligence?

• Investor research to test the business plan•Assumptions are challenged – support your assertions

with evidence•Diligence process often reshapes the plan•Emphasis on customer/purchaser/user interviews•Expect 3-6 month process from start to closing•Requires high effort from entrepreneurial team

FDA route? Data submission requirements? Clinical trial design? Budget?Regulatory Path

Existing or new CPT/ISDN9 code? Private pay? Incremental or replacement?Reimbursement

Exit path? Potential acquirers? ROI? Comparables? Exit

Capital raised to date? Sources? Timetable of cash requirements vs milestones. Cap table? Pro forma P&L with milestone overlay? Pre-$ valuation and amount sought. Use of funds? Deal terms.

Financing

Team background? Directors? SAB? Staffing plan? Organizational structure? Operational plan?Management

Barriers to competition. Patent filings? Breadth and strength of claims? Prosecution status? Patentability analysis? Freedom to operate assessment? License terms?

IP

Revenue sources? Product economics? COGS? Margin? Distribution costs? Partnering? Who benefits/who’s hurt?Business Model

Describe target market segments and adoption criteria. Develop market size model with unit volume, penetration curve, pricing, etc. Go to market strategy ?

Market

Current and emerging players? Basis of sustainable advantage: compare features and performance characteristics.Competition

How is the product enabled? What is the underlying science and engineering? How is it different from the alternatives? Status of technology development? Proof of principle? Publications? Validation? In vitro/in vivo data? Prototype available?

Technology

Describe the offering. What does the product/service do? How does it affect clinical decision making? How does is fit into clinician workflow? What product does it replace? Historical genesis.

Product

What is the problem addressed? How does the solution satisfy the unmet need? Who values that? Cost/benefit?Value Proposition

Due Diligence Rubric

Therapeutics Devices Diagnostics HCIT

Time to market 10-12 years 2-5 years 2-8 years < 1 year

Time to exit ~5 years Significant sales ~5 years 2-5 years

Investment to market

$250MM $10MM $25MM+ $0+

Investment to exit $100MM $30MM+ $25MM+ $5-50MM

FDA Major issue Increasing issue Increasing Usually nonissue

Reimbursement Limited exposure Important problem Important problem

Generally not reimbursed

Stage to show for funding

Two years from clinical, animal data

Prototype with evidence

Prospective data analysis

Adoption

Market minimum size

$350MM, $1B better

$200MM, $1B better

Varies, must be large

$200MM minimum

Leading risk Will it work and can we get it through FDA

Adoption rate Will it work well enough to be adopted

Adoption

Rules of Thumb

Medical Devices

• Require more capital than you think• FDA is an increasing issue – current uncertainty• Need to develop clinical data to convince

skeptical MDs to change their practice of medicine

• Reimbursement is a major challenge – new codes take ~2 years post-FDA approval

• Outsource R&D model – large device companies acquire many more products than they develop

• Diligence around market need is key – slow adoption kills companies

• Strong preference for therapeutic vs diagnostic devices