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  1. 1. tec-inc.org www.n MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor Feb04 US Detection Technologies, Newest Program Company Developers of proprietary ultra sensitive molecular detection and identification systems for military, Homeland Security and medical applications. US Detection Technologies (USDT) has been admitted to NTEC as the second program company for incubation. USDT is a chemical/biological sensor developer of proprietary ultra sensitive molecular detection and identification systems for military, Homeland Security and medical applications. USDT focuses on developing ultra sensitive, real-time detection and identification technologies for chemical and biological warfare agents, medical diagnostics, environmental monitoring and compliance and process monitoring. USDT has identified a critical need for advances in these areas to produce quality products which have sufficient sensitivity for real-time detection, sufficient selectivity for molecular identification, affordability for mass production and widespread use, and suitability for technician-free, environmentally rugged applications. (CONTINUED) NTEC & Eastern European Incubators: Lessons & Links Larry Calton, Executive Director (L) Phong Le, Director (R) By Norman Kaderlan, Ph.D., President, Technology Innovation Group What does NTEC have in common with incubators in Eastern Europe? That was the topic of “Never doubt that a small group of thoughtful, conversations in October when Larry Calton and Phong Le met with managers-in-training from committed people can change the world. soon to be launched incubators in Lodz and Warsaw, Poland, and with a delegation from two Indeed it is the only thing that ever has.” incubators from Romania. (CONTINUED) -Margaret Mead (1901-1978) Distinguished American Anthropologist and Writer Successful Medical Device Research & Development FROM THE DESK OF By Thomas D. Franklin, Jr., Ph.D., Sr. Scientific Advisor, NTEC LARRY CALTON Happy New Year! I hope the holidays The processes involved in successful medical device R&D that lead to commercialization are delivered to you peace and happiness … multifold and involve a broad understanding of the technology application in appropriate market; not to mention rest and relaxation. I’m early capture of the intellectual property; recruitment and collaboration of creditable clinical excited to report that NTEC is embarking champions; gaining early, mid, and late cycle funding; selecting a diversified and experienced on our second official calendar year of management team; gathering regulatory insight and guidance; maintaining perseverance and a operations, and we are optimistic about good action plan that is continually updated by the whole team (CONTINUED) the opportunities that lay before us in 2004. (CONTINUED) CONTINUED ON NEXT PAGE MEDtech Review is published by NTEC. If you have a question, comment or suggestion, please send an email to info@ntec-inc.org. PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  2. 2. NTEC SENIOR ADVISORS Bridge Financings – a Win-Win for Investors and Entrepreneurs By David Burton and Bo Sartain of Haynes and Boone, LLP Bridge financings provide an efficient financing mechanism for start-up companies to raise seed capital (or small amounts of capital between major financing rounds) from friends, family, angel investors, and even institutional venture capital investors. Why efficient? A bridge financing can typically be negotiated, documented and closed in significantly less time than it takes to complete a venture capital preferred stock equity financing. This shorter process translates into significant savings to the company for expenses, such as legal fees, necessary to complete the financing. Robert Kramer, M.D. This is particularly important if the amount of money being raised is small so that a Senior Medical Advisor disproportionately high percentage of the capital being raised is not consumed in expenses related to transaction negotiations and documentation. (CONTINUED) A “Business-Friendly” Approach to FDA Compliance By Krista Oakes, V.P., Medical Device Division, Shotwell & Carr, Inc. We all know the big names in the medical device industry, but the truth is that the majority of medical device firms are small, entrepreneurial businesses with less than fifty employees. These Thomas Franklin, Ph.D. small firms face a number of marketplace challenges as they strive to be competitive in innovation, Senior Scientific Advisor quality, and price while meeting these challenges in a heavily regulated environment. Those who thrive in this environment understand the principles of what I refer to as “business-friendly” compliance. (CONTINUED) Investor’s Voice By LaDonna Carrington The entrepreneurial journey of transforming an innovation into a profitable reality is filled with many unexpected adventures and detours. Attracting investment capital to fund this journey requires Douglas Ball, M.D. demonstrating to the investment community how the business will make money and ultimately Senior Medical Advisor provide the investor with the desired return. Abstractions such as business strategy and financial forecasts must be presented with confidence to the investor in words, lines, columns, graphs and pictures for an informed investment decision. EVENTS CALENDAR The purpose of this column is to provide the readers of MEDtech Review a navigation of this MAY 26, 2004 - Invest SW Summit journey from an investor’s perspective. Articles will be presented covering many stages from idea APRIL 28, 2004 - Texas Investment Forum to business planning and capital procurement. Topics will include: creating a business plan, building a financial model, determining capital requirements, preparing presentations, estimating APRIL 8, 2004 - Life Science Professionals company valuation, preparing for due diligence, and other relevant information. The column will 8th Annual Educational & Exhibitor Program also provide insights and opinions from other investors and experts in the private equity industry MARCH 21, 2004 – World’s Best with periodic contributions from guest columnists. Technologies Showcase LaDonna Carrington is the Founder and President of Carrington Company which provides consulting and advisory services to start-up and emerging growth ventures and private equity investors. LaDonna is an For a current listing of all events, link to active investor and a member of the Dallas Angels. LaDonna holds BBA and MBA degrees from Southern NTEC’s events calendar. Methodist University. CONTINUED ON NEXT PAGE PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  3. 3. NTEC CONTRIBUTORS Life Sciences Dominates VC Investing in Q3 2003 By LaDonna Carrington • Venture capital investments totaled $4.2 billion in Q3 2003, down 8% from Q2 2003. • A total of 667 entrepreneurial companies received funding, a decline of 5% from the previous quarter. • VC’s have invested in the range of $4 billion for five consecutive quarters, sustaining a stable pace of investing. • Investments in the life sciences sector, which includes biotechnology and medical devices & equipment, totaled $1.24 billion, representing 30% of all dollars invested, which substantiates the VC industry’s shift in focus away from information technology and toward the life sciences. • For the first time in seven years, biotechnology was the number one industry with $873 million invested, an increase of 31% from the previous quarter and 88% from a year ago. • Medical Devices and Equipment totaled $375 million invested, placing the sector in fourth place for the quarter. (Link to The MoneyTree Survey) Medical Technology - Texas and Southwest "Baylor Health Care System Going Digital" (The Dallas Morning News) "Getting Texas's Slice of Science" (The Dallas Morning News) Bedside Device Helps Hospital Patients Keep In Touch (Star Telegram) “Houston Cancer Center Receives $34 Million in Research Grants” (Star Telegram) Texas Doctors Say New Law Means Better Medical Care (The Kansas City Star) Biotech Headliner Would Stir Things Up (Dallas Business Journal) Group Launches Study To Prevent Strokes (The Macon Telegraph) Alliance Aims to Grow Local Life Sciences Industry (Dallas Business Journal) Medical Technology - National News “Bedside Manner Goes High-Tech” (Inside 1to1*) Venture Reporter CEO of The Week : James Sweeney, CEO, CardioNet (Venture Reporter) Venture Reporter VC of The Week : Thomas Fogarty, Partner, Three Arch Partners (Venture Reporter) Who will pay for technology to remedy healthcare dilemma? (Pittsburgh Post-Gazette) PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  4. 4. NTEC CONTACT INFO Government Funding Spurs Private Innovation (Larta) The North Texas Enterprise Center for Biosciences: High Risk, High Reward & Potential for "Real Chaos" (Knowledge @ Wharton) Medical Technology (NTEC) was founded to assist entrepreneurs with the challenging task “CDC: ‘Adaptive IT System Needed to Counter Health Threats” (Health-IT World) of starting and growing new medical techno- logy ventures. For more information, please Kauffman Foundation Gives Voice to Angel Organizations (Kauffman Foundation) link to our website, call us at 214.618.6832 or email us at info@ntec-inc.org. VC Holds Steady In Q3 2003 (SSTI Weekly Digest) Angels Aligning In Own Association (SSTI Weekly Digest) The Homeland Security Marketplace: Selling to the Federal Government (Larta) Medtech Snapshot (Medical Devicelink) 2611 Internet Blvd., Ste. 109 Frisco, TX 75034 www.ntec-inc.org PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  5. 5. From the Desk of Larry Calton (CONTINUED) During the last quarter, our team worked diligently to partner with the Texas Department of Economic Development to assist with the deployment of resources to state supported technology initiatives. As reported in our last newsletter, Senate Bill 275 was signed by Governor Perry on September 1, 2003. Originally, we thought this Bill allocated approximately $12 million towards investment in new companies and products but after further review, the allocation from the Bill totaled $45 million. This amount is divided into two funds, the Small Business Incubation Fund and the Product Development Fund. Each fund has the potential to both support NTEC’s program companies as well as NTEC directly. We are working with area State Representatives to get a member of the NTEC network appointed to the nine member committee that will oversee the two funds and their operations. We will update you on the funds and our interactions with the State Economic Development Department in future newsletters. On the company investment front, NTEC is working with a number of state leaders in Angel funding to establish a collaborative framework for the efficient and effective sharing of best practices and deal flow. This Angel Network includes participants from Dallas, Houston, Austin and other key technology cities around the state. The goal of the group is to help Angel Investors with opportunity sharing and deal evaluation while matching industry specific opportunities with the investors best qualified to evaluate and fund them. We expect many other benefits to emerge as a result of this unique collaboration, and I will share more details as this group meets throughout the coming year. Due to the ramp up of our in-house Program Companies, we did not spend much time on the NTEC Seed Fund I during the last quarter of 2003. However, the seed fund will be a significant focus in 2004. In Q4 2003, NTEC continued to see strong external interest in our incubation and acceleration program. We reviewed over 30 new business opportunities and hosted approximately 15 company presentation sessions to evaluate those companies that passed NTEC’s preliminary criteria. Of those presenters, two companies are still undergoing due diligence, and we expect that at least one new Program Company will be announced before the end of Q1 2004. NTEC was also asked to share best practices and incubation insights with business teams from both Poland and Romania. This was an excellent learning experience for all involved and put into focus how different the challenges of company creation are in different geographies and political environments. We also completed a short tour of Texas and New Mexico, meeting with the University of Texas at Austin, Los Alamos National Labs, Sandia National Labs, Baylor College of Medicine and several other key area and regional centers of intellectual property. Further, we continue to build NTEC’s network of capital providers extending our contacts in both Houston and Austin as well as Albuquerque and Santa Fe. In our first newsletter I failed to recognize some very important contributors to NTEC’s ongoing success. We have been fortunate enough to benefit from the support and experience of several very experienced, in-house, Scientific and Medical Advisors. Tom Franklin, Ph.D., Senior Scientific Advisor, and Cardiovascular Physiologist, has been working closely with our Program Companies while assisting NTEC with new company evaluations and grant funding opportunities. Robert I. Kramer, M.D., is a long time Dallas resident and prominent Pediatrician. Dr. Kramer has been a recognized leader in the Dallas area medical community for over 40 years and was once on the short list to be U.S. Surgeon General. Like Dr. Franklin, Dr. Kramer gives generously of his time assisting both NTEC and our Program Companies. Doug Ball, M.D. brings to NTEC a background in both surgery and radiology. Dr. Ball has been instrumental in several key NTEC company evaluations and his experience in biotechnology has enabled our Center to review and consider a broader spectrum of business opportunities. In addition to these three key in-house advisors, NTEC has added a number of new external Medical and Scientific Advisors to our already impressive list including Scott Bundy, M.D., Drew Johnson, and Malcolm Stewart, M.D. Our web site provides greater insight into the significant contributions of these special leaders, and we are sincerely grateful for their time and participation in NTEC. Looking forward into 2004, NTEC will be focusing on several key strategic initiatives. The first, NTEC Seed Fund I, is getting my full attention in the first quarter of 2004. NTEC has benefited from excellent leadership (see NTEC Advisory Board on our web site) regarding the structure and focus of the fund. Further, we have been connected to a key venture capital figure that will soon be moving to the North Texas area from San Diego and expect his knowledge and experience to greatly impact our fundraising efforts. Our goal is to have the Seed Fund structure and fundraising documents complete by the end of Q1 and be in full fundraising mode by early Q2 2004. In addition to our Seed Fund, NTEC will be focusing on growing our external presence in the regional Medtech community. Our 2004 event calendar has been completed, and we expect to hold or participate in nearly twice as many education and technology events as we did in 2004. Keep a close eye on our event calendar to keep current on these and other area events. We are also working with local media to provide additional information on NTEC and our Program Companies. Media features are scheduled in both the Dallas Morning News Business Section and a PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  6. 6. cover story in Frisco Style magazine. Additionally, we are formally launching our Preferred Provider Network in 2004. This network of carefully screened and pre-qualified service providers will work closely with NTEC and our Program Companies to maximize company growth and return on capital. Participants in this program will be evidenced by a newly created “gold seal” which can be displayed on the provider’s web site and correspondence. If you are interested in joining the Network, please contact Kim Cogbill at 214.618.7903. I hope you enjoy this issue of our newsletter. We strive to bring our readers information that is relevant to the growth and promotion of Medtech and entrepreneurial ventures. We welcome your feedback and encourage you to participate in this exciting, growing industry. Finally, I encourage you to visit us when you are in the area. Our passion for what we do is contagious and we welcome all who want to share in that passion. Larry W. Calton Executive Director (Back to Top) PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  7. 7. US Detection Technologies, Newest Program Company (CONTINUED) “Measurements performed in USDT’s labs have demonstrated dramatically increased capability in low level detection and identification technology for biological and chemical substances,” said Larry Calton, executive director of NTEC. “USDT has developed UltraSensitiveVibrational Spectroscopy (USVS) technology and brings to market a superior chemical/biological warfare sensor platform that can also be positioned for medical and commercial applications.” The USDT technology is competitively positioned for profitable growth in markets that are today over $1 billion and growing. It is the only existing technology capable of meeting the detection and identification sensitivity of attogram amounts of chemical and biological threat agents and a detection time of less than one minute, in accordance with U.S. government requirements. USDT’s platform is one of the few dual-purpose sensors for both chemical and biological threat detection. It can also be used in portable, fixed and badge-type applications. The current management and advisory teams include: • Wayne A. Weimer, Ph.D., Co-Founder, CEO, CTO • Connie Weimer, M.S., Co-Founder, VP Operations • Shell Lambert, Ph.D., VP, Strategic Planning and Development • Brian Breslin, M.B.A., Director of Business Development • Douglas Ball, M.D., Medical Director • Zheng Chai, Ph.D., Senior Scientist • Lt. General Jack Woodmansee, Jr., Ret., Strategic Advisory Group • George H. Heilmeier, Ph.D., Strategic Advisory Group • Robert N. Parker, M.S.E.E., Strategic Advisory Group To learn more about US Detection Technologies, please visit the website: www.usdetect.com. (Back to top) PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  8. 8. NTEC & Eastern European Incubators: Lessons & Links (CONTINUED) Incubators in Eastern Europe play essentially the same roles as incubators in the US, though the environments are significantly different. To understand the similarities and differences, it is helpful to understand that the vigorous development of a regional technology-based economy requires several elements: technology, talent, know-how, capital, context and culture. The fundamental building block for a technology-based economy is a steady and robust source of inventions that can become the basis of new ventures or new product lines of existing ventures. The technologies may come from universities, research institutions, existing companies, or individuals. A second requirement for a technology-based economy is talent, individuals trained in science and technology who can take the technology from the laboratory to the marketplace. The third requirement is know-how—a pool of experienced entrepreneurs who can form the core of the management team of the new ventures. Also important are experienced entrepreneurs who can serve as advisors and mentors, and a range of capable and experienced service providers who can offer support and expertise in law, accounting, finance, marketing, etc. A fourth requirement is capital, a stable and sufficient source of funding that will support and nurture new ventures from pre-startup activities through launch and expansion. The final requirement for the development of a technology-based economy is the existence of the conditions and culture that encourage entrepreneurship. These include societal values and norms, and legal, financial, and regulatory systems that foster and encourage entrepreneurship. The best of incubators, like NTEC, maintain a know-how network of experienced entrepreneurs who provide strategic and operational advice and support that is sorely needed by new ventures. Incubators also provide access to capital either indirectly through qualified referrals to capital sources or directly through a seed fund. These resources act as a magnet that attracts the talent and technology that are at the core of new ventures. In developing countries such as Romania and Poland, incubators often have access to high quality technical talent and innovations, but capital and know-how resources are more difficult to obtain. Their cultures and context also provide substantially greater challenges than in the U.S. The encounter with the visiting delegations revealed several possibilities for collaboration. Relative to the Eastern Europeans, NTEC is rich in resources and sophistication. As such, it provides a benchmark for newer, smaller, or less well-endowed incubators. NTEC and its companies can provide important links to resources that such incubators lack, especially to capital and know-how. For example, NTEC companies may seek Polish companies with compatible technologies and enter into joint licensing or research agreements. NTEC companies could become the portal for introducing Romanian technology into the US market; conversely, Polish companies could provide a similar point of entry to the Eurozone for NTEC companies. And, given the richness of the talent pool in selected technologies in Romania and Poland, NTEC companies could enter into partnerships for technology development in Europe. By actively participating in exchanges such as these, NTEC creates connections that provide new possibilities both to its members and European companies, while enriching the value it provides. Norman Kaderlan is President of Technology Innovation Group, Inc., which helps communities around the world build wealth through entrepreneurial development and technology commercialization. The company’s professionals act as participant advisors in assisting institutions and corporations with the transition of scientific discoveries from the laboratory to companies that produce new products and services. He can be reached at nkaderlan@techingroup.com. (Back to top) PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  9. 9. Successful Medical Device Research & Development (CONTINUED) During 2004 NTEC will run a series of brief articles targeting the processes necessary for a successful medical device commercialization initiative. These will include: • Capturing and managing the intellectual property; • Assessment of uniqueness and marketability of the idea/invention; • Recruiting the appropriate management team; • Developing a business plan with operational actions that are routinely updated; • Establishing collaboration with national and international champions; • Understanding and achieving regulatory approval; • Gaining early, mid and late cycle funding; and • Licensing, merging, or selling. Oftentimes the inventor or creator of the technology that might have commercial potential has a great in-depth understanding of the technological application but is lacking in many of the other areas necessary for successful commercialization. Sometimes the inventors are reluctant to surround themselves with the appropriate talent to get the job done due to naivety or for fear of losing control. Another issue that the inventors must deal with relates to what do they really want to do with their invention: • Start a company to commercialize the product, • Start a R&D company to finalize the development of the product, • License the product to an established company or a new start-up company, or • Sell the product to an established company or a new start-up company. Some inventors want to stay in the R&D business and not be involved with the final commercialization of their product. In this case, they either license or sell their product to another company for some level of consideration that varies depending on the specific deal….an outright, lump sum sale; a license fee (exclusive or non-exclusive) and royalty tied to performance milestones; or some other arrangement. They often are retained for a period of time as consultants by the new owner or licensor to assist in the transition from bench to trials to manufacturing, marketing, and sales. If the inventors decide to start a company to commercialize the product, there are ways that they can facilitate their success. One of the first things to do is to make sure that the intellectual property associated with the invention is well defined and captured as early as possible. It is important to identify IP attorneys that have experience in the specific field of the invention, not just any attorney, to help file the patent application. Once the patent is filed there is a waiting period of least 18-24 months before a patent is usually awarded. During this time inventors continue to seek funds for further development of the invention from various sources at local, state and federal levels, e.g. NIH (National Institute of Health), NSF (National Science Foundation), NASA (National Aeronautics & Space Administration), DoD (Department of Defense), SBIR (Small Business Innovation Research), ATP (Advanced Technology Program) and TAP (Technology Access Program), industrial collaborators that may be interested in the invention (although they will require some rights for funding the development), family and friends, other investors (who also will require some rights/ownership), etc. It is obviously advisable for the new start-up company to take the development as far as possible before getting investors and corporate partners involved who require some ownership rights. The new start-up medical device company also can greatly benefit from association with a medical device incubator or accelerator like NTEC. At NTEC there are resources and talents to help evaluate and fulfill the management team requirements; to facilitate the completion and updating of the business plan; to introduce the company to appropriate clinical champions, academic researchers, IP attorneys, state and federal funding sources, angel investors, etc. NTEC has a diverse advisory board with business, legal, engineering, scientific, medical, regulatory, banking, real estate, human resources, and investor expertise to help evaluate, guide, and nurture the new start-up companies. One of the main criteria for selection to enter the NTEC facility, assuming that the potential product is novel and has merit, is that the company principals need to be ‘coachable’ and willing to take advice from the NTEC team and their advisors and stakeholders. North Texas has a wealth of academic institutions with expert faculty and research facilities that can benefit the medical device companies. Often the product development process might need a specific expert for consultation or PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  10. 10. the product may need further testing in animate or clinical studies. Usually these resource needs can be found at UTSW (University of Texas Southwestern Medical Center), UTD (University of Texas Dallas), UTA (University of Texas Arlington), UNTHSC (University of North Texas Health Science Center), or in the DFW community based hospital systems. The staff at NTEC can help open doors and make appropriate introductions at these institutions. (Back to top) PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  11. 11. Bridge Financing – A Win/Win for Investors and Entrepreneurs (CONTINUED) How it works A bridge financing is structured as a convertible promissory note. Typically, the note will provide that the principal and accrued interest under the note will convert into shares of the company’s stock upon the closing of its next equity financing. The shares to be received upon conversion will have the same rights and features as the shares purchased by the investors in the next round of financing, and for the same price per share. Because bridge loans are very high-risk investments, most often the company raising the money will also be required to issue warrants to the bridge loan investors as an equity “sweetener” for bearing the extra risk of investing prior to the company’s raising of more substantial amounts of money (the interest on the note is typically a nominal amount). The size of the warrant, or “warrant coverage,” is a risk premium and is usually expressed as a percentage of the principal amount of the corresponding bridge note. For example, a bridge loan of $500,000 with 50% warrant coverage means that the investor’s warrant will be for $250,000 worth of the company’s stock. The warrant may be exercisable for shares of either common stock or the equity security being issued to the investors in the company’s next equity financing (which is typically preferred stock). From the standpoint of the company, it is generally better to have the warrant be for common stock rather than preferred stock. This is particularly true if the exercise price of the warrant is for a nominal amount. The exercise price of the warrant is generally set at either the price per share established in the next financing round (best for the company as it minimizes dilution from the warrant exercise) or at a nominal price (example par value of the stock – a highly dilutive alternative). The exercise price of the warrant is a negotiable point and will vary from deal to deal. Benefits to the Entrepreneur and the Company • Lower transaction costs because key negotiating points with the investors are deferred until the next major equity financing. Namely, agreeing on a valuation for the company and the special rights and preferences the investors require for preferred stock terms are postponed because the convertible note will convert into stock in the next financing on the same terms and for the same price as the stock the company issues to investors in the next financing. • No company valuation is set. This feature of the bridge financing is especially important to companies wanting to use stock or stock option grants as a form of “sweat equity” to attract talent. For example, if a company issues common stock to friends, family or angel investors in order to raise seed capital at $1.00 per share, this price will establish a fair market value for the company’s stock and will affect the company’s ability to issue stock or grant stock options below that price without creating unfavorable tax and equity compensation issues, and may cause cheap stock and other financial accounting issues and charges for the company. Benefits to the Investor • Creditor protection. In the event that the company is not able to secure any additional financing and is forced into liquidation or bankruptcy, an investor is better off as a creditor than a stockholder of the company and will be in a superior position vis-à-vis the stockholders in the priority of the liquidation of assets. Also, a bridge note holder can further strengthen its protection by structuring the bridge financing as a secured convertible note, placing the investor ahead of general unsecured creditors such as trade creditors. Secured bridge financings are more complex transactions, however, and require more time and legal expense to complete. • Dilution protection; not setting a value on the company helps the investors too. One of the greatest uncertainties in angel financing deals structured as common stock investments is how much dilutive effect the next equity round of financing will have on the angel investor, both in terms of numbers of shares and a dilution of the angel’s rights and protections. Angel investors may agree on a value for the price per share of the company, but that is no guarantee that the venture capital investor will share the same view. With the convertible note, the angel investor secures the same valuation and the same rights and preferences that the venture capital investors will negotiate in the next equity round. (Back to top) PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor
  12. 12. A “Business-Friendly” Approach to FDA Compliance (CONTINUED) Business-friendly compliance is an approach that focuses on healthy operations that consistently meet sound business objectives. When a company is in this state, regulatory compliance is essentially a natural byproduct. By contrast, regulatory compliance problems are often symptomatic of underlying operational and/or organizational deficiencies that can threaten the company in a number of ways. A common mistake among compliance professionals is that they focus too narrowly on FDA expectations, resulting in quality system requirements that may seem overly burdensome or non-value-added to the other members of the organization. This practice promotes the misconception that compliance is necessarily a paperwork-intense, bureaucratic process that conflicts with the other business objectives of the company. As a result, compliance activities are at best reluctantly supported by management, and become difficult to sustain. A business-friendly compliance professional understands that regulatory compliance is essential, but also understands that FDA medical device regulations are necessarily broad in order to apply to the vast spectrum of products in the marketplace. They understand that FDA is actually prohibited by law from prescribing unduly burdensome requirements. They understand that regulatory requirements can be translated into value-added practices that enhance the company’s ability to meet its objectives. Because above all, they understand that compliance becomes moot if the company is no longer in business. With a business-friendly approach, compliance professionals work closely with management and with other functions in the organization to develop best practices that contribute to the overall success of the company. They can answer the “why” behind every “what” that is required. The quality system is not an isolated part of the operation, but is integrated into all areas of the organization. Their goal is not limited to passing an audit, but is rather focused on achieving a healthy overall operation that is consistently meeting the customer’s needs and the company’s objectives. With this focus, it is easy to secure the support of all members of the organization, which is a key indicator of quality system sustainability and compliance success. A recent case study illustrates the difference that a business-friendly approach can make in solving a compliance problem. A company received an FDA warning letter citing numerous deficiencies in their product complaint handling system. They hired two different consultants to help them resolve these deficiencies. The first consultant used a traditional approach: they reviewed the FDA’s findings and the company’s procedures, and added new requirements to the company’s procedures to address FDA’s concerns. This approach is likely to resolve the specific concerns that FDA raised, so long as the company continues to follow the new procedure. However, this approach failed to ensure a sustainable solution by addressing underlying process ineffectiveness. The second consultant approached the problem using a business-friendly approach. Like the first consultant, they reviewed the FDA’s findings and the company’s procedures. However, they also observed some other symptoms of an overall ineffective complaint handling process: long investigation cycle times, high rates of problem recurrence, unhappy customers, frustrated employees, wasted resources, and frequent documentation errors/omissions. The consultant recognized that the company was going through the motions of complaint handling without reaping any benefits from it. They were more concerned with satisfying the next auditor than satisfying the customer, and as a result they were not satisfying anyone. Additionally, their procedures were too complex and promoted a focus on process activities rather than process results. The solution was to create a new, simplified complaint handling procedure that was built around the essential business needs of customer satisfaction and problem solving. The complaint handling process was transformed from a burdensome FDA-imposed requirement to a value-added business tool. The result was a sustainable process that better fit the company’s needs, and – not surprisingly – helped them satisfy the FDA’s concerns as well. As the medical device industry becomes increasingly competitive in innovation, quality, and cost-effectiveness, a business-friendly approach to regulatory compliance has become an increasingly important strategy for success. Founded in 1974, Shotwell & Carr has pioneered the practice of FDA regulatory consulting in the medical device, pharmaceutical, and veterinary products industries. Headquartered in Carrollton, TX, the firm has additional offices in Houston, TX, California, and Great Britain. (Back to top) PUBLISHED BY NTEC © 2004 MEDtech Review February 2004, Volume 1 Issue 2 LaDonna Carrington, Editor

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