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Raising Capital for
Medical Device
Development
Challenges for
Inventors and Investors
Presented by !
Robert Stathopulos!
!
President, Product Development Technology, Inc.!
Sponsor & Advisor, Entrepreneurs University!
!
02 April 2013!
2. Raising Capital for Medical Device Development
2© 2013 Product Development Technology, Inc.
• Established companies develop existing device iterations
• Start-up companies develop most new devices categories
• Innovation has outstripped ability to assess performance
• Dissemination of innovation delayed by outcomes validation
Product Innovation
3. Raising Capital for Medical Device Development
3
MEDICAL DEVICE DEVELOPMENT
Low Impact
on Clinical Utility
High Impact
on Clinical Utility
MARGINAL
INNOVATION
'Existing' Technology
applied to 'Existing' Medical Use
LOWEST UNCERTAINTY
THERAPEUTIC
INNOVATION
'Existing' Technology
applied to 'New' Medical Use
MEDIUM to HIGH UNCERTAINTY
High Impact
on Technology-in-Use
Low Impact
on Technology-in-Use
TECHNOLOGICAL
INNOVATION
'New' Technology
applied to 'Existing' Medical Use
LOW to MEDIUM UNCERTAINTY
RADICAL
INNOVATION
'New' Technology
applied to 'New' Medical Use
HIGHEST UNCERTAINTY
© 2013 Product Development Technology, Inc.
MODEL OF PRODUCT INNOVATION
4. Raising Capital for Medical Device Development
4
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
"New" Medical
Technology
"Existing"
Clinical Use
"Existing" Medical
Technology
"Existing"
Clinical Use
"Existing" Medical
Technology
"New"
Clinical Use
"New" Medical
Technology
"New"
Clinical Use
HIGH
LOW
UNCERTAINTY
SCALE
"EXISTING"
CLINICAL USE
Domain
"NEW"
CLINICAL USE
Domain
LEVELS OF DEVELOPMENT RISK
5. Raising Capital for Medical Device Development
5
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
LEVELS OF DEVELOPMENT RISK
HIGH
LOW
UNCERTAINTY
SCALE
Plateau of
Status Quo
(We do not wish
to change anything)
Plateau of
Utility Promotion
(We find new means
for old ways)
Plateau of
Everything Changes
(We find new means
with new ways)
"EXISTING"
CLINICAL USE
Domain
"NEW"
CLINICAL USE
Domain
Plateau of
Technology Promotion
(We do it
Smaller-Better-
Faster-Cheaper)
6. Raising Capital for Medical Device Development
6
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
LEVELS OF TECHNOLOGY
READINESS
Basic Principles
Observed
Speculative
Application
Formulated
Critical Function
Proof-of-Concept
Breadboard
Verification
in Laboratory
Breadboard
Verification
in Simulated Use
System Prototype
Verification
in Simulated Use
System Prototype
Verification
in Actual Use
Final Product
Validation
in Actual Use
Final Product
Validation
in Marketplace
STEP #9
STEP #8
STEP #7
STEP #6
STEP #5
STEP #4
STEP #3
STEP #2
STEP #1
VERIFICATION
PHASE
FEASIBILITY
PHASE
7. Raising Capital for Medical Device Development
7
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
Inventor
Venture
Team
Seed
Investors
Compliance
Officers
Device
Users
Patent
Attorneys
Key
Suppliers
Family
Members
Angel
Investors
WHAT KEEPS THE INVENTOR UP AT NIGHT?
8. Raising Capital for Medical Device Development
8
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
WHAT KEEPS THE INVESTOR UP AT NIGHT?
Inventor
Angel
Investors
9. Raising Capital for Medical Device Development
9
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
INVENTOR PERSPECTIVE
Compelling Product Concept
Imperative: “Do It Right”
Goal: “Get Product to Market”
Supplies Vision and
Perspiration
10. Raising Capital for Medical Device Development
10
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
INVESTOR PERSPECTIVE
Compelling Investment Opportunity!
!
Imperative: “Get It Done”!
"
Goal: “Move Venture to Exit”"
"
Supplies Cash and Credibility"
11. Raising Capital for Medical Device Development
11
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
INVENTOR + INVESTOR
as
THE ODD COUPLE
12. Raising Capital for Medical Device Development
12
MEDICAL DEVICE DEVELOPMENT
• Evidence – Product Functions as Intended
• Evidence – Product has Clinical Utility
• Evidence – Product can be Profitable
• Evidence – Business Model is Scalable
• Evidence – Product has Proprietary Barrier
• Evidence – Development Path is Viable
• Evidence – Regulatory Path is Viable
• Evidence – Reimbursement Path is Viable
• Evidence – Venture Team is Competent
• Evidence – Venture Team has Skin-in-the-Game
• Evidence – Use of Proceeds will be Effective
• Evidence – Investor Exit is Plausible
• Evidence – Seed Stage Funding is Clean
• Evidence – Product Design is Documented
© 2013 Product Development Technology, Inc.
INVENTOR CHALLENGES
13. Raising Capital for Medical Device Development
13
MEDICAL DEVICE DEVELOPMENT
• Will this Venture FIT into my PORTFOLIO?
• Are the Product and its Market REAL?
• Is the Technology behind the Product READY?
• Will the Product have the Cache to WIN?
• Is the Expected Return WORTH the Investment?
• Will the Venture Team meet its COMMITMENTS?
• Is there a viable path to US Market CLEARANCE?
• Is there a viable path to US REIMBURSEMENT?
• Will Due Diligence confirm the Inventor CLAIMS?
© 2013 Product Development Technology, Inc.
INVESTOR CHALLENGES
14. Raising Capital for Medical Device Development
14
MEDICAL DEVICE DEVELOPMENT
INVESTOR MINEFIELD
• Return on Investment based on liquidity event
• Novel Products tied to emerging or untried markets
• Venture is pre-revenue with no customer history
• Products in Development susceptible to market changes
• Product Knowledge held by very few
• Further Funding limited if key milestones missed
• Development Cycle has high cash-burn rate
• Venture Valuations are speculative or intuitive
• Minority Shareholders have little control
• Entrepreneurs poor at anticipating future problems
© 2013 Product Development Technology, Inc.
15. Raising Capital for Medical Device Development
15
MEDICAL DEVICE DEVELOPMENT
INVENTOR MINEFIELD
• PATENT CLAIMS disallowance
• MARKET LANDSCAPE change
• REGULATORY LANDSCAPE change
• REIMBURSEMENT LANDSCAPE change
• PRODUCT COST escalation
• CLINICAL CLAIMS disallowance
• KEY SUPPLIER bankruptcy
• VENTURE FUNDING difficulties
© 2013 Product Development Technology, Inc.
16. Raising Capital for Medical Device Development
16
MEDICAL DEVICE DEVELOPMENT
TYPES OF MEDICAL DEVICES
© 2013 Product Development Technology, Inc.
In-Vitro
Diagnostic
Device
Medical
Capital
Equipment
Medical
Device
Software
Active
Medical
Device
Disposable
Medical
Device
Device Electronics Software
Software
Disposable Hardware SoftwareElectronics
Disposable
DisposableAssay SoftwareInstrument
17. Raising Capital for Medical Device Development
17
MEDICAL DEVICE DEVELOPMENT
DEVICE DEVELOPMENT PROCESS
© 2013 Product Development Technology, Inc.
CONCEPT
DEVELOPMENT
INVESTMENT
GATE #2
INVESTMENT
GATE #1
SEED
ROUND
FOUNDERS
ROUND
CONCEPT
DEVELOPMENT
PROTOTYPE
DEVELOPMENT
INVESTMENT
GATE #2
INVESTMENT
GATE #3
INVESTMENT
GATE #1
SEED
ROUND
ANGEL
ROUND 1
ANGEL
ROUND 2
FOUNDERS
ROUND
CLASS II
MEDICAL
DEVICE
CLASS III
MEDICAL
DEVICE
12 to 24 Months 12 to 24 Months
12 to 24 Months
$250,000 $250,000
PRE-CLINICAL
DEVELOPMENT
ANGEL
ROUND 2
ANGEL
EXIT
ANGEL
ROUND 3
CORPORATE
ACQUISITION
12 to 24 Months
24 to 48 Months
PROTOTYPE
DEVELOPMENT
TECHNOLOGY
DEVELOPMENT
INVESTMENT
GATE #3
12 to 24 Months12 to 24 Months
GOVERNMENT
GRANTS
ANGEL
ROUND 1
12 to 24 Months
ANGEL
EXIT
CORPORATE
ACQUISITION
36 to 72 Months
(3 to 6 Years)
72 to 144 Months
(6 to 12 Years)
$2,000,000
to
$3,000,000
$2,000,000
to
$3,000,000
$250,000$250,000
INVESTMENT
GATE #4
INVESTMENT
GATE #5
$3,000,000
to
$4,000,000
$3,500,000
to $5,000,000
CLINICAL
DEVELOPMENT
CLINICAL
DEVELOPMENT
$7,000,000
to
$10,500,000
$1,000,000
to
$2,000,000
$500,000
to
$1,000,000
$1,000,000
to
$1,500,000
18. Raising Capital for Medical Device Development
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MEDICAL DEVICE DEVELOPMENT
DEVICE DEVELOPMENT PROCESS
© 2013 Product Development Technology, Inc.
CLINICAL
DEVELOPMENT
MANUFACTURING
DEVELOPMENT
MARKET
DEVELOPMENT
CORPORATE
ACQUISITION
PRODUCT
INTRODUCTION
INVESTOR
EXITVC
ROUND 1
VC
ROUND 2
VC
ROUND 3
12 to 24 Months 12 to 24 Months 12 to 24 Months
External vs. Internal
Manufacturing
$2,000,000
to
$5,000,000
$1,000,000
to
$3,000,000
$1,000,000
to
$3,000,000
External vs. Internal
Sales Team
Not Reimbursed
to Reimbursed
Funding
Source
Switch
VENTURE CAPITALIST FUNDING
> Later Stage Venture
> Lower Risk Investment
> Larger Investments
ANGEL INVESTOR FUNDING
> Early Stage Venture
> Higher Risk Investment
> Smaller Investments
19. Raising Capital for Medical Device Development
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MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
PRE-MONEY VALUATION
for
EARLY STAGE VENTURE
EXECUTION
STRATEGY=
=
PRODUCT
IDEA
PRE-MONEY
VALUATION
$750,000 to $1,500,000 (Typically)
Weak Idea 1
Fair Idea 5
Good Idea 10
Great Idea 15
Brillant Idea 20
Weak Execution $1,000
Fair Execution $10,000
Good Execution $100,000
Great Execution $1,000,000
Brillant Execution $10,000,000
20. Raising Capital for Medical Device Development
20
MEDICAL DEVICE DEVELOPMENT
CORPORATE ATTRACTION
to EARLY STAGE VENTURE
• Exposure to emerging technology
• Access to specialized knowledge
• Understanding of emerging market
• Access to entrepreneurial talent
• Investment in potential acquisition
• Blocking competitor acquisition
• Access to new customer or distributor
• Access to complementary technology
© 2013 Product Development Technology, Inc.
21. Raising Capital for Medical Device Development
21
MEDICAL DEVICE DEVELOPMENT
FINANCIAL VENTURE
• Exit Value based on ‘future
profit generation’
• Use Proceeds to drive growth
• Venture has revenue, profit,
growth
• Profitability-Driven Acquisition
• Sale limited by profit-
generating capability
STRATEGIC VENTURE
• Exit Value based on ‘asset or
capability’
• Use Proceeds to build asset or
capability
• Venture leverages acquirer’s
operation; too costly or time-
consuming to copy
• Synergy-Driven Acquisition
• Sale limited by business synergy
effect
CORPORATE VALUATION
of EARLY STAGE VENTURE
© 2013 Product Development Technology, Inc.
22. Raising Capital for Medical Device Development
22© 2013 Product Development Technology, Inc.
The Drama of !
REGULATORY APPROVAL !
& INSURANCE REIMBURSEMENT!
23. Raising Capital for Medical Device Development
23
MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
US REGULATORY
PATHWAY
PROTOTYPE
DEVELOPMENT
BENCH
TESTING
ANIMAL
TESTING
PRE-SUBMISSION
MEETING
PILOT
CLINICAL
US MARKET
CLEARANCE
IDE
SUBMISSION
IDE
SUBMISSION
PIVOTAL
CLINICAL
APPLICATION
REVIEW
US MARKET
CLEARANCE
APPLICATION
REVIEW
US MARKET
APPROVAL
> Traditional 510(k)
> Special 510(k)
> Abbreviated 510(k)
> Traditional PMA
> Modular PMA
> Streamlined PMA
> Product Development Protocol
> Humanitarian Device Exemption
> De Novo 510(k)
CLASS I
DEVICE
CLASS II
DEVICE
(Not Significant Risk)
CLASS II
DEVICE
(Significant Risk)
CLASS III
DEVICE
510(K)
APPLICATION
PMA
APPLICATION
24. Raising Capital for Medical Device Development
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MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
EU REGULATORY PATHWAY
Select
EC Directive
Classify
Medical Device
Select
ISO Certified
Manufacturer
Prepare
Technical File
or Design Dossier
Select
Notified Body
Audit
Technical File
or Design Dossier
Prepare
Declaration
of Conformity
Affix
CE Mark
25. Raising Capital for Medical Device Development
25
MEDICAL DEVICE DEVELOPMENT
CMS
Scrutiny
CLINICAL
OUTCOME
MEDICAL
SAFETY
ECONOMIC
OUTCOME
FDA
Scrutiny
MEDICAL
SAFETY
CLINICAL
EFFICACY
• FDA validates safety and efficacy
of new device
• CMS considers patient need and
medical necessity
• CMS will not approve new costly
procedure or device if current
treatment gives similar outcome
• CMS will approve new device with
demonstrably superior results
• CMS will approve new procedure
if greatly needed and no current
alternatives
• Health economics must justify
more costly device with better
patient outcome
© 2013 Product Development Technology, Inc.
INSURANCE REIMBURSEMENT
26. Raising Capital for Medical Device Development
26
MEDICAL DEVICE DEVELOPMENT
• FDA Clearance insufficient for Reimbursement
• Reimbursement is success driver for new technology
• Medicine-Based Evidence ranks Quality of Evidence
• Clinical effectiveness of device for Patients
• Cost effectiveness of device for Stakeholders
• No guarantee for Coverage or sufficient Payment
© 2013 Product Development Technology, Inc.
INSURANCE REIMBURSEMENT
BENEFITCOST
TECHNOLOGY
ASSESSMENT
• PATIENT
• PROVIDER
• PURCHASER
• PAYER
• REGULATOR
• SOCIETY
• PATIENT
• PROVIDER
• PURCHASER
• PAYER
• REGULATOR
• SOCIETY
27. Raising Capital for Medical Device Development
27
MEDICAL DEVICE DEVELOPMENT
• Device receiving 510(k)
Clearance is substantially
equivalent to currently
marketed product
• Device would fall under
current reimbursement
coverage, code and
payment constraints
• Argument for higher
payment for Device is
illogical
© 2013 Product Development Technology, Inc.
INSURANCE REIMBURSEMENT
REGULATORY
PATHWAY
REIMBURSEMENT
PATHWAY
Pathway
Synchronization
28. Raising Capital for Medical Device Development
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MEDICAL DEVICE DEVELOPMENT
© 2013 Product Development Technology, Inc.
“If everything seems under control,
you’re just not going fast enough.”
--Mario Andretti