This document discusses medical device markets and channels. It notes that medical devices generally require physical delivery and direct sales to hospitals, physicians, or patients. Some exceptions include software-based products. It also discusses that building sales and marketing infrastructure for medical devices is very expensive. As alternatives, it suggests targeting key customers of larger companies or pricing based on clinical viability rather than revenue to attract acquirers. Finally, it mentions that medical device gross margins impact the viable distribution methods and exit opportunities.

1. UCSF Lean Launchpad For Life Science
and Healthcare Startups
Medical Device Track
Class 3
Channels
October 15, 2013
Allan May
Chairman, Life Science Angels
amay@lifescienceangels.com
UCSF Lean Launchpad - Allan May ©

2. MEDICAL DEVICE MARKETS ARE
PHYSICAL MARKETS
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Medical devices encompass a large range of tangible and intangible
items with a wide variety of business models and issues
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Imaging equipment, such as MRI, CT and ultrasound
Therapeutic capital equipment, such as Stereotactic radiosurgery, lasers, and
surgical robots
Implants, such as total joints, pacemakers, stents, and artificial corneas
Instruments and tools, such as scalpels, syringes, and electrocautery
Devices, such as catheters, introducers, and sheaths
Monitoring equipment, such as glucometers, pulse oximetry, and vital signs
monitors
Durable medical equipment, such as crutches, wheelchairs, and home oxygen
Disposables, such as syringes, wound dressings, and casts
Medical devices generally require physical delivery
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Exceptions:
 Software based products
 Morpheus: Enhanced imaging data via post processing
 Physician office management software
 Big Data based products
UCSF Lean Launchpad - Allan May ©

3. MEDICAL DEVICE CHANNELS TEND TO BE DIRECT
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Most devices are sold to hospitals, physicians or patients directly
Most medical devices require direct sales
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There is often an educational/training component to the sales known as the
“learning curve”
Sales and clinical applications personnel often guide physicians through the
learning curve
In some products, sales and clinical applications specialists attend each procedure
at which the device is used
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Commonly a sales rep and tech rep send an entire day to assist a single product usage
Some Medical device products/sectors use distributors
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Distribution channels vary by clinical area: Eg, spine devices and surgical
instruments tend to use distributors
Commodity type items, such as hospital supplies, tend to use distributors
Distribution channels also vary by geography
 OUS markets tend to be much more distributor dominated
UCSF Lean Launchpad - Allan May ©

4. MEDICAL DEVICE CHANNELS TEND TO BE
DIRECT (2)
 OEMing components to larger manufactures is
generally low margin, hard to exit businesses
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The negotiating power lies mainly with the manufacturer
 VARs are virtually non-existent since any alterations
of approved devices require separate clinical trials
and regulatory approvals
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EG, adding a steroid to the tip of a pacemaker to prevent fibrosis
 Retail channels exist but solely in consumer products
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Hearing aids, eye glasses, wound dressings
UCSF Lean Launchpad - Allan May ©

5. MARKETING AND SELLING MEDICAL DEVICES
CAN BE A RISKY STRATEGY
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Getting and keeping medical device customers often results in
wasteful duplication of resources
GMP manufacturing, quality systems, QA/QC, and sales and
marketing infrastructure are required in order to Market and Sell
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These systems and processes are very expensive to finance
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Sales people tend to cost >$350-400k/year fully loaded
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It normally takes one or more dilutive equity rounds
Clinical applications or technical support specialists are required to
assist sales and marketing
Most acquirers have extensive manufacturing infrastructure and
dedicated sales and marketing forces
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So they don’t pay extra value in exits for duplicative resources
They DO pay for proof of penetration and uptake, but that tends to
take >1-2 years and be very expensive in terms of cash burn
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Requires substantial funding capital usually from venture capitalists or
corporate venture capital groups
UCSF Lean Launchpad - Allan May ©

6. ALTERNATIVE STRATEGIES FOR SELLING
MEDICAL DEVICES
 What is it you are trying to prove?
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Revenue, or revenue ramp to get a multiple of sales on exit?
KOL uptake?
Clinical viability?
 Building a sales and marketing force and ramping
sales is expensive, risky and time consuming
 A targeted, focused rollout can be equally effective
 Converting key customers of strategics is a very
effective way to get the attention of acquirers
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Target hospitals where their KOLs practice
Target major hospitals/customers in their sales channel
Demonstrate physician/patient satisfaction and build clinical
experience
Price/Dreams beats Price/Earnings in most cases!
UCSF Lean Launchpad - Allan May ©

7. CHANNEL PROFIT FIT IN MEDICAL
DEVICES
 Gross margin impacts distribution method and exit
 First Gen medical devices often have 40-50% margins
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Medical device distributors tend to require >25% margins, which is a major reason
distribution is often not a viable channel
 Normally, all available cash in medical device startups is
spent proving safety and efficacy
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Cost engineering or cost reduction usually comes in the Series C round or later
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It commonly takes 6-12 months (or longer) to reduce costs and maintain safety and
efficacy
 Medical device acquirers will require products with >65%
margins
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Sometimes a clear engineering pathway to COGs reductions is sufficient without
actually spending the cash to prove it
Sometimes larger volumes driven by the large sales and marketing forces of major
device companies can achieve COGS and economies of scale unobtainable by
startups
UCSF Lean Launchpad - Allan May ©

8. UCSF Lean Launchpad For Life Science
and Healthcare Startups
Medical Device Track
Class 3
Channels
October 15, 2013
Allan May
Chairman, Life Science Angels
amay@lifescienceangels.com
UCSF Lean Launchpad - Allan May ©