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September 10th, 2020

ELEVATE PERSPECTIVE

The Medical Device Startup

By Dan Meek, Entrepreneur-in-Residence, Northeast Indiana

Medical devices intersect engineering, chemistry, science and human health. The industry can be perfect for an engineer, marketing professional, CEO, scientist or technician to build a career on.

In my 20-plus years of working with medical device companies, I have heard much advice given to entrepreneurs about how to build a startup. This includes everything from companies involved in the replacement of human tissue, medical diagnostics, imaging, pharmaceuticals and drug delivery devices. For a medical device company developing Class I devices like surgical instruments to Class II and Class III devices like ventilators and pacemakers, the amount of information out there can be overwhelming. As an entrepreneur, your passion will drive you through the countless articles, peer-reviewed studies, discussions and general advice you will receive as you navigate your company’s path. Some might say the best advice is to let that passion be your guide because no matter how much advice you receive, there will always be unforeseen obstacles. But given that your medical device startup journey could envelop nearly a decade of your career, perhaps some thought-provoking remarks will help you establish a clearer path to success.

For the Team Raising Capital

During my experience as a medical device professional, I heard the phrase that developing drug products is “not for the weak or the cheap.” (Note: Medical devices can be regulated as a drug product in situations where the device controls a patient’s drug dosage). Generally, medical device firms will require up to $20 million to $25 million from inception to exit. There are examples of companies raising $40 million to $50 million, and a few may require $80 million to $100 million to reach an exit. The challenge for medical device companies is to align development and clinical plans with all associated uncertainties, to the capital access plans to achieve a seamless flow of advancement. Extremely well thought out plans, with contingencies and noted potential areas of delay, will provide investors a comprehensive look at the full opportunity.

RECOMMENDATION: Build best, base and worst-case timelines and use the scenarios to determine the impact on development costs, market launch and overall value creation. Doing so will demonstrate your team’s experience and ability to direct the company.

Product Development Team

As an investor who seeks opportunities in medical devices, I am always encouraged when I see good communication and alignment between the management team and the product development and engineering teams. My experience in medical devices has taught me that management teams must clearly communicate to the product development teams in order to succeed. Engineering teams can overlook the business needs when engrossed in the design phase of an innovative medical device. For example, an engineer may be evaluating two design options, one with a higher component and assembly cost. Good engineering economic analysis and design reviews must be considered, but in a startup burning tens or hundreds of thousands of dollars per month, the engineer may overlook the fact that significant delays could deplete funds and “down round” future financing. Clear communications on company burn rate, runway and critical dates will give product development teams what they need to work through design considerations expediently.

A CEO of a startup once said to me, “The science is proven. Now it is just engineering left to complete.” Although this quote indicates pathway advancement, the CEO lacked the awareness of risks and development costs associated with designing the product. Many of the large costs associated with a medical device company are tied to engineering and achieving a final design version for manufacturing. Medical devices must diagnose properly; treat safely and effectively; and be manufactured to provide the same performance (within defined specifications) each time, for each device manufactured. This is no small feat, and engineers, chemists and other scientific professionals are often challenged to meet design specifications that many people don’t think about.

For example, ambient air pressure varies with altitude. In the U.S., we have hospitals in places like Louisiana (low altitude) and Colorado (high altitude). If air pressure can impact the performance of a medical device, engineers must account for this in the design, and test the device in these atmospheric conditions. Design verification testing can be a lengthy process of device development, especially if design issues are found, and should be accounted for early in a company’s plans.

RECOMMENDATION: Be realistic about development timelines and understand the impact of design development on the overall plan to obtain market launch. If you don’t know, seek the guidance of experienced product development professionals.

Intellectual Property

Patent applications, patent filings and issued patents are essential components of a medical device company. Trade secrets are also highly valuable. But first-time medical device entrepreneurs often overlook the need and associated costs with patentability assessments, and freedom-to-operate legal opinions that can influence an investor’s interest in a company. Intellectual property legal services can be expensive, but they are essential in this industry.

RECOMMENDATION: Find the right intellectual property counsel early. Ask for recommendations, ask for referrals, interview firms and look for the right attorney to represent your company based on the match of skill sets and experience to your company’s focus. If your device relies heavily on chemistry, find an attorney who also specializes in chemistry. Your patent applications will be stronger, and so will your company.

Quality Assurance and Medical Device Regulations

The medical device industry is regulated by strict standards, including FDA’s 21 CFR Parts 11 and 820, Quality System Regulation (QSR) and ISO 13485. For those in the industry, this is well understood.

RECOMMENDATION: Always communicate the importance and impact of these regulations to investors and how they specifically impact the business and medical device being developed by the company. This accomplishes two things:

1) Confidence: It clearly demonstrates the thoroughness of the company executives and their experience;

2) Communication: It helps justify the company’s development plans, costs and timeline to interested investors.

It is so easy to gloss over this point, but I advise companies to take this seriously as it can lead to significant delays in regulatory approval, thus impacting the financial health of the company.

Regulatory and Reimbursement Strategy

These two topics are likely the most important areas of consideration for a new medical device startup. Volumes have been written on these subjects. In the past, obtaining regulatory clearance for a medical device was viewed as the ultimate achievement toward navigating toward a successful exit, but in more recent years successful commercialization including a reimbursement has become increasingly important. Regardless of the stage of your company, being able to communicate the regulatory strategy for your device, as well as plans to obtain medical reimbursement for the company, or for your customers, is very important to raising capital.

RECOMMENDATION: Interview several regulatory and reimbursement professionals and seek those with particular experience in the industry in which you plan to launch your product.

Timing

As mentioned, one can easily devote a decade to building their career on a medical device startup. Years ago, the average time to exit for a medical device company was around seven years, but recent data suggests this now stands at about 10 years. Given this, medical device startups should pay close attention to the status or age of a venture capital fund, as newly formed funds will likely be the most active on new opportunities, while funds nearing the end of their active investment period will be seeking later-stage investment opportunities.

Conclusion

Medical device startups offer very rewarding career opportunities. I talk about my experience often, as it was a highlight of my career, and in an industry that I hold a passion for today. As an investor working with medical device entrepreneurs, this view is commonly shared. The impact one can make for a patient, or for the healthcare industry in general, makes medical devices an attractive entrepreneurial and investor area of pursuit.

Dan Meek serves as Entrepreneur-in-Residence for northeast Indiana. He most recently served as President of Seneca Business Ventures, a commercialization and innovation consultancy. He also was Vice President of Venture Development and Director of Bioscience Commercialization at Rev1 Ventures. His background has focused on commercialization, early-stage investments, and new ventures.

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