MEDICAL DEVICE DEVELOPMENT_0327

1

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!

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

MEDICAL DEVICE DEVELOPMENT

Low Impacton Clinical Utility

High Impacton Clinical Utility

MARGINALINNOVATION

'Existing' Technology applied to 'Existing' Medical Use

LOWEST UNCERTAINTY

THERAPEUTICINNOVATION

'Existing' Technology applied to 'New' Medical Use

MEDIUM to HIGH UNCERTAINTY

High Impacton Technology-in-Use

Low Impacton Technology-in-Use

TECHNOLOGICALINNOVATION

'New' Technology applied to 'Existing' Medical Use

LOW to MEDIUM UNCERTAINTY

RADICALINNOVATION

'New' Technology applied to 'New' Medical Use

HIGHEST UNCERTAINTY

© 2013 Product Development Technology, Inc.

MODEL OF PRODUCT INNOVATION


4



"New" MedicalTechnology

"Existing" Clinical Use

"Existing" MedicalTechnology

"Existing" Clinical Use

"Existing" MedicalTechnology

"New" Clinical Use

"New" MedicalTechnology

"New" Clinical Use

HIGH

LOW

UNCERTAINTYSCALE

"EXISTING"CLINICAL USE

Domain

"NEW"CLINICAL USE

Domain

LEVELS OF DEVELOPMENT RISK


5



LEVELS OF DEVELOPMENT RISK

HIGH

LOW

UNCERTAINTYSCALE

Plateau ofStatus Quo

(We do not wishto change anything)

Plateau ofUtility Promotion

(We find new meansfor old ways)

Plateau ofEverything Changes

(We find new meanswith new ways)

"EXISTING"CLINICAL USE

Domain

"NEW"CLINICAL USE

Domain

Plateau ofTechnology Promotion

(We do itSmaller-Better-Faster-Cheaper)


6



LEVELS OF TECHNOLOGY READINESS

Basic PrinciplesObserved

SpeculativeApplicationFormulated

Critical FunctionProof-of-Concept

BreadboardVerification

in Laboratory

BreadboardVerification

in Simulated Use

System PrototypeVerification

in Simulated Use

System PrototypeVerification

in Actual Use

Final ProductValidation

in Actual Use

Final ProductValidation

in MarketplaceSTEP #9

STEP #8

STEP #7

STEP #6

STEP #5

STEP #4

STEP #3

STEP #2

STEP #1

VERIFICATIONPHASE

FEASIBILITYPHASE


7



Inventor VentureTeam

SeedInvestors

ComplianceOfficers

DeviceUsers

PatentAttorneys

KeySuppliers

FamilyMembers

AngelInvestors

WHAT KEEPS THE INVENTOR UP AT NIGHT?


8



WHAT KEEPS THE INVESTOR UP AT NIGHT?

Inventor

AngelInvestors


9



INVENTOR PERSPECTIVE

Compelling Product Concept

Imperative: “Do It Right”

Goal: “Get Product to Market”

Supplies Vision and Perspiration


10



INVESTOR PERSPECTIVE

Compelling Investment Opportunity!!

Imperative: “Get It Done”!"

Goal: “Move Venture to Exit”""

Supplies Cash and Credibility"


11



INVENTOR + INVESTOR as

THE ODD COUPLE


12


•  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


INVENTOR CHALLENGES


13


•  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?


INVESTOR CHALLENGES


14


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



15


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



16


TYPES OF MEDICAL DEVICES


In-VitroDiagnosticDevice

MedicalCapital

Equipment

MedicalDeviceSoftware

ActiveMedicalDevice

DisposableMedicalDevice

Device Electronics Software

Software

Disposable Hardware SoftwareElectronics

Disposable

DisposableAssay SoftwareInstrument


17


DEVICE DEVELOPMENT PROCESS


CONCEPTDEVELOPMENT

INVESTMENTGATE #2

INVESTMENTGATE #1

SEEDROUND

FOUNDERSROUND

CONCEPTDEVELOPMENT

PROTOTYPEDEVELOPMENT

INVESTMENTGATE #2

INVESTMENTGATE #3

INVESTMENTGATE #1

SEEDROUND

ANGELROUND 1

ANGELROUND 2

FOUNDERSROUND

CLASS IIMEDICALDEVICE

CLASS IIIMEDICALDEVICE

12 to 24 Months 12 to 24 Months

12 to 24 Months

$250,000 $250,000

PRE-CLINICALDEVELOPMENT

ANGELROUND 2

ANGELEXIT

ANGELROUND 3

CORPORATEACQUISITION

12 to 24 Months 24 to 48 Months


TECHNOLOGYDEVELOPMENT

INVESTMENTGATE #3

12 to 24 Months12 to 24 Months

GOVERNMENTGRANTS

ANGELROUND 1

12 to 24 Months

ANGELEXIT


36 to 72 Months(3 to 6 Years)

72 to 144 Months(6 to 12 Years)

$2,000,000to

$3,000,000

$2,000,000to

$3,000,000

$250,000$250,000

INVESTMENTGATE #4

INVESTMENTGATE #5

$3,000,000to

$4,000,000

$3,500,000to $5,000,000

CLINICALDEVELOPMENT

CLINICALDEVELOPMENT

$7,000,000to

$10,500,000

$1,000,000to

$2,000,000

$500,000to

$1,000,000

$1,000,000to

$1,500,000


18


DEVICE DEVELOPMENT PROCESS


CLINICALDEVELOPMENT

MANUFACTURINGDEVELOPMENT

MARKETDEVELOPMENT


PRODUCTINTRODUCTION

INVESTOREXITVC

ROUND 1VC

ROUND 2VC

ROUND 3

12 to 24 Months 12 to 24 Months 12 to 24 Months

External vs. InternalManufacturing

$2,000,000to

$5,000,000

$1,000,000to

$3,000,000

$1,000,000to

$3,000,000

External vs. InternalSales Team

Not Reimbursedto Reimbursed

FundingSourceSwitch

VENTURE CAPITALIST FUNDING> Later Stage Venture> Lower Risk Investment> Larger Investments

ANGEL INVESTOR FUNDING> Early Stage Venture> Higher Risk Investment> Smaller Investments


19



PRE-MONEY VALUATION for

EARLY STAGE VENTURE

EXECUTIONSTRATEGY=

=

PRODUCTIDEA

PRE-MONEYVALUATION

$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


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



21


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



22 © 2013 Product Development Technology, Inc.

The Drama of !REGULATORY APPROVAL !

& INSURANCE REIMBURSEMENT!


23



US REGULATORY PATHWAY


BENCHTESTING

ANIMALTESTING

PRE-SUBMISSIONMEETING

PILOTCLINICAL

US MARKETCLEARANCE

IDESUBMISSION

IDESUBMISSION

PIVOTALCLINICAL

APPLICATIONREVIEW

US MARKETCLEARANCE

APPLICATIONREVIEW

US MARKETAPPROVAL

> 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 IDEVICE

CLASS IIDEVICE

(Not Significant Risk)

CLASS IIDEVICE

(Significant Risk)

CLASS IIIDEVICE

510(K)APPLICATION

PMAAPPLICATION


24



EU REGULATORY PATHWAY

SelectEC Directive

ClassifyMedical Device

SelectISO CertifiedManufacturer

PrepareTechnical File

or Design Dossier

SelectNotified Body

AuditTechnical File

or Design Dossier

PrepareDeclaration

of Conformity

AffixCE Mark


25


CMSScrutiny

CLINICALOUTCOME

MEDICALSAFETY

ECONOMICOUTCOME

FDAScrutiny

MEDICALSAFETY

CLINICALEFFICACY

•  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


INSURANCE REIMBURSEMENT


26


•  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



BENEFITCOST

TECHNOLOGYASSESSMENT

• PATIENT• PROVIDER• PURCHASER• PAYER• REGULATOR• SOCIETY

• PATIENT• PROVIDER• PURCHASER• PAYER• REGULATOR• SOCIETY


27


•  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



REGULATORYPATHWAY

REIMBURSEMENTPATHWAY

PathwaySynchronization


28



“If everything seems under control, you’re just not going fast enough.”

--Mario Andretti

Documents

MEDICAL DEVICE DEVELOPMENT_0327