So you want to start a medical device company? Here’s a bit of hope: Venture capital’s withdrawal from the increased risk presented by medtech investments doesn’t mean you can’t raise enough cash to get going. You’ll just need to get creative.
Once you’ve got some scratch, you’ll need to think about outsourcing product design and development and prototyping services.
All set? Now you need to think about getting your device on the market. Once you’ve gotten that figured, you should figure out how to keep your FDA or CE Mark approval through your quality systems.
And you still need to get paid, right? You need to build a reimbursement strategy into your plan.
Finally, to protect the intellectual property underlying all of this effort, you need to understand U.S. patent law.
Raising capital in a VC-light environment
Venture capital hasn’t completely deserted the medical device sector, but most analysts agree that VCs are simply not as interested in medtech as they are in other sectors like biotech. Medtech attracted less than $5 billion in 2014, only 5.9% of all U.S. venture dollars that year, according to the Ernst & Young Pulse of the Industry report.
And it’s startups that are feeling the pressure most deeply. VC backing of earlier-stage medtechs now makes up a smaller share of a smaller pie “due to the retreat of several stalwart medtech-focused VCs at a time when corporate venture investors have yet to fill the gap,” according to the report. Seed, Series A and Series B rounds dropped 8% in 2014-2015 from fiscal 2013-2014 and made up only 29% of medtech venture investments in 2014-15.
Although VC has diminished, other funding sources are out there – the biggest change is that they’re just much smaller:
• Angel investors – Often individuals with deep pockets and an interest in a specific disease or condition. Get busy networking with as many high-net-worth people as you can.
• Private placement – Use a private placement – the sale of securities to a relatively small number of select investors – to fund your vision by raising money from individual donors.
• Incubators – Public, private or academic incubators offer subsidized business accommodation, academic support and business mentoring, and connections with resources for prototyping, testing and clinical trials.
• Entrepreneurial competitions – Universities or large companies, hoping to attract technology partners, often offer technology contests with sometimes significant payouts in cash and in-kind services.
• Crowdfunding – Most effective after the early development phase, when the funds are needed for validation or prototyping. The same high risk and high capital needs medical technology that made VCs chary of medical technology make the crowd a less optimal source of cash.
• City, state, & county resources – Local governments often use tax breaks and other incentives to draw entrepreneurs to development zones. And your area likely has technical associations formed to boost the industry, some with their own tech incubators. Trade associations offer access to universities or hospitals for clinical testing and connections to local angel investors and competitions. They can also provide opportunities for networking and mentorship.
As Aum Cardiovascular CEO Marie Johnson puts it, “They don’t give you money because they’re in love with the story.” (Johnson raised $5 million for Aum via private placement.) The best advice for any medical device startup is that today, no medtech investment pitch, no matter the source receiving it, succeeds without compelling clinical date, a clear unmet and demonstrable cost savings over current treatments.
Are you ready for an outsourcer? Here’s how to find out.
Outsourcing your product development doesn’t have to mean losing control of your technology. Although it’s one of the biggest decisions a startup will make, working with a contract supplier can deliver unexpected benefits.
Gary Boseck, VP of technical operations at Vention Medical, says there are ways for startups to prepare for the challenges that come with working with an outsourcing partner.
And partnership, he says, is really the key word. “CMOs want their clients to succeed. They have a vested interest in helping develop a technology that has potential in the market and their expertise can contribute to the likelihood of success.”
Getting a trusted CMO involved early in the process could even have some unexpected benefits. Boseck says some CMOs will provide funding for their most promising startup clients. Others hold contests to attract the best startup technologies and assist in developing those platforms for the market.
Readiness is all
It’s not an easy road from ideation to production, Boseck notes. “As the saying goes, ‘If it were easy, someone would have already done it.’” That’s precisely the point: Contract manufacturers have done it, and they’re willing and able to help startups do it as well.
There are a few questions medtech startups should ask themselves when considering whether to look outside the company for product development:
• Can you provide well-defined and stable product requirements? Although adjustments are expected and often necessary, keep in mind that mission creep can kill deadlines, Boseck notes.
• Do you have clear priorities? Whatever the challenges, your end goals should be very well defined.
• Can you provide timely feedback to the team? Manufacturing can’t take place in a vacuum. Startups, which often have limited staff, should commit to having a dedicated liaison with their CMO partner.
• Will you actively engage with the CMO development team? This might be as easy as getting a team member on site frequently.
• Do you understand the development process? If not, ask more questions.
• What are the terms? Make sure IP and ownership of the work product is well defined.
Another important aspect of engaging with a CMO is the selection process, often a rigorous and challenging one, Boseck says. Some CMOs actively try to entice startups, but just because they claim to be experts “they may not meet your specific requirements,” he cautions. Boseck advises budding medtech entrepreneurs to evaluate CMOs based on the following criteria:
• Their expertise matches the project need. This should encompass design expertise, clinical familiarity, and component and assembly experience.
• The CMO offers the full spectrum of needed services. These should include concept ideation and prototyping, clinical production and scalable commercial production.
• The CMO is accessible and responsible. This is the due diligence portion of the analysis. You’ll need to talk to a variety of clients, and conduct some online research, just to start. A good CMO has a reputation for building good working relationships, with an emphasis on trust and transparency.
Quality and compliance for startups: What you can ignore and what you can’t
Quality systems might be the last thing on your startup’s mind, as other activities take precedence. But it’s not a good idea to overlook the development of your quality system at the beginning.
“I think it’s a good idea to put process and product planning in place right from the start, simply because once things get going, they get going fast,” notes Timothy Lozier, director of marketing for ETQ. “You might be too worried about R&D, product and supply chain, and then market approval, to think about compliance. But it will come to you, and you don’t want to get caught off-guard.”
“Establish a quality management system that suits the company size and expected growth,” adds Christine Santagate, client solutions advisor with Regulatory Quality & Solutions. “Make sure that it’s something that the current staff can manage and maintain. When a company institutes a [quality management system] that’s too large, they set themselves up for failure to comply with their own system.”
Implementing and maintaining a QMS is a crucial part of regulatory compliance. The medical device quality system is primarily concerned with production and post-production. FDA 21 CFR Part 820 defines the quality regulations for the U.S. market. Otherwise, ISO 13485 can be used to build a quality system for global markets.
Although it’s time-consuming and expensive, establishing a total quality management system need not be as challenging as it sounds. The key is to build the system as you develop, focusing on the relevant aspects of quality and ignoring the others until they’re needed.
“You have to find something you can scale with,” says Lozier. “There are systems out there that let you start off small-scale and simple (yet effective), but as you grow you can grow the solution with your business.”
Startups should begin building their quality and compliance programs during the development phase, he advises, by focusing on design controls, risk management, document control and record management, and supplier management.
Design controls, essential for a QMS, can also help with the design process by capturing key aspects of development to prove your product meets user needs and is safe and effective. Likewise, risk management works with design controls to create documents and records throughout product development, to demonstrate that you’ve considered the risks and are doing something about them. Document management is the process that helps those pieces of the puzzle stay together.
“The concept of planning and gaining control over the process is that as you grow, you’ll always have them to lean on,” Lozier explains. “People can follow a process, but if it’s not documented, then you run into issues.”
Lozier emphasizes centralizing documentation, process and product planning.
“Too often, companies take that first step towards documenting their processes, but it resides in spreadsheets, file systems, and other, more decentralized, often manual methods. Having a system that’s able to manage and track these things, as well as serve as a central resource, is important to ensuring consistency in the operation. One source of the truth outweighs the risks associated with errant copies floating around the operation.”
Lozier cites tools that offer free or scalable methods to handle compliance events, issue actions, and launch corrective & preventive actions (CAPAs). ETQ, for example, offers traqpath, a free download, and VERSE, a cloud-based quality management system that brings in document control/training and CAPA. In addition, both tools have a supplier component to them, which can help startups send actions and CAPAs to suppliers through secure external assignments.
Many vendors have programs that are specifically designed to help companies scale compliance.
“These aren’t expensive tools, but are built with startups in mind,” says Lozier. “The benefit is that if you’re a startup and you’re looking to just put the pieces in place, you can do that for a low cost to your business, or even for free. That way, you’re not ignoring it, or factoring in major investment on something you may not need now.”
Committing assets to compliance is a “future-proofing” investment, he says. “You’re going to have to meet the compliance standards and regulations as you grow, and, just like documenting your processes and controlling and tracking your quality and compliance operations, you don’t want to be caught in growth mode and playing catch-up.”
How to plan your regulatory strategy
The regulatory burden for startup medical device businesses might be the most rigorous of any industry, and with good reason – making products for implantation or use in the human body requires hurdling a pretty high safety and efficacy bar.
So building a regulatory strategy from the very beginning is crucial, and there some key considerations every medtech startup should keep in mind, according to Christine Santagate, client solutions advisor at Regulatory Quality & Solutions.
First off, Santagate advises, startups should remember to budget for the testing and related costs associated with regulatory processes.
“The regulatory strategy is really an extension of the overall business plan and the costs associated should roll up into the overall budget. Unfortunately, testing and registration costs are sometimes overlooked when creating a business plan,” she explains. “The testing times and costs of sterilization validation, environmental testing, aging, biocompatibility and possibly clinical trials are sometimes not fully understood, as the initial focus is usually on technology and not on the entire life cycle.”
Another early consideration is where to pursue approval first. The relative ease of obtaining a CE Mark in Europe compared with the FDA’s more stringent requirements has been an attraction in the past, but Santagate says that’s changing.
“It used to be easier to gain approval in Europe, but things are changing quickly. With the updated ISO 13485 and pending IVDR updates, notified bodies [in Europe] are going to have their hands full,” she says. “Small startups should focus on gaining approval in the country that allows the most opportunity and is manageable and sustainable for their small staff.”
If the U.S. is the first target for commercialization, planning a detailed approach ahead of time helps determine which pathway to pursue, depending on the type of device being developed. It can help to find a trusted partner with the expertise in this area, to develop a regulatory strategy up front and identify potential paths to market – and its associated risks.
“This strategy will assess applicable FDA regulations, device classification options, potential predicate device and product claims, indications and contra-indication options, and potential regulatory risks based on the company’s marketing claims, product requirements, risk analysis, etc.,” Santagate notes. “The advantage in working with a consulting group is that they stay up to date on all regulation changes. A group like R&Q has 80+ full time consultants with experience spanning nearly all FDA device classes and they can provide an experienced, independent review.”
If your device is Class III, requiring the FDA’s most-stringent pre-market approval path, establishing a relationship with the agency and keeping the lines open should be your primary considerations.
“Make sure that indications are clear and supported and that any study design is robust and appropriate data points are collected to support the submission,” Santagate advises. “It’s all in the preparation – this is a long process and up-front focus and attention to detail will be well worth the effort.”
Santagate says a sound regulatory strategy can be an unexpected benefit for startups on the funding trail.
“Potential investors are able to see that the company has a planned path forward, based on risk. It provides an additional layer of preparedness and overall understanding of the full funding requirements – and how those funds will be used,” she says.
Reimbursement tops the ‘must-do’ list
Five years ago, if you asked a medical device executive about their top worry, regulatory – specifically, the cost and uncertainty around winning favor with the FDA – nearly always came first.
Today, those same executives are more likely to cite reimbursement as their top issue. Driven by the declining number of physicians owing their own practices – 70% in 2002, compared with about 25% in 2011, according to the U.S. Medical Group Management Assn. – and the resulting shift to group purchasing organizations, reimbursement has vaulted to the top of the list of must-do items for new medical device concerns.
“Reimbursement comes up in just about every discussion I’ve ever had with investors,” says David Rosa, the former president & CEO of Sunshine Heart in Eden Prairie, Minn. “Today, they’re all looking to de-risk their investment, and they all want to know, up front, the likelihood of reimbursement.”
“The hardest questions you’re going to get are on the reimbursement side,” adds Preceptis Medical president & CEO Steve Anderson. “It goes to the heart of everything we’ve been doing. Five years ago, we would’ve said, ‘Oh, reimbursement, I don’t need to worry about that.’ But this is the big issue today. It’s a big issue, and a big opportunity.
“It really is all about the money. The first real money we spent was on an outside analysis on reimbursement strategy. So it was fundamental to everything we’ve done,” Anderson says.
In fact, Minneapolis-based Preceptis chose to develop its therapy to help children with hearing problems in part because of its relatively simple reimbursement path, he adds.
Bob Thompson, president of Gahanna, Ohio-based Comprehensive Reimbursement Solutions, says the key is targeting a truly unmet need.
“There’s a lot of opportunity out there,” Thompson says. “If you direct your products toward unmet medical needs, you’ll see the benefits – particularly if you deal with the quality and cost-control issues that hospitals and payers are feeling.”
The challenges vary by country, so it’s important to become familiar with the ins and outs of local reimbursement policies in your target markets before you start spending on product development. One challenge common to most markets is the gap between reimbursement rates and the actual value of the technology. In many countries, rates are set using cost-based formulae by device or procedure type.
Because winning reimbursement hinges on clinical data, startups should plot their reimbursement strategy in parallel with their clinical and regulatory plans. That’s because collecting Class I data from randomly controlled trials and post-approval Class II data is key to a favorable review from a payer. Startups should also have a strategy for disseminating that data to peer-reviewed publications and at medical conferences once it’s collected.
In the U.S., an increasing number of payers are exploring value-based reimbursement models, not least the Centers for Medicare & Medicaid Services. Last July Medicare announced a program to bundle reimbursement payments for hip and knee replacement procedures, saying it wants to “hold hospitals accountable for the quality of care they deliver to Medicare fee-for-service beneficiaries.”
Startups that can demonstrate that their devices both improve outcomes and can be reimbursed based on that improvement stand a better chance of winning a favorable decision from payers.