The Medical Device Milestone Map

Medtech start-ups from inception to exit: what are the key mile-
stones and what are the ACTUAL timelines and costs?
A data-driven approach to figuring out the new reality of medical
device venture capital investing.
BY REVITAL HIRSCH

Medical device venture capital investing has changed WHAT ARE WE ASSUMING?
significantly since the onset of the economic downturn. There seem to be five major assumptions hiding in a typical
Fundamental concepts and premises, such as capital ‘All I need...’ statement:
intensity, company stage at exit, the degree of difficulty in 1. The key milestones that a company will have to achieve to
obtaining regulatory approval and exit valuations, are bring its product to market.
undergoing major shifts.
2. The time it will take to achieve those milestones.
These shifts are likely to have a considerable effect on the
3. The stage of the company when it is acquired.
medical device venture capital ecosystem. This is what
4. The amount of capital the company will burn prior to
prompted the research that led to this article – a test of the
being acquired.
generally-accepted rules-of-thumb used daily by investors and
by those seeking funding vis-à-vis recent industry statistics. 5. The expectations regarding company valuation at exit.
These assumptions determine the potential investment
Every professional in the medical device venture capital multiple and return-on-investment that a venture capital fund
industry is familiar with the experience of having participated can expect from a portfolio company. They also influence the
in an introductory meeting with the founder of an early stage amount of reserves a fund earmarks for follow-on
medical device start-up. investments – a key component in a fund’s ability to continue
The founder defines the unmet clinical need, quantifies the supporting a company. But perhaps most importantly, these
vast addressable market and proudly displays what looks like assumptions create an anchor of initial expectations – a ruler
a piece of garden hose duct-taped to a few cables. While by which the fund determines the attractiveness of a
agreeing that the ‘prototype’ is a bit rough around the edges, proposed investment and measures a portfolio company’s
he is certain that – with a little imagination – you can surely performance throughout the lifetime of the investment.
see how his invention will revolutionize the medical device 1. THE MILESTONES
industry.
There is a core set of milestones that apply to the vast
All he needs is an investment of a few million dollars and two majority of medical device start-ups:
– no more than three – years to obtain regulatory approval.
Development Stage Milestones:
Then the company will be acquired for hundreds of millions of
dollars, providing you – the investor – with an extraordinary  Market requirements document (MRD) is essentially the
return on your investment. premise on which a start-up is based. The document
describes the current state of the universe, highlighting
Granted, this is an exaggeration. But these widely-used ‘All I
not only what is there but also what is missing from it,
need…’ statements mask a host of underlying assumptions
setting the stage for formulating ‘the need’ that a start-up
that drill down to the very core of venture capital investing in
is responding to.
medical devices.

December 2013 1
 The Medical Device Milestone Map

The MRD then outlines – in great detail – the product that  Clinical unit. Following design validation (confirmation
will be developed. This includes product features, usability that the requirements for a specific intended use can be
requirements, cost targets and the clinical and economic fulfilled consistently) the company will have a clinical unit.
value propositions. This is the device with which the start-up will perform its
While technical in nature, the MRD is prepared from the pre-clinical, clinical and regulatory processes.
end-market perspective, which makes this an important For this finished product the company will prepare a
business document as well. device master record, which will later serve as a critical
 Product requirements document (PRD) is the translation first step in the transfer-to-production process.
of the requirements outlined in the MRD into the  Pre-clinical validation. The company will use the clinical
comprehensive set of technical specifications and unit in an animal model, testing for safety and for initial
performance thresholds required of the materials, efficacy (including comparison to predicate devices that
components, sub-assemblies and the finished product. have been cleared and are in use in medical practice).
An important section of the PRD is risk assessment, a Every development process incurs setbacks and delays:
process that includes:  A component or sub-assembly may not perform according
− the identification of design, use and process risks; to specifications.
− an assessment of the risks’ frequency of occurrence  Design constraints may limit the ability to incorporate the
and the severity of their outcomes; full set of features outlined in the MRD.
− a review of the steps taken to mitigate those risks.
 The results of a pre-clinical trial may require varying
Companies developing medical devices the use of which degrees of product redesign.
exposes patients to potential safety concerns will also be
Yet development plans rarely factor sufficient delays into
required to carry out a clinical risk-benefit analysis.
their timelines or funding requirements.
 Design reviews will take place throughout the product
Many companies these days are completing large financing
development process to evaluate the design against its
rounds that are broken down into milestone-based tranches.
requirements. In each review the design will be examined
This financing structure provides a start-up with the security
against different sets of criteria, including technical
of knowing it is sufficiently funded for the foreseeable future,
specifications, small- and large-scale manufacturing, risk
freeing management to focus its attention on developing the
assessment and usability.
product and building the company. But for this to succeed,
Design reviews will occur at different levels: components the company has to achieve its milestones within the
and sub-assemblies will be reviewed first as stand-alone timelines and budgets to which it has committed.
modules and then a second time as part of the fully-
Now, think of a 3-month delay in the development process at
integrated finished product.
a time when a start-up is burning $400k per month. The
 Engineering prototype is the first tangible embodiment of company will be $1.2m short to reach the milestone that
the conceptual design. It is likely the product of several triggers the next cash infusion. Whether that milestone was
iterations of both the preliminary and detailed design part of a tranched financing round or whether it was
processes. supposed to trigger a new external financing round – there is
 Design freeze. After the sub-assemblies and the now a $1.2m funding gap that needs to be filled.
engineering prototype have undergone verification Medical device start-ups literally cannot afford to assume
(confirmation that the design output meets the design (and create expectations for) a ‘hiccup-free’ development
input requirements) the company will lock down its process. They need to proactively plan for setbacks and
product design by declaring a design freeze. delays in sub-processes that entail a higher degree of risk.
The design freeze will trigger activation of design change Clinical & Regulatory Milestones:
controls, a set of procedures for the identification,
 First in human is the first time an investigational device is
documentation, verification, validation and approval of
used on human subjects. Assuming the procedure’s safety
changes before their implementation.
and efficacy end-points are met, a few additional
Any changes made to function or features after a design procedures may be performed to create an initial base of
freeze is declared will apply to the next-generation device. clinical experience in the use of the product.

December 2013 2
 Exhibit 1A

Verification Validation Transfer to Production

Product Preliminary Critical Design

Requirements Design Design Reviews Design Clinical & Regulatory Transfer
Document Specification Review Processes Review
Product
Dev.
Market Project Detailed Engineering Design Clinical Device Regulatory Commercial
Requirements Plan Design Prototype Freeze Unit Master Approval Product
Document Specification Record
Pre-Clinical Product Development Milestones

Market Requirements Document: Product Development and Prototyping Device Master Record:
 Current state of the universe:  Component, sub-assembly and finished
– Existing / under development products, product specifications
and their strengths & weaknesses  Final bill of materials
– User groups and profiles  Incoming material / component inspection
– Patient groups and profiles procedures
– Reimbursement  Manufacturing / assembly procedures and
– Intellectual property schematics
 The need  In-process inspection and testing procedures
 Proposed product:  End product inspection and testing procedures
− Internal & external requirements (prioritized  Packaging and labeling specifications and
for ‘must haves’ and ‘nice to haves’) procedures
− Features  Finished product acceptance criteria
− Performance thresholds
− Constraints
− Form factors
− Bill of materials / cost targets
− Manufacturing and assembly
− Value proposition (clinical and economic)
ALL vis-à-vis: safety, quality, reliability, usability, Creation of Scientific Clinical Program Design
regulatory approvability and (marketability) Advisory Board of (assisted by SAB and
Key Opinion Leaders external regulatory counsel)

Pre-
Clinical
Dev.

(Cadaver Testing) In-Vitro & In-Vivo Animal Testing: Final

 Biocompatibility testing Pre-Clinical
 Safety Report
primary milestone  Final device testing prior to (Pre-Clinical
regulatory submissions Validation)
secondary milestone  Initial efficacy / pre-clinical validation
tertiary milestone (incl. comparison to predicates)

December 2013
3
The Medical Device Milestone Map
 Exhibit 1B

Patient Patient
Recruitment Follow-Up Data
IRB Investigators’ First-In- Collection CE Mark
Meeting Meeting Human Completed Filing
CE Mark
Clinical
IRB IRB Site Up 2 nd & 3 rd Recruitment Last Final CE Mark
Dev. Filing Approval Sites Up Completed Patient Clinical Approval
Out Report
Clinical and Regulatory Milestones

(Clinical
Validation)
Site Roll-Out

Pilot / Feasibility Clinical Trial

IDE Approval (Pilot Trial) Patient Recruitment

Pre-IDE 1 st Last Final

Meeting Pre-IDE IDE IRB Investigators’ Patient Recruitment Patient Clinical FDA
Request Meeting Filing Meeting Meeting In Completed Out Report Approval
FDA
Clinical
Dev. Pre-IDE Pre-IDE Pre-IDE IDE IRB IRB Site Up 2 nd Last Data FDA
Materials Meeting Meeting Approval Filing Approval Site Up Site Up Collection Filing
Submission Date Set Minutes Follow-Up Completed

Site Roll-Out Sites’ Roll-Out

Main Pre-IDE Meeting Discussion Topics:
 Device classification
 Regulatory pathway (510k, DeNovo, PMA)
 Predicates / substantial equivalence
 Pre-clinical & clinical data Pivotal Trial
 Intended use / indication for use
 Clinical trial design:
− Patient population
(inclusion & exclusion criteria)
− Primary & secondary endpoints
− Outcome measurements
− Duration of follow-up primary milestone
− Trial sample size secondary milestone
− Statistical analysis plan
− Evaluation methods tertiary milestone

December 2013
The Medical Device Milestone Map

4
 The Medical Device Milestone Map

 Clinical validation is obtained after a device has been used subject to the strictest controls and requiring significant
successfully in a pilot trial in which all clinical end-points tiered clinical development that encompasses hundreds of
were achieved. The sample size of a pilot trial is usually patients and spans a prolonged period of time.
equal to the minimal number of patients necessary for the As with the development process, medtech start-ups should
results to hold statistical significance. expect delays in their clinical and regulatory processes:
 CE Mark is the regulatory approval that enables a  The FDA may designate a device to a PMA pathway,
company to sell its device in European countries. whereas the company was expecting a 510(k).
Obtaining the CE Mark means that the company is
 The company may incur delays in obtaining IDE approval.
compliant with the European medical device directive that
(See Sidebar: The Kips Bay Medical IDE timeline).
applies to its device.
 The FDA may require a trial sample size that is larger than
 510(k) clearance / DeNovo approval / PMA approval are
a company originally anticipated.
the regulatory routes that enable a medical device
 A company may not roll-out sites or recruit patients to
company to commence commercial sales in the U.S.
participate in its clinical trial as quickly as planned.
510(k) clearance is the route in which the FDA applies the
 The occurrence of a major adverse event may require
least amount of controls, making it the shortest and least
suspension of patient recruitment until the company can
demanding pathway.
show that the adverse event was not caused by its device.
The core principal underlying the 510(k) is proving that a
Medical device companies need to identify sub-processes in
device is substantially equivalent to a predicate device (or
their clinical and regulatory development plans that are at risk
multiple devices) that has been cleared previously.
to incur delays and build ‘cushions’ into their timelines and
PMA approval is the process intended for high-risk
fundraising plans.
devices. It is the most rigorous of the device pathways,

The Kips Bay Medical IDE Timeline

Founded in May 2007, Kips Bay Medical is developing the patient multi-center clinical trial conducted outside the U.S.
eSVS® Mesh, an extravascular knitted nitinol prosthesis The company encountered a delay of more than 2½ years in
designed to maintain the patency of autologous saphenous obtaining IDE approval (see timeline below). Even then, the
vein grafts in patients undergoing coronary artery bypass approval was conditional, requiring staged enrollment and
graft (CABG) surgery. allowing only a handful of patients to be implanted in the first
The device obtained CE Mark in May 2010 based upon the stage. During this 2½ year period the company’s operating
safety and effectiveness clinical data generated by a 90- cash burn totaled $15.1m, an average of $502k per month.

April 2010 April 2012 November 8, 2012

Kips Bay Medical is in process The company submits a Pre-IDE The FDA grants
of amending its IDE application. February 2011 filing, providing the FDA with conditional approval
The company anticipates The company revises its additional information on the July 18, 2012 of Kips Bay Medical’s
“beginning enrollment in a expectations of IDE trial performance of its eSVS® Mesh, Kips Bay re- IDE to include four
United States IDE trial in the enrollment to begin in and is advised by the agency to files its IDE U.S. sites in the eMESH
second half of 2010”. the first half of 2011. proceed with its IDE filing. application. I clinical feasibility trial.

September 20, 2011 August 17, 2012 Sep 24, 2012

Kips Bay issues a press release The company receives a letter Kips Bay submits
stating that the FDA is continuing from the FDA that disapproves an amended IDE
to require additional information the July 2012 IDE application and application.
from the company prior to requests additional information
approving its IDE submission. on the pre-clinical design testing
of the eSVS® Mesh.
Sources: Kips Bay Medical SEC filings and press releases

December 2013 5
 The Medical Device Milestone Map

Commercialization Milestones: infrastructure to keep ahead of the expansion.

 First U.S. and OUS purchase orders. Transitioning from a This milestone is usually beyond the realm of venture-
development stage to a commercial stage company is a backed medtech companies. By this stage the company is
landmark event for a start-up, signaling an entirely new likely to have been acquired or has carried out an IPO.
level of maturity and capability. Milestone maps for the development, clinical and regulatory
The first sale under CE Mark and the first sale under FDA stages are detailed in Exhibits 1A and 1B. These maps contain
clearance is each a milestone unto itself. However, the a comprehensive set of milestones shared by the majority of
first U.S. sale is held in higher regard because this is the medical device start-ups.
primary commercial market and because the FDA Primary milestones are often inflection points that enable a
regulatory process is considered more rigorous than that medical device start-up not only to raise additional capital,
of regulatory bodies in other countries. but to do so at a higher valuation than that of the previous
 Cash flow breakeven is the day a medical device company financing round.
becomes self-sufficient as it no longer depends on its The development, pre-clinical, and clinical processes can and
investors for future cash infusions. will vary from one medical device start-up to the next,
Until companies reach relatively high revenue levels depending on the type of product, the company’s go-to-
(usually triple-digit millions) they are likely to swing back market strategy and its ability to raise capital. Consequently,
and forth between cash flow positive and negative, as start-ups should tailor this ‘master list’ of milestones to their
periods of accelerated growth require investments in own unique set of circumstances.

Exhibit 2
Time to First 510(k) Clearance* Time to First CE Mark* for ‘510(k)’ Companies
(excl. outliers of <1 year and >16 years) (excl. outliers of <1 year and >16 years)
N=491, of which are 92% are Class II devices N=288
6.4
5.9 6.0 5.9
5.8 5.8
5.4 5.7 5.7 5.6
5.4 5.3 5.2
5.9 5.3
5.1 4.9
4.9 4.6
Years

5.4
Years

4.5 5.3

Years
4.8 5.2 Average 5.1 5.1 5.1
4.4 4.8 Average
4.9 4.9
Median
Median 4.7
4.3
4.3
3.8 3.9
3.9
3.63.8
3.5

2007 2007
2008 2008
2009 2010
2009 2011
2010 2012
2011 20132012 2007 2008 2009 2010 2011 2012 2013

6% 7%
7% 8% 9% 8% 10%
Percent of First 510(k) FDA Clearances

10% 14% 10% 18% 8%

15% 14% 25%
19% 16% 16% 19% 14% 28%
10% 20%
Percent of First CE Marks

24% 21%
31% > 10 years, ≤ 13 years > 10 ye
20% 28%
32% > 7 years, ≤ 10 years > 7 yea
37% 33%
36% 41% 43%
> 4 years, ≤ 7 years 29% 25% 42% > 4 yea
53% 49%
> 1 year, ≤ 4 years > 1 year
55% 52% 51% 45%
35% 35% 33% 36% 39%
32% 31% 26%
19% 18%

2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013

* Time to first regulatory approval is measured as time elapsed from company inception to the first 510(k) clearance and first CE Mark a company obtains.

December 2013 6
 The Medical Device Milestone Map

2. TIME TO REGULATORY APPROVAL Exhibit 3

Historically, U.S. start-ups were focused on the domestic Average Pages per 510(k)
market as their primary commercialization target, making 369

Average Pages per 510(k)

FDA clearance the primary objective. Obtaining CE Mark was
a secondary milestone, pursued only after a start-up had
266
obtained FDA clearance. In the last several years, the average
231
time from company inception to first 510(k) was 5.2 years and
the average time to first CE Mark was 5.9 years. 164

However, 510(k) clearance is not obtained as quickly or as

76
easily these days as it was in the past: in the previous decade, 50
the median period for a medtech start-up to achieve its first
1983 1988 1993 1998 2003 2008
premarket clearance was 4.1 years (from inception). In the
Calendar
Source: CDRH Preliminary Internal Year– Volume I, August 2010
Evaluations
last three years this timeline increased by 12 months – to 5.1
years. (See Exhibit 2). This additional year creates a multi-
billion dollar burden on medical device start-ups and life- Exhibit 4
science venture capital firms. Average Time to Decision: 510(k)s
154
The increase in time to FDA clearance is the result of two
148
main causes: 139 139
 Lengthening of the product development process.
Medical devices under development are becoming more 116 119
Days

and more complex, as evidenced by increasingly long

102 101
510(k) filings. (See Exhibit 3). 96 97 99
92 90
The prolonged product development process delays the
start of the clinical and regulatory processes, which results
in a delay in FDA clearance.
'00 '01 '02 '03 '04 '05 '06 '07 '08* '09* '10* '11* '12*
 Lengthening of the regulatory process. In recent years
Fiscal Year (Receipt Cohort)
the U.S. regulatory process has suffered from lack of
* Cohorts still open; FY 2011 cohort is 99.8% closed and FY 2012 cohort is 97.6%
consistency and predictability, resulting in a prolonged
closed - average times will increase
timeline to FDA clearance or approval.
Sources: FDA’s Medical Device Program 2013: Looking Back and Looking
Two measurable manifestations show: Ahead, May 2013. CDRH Update, IMDMC Annual Meeting, November 2013.

− A considerable increase in the FDA’s review time of

premarket submissions. During 2000-2006 the average Exhibit 5
time to decision for a 510(k) was 14 weeks. By 2010 it
Percent of 510(k)s with Additional Information Request on 1st
had increased by 60% to 22 weeks. (See Exhibit 4).
FDA Review Cycle
− A 100% increase in the percent of 510(k)s in which the 77%
75% 75%
72%
Percent With AI Request

FDA requests additional information on the first review

cycle. (See Exhibit 5). 65%
61%
As a result of the increase in the time and effort required to 56%
obtain FDA clearance, some medical device start-ups have 50%
begun shifting their strategy – postponing the U.S. regulatory 44%
process in favor of obtaining CE Mark earlier. 40%
37% 38% 36%
This change in strategy allows for earlier commercialization
(an increasingly important milestone with venture capital
funds) and is instrumental in building a strong body of clinical '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

evidence – one that can usually be leveraged later on to Fiscal Year (Receipt Cohort)
support the U.S. regulatory process. Source: FDA’s Medical Device Program 2013: Looking Back and Looking
Ahead, May 2013

December 2013 7
 The Medical Device Milestone Map

3. COMPANY STAGE AT EXIT The $10m-$25m range is where medtech start-ups historically
FDA clearance has been perceived as the primary milestone sought funding from public markets. However VC funds are
to trigger an acquisition. To this day, many business plans end increasingly supporting companies into and beyond this
with the regulatory approval milestone – disregarding the revenue bracket, as evidenced by an increase in large
time, infrastructure and funding required to carry out even a financing rounds performed by commercial stage start-ups
limited commercial launch. looking to expand their commercial efforts:

The data do not support such an assertion: less than 1 in 6  In October 2013, LensAR raised $87m to support
medtech acquisitions and only 1 in 3 medtech start-up continued commercialization of its laser cataract surgery
acquisitions are performed while a company is still pre- system throughout the major medical markets worldwide.
revenue. (See Exhibit 6).  In July 2013, Tria Beauty raised $45.5m in equity and a
Exhibit 6 structured debt facility to launch multiple new devices,
expand distribution and accelerate its growth.
Company Revenues at Exit: All MedTech Acquisitions
 Following a $150m equity round in 2011, Valeritas closed a
(For Deals >$10m Taking Place since Jan 1, 2000. N=711)
$100m structured debt financing in June 2013 to support
30%
Normalized for Unknowns the commercialization of its V-Go® insulin delivery device.
Percent of M&A Deals

24% Actual 26% This extended period of venture-backed ownership and the
increase in total amount invested may require adjustments
18%
from start-ups and venture capital funds alike:
12%
13%  Medical device start-ups should extend their business and
11% 11% 11% 11% 11% fundraising plans to include initial commercialization
6%
6% efforts. This will result in a more realistic set of
0% expectations and create a better alignment of interests
Pre-Rev. <$10m $10m- $25m- $50m- $100m- >$250m Un- between companies and their investors.
$25m $50m $100m $250m known
 Venture capital funds may need to adjust their business
Revenues at Acquisition
Company Revenues at Exit: MedTech Start-Up Acquisitions model by:

(For Deals >$10m Taking Place since Jan 1, 2000. N=312) − Investing in fewer companies per size of fund and
50%
allocating greater reserves per company for follow-on
Normalized for Unknowns investments. For example, a $250m fund that had
47%
40% Actual originally targeted a portfolio of 20 start-ups may
Percent of M&A Deals

reduce that number to 16 companies.

30%
− Changing their portfolio mix - preferring mid-to-late
28%
20% stage deals over early stage deals, as the former have a
somewhat lower risk profile, require a shorter time to
10%
mature and need less money to reach exit.
6% 8% 7%
0% − Reevaluating their target return-on-investment and
Pre-Rev. <$10m $10m- $25m- $50m- $100m- Un- investment multiples – two fundamental parameters
$25m $50m $100m $250m known*
by which the venture capital industry is measured.
* Most of which are commercial-stage start-ups.
Revenues at Acquisition
Selling a start-up at the pre-revenue stage is sometimes 2+3= TIME TO EXIT
referred to as ‘selling the dream’ – when there is very little Only 25% of acquisitions in the medtech industry occur within
clinical evidence, when physicians’ willingness to adopt has 6 years of a company’s inception. (See Exhibit 7).
not been established and when the economic value There is likely a high degree of overlap between these ‘early
proposition is still unproven in practice. acquisition’ companies and the ‘pre-revenue’ companies in
At <$10m annual revenues, the company is making some Exhibit 6 – especially in light of the time to first 510(k)
commercial headway. Potential acquirers are usually familiar clearance or CE Mark being 5-6 years.
with the company by this time but they tend to ‘wait and see’ Clearly, an early-stage (pre-revenue) or quick (≤ 6 years) exit
if the ramp-up is successful before making a purchase offer. is the exception – not the rule.

December 2013 8
 The Medical Device Milestone Map

A medical device start-up creating expectations (internally, 4. CASH BURN

and with its investors) for such an exit needs to have The amount of capital a start-up will need until it is acquired is
compelling arguments and evidence from comparable one of the (if not THE) most defining pieces of information
companies supporting the validity of such a claim. for the company and its investors. It is also the most difficult
Exhibit 7 to estimate with any acceptable degree of accuracy.
Time to Exit: From Start-Up Inception to Acquisition Funding requirements will vary greatly depending on the type
(For Deals >$10m Taking Place since Jan 1, 2000. N=310) and complexity of the device, scope of clinical development,
and company stage at acquisition.
25%
22% 22% Initially, a start-up’s activities will be focused on product
20% development activities with a skeleton staff. As the company
Percent of M&A Deals

16% matures, its activities will broaden to include clinical trials,

15% regulatory processes, manufacturing and, ultimately, sales.
13%
Hand in hand with the expansion in activities, the company
10%
7% 8% will build out its team to include additional positions that it
6%
5% did not need to staff from day one. These include a quality
5%
2%
assurance position, a clinical and regulatory team, a full-time
0% CFO and eventually a VP Sales and sales representatives.
<2 2-4 4-6 6-8 8-10 10-12 12-14 14-16 >16
As such, a start-up’s cash burn will increase dramatically over
Years from Inception to Acquisition
time – from as little as $50k a month in its first year to $1.0m
This time-to-exit distribution tightly coincides with the typical (or more) per month when it is carrying out a clinical trial or
life cycle of a venture capital fund: initiating commercial launch of its product. (See Exhibit 8).
 The first six years of a fund are the active investment Exhibit 8
period, in which the fund makes initial investments and
Cash Burn in the First Decade of a Medical Device Start-Up
builds out its portfolio of start-ups.
(N=1,196 company years between 1990 and 2012)
 The next four years of a fund’s 10-year life cycle are
Full Years of Operation
dedicated to follow-on investments (portfolio main-
1 2 3 4 5 6 7 8 9 10
tenance) and to realization of investments. 0
 Many funds will be able to obtain two 1-year extensions,
Monthly Cash Burn ($ '000)

prolonging the life of the fund to 12 years. This period is (200)

almost exclusively focused on realization of investments.
(400)
There is usually a strong correlation between a fund’s stage median
and the stage of its new investments – newly formed funds (600)
tend to invest in earlier-stage companies and funds nearing
the end of their active investment period usually invest in (800)
average
later-stage companies.
(1,000)
A fund that is nearing the end of its active investment period Full Years of Operation
is likely to have earmarked the majority of its reserves to its 1 2 3 4 5 6 7 8 9 10
existing portfolio companies. Moreover, a fund at this stage 0

will not be able to spend six years building up a start-up as it

Cumulative Cash Burn ($m)

will be under pressure to begin realizing its investments and (20)

making distributions to its limited partners.
median
When raising capital a medical device start-up needs to be (40)
cognizant of the vintage of the funds it is pitching. There
average
needs to be an open discussion regarding a potential (60)
investor’s ability to continue supporting the company and
making follow-on investments beyond the current round.
(80)

December 2013 9
 The Medical Device Milestone Map

As long as the cash burn is within the approved budget and Companies that exit sooner or those that are developing
enables the company to achieve its goals – all is well. It is medical devices lower in complexity and in risk profile are
when the cash burn does not yield the expected outcomes likely to need less funding. However, more and more start-
that assumptions and plans need to be reevaluated. ups are breaking the $100m threshold in their cumulative
The average and median time-to-exit for medical device start- venture capital fundraising. (See Sidebar: The $100m Club).
ups is 8.8 years and 8.2 years, respectively. By this time, a Medical device companies requiring such large amounts of
medical device company may have burned between $45m and capital will need to build funding syndicates. These syndicates
$65m. (See Exhibit 8). can range from three to six or more venture capital funds.

The $100m Club

Examples of companies that have been acquired: Examples of companies that have gone public:
 Acclarant raised approximately $103m prior to being  GI Dynamics (ASX:GID) raised $114m in venture capital
acquired by Ethicon for $785m in December 2009. At the prior to its September 2011 IPO. The company initiated
time of acquisition the company had revenues of $22m. commercial operations OUS shortly afterwards, but is not
 OptiMedica raised $102m in venture capital prior to being expected to obtain FDA approval prior to 2016.
acquired by Abbott in July 2013 for $250m upfront plus  Globus Medical (NYSE:GMED) raised $129m in venture
$150m in milestone payments. At acquisition OptiMedica capital prior to its August 2012 IPO, in which the company
had FDA clearance and CE Mark for close to 7 years - each. raised $21m (and selling shareholders received $84m). At
 Salient Surgical raised $129m in venture capital prior to IPO Globus Medical’s TTM revenues totaled $363m and its
being acquired by Medtronic for $525m in July 2011. At operating margin was 30%.
acquisition the company had annual revenues of $100m.  Tandem Diabetes Care (NASDAQ:TNDM) raised $142m in
 Zonare Medical Systems raised $173m in venture capital venture capital prior to its November 2013 IPO, which took
prior to being acquired by Mindray Medical for $102m in place one year after the commercial launch of the
June 2013. Zonare has been selling commercially for company’s t:slim insulin delivery system. Tandem raised
several years and had annual revenues of $64m at exit. $138m in its IPO at a pre-money valuation of $200m.

There are at least 45 active (yet-to-be-exited) medical device start-ups that have raised more than $100m in venture capital.
Some examples are detailed in the following table:

Company Medical Field Founded Years VC First Years Years

Since Raised 510(k) Since First Since First
Inception to Date Clearance 510(k) CE Mark
Aptus Endosystems Peripheral vascular 6/2002 11.4 $100m 11/2011 2.0 2.5
ConforMIS Orthopedics 3/2004 9.7 $182m 3/2005 8.7 5.9
EndoGastric Solutions Gastroenterology 4/2003 10.7 $155m 3/2007 6.7 unknown
InfraReDx Cardiovascular 11/1999 14.0 $131m 6/2006 7.4 2.6
Mevion Medical Systems Oncology 2/2004 9.8 $126m 6/2012 1.5 1.7
NeuroNetics Neurology 4/2003 10.7 $128m 10/2008 5.2 1.5
OmniGuide Surgery 5/2000 13.5 $111m 5/2005 8.6 6.4
SuperSonic Imagine Imaging 4/2005 8.7 $128m 8/2009 4.3 5.4
TherOx Cardiology 6/1994 19.5 $113m 11/1997 16.1 12.2
Sources: SEC filings, company press releases and the FDA searchable 510(k) database

These companies, which have developed devices that target all the major medical fields, have been active for more than 10
years, have raised an average of $130m each and have had U.S. and European regulatory clearances for numerous years.
The vast majority, if not all, of these start-ups have commenced commercial operations – in the U.S. as well as abroad.

December 2013 10
 The Medical Device Milestone Map

A funding syndicate will afford a medtech start-up access to a purchasing? And how will the decision effect its
larger pool of money. In parallel, each of the syndicate positioning in the market?
participants will have a sense of security from sharing the risk  Financial. The accumulated (and future) losses of a start-
and from knowing that there are enough resources in up and the goodwill or intangible assets associated with
aggregate to support the company until it is acquired. the acquisition may provide the acquirer with quantifiable
However, there can be drawbacks to funding syndicates: an tax benefits.
earlier vintage fund that is under pressure to begin realizing When gearing up for an exit process, medical device start-ups
its investments, or a fund that has depleted its reserves and is usually focus on preparing extensive documentation and
unable to make additional investments, may lobby for an quantitative models to best support the company-internal
earlier exit at a lower valuation while a fellow investor may and business environment related factors.
want to continue funding the company and hold out for that
Paying greater attention t0- and addressing the acquirer-
higher exit valuation.
specific considerations will sharpen and enhance the value
A medical device company funded by a syndicate of investors proposition underlying the proposed acquisition, potentially
needs to be aware of these potential conflicts of interest and yielding a higher exit valuation.
must actively manage them when they arise.
The exit valuation ‘sweet spot’ in medical device venture
5. EXIT VALUATIONS capital investing is the $150m-$350m range. But this range
Valuation of a pre-revenue or early-revenue company is more accounts for only 17% of all medtech start-up acquisitions (22%
art than science. However, the qualitative factors influencing normalized for ‘unknowns’). (See Exhibit 9).
the valuation are fairly clear: As with time-to-exit, entrepreneurs pitching to potential
 Factors specific to the target company include investors visions of high exit valuations need to have
uniqueness of the device and its underlying technology, convincing supporting data why their company is going to
the extent of the product’s disruption to current medical exit in the top deciles of all medical device start-ups.
practice, strength of the intellectual property protecting Exhibit 9
the device and the clinical body of evidence supporting MedTech Start-Up Exit Valuation ($m)
the safety and efficacy of the device.
(For Deals >$10m Taking Place since Jan 1, 2000. N=312)
 External factors encompass the addressable market size
40%
and its growth prospects, reimbursement coverage and Normalized
the landscape of competitive products – those currently in Actual
Percent of M&A Deals

use as well as those under development. 30%

28%
 Factors specific to the acquirer. There are three main
20% 24%
groups of considerations affecting the acquirer’s 22%
willingness to pay:
− Economic. The revenues and profits that can be 10%
10%
generated from the acquired product by leveraging 7%
6% 4%
the acquirer’s existing sales and support infrastructure. 0%
Un- < $50m $50m- $150m- $250m- $350m- > $500m
− Strategic. The acquired device may fill a gap in the
known $150m $250m $350m $500m
acquirer’s product portfolio, may enable the acquirer
to leapfrog its competitors and increase its market Exits taking place in the $50m-$100m valuation range account
share, or may serve as the acquirer’s entrance into a for 19% of medtech start-up M&A deals (24% normalized for
new market altogether. ‘unknowns’). This valuation range is at the low end of the
From the defensive prospective, the acquirer may be target exit valuation for venture-backed medtech companies,
better off purchasing a company over letting one of its as it is likely unable to support the venture capital funds’
competitors buy it. target investment multiples or target return-on-investment.

Also, the potential acquirer faces the ‘build vs. buy’ However, the culmination of a venture capital fund’s
dilemma: how much effort, time and money will it take performance is measured at the portfolio level rather than
for the acquirer to internally develop the device it is per company.

December 2013 11
 The Medical Device Milestone Map

Each portfolio will have a small number of investments that Start-ups basing their ‘all I need…’ statements on information
yield exceptional returns, some that yield mediocre outcomes generated by the type of data-driven approach presented in
and some investments that are written down in their entirety. this article will be taken more seriously by potential investors.
This is the very nature of the venture capital industry. Venture capital funds can apply this methodology as a
CONCLUSIONS decision-supporting tool in their due-diligence process, in
setting the terms for initial as well as follow-on investments,
It seems that many of the rules-of-thumb commonly applied
in allocating reserves among portfolio companies and in
to medical device venture capital investing in the past are no
building investment multiple and ROI models.
longer accurate:
This type of analysis enables venture capital funds and
 Regulatory approval is not necessarily the ‘holy grail’ of
medtech start-ups to frame their expectations more
milestones. The majority (⅔) of start-ups are acquired
objectively and realistically – a process that is likely to result in
post-commercialization as opposed to pre-revenue.
an improved alignment between funds and their portfolio
 Only a minority (¼) of medtech start-up acquisitions will
companies throughout the lifetime of the investment.
take place within six years of a start-up’s inception.
 Many medtech start-ups will need more than $25m to
reach exit – some will require double that amount and a Revital Hirsch is an Associate at SCP Vitalife Partners, a life
‘select’ few will raise more than $100m in venture capital sciences dedicated venture capital firm.
prior to exit. www.linkedin.com/in/revitalhirsch/
 Not every company will be acquired for $250m (or more). The author is grateful to Roger Carolin, Gerri Henwood,
Indeed, between 40% and 55% of start-up acquisitions are Gil Kaminski and Ofri Vaisman for their insightful contributions
in the double-digit millions of dollars. to this article.

December 2013 12