Entries Written By Michael Raymer
As the premiere destination for healthcare startups, we’re fortunate to be able to see, evaluate, and invest in the very best. But along the way, we also see the mistakes that startups make. We discussed the challenges that face direct-to-consumer healthcare startups, and that opened a new line of discussion. Could we apply that method to startups from other specialties as well?
It makes sense to start with the segment that we see most often at AngelMD — Medical Devices. Launching a Medical Device startup is challenging. In my career I have had the opportunity to be involved in many early-stage device companies. After reflecting on those successes and failures, I have developed a list of six key factors to building a successful medical device startup.
1 – Quality First
The first element of a successful medical device business model is to design and build your device from day one with an FDA quality system. This will dramatically shorten your device development and approval cycles.
According to the FDA, The Quality System (QS) Regulation is in place to ensure that manufacturers “establish and follow quality systems to help ensure that their products consistently meet applicable requirements and specifications.” Rather than dictating how a manufacturer must produce a device, QS provides the framework that all manufacturers must follow, allowing the manufacturer to fill in the details themselves.
Navigating QS Regulation isn’t a skill set that we would recommend to someone without experience. If no one on your team has medical device development experience, it is critical to secure an expert consultant to help put that quality process in place.
2 – Know the Codes
The second element of a successful medical device business model is to create a product with a known reimbursement code. Many entrepreneurs, including physicians, are shocked to learn of the complexity associated with securing a new CPT code required for reimbursement.
In order to establish new CPT codes, an individual, a physician, or a specialty group must submit a coding change request form. The CPT Advisory Committee then reviews the proposed code. The change request must address the following:
- A complete description of the procedure/service (e.g., Describes in detail the skill and time involved. If this is a surgical procedure, include an operative report that describes the procedure in detail)
- A clinical vignette which describes the typical patient and work provided by the physician/practitioner
- The diagnosis of patients for whom this procedure/service would be performed
- Copies of peer reviewed articles published in the US journals indication the safety and effectiveness of the procedure, as well as the frequency with which the procedure is performed and/or estimation of its projected performance
- Copies of additional published literature which you feel further explains your request (e.g., practice parameters/guidelines or policy statements on a particular procedure/service)
- Evidence of FDA approval of the drug or device used in the procedure/service if required.
But that’s only half of the story. In addition, a device startup needs to address the following questions:
- Why aren’t the existing codes adequate?
- Can any existing codes be changed to include these new procedures without significantly affecting the extent of the service?
- Give specific rationale for each code you are proposing, including a full explanation on how each proposed code differs from existing CPT codes.
- If a code is recommended for deletion, how should the service then be coded?
- How long (i.e, number of years) has this procedure or service been provided for patients?
- What is the frequency with which a physician or other practitioner might perform the procedure/service?
- What is the typical site where this procedure is performed (e.g., office, hospital, nursing facility, ambulatory or other outpatient care setting, patient’s home)?
- Does the procedure/service involve the use of a drug or device that requires FDA approval?
If CPT Advisory Committee approves the creation of a new code, there is still a six-month lag in its implementation. New CPT codes are released bi-annually on January 1 and July 1. If a code is approved on January 1, it is not made active until July 1.
It’s worth noting: AngelMD only considers providing capital to startups that are able to leverage existing reimbursement codes.
3 – Will Someone Use This?
The third element of a successful business model is a medical device that generates a financial or clinical return on investment. The market is moving toward pay-for-performance and it is critical that medical device startups are able to intersect with this market dynamic.
In years past, when fee-for-service was still the status quo, it might have seemed like a good idea to come up with “yet another device.” In modern healthcare, with performance-based reimbursement, the focus has to shift. During the clinical testing phase, it is important to measure positive impacts on healthcare delivery costs or improved patient outcomes.
4 – Stack Your Team
The fourth consideration is the composition of the management team. In the AngelMD network, physicians are actively involved in the early stages of startups. Unfortunately, that isn’t the status quo. The healthcare industry as a whole sees far too many companies that have a goal in mind, but no team to get them there.
In the larger startup world, it’s become more common to see non-technical founders who then find a technical co-founder to help them build their dream. The same should hold true in the med device world. If you are not coming from a medical device background, it’s important to select a business partner that has medical device experience that can complement your own skill set. Ideally, that person will have direct experience in a segment that your device is targeting.
5 – Know The Costs
The fifth element to consider — and you should evaluate this both early and often — is the projected cost of manufacturing. More than a few medical devices have failed because of the inability to manufacture the device at a price that is still cost effective.
6 – Find a Guide
The sixth element of a successful medical device company is to secure a ‘sherpa’. The role of the guide is to help the company navigate through the FDA’s approval process. FDA regulations are constantly changing, and the approval cycle can be shortened by having an expert to manage your company’s submissions and interactions with the agency.
A simple understanding of the FDA’s regulatory process isn’t enough. For example, there are changes that are specific to digital health, diabetes management, and a wealth of other device categories. There are also incentivized paths available that can help to shorten the approval process for some types of devices.
There are challenges to launching a new medical device, but physicians and entrepreneurs have never been ones to back away from a challenge. By arming yourself with the tools to be successful, and knowing the potential pitfalls, you’ll be better prepared for the journey ahead.
Today’s markets are making it more difficult for investors and fund managers to find alpha. They are now looking outside of their comfort zones to find an advantage over the status quo. Some would argue that alpha is a victim of the vast amounts of data available to everyone through the Internet. This democratization of data means that the opportunity for alpha is largely driven by how humans or machines perceive the same pieces of information.(more…)
Three main drivers for macro-economic growth for any country’s economy include accumulation/deployment of capital, increase in labor outputs, and technology advancement. AngelMD is focused on driving healthcare growth by both unlocking access to capital and supporting the very best healthcare technology advancements.
Family offices today are playing an increasing role in deployment of capital on a global scale. In 2008, an estimated 1,000 single-family offices were in the world. Less than a decade later, Ernst & Young reports the number has grown to more than 10,000 family offices globally. Family Office Exchange says that, while most estimates peg the current number of family offices in the United States to somewhere between 3-5,000, the real figure could be closer to 6,000.
Research conducted by Dominic Samuelson, CEO of Campden Wealth, suggests family offices currently hold assets in excess of $4 trillion. Family offices are now capable of making transactions that were traditionally reserved for big companies or large venture and private-equity firms, therefore making them a notable force in the marketplace.
The Global Family Office Report shows more than a quarter of family offices (28%) report being engaged in impact investing (i.e. investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.) Two-fifths plan to increase their allocations this coming year, a push largely attributed to ethically-minded millennials moving up through the family ranks.
A major trend affecting future growth of family offices is to balance changing investment strategies for increased emphasis on direct minority-stake investments, yet more active participation in the strategic management of these investments versus rising operational costs and the need for specialist, more scarce talent.
Impact investing by Family Offices is a natural fit on the AngelMD platform. Rather than building up staff to evaluate healthcare investment alternatives, Family Offices can rely upon the AngelMD network to source, evaluate and deploy capital to the best healthcare impact investments.
The JOBS Act created the regulatory framework for AngelMD’s syndicated investment model for accredited individuals. To be considered accredited, an investor must have a net worth of $1,000,000, excluding the value of their primary residence, or income of $200,000 each year for the past two years. In just over 24 months, AngelMD has been able to leverage our digital platform and network of accredited investors to execute 30 syndicate investments in leading healthcare startups.
AngelMD physicians are able to play a key role in our syndicate investment vehicle by sourcing, vetting, scoring, and advising the best healthcare startups. A portion of the AngelMD physician membership also participates as investors and leaders in syndicate opportunities. This proven model, however, is materially enhanced when complemented by funds that are available to precede and/or follow-on to syndicated investments. This rationale underlies the creation of AngelMD’s Catalyst family of Funds.
The Catalyst I LP fund leverages the network as an input to investment decisions made by each Fund Manager. Rather than investing in individual syndicates, family offices, institutional investors, and sovereign funds view AngelMD funds as the more efficient model for capital deployment. Over time, AngelMD will create a number of thematic funds that will deploy significantly more capital than our syndication model.
The AngelMD network of family office membership will continue to grow as they seek platforms that provide returns while simultaneously providing societal impact. Over time, we believe that the majority of our deployable capital will come through those relationships.
Amazon is the disruptive threat that is considered by many healthcare corporate strategists during their annual planning cycle. Amazon is a threat because they have a demonstrable track record of wringing out the inefficiencies in markets.
The acquisition of Whole Foods terrified the traditional grocery chains — and the market agreed driving down their stock prices the day of the announcement. A year and a half later, Amazon has shown the ability to grow their Prime membership via their Whole Foods channel. They are capturing “big data” shopping habits which will ultimately fuel the pivot to the grocery home delivery market. That is the nightmare scenario for grocery stores looking at becoming the next Borders bookstore.
That transition will be driven by improving the customer grocery shopping experience.
Amazon’s first significant foray into healthcare is the acquisition of PillPack, an online pharmacy company. PIllPack simplifies medication management for consumers by delivering packets with presorted does. A person receives a packet with all of their day’s pills in a single pouch.
The interesting part of the strategy is that they are effectively targeting the small population of individuals that consume the vast majority of prescribed medications.
The acquisition of PillPack gave Amazon a foothold in all 50 states. This foothold will greatly accelerate its entry in to this regulated space. The stock prices of CVS, Walgreens, and Express Scripts immediately took a hit the day of the announcement. CVS has since launched next-day prescription delivery services in an effort to fend off Amazon’s approach.
Amazon chose this healthcare entry point because of the inefficiency of the current market, as well as the poor customer experience. This approach is in keeping with Amazon’s relentless focus on customer as they transition into new markets.
It is interesting to revisit the 1999 CNBC interview with CEO Jeff Bezos in light of the above two transactions. That theme is repeated again in the 2018 letter to Amazon shareholders. If you look back at all 23 letters to shareholders, the word customer appears 443 times making it the most common word in all letters.
By contrast, Amazon is mentioned only 340 times.
How does Amazon achieve their focus on customers without having direct dialogue? Have you ever been able to get someone on the phone at Amazon? Universally, the answer is no.
- They accomplish this by leveraging their digital platform to observe online behaviors.
- They experiment relentlessly to improve workflow.
- They leverage data and AI to anticipate their customer’s needs.
This sounds like a great model for AngelMD. Our digital platform will scale to 100K physicians by restlessly improving the user experience and anticipating their needs related to insider access to information and education.
Later this year we will be introducing the concept of community leaders focused around specialty groups. Their role will not be to call every physician but rather monitor signups, site traffic, conduct small focus groups, and feed product improvement recommendations to the software team.
Are you ready to be a part of the future of healthcare? Join AngelMD today to connect with, advise, and invest in early-stage medical startups.