Category Archive For "Investing"
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.
We’re joined for this episode by attorney Roger Hauptman. Roger works with both startups and investors, so he has a keen understanding of how to structure deals that are fair to both sides of the equation. Our discussion this week delves into preferred equity, convertible notes, and SAFEs. Roger talks with Tobin and Jeff about the differences between them, and what you need to know.(more…)
The past decade has seen a stark increase in the number of private equity firms that are investing in healthcare. On the other side of that same coin are singular investors — or groups of investors — who are looking to diversify their portfolios by investing in healthcare. It only stands to reason that, by investing in what they know best, physicians stand a better chance to beat the odds. But the practice is not without its potential pitfalls, and it is important to know how to avoid them.(more…)