No Low-Hanging Fruit for Medical Device Entrepreneurs

In a speech at Windhover's December 2000 Start-Up Symposium, Novoste chairman Tom Weldon argued that device start-ups will be fewer and riskier. Both the FDA and physicians are demanding trials that prove clinical efficacy, raising the cost and therefore the risk of starting new companies. That means these firms will have to target larger markets, which by their very nature will require a change in medical practice and thus also a more expensive selling effort. Unless companies go after products that can sell a minimum of $500 million annually, financiers won't be able to justify the investment required to get these companies off the ground.

The 1999-2000 window for medical IPOs was the biggest in history—with more than 100 offerings, raising $7.8 billion. But one segment of the business participated hardly at all: medical device companies. Of the dozens waiting in the wings to tap the public markets, only a handful have actually done so.

The problem, says Tom Weldon, chairman of Novoste Corp. and CEO of the device incubator, The Innovation Factory, is a fundamental change in device opportunity. The low-hanging fruit simply isn't worth plucking anymore.

It's not that the low-hanging fruit doesn't exist—it's that, increasingly, company executives and their investors wonder whether there's any reason to pursue it. In a speech at Windhover's December 2000 Start-Up Symposiumin Laguna Niguel, CA, Weldon argued that, in the past, most device start-ups, which targeted relatively small markets, had been fundable because the regulatory environment had been relatively loose. Investors traded off absolute market size for ease of approval—in sharp contrast to the biotech world where the far higher risks of pharmaceutical clinical development are rewarded with far larger market opportunities. Device companies, says Weldon, didn't need to do large, placebo-controlled trials, so didn't have to raise huge amounts of funding.

The medical downside of the regulatory environment was that some devices sold to physicians didn't work—laser angioplasty and atherectomy in the mid-1990s, and transmyocardial revascularization more recently (See "Laser Revascularization Gets Zapped,"Windhover's Update, November 1, 2000). And a few others caused severe side-effects—the Dalkon Shield birth control device being one well-known example.

With the entrance of David Kessler as head of the FDA in 1990, the approval environment for devices began to chill. By the late 1990s, many devices that would once have been approved under the 510k exemption or been required to submit a relatively straightforward PMA were now forced to do drug-like trials. Novoste may be the device industry's best example: the clinical trials program for its Beta-Cathbeta-radiation device for preventing arterial restenosis took five years and cost $130 million. The trial Novoste began in 1997 was, in fact, the first pivotal multicenter randomized trial of a VBT device.

But it was not merely the FDA that was changing: so were doctors' expectations. Perhaps under the tutelage of the more conservative FDA, physicians were increasingly interested in seeing clinical evidence. While the Beta-Cathsystem is perhaps an extreme example—the idea of putting radioactive seeds into patients' arteries has got to give a cardiologist some pause—Weldon believes that without major randomized trials and the compelling clinical data that they produce, many companies will find it difficult to successfully sell products.

Indeed, when Beta-Cathwas launched in Europe, following several well-documented trials, average utilization actually declined significantly over the course of the first six months and then began to rise again. The reason: cardiologists were waiting to see whether the radiation they used in their first few procedures did, in fact, delay restenosis (which it did), before using it again.

All of which leads Weldon to argue that most new medical device start-ups will be both far riskier and far fewer, though their payoff, if successful, will be commensurately greater. In the first place, they'll have to address much larger markets, $500 million or more, Weldon expects, to justify the required investment. Such markets are not only more difficult to find but, like intravascular radiation, they generally require a change in medical practice, which in turn implies fairly extensive clinical trials to prove the value of the device, as well as missionary selling to convince physicians to adopt them.