Medical Device Daily Washington Editor

WASHINGTON – Funding for med-tech start-ups already was thought to be a looming issue last year as the economy faltered, and this year's annual meeting of the Medical Device Manufacturers Association (MDMA; Washington), which opened here Tuesday, made clear that the worry is not strictly an expression of paranoia.

In a session titled "Gaining Access to Capital in Challenging Times," J. Casey McGlynn, chairman of the life sciences group at the law practice of Wilson, Sonsini, Goodrich and Rosati (Palo Alto, California), said "a good six months after the economic collapse, I thought medical devices" were holding up. He was "not thinking we'd be immune," but that the industry would nonetheless prove more resilient than it has.

"We are seeing things getting done, but they are getting harder," McGlynn said of financing deals, adding that he sees "a significant reduction in dollars being invested," specifying that VC is down by 30%.

Financing entities, he said, "are having their own internal problems," including low reserves of cash to service their current portfolios. He noted that as a consequence, the typical VC firm is rethinking its modus operandi, including taking a fresh look at current projects with an eye toward determining which to abandon. However, some VC portfolios are starting to falter because of tougher regulatory and reimbursement conditions in addition to economic conditions.

"Many are paralyzed by indecision," McGlynn noted, and "rather than taking action, they're sitting on the sidelines." Hence the latest start-up firm faces a lot of lethargy from investors.

Some financing syndicates are putting more cash into their current device developers, he said, but firms that have a high cash burn rate "are having trouble" because further funding is tough to get. For device developers "with weak syndicates, that is an absolute disaster" and because the VC managers are starting to waver, "in some cases, we're going to liquidate these companies."

Bank debt also is an issue because "many companies see that 30% to 40% of their burn rate is going to servicing debt," McGlynn said, a liability which cannot be suspended or sloughed off.

Among what he described as "intelligent funding strategies" is a tight focus on controlling the company's cash burn rate. "Start thinking about becoming a company that can do something with every dollar it has," he said, adding, "if you can't do it, you're going to get replaced by someone who can" constrain its burn rate.

"My No. 1 message is to look at your burn rate," McGlynn said.

On the subject of development plan timetables, he recommended that developers "meet or exceed your plan," and "get into man quickly." This last requirement holds even if the developer has to go to Europe to do it.

"You have to get out of this country and into man as quickly as you can," McGlynn urged, adding that early commercialization is essential for firms that face a long regulatory path in the U.S. He noted that CoreValve (Irvine, California) never got FDA approval prior to its sale to Medtronic (Minneapolis). "They knew that doctors wanted that product," he said, which was the justification for the purchase of CoreValve.

"You have to start your fundraising early," he said. "We used to say you have to start six months early," but that adage has been adjusted to call for as many as 12 months. "Maybe you have to wine and dine them in ways you didn't have to earlier," he remarked, adding that a full set of data is now more essential.

McGlynn asked rhetorically: "Is your operating plan clear?" He clarified that those who seek venture capital must present an operating plan that makes it clear that the money will do what the developer claims it will do. However, he also said that bad news in the form of a negative response is only utterly bad if no new understanding came about as a result. "If in getting a 'no' you didn't learn anything, that was a total waste."

The second speaker, Ryan Drant, a general partner at New Enterprise Associates (Menlo Park, California), lamented that McGlynn "took about 90% of my material," then remarked, "I'm going to tell you some of the same depressing news" as was delivered by McGlynn.

"Funding for the device space has taken a pretty precipitous fall in the last four quarters" Drant acknowledged, but hinted that some trimming of VC availability was inevitable. "It was pretty frothy in the last quarter of 2007," he observed.

Part of the reason for the "frothy" remark was that med-tech had taken a historically unusual share of VC in 2007. "Historically there was a three-to-one relationship for biopharma" compared to med-tech, but the latter had snared the majority of healthcare VC investment that year.

"A lot of people interested in doing early rounds," Drant said, as well as late-stage rounds, although the "terms may be obnoxious" to the inventor. However, he said he sees "incredibly little funding" for expansion stage firms that have made some headway but still have a way to go.

To the surprise of no one, Drant said that "the IPO market is pretty quiet," with two so far in 2009. "I don't think we should be surprised that public investors want to invest in clinical-stage companies," he said, and while there are a couple of firms that could go public today, "the issue is that if you don't need the money, why would you?"

"We're still bullish on mergers and acquisitions," Drant remarked, because big firms have to grow and they do not invent much. He said he knows a firm whose shares went from eight times revenue to twice revenue, which fosters a lot of interest in small firms with promising products. "They can't generate growth internally; they have to get aggressive" about buying companies.