Medical Device Daily Contributing Writer

MINNEAPOLIS — The largest amount ever — $2.7 billion — was invested in med-tech companies in 2006, with the 1Q07 figure of $1.1 billion already trending to top that figure. That med-tech investing total represented 10.2% of all U.S. venture dollars in 2006, and 1Q07 again already tops that percentage so far, at 15%.

These numbers were the sunny highlights of the opening remarks of Ralph Weinberger, a partner with the Technology Industry Group of PricewaterhouseCoopers (Minneapolis) at the 6th Annual LifeScience Alley/International Business Forum (Minneapolis/IBF;Long Island, New York) held here last week.

Weinberger added: "Over the past 11 years of tracking this type of data, 2006 also produced, on average, the largest sized deals."

But against this backdrop of a best-of-times outlook for med-tech investing, Phil Nalbone, senior research analyst for RBC Capital Markets, (San Francisco), cited a large cloud behind the silver lining: "It has also become a difficult area to invest in, with challenges never greater, especially in terms of highly regulated, reimbursement-driven, intellectual property-mediated issues. All of these things mean more investment risk."

With the abundance of money flowing into med-tech companies, come higher expectations for delivery of success. Although investor receptivity and curiosity in this sector is the highest ever — because the deals are larger and more frequent as initial investors continue to re-up their dollars — tolerance for poor execution has decreased significantly. Private investors are seeking a higher return on their risk-burdened investment than they might receive from the public markets.

When Steve Shapiro, a technology partner with Galen Associates & Advanced Technology Ventures (Palo Alto, California), queried a panel of distinguished venture capitalists as to what the difference is between investing today vs. the year 2000, the responses came in triplicate:

• It now takes longer to exit, from four to five years to seven to nine years.
• Reimbursement has become a major issue, now requiring companies to prove that their products are reasonable and necessary, not just FDA-cleared/approved.
• The regulatory pathway has become increasingly difficult and complex, with an average trial study road to PMA approval ranging from $75 million to $100 million, and no guarantees of meeting study endpoints.

True proof-of-principal isn't just scientific; it has become one of market adoption and acceptance over technology risk, according to the panelists. From an investor's viewpoint, the technology may demonstrate efficacy and win FDA okay, but that does not guarantee that anyone outside the university setting is willing to pay.

True risk reduction for an investor happens at the point of commercialization where the market model seems to be working.

For small companies, this may be demonstrated in a regional as opposed to a national roll-out. As long as the sales are coming from a representative sample of hospitals and practitioners, the market forecast with its associated assumptions can be projected to a national basis.

Overall, the biggest difference is that investing in med-tech today takes longer and costs more than it did in 2000.

However, Phil Nalbone concluded: "Having said all this, the med-tech market is driven largely by emotion."
An emerging new area of med-tech investing — and one that skirts many regulatory and most all reimbursement issues — is that of "lifestyle" medicine, or "not medically necessary but desired" medical applications, most often paid for by the consumer. Once viewed by investors in legitimate therapeutic medical companies as the ugly stepchild, lifestyle medicine has recently become a compelling investment opportunity, according to one group of panelists.

According to Jim Glasheen, general partner of Technology Partners (Palo Alto, California), lifestyle medicine "is being driven by growing payor pressure coupled with consumer assertiveness," this consumer usually in the "Boomer" category.

Boomers are, Glasheen said, the "largest population sector that claims over 50% of all U.S. discretionary income that is willing to pay for what insurers or other third party payors won't. They are informed and want to be involved with their own healthcare, even at their own expense."

Two major examples of medical lifestyle products are Viagra and Botox, both initially considered failures for the specific medical conditions they were designed to treat, but "blockbusters" once finding homes in lifestyle applications.

Other examples — importantly, most in the device category — are breast implants, dermal fillers, lightweight portable oxygen delivery systems (as opposed to in-home heavy tanks that are reimbursable), high-tech intraocular lenses (compared to generic lenses paid for by Medicare), refractive surgery for vision correction, less-invasive bariatric products, and cosmeceuticals. The aesthetic market was one of the first lifestyle medicine markets, offering Boomers more youthful appearance.

Dennis Condon, CEO of Apsara, and one of the participants on a lifestyle medicine panel, said that aesthetics, "can be categorized into four groups: implants, fillers, cosmeceuticals and capital equipment [such as lasers]. For a company to succeed in the aesthetic arena now, they must offer products in all four categories."

Condon predicted that consolidation soon will be occurring rapidly in these sectors, since so many different companies are addressing the aesthetic market and many have products in all four areas in order to drive sales and take advantage of their sales forces.

Unlike many therapeutic markets, the panelists identified two key drivers to lifestyle medicine: clinician demand and patient — or in this case, consumer demand.

Clinicians in general recently have suffered a decrease in their annual salaries by 6% to 8% and now see making up some or all of their lost revenue by offering lifestyle products that are paid for directly by the consumer and, importantly, at the time service is rendered.

Panelists said that a key need is to be tutored in the business aspects of these product offerings and services, not just the medical side.

Direct-to-consumer advertising is often a critical component of such business opportunities and must be accompanied by clinician management of patient expectations, since the therapeutic endpoints in these areas are often fuzzier than in traditional medicine.

So while investments in therapeutic medical products require a lengthy regulatory and reimbursement pathway, lifestyle medical products can get to market quicker and produce revenues for their providers immediately.

They still need clinical studies to drive market adoption, but if the Boomers want such products and are willing to pay for them, they offer significant opportunities.