Tom Rodgers, Partner

Beyond Therapeutics

Therapeutic devices represent the core target of VCs firms investing in medtech. Companies developing these technologies have reeled in the bulk of venture dollars over the past two decades. The attraction to therapeutics is unlikely to fade, as there always will be capital available for novel, disruptive ideas that address large, unmet clinical needs.  However, one cannot ignore the narrowing of investment filters in the wake of troubling macroeconomic factors and the ever-increasing regulatory and reimbursement hurdles these companies face. Furthermore, for a variety of reasons, truly novel, disruptive therapeutic technologies, with unique and broad IP estates, led by experienced entrepreneurs are rare these days.

Beyond this core of traditional therapeutics lies a set of intriguing opportunities that over the past several years has quietly emerged from what has long been considered the backwaters of venture investing.  These opportunities, broadly characterized as “therapy-enabling technologies,” are not implants or surgical instruments, but rather innovations that focus on predicting response to specific therapies, guiding interventions, monitoring patients, or improving the delivery and effectiveness of established therapies plagued by poor compliance.  While more traditional therapeutics fall within the realm of potential acquirers like Medtronic, Boston Scientific, or Johnson & Johnson, therapy-enabling technologies fall under the realm of Phillips, Siemens, GE, Hologic, Inverness, and Covidien.  It’s important to note that this latter group is more likely to be in acquisition mode than the device giants.

The much-hyped shift towards “personalized medicine” means more specialization and tailoring of individual therapies, which means more expensive therapies.  These therapies can only credibly lay claim to cost-reduction arguments if they’re matched with therapy-enabling technologies that will separate likely responders from non-responders and/or those likely to experience recurrence vs. non-recurrence.  The result is that we’re no longer talking about low-price, low-margin, quickly-commoditized screening tools and uninspiring M&A activity. Instead, we are talking about several hundred dollars, or, in some cases, several thousand dollar tests used to rule in or rule out the potential appropriateness of undergoing invasive surgeries or expensive drug courses or risk exposure to dangerous side effects.

While treatment guiding molecular diagnostic tests like Genomic Health’s Oncotype Dx may serve as the poster child for therapy-enabling technologies, this intriguing field also includes monitoring devices such as one developed by Glumetrics which will help patients avoid dangerous spikes and troughs in blood glucose levels as they recover from surgeries.  Other examples include platforms designed by companies like Aperio that create digital pathology images that can be viewed by a pathologist, regardless of geographic location, ensuring that the right case is reviewed by the right expert at the right time, enabling more-efficient and potentially more-accurate diagnosis of cancer.  The role for diagnostic and imaging solutions like these is much higher up on the clinical utility ladder than their predecessors. 

Although therapy-enabling technologies will play a critical role in patient care, these devices and tools will bypass much of the FDA logjam associated with evaluating the safety risks of implanted devices and interventional tools that improve quality of life and reduce symptoms but may not cure patients. Approvals will usually be required, but the path is more straightforward.  Post-marketing trials often times may be needed to accelerate clinical adoption or support economic value propositions to payers, but the cost and scale of these trials is a fraction of what is typical for therapeutics.

Perhaps most importantly, therapy-enabling technologies play a crucial role in the ever-expanding cost-avoidance argument.  All signs point to an expanding role for the Centers for Medicare & Medicaid Services (CMS) as the kingmaker or executioner for new innovations.  While instinctively skeptical, government and commercial payers are a receptive audience for cost-avoidance arguments.  Therapy-enabling technologies can reduce costs by ruling out inappropriate, expensive therapies or by addressing compliance challenges with established therapies.

For example, a type-2 diabetes patient can wear a simple, inexpensive, discrete pump to help them comply with prescribed, daily insulin therapy and reduce the use of more expensive and clinically-suboptimal, long-acting insulin injections.  The V-Go, developed by Valeritas could finally help type-2 diabetes patients overcome these barriers.  Another example is in the wound care market where guidelines and best practices for closing chronic wounds are generally well-established, but because dressings are often chosen, assembled and applied by untrained staff, or in many cases family members, these guidelines are not always properly followed, resulting in lengthy healing times.  In this billion dollar market, PolyRemedy has developed a solution that eliminates many of the hassle factors by fabricating customized, unit-of-use dressings matched to the individual wound, while ensuring and monitoring compliance with established protocols. 

Looking beyond therapeutics may represent the road less traveled for medtech investors, but the time has have arrived for some of these market segments to merit mainstream consideration. This could be seen as a defensive strategy considering the changing dynamics of the therapeutic device landscape where trials are longer and costlier; regulatory processes are harder to navigate; and companies are forced to fight and win reimbursement battles so they have a shot at generating revenues streams that will move the dial for acquirers. Offensively, therapy-enabling technologies offer a chance to invest in commercialization efforts sooner rather than funding years of R&D and clinical trials.  The yield from this should certainly be less binary, but could also result in attractive returns if your value propositions appeal to CMS and the new breed of acquirers like Siemens, Phillips, GE, Hologic, and Olympus that are aggressively building diagnostics and imaging footprints.  While medtech investors will never abandon the core, the upside for the few firms pioneering to the periphery is potentially significant.