The Medtech Strategist Is Published Non-Existent, Despite Positive Signs from Bringing the Benefits of a by Innovation in Medtech

DECEMBER 12, 2017 Vol. 4, No. 17

Published by Innovation In Medtech, llc

CEO PERSPECTIVE Medtech’s Billion-Dollar Man: Q3 FINANCING WRAP-UP An Interview with Keith Grossman Ending the Year the Way It Started: David Cassak, 4 Strong M&A, Weak IPOs Stephen Levin, 18 SPINE At NASS, Technologies March On —and so does Value-based Medicine DES MARKET UPDATE Wendy Diller, 24 US DES Market Braces for New Entrants,

MEDTECH INVESTMENT TRENDS More Pricing Pressures Early-Stage Deals Attract Mary Thompson, 30 New Investors to Emerging Sectors, While CV Declines START-UPS TO WATCH Stephen Levin, 34 ICHOR VASCULAR: Bringing the Benefits of a See page 19 MARKET TRACK Minimally Invasive Procedure Medical Device & Diagnostic M&A Environment to Arterial Embolectomy USU.S. Device Device & Diagnostic and M&A – 2000Diagnostic-2017 YTD M&A: 2000 – 2017 YTD Mary Stuart, 38 Aggregate Deal Value Number of Deals (US$ in Billions)

$80 100 Transaction Value $73 WELLINKS: Number of Deals 90 $70 $67 $66 $65 $63 80 Applying Connected Health $60 $56 70 to Improve the Efficacy of $49 $50 $50 60 Scoliosis Braces $40 50 $34 Wendy Diller, 40 $29 $30 40 $30 $28 $26 $27 $25 $26 $22 $22 26 30 $20 $20 $19 $20 $16 $13 20 $12 $12 23 $10 $8 $6 10

INSIDE THIS ISSUE 3

CEO perspective two, new competitors in the coming months and the impact is expected to drive further Medtech’s Billion-Dollar pricing pressures in a space that has been DECEMBER 12, 2017 | Vol. 4, No. 17 Man: An Interview with bending to commoditization for some time Keith Grossman now. Editors-in-Chief Over the past decade, Keith Grossman has Mary Thompson, 30 DAVID CASSAK had not one, but two billion-dollar exits, first STEPHEN LEVIN with Conceptus and, most recently, with Tho- Executive Editor ratec, the LVAD company Grossman ran for Medtech Investment Trends MARY THOMPSON a decade, executing a successful turnaround of a struggling company, before leaving only Early-Stage Deals Attract New Senior Writers/Market Analysts to return and lead it to its 2015 acquisition Investors to Emerging Sectors, WENDY DILLER by St. Jude Medical. Technology and market While CV Declines MARY STUART development were critical to both Concep- According to a wrap-up of the year’s invest- tus’ and Thoratec’s ultimate successes, but Director of Operations ment trends, presented by Jonathan Norris, Grossman’s real accomplishments lay in a Managing Director of Silicon Valley Bank, SANDY CORBETT genius for execution. at this year’s Phoenix Medical Device and Sales & Customer Service David Cassak, 4 Diagnostic CEO Summit, medtech fun- KRISTY KENNEDY draising continued at a strong pace in BRIDGET KELLY-STOLL 2017, although early-stage cardiovascular Q3 Financing Wrap-up deals have declined. Norris details where, Marketing & Web Director Ending the Year the Way instead, investors are putting their money. TRACY NEILSSIEN It Started: Strong M&A, Stephen Levin, 34 Publication Designer Weak IPOs PAUL STREETO [Summary for TOC]In what has become a recurring theme in our quarterly financing Start-Ups To Watch wrap-ups for the past two years, the US medtech IPO market for Q3 of 2017 was ICHOR Vascular: The MedTech Strategist is published non-existent, despite positive signs from Bringing the Benefits of a by Innovation In Medtech. what historically have been leading indica- tors of a public market revival, most notably Minimally Invasive Procedure For information call (480) 985-9512 or strong follow-on offerings and convertible to Arterial Embolectomy (888) 202-5939 toll-free in the US. securities. And the prospects for medtech Acute limb ischemia, the sudden occlusion of Subscription price is $1995 (online only) IPOs will remain sparse through the end of a peripheral artery by clot or other embolic per year for an individual subscription, the year. The silver lining, however, contin- material, is a life- and limb-threatening con- with department, division and ues to be a strong M&A climate dition that affects a significant number of company-wide site licenses priced people. Less than stellar outcomes after sur- based on the number of users. Stephen Levin, 18 gical arterial embolectomy haven’t improved High-quality print copy also available, in 30 years, despite the implementation of for an additional fee. multidisciplinary team approaches to man- Spine 2490 Black Rock Turnpike, #326 aging the condition. ICHOR Vascular hopes Fairfield, CT 06825-2400 At NASS, Technologies March to change that with an easy-to-use, one- size-fits-all percutaneous device. 480-985-9512 On—and so does Value-based 888-202-5939 Medicine Mary Stuart, 38 At the 2017 meeting of the North Ameri- www.InnovationInMedtech.com can Spine Society, innovations in robotics, [email protected] expandable interbody cages, and surgical Wellinks: Applying Connected navigation attracted a lot of attention—and Health to Improve the Efficacy more competition—even as discussion over Copyright ©2017 of Scoliosis Braces the future of value-based care heats up. by Innovation In Medtech, LLC. While bracing has been demonstrated to be All rights reserved. Wendy Diller, 24 as effective as surgery in correcting spinal No part of this publication may be deformity in moderate adolescent idiopathic reproduced in any form or incorporated scoliosis, the bracing therapies suffer from into any information retrieval system DES Market Update compliances issues that keep them from without the written permission of achieving optimal outcomes. Early-stage the copyright owner. US DES Market Braces Wellinks has developed a wearable monitor for New Entrants, to help patients comply with their therapy. MedTech More Pricing Pressures Wendy Diller, 40 Strategist The US coronary drug-eluting stent (DES) .com market will see the entry of one, and possibly

DECEMBER 12, 2017 4 CEO PERSPECTIVES

Medtech’s Billion-Dollar Man: An Interview with Keith Grossman Over the past decade, Keith Grossman has had not one, but two billion-dollar exits, first with Conceptus and, most recently, with Thoratec, the LVAD company Grossman ran for a decade, executing a successful turnaround of a struggling company, before leaving only to return and lead it to its 2015 acquisition by St. Jude Medical. Technology and market development were critical to both Conceptus’ and Thoratec’s ultimate successes, but Grossman’s real by accomplishments lay in a genius for execution. DAVID CASSAK

In the medical device industry, we success, but all but establish the left internal challenges and fierce compe- celebrate innovation in medical devices ventricular assist device (LVAD) market tition from a competitor, HeartWare. and the men and women who come as the huge market it has become— Worse, after the six years since Gross- up with ideas for great technology. But and see the company’s sales soar from man’s departure, Thoratec’s stock price true success in this industry isn’t just $100 million to $1.3 billion. was at the same point it was when he about inspiration, it’s also about execu- left. Asked by the company’s Board to With Thoratec well positioned, tion. And few people in this industry return as CEO, Grossman turned the Grossman in 2006 decided he wanted have shown as great a genius for execu- company around. Within a year, Tho- to do something else, and he resigned tion as Keith Grossman. ratec’s stock price doubled and, in the from the company. After a brief spell as part of the story everyone knows, he Grossman started his career at Amer- a venture capitalist, he was recruited achieved his second billion-dollar exit ican Hospital Supply as a sales rep in to head a small company making con- its McGaw IV solutions business. After traceptive devices, Conceptus. Like of this decade when St. Jude (now part stints at a handful of other companies, Thoratec, by the time Grossman got of Abbott) acquired the company for he was recruited to join Thoratec as to Conceptus, the company had been $3.4 billion in late 2015. its CEO. So many of us associate Tho- around for a while—10 years—and had Two struggling companies, three ratec with Grossman, but the company struggled with a failed strategy and a turnarounds—two of them amazingly had already been around for 20 years stock price at all-time lows. and had been a public company for quick—and two billion-dollar-plus ex- 14 of those years when he got there. And, as he had done at Thoratec, its. That, in a nutshell, is Grossman And at the time, Thoratec was, to be Grossman quickly turned the company Grossman’s story and it’s why he was blunt, in terrible shape—lacking clear and had sales booming—so much so honored with the Phoenix Medical De- direction, suffering through a long- that within five years, in 2011, he engi- vice Conference Life Time Achievement delayed clinical trial, and with no clear neered his first billion-dollar exit, when award. In the following Q&A, conduct- market for its lead technology. Over Conceptus was acquired by Bayer for ed this past October at the Phoenix the next ten years, under Grossman’s $1.1 billion, more than three times the Conference, Grossman talks at length guidance, Thoratec would complete company’s market cap when he joined. about his achievements and the oppor- a ground-breaking clinical trial—one Meanwhile, during his absence, Tho- tunities and challenges he faced along which would not only drive Thoratec’s ratec was again struggling, beset by the way.

and out of the abdominal wall. And it was made of a clear polyurethane so you could actually watch this prosthetic Medtech’s Billion-Dollar Man: ventricle pumping blood and supporting the left side of your circulatory system. That’s where Thoratec was when I joined.

MTS: Was there much of a ventricular assist device market An Interview with Keith Grossman KEITH GROSSMAN at the time?

The MedTech Strategist: I know that you had worked at Grossman: There was no market at the time. This was several companies, including American Hospital Supply and a first-of-its-kind approval for a short-term indication. The a generic drug distribution company, before taking over as objective was to get in, staff a management team, refinance CEO of Thoratec. Before we get into the Thoratec story, was the company, create a commercial structure, re-list the com- there anything in those early experiences that prepared you pany as a public entity while raising capital, and start to build for what you would find when you got to Thoratec? a market that we all thought could be interesting. As somebody I know would say, this was an opportunity with a lot Keith Grossman: Of course! But let me give you of hair on it. What helped was that, to some extent, I didn’t a little context around my decision to join Thoratec. I had know what I didn’t know about the cardiovascular device just done a four-year stint with a generic drug manufactur- space. I had been in other parts of the industry and [cardio- ing and distribution business located in the Midwest. It had vascular] always looked interesting and exciting to me—lots been private-equity backed, and just after we sold it to a of big challenges, but an opportunity to do something that Canadian generic drug company, I got a call from a board really mattered for patients and clinicians and, if it worked, member of Thoratec. Here was the pitch: Thoratec was could pay off big for investors. a 20-year-old company at the time, founded in 1976, and had never commercialized anything. The company had been MTS: You inherited a company that clearly wasn’t running a clinical trial for the first ventricular assist device performing well. How much of your challenge was cultural? in the US for the short-term bridge-to-transplant indication, What shape was the management team in, the folks who and the company believed it was about to get approval. I would have to execute on what you wanted to do? Did you said, ‘Well, that’s pretty exciting. How long have you been have to have a complete overhaul of the people at Thoratec at this?’ And they said, ‘The clinical trial so far has taken us or did you find folks willing and able to help you turn the 13 years.’ company around?

MTS: And it was supposed to have taken four years. Grossman: Thoratec was kind of unique. There aren’t many cases of companies that are both start-up and turn- Grossman: Right. And keep in mind that Thoratec around. This was a company that was 20 years old, had had already gone public, then been de-listed and had run been working on a clinical trial for 13 of those years, and through all of their cash—they had a million dollars in the was almost out of money. There were about 35 employees, bank and were burning through it. But they were just about housed in a little building in Berkley, California, in a danger- to get FDA approval and I said, ‘Why don’t we talk after you ous neighborhood. I mean, there was literally a chalk outline get your approval?’ in the parking lot of the building two weeks before I started. So I was sort of starting from scratch on one hand. But there Sure enough, they got their approval, and it was for a device was also a small but established company there that needed that was the first of its kind—a first-generation, pneumati- to be turned around, outside of a small talented R&D engi- cally driven VAD to support patients waiting for a heart neering team. transplant, not the permanent destination therapy indication that [VADs] have today. There was an air compressor system about the size of a small refrigerator that sat next to MTS: You described a technology that was pretty primitive the patient. The pump was actually worn on the outside of and inconvenient for patients. Yet you had a brand new FDA the body connected by two very large cannulas that came in approval when you arrived. How much of the challenge was

DECEMBER 12, 2017 6 CEO PERSPECTIVES

technological—a need to refine the device—as opposed to things, was very happy with how things were going. We had commercialization or operational? gotten to about $40 million in revenues and were profitable, which was really extraordinary. The board was very satisfied Grossman: It was both. We didn’t have cash. We didn’t with where we were headed. We were public again and the have a manufacturing facility. We had no place to build our market cap was going up. I still have the memo that I wrote devices in order to launch them commercially. My first job to the board, saying ‘This is great, but we don’t have the was to raise capital. We had to build a manufacturing facility technology it takes to succeed long term. This success isn’t in the Bay Area for our first-generation device; at the same going to last.’ time, it became very clear very quickly that we needed a second-generation answer for these patients. The reason I reached that conclusion was that we didn’t really have a lead on the technology that was going to mat- The good news for the company was that it was serving a ter. The technology that was really going to matter was one real need, and there was a market. We all know the heart that could be approved for long-term use, a technology that failure numbers and the many, many tens of thousands could be implanted in the patient and allow the patient of patients who die every year compared to the couple of to go home. These weren’t the small group of transplant thousands of available heart transplants. So there were all candidate patients, but rather the many tens and even hun- of these patients dying and, as a result, a hunger for any dreds of thousands of patients who would need this device technology that could keep people alive as they were on the longer term. We didn’t have that. We had been working on waiting list [to get a heart transplant]. We also had a clinician it when I joined, but I concluded pretty early that it was a bit group that really wanted us to succeed and they were fairly of a pipe dream. concentrated. There are around a thousand open heart centers, but only 10% of them are doing transplants. We were So I figured we had a couple of options: we were either able as a small company with a small commercial footprint going to have to diversify and re-shape the company, or to get to all of our users easily. And that, by the way, shapes we were going to have to be part of a larger organization the way operating expenses [OPEX] are structured in a VAD that could help us develop the technology more quickly. We company to this day. We’re able to spend a higher amount started exploring all of those options and it was just about of money on R&D and still have a normal looking OPEX that time that Guidant showed up. This was on the heels of structure because we don’t have to spend what a lot of their AAA graft acquisition, EVT, and their aspiration at the companies have to spend on sales and marketing. time was to create a vascular and cardiac surgery business within the company. MTS: And it should be pointed out that yours was literally a life-or-death technology; people are going to die if they MTS: Did you reach out to them or did they come calling don’t get your technology. on you? That’s right. If the pump stops for any rea- Grossman: Grossman: They actually came to us. At the time, they son, patients are horizontal in seconds. It’s a life-supporting thought that VADs would be a great anchor to the business system. And that’s a daunting and sobering challenge. they wanted to build, a device business that would be durable and wouldn’t get assaulted by competitors quickly. VADs MTS: Once you joined the company, Thoratec’s track record were also something that they could build around with the over the next ten years in terms of revenue growth and cardiac surgeon and do some other things. It was all part of profitability would be extraordinary. Yet you told me once a game plan. that for as well as Thoratec was doing and as happy as the investors were, you didn’t really believe the company could Their approach to us started a diligence conversation that survive as a stand-alone company. That brings Guidant into lasted about six months, and they took their time because the picture. Why didn’t you think Thoratec could survive they could. There’s a great lesson there: unless you have a long-term as a stand-alone company and where did Guidant competitive process, be ready for a long, “thoughtful” dili- fit in the company’s story at that time? gence process. But eventually we had negotiated everything and were going to be signing the next day or the day after Grossman: I was maybe a year and a half into my that. Everything was done, even employment agreements. tenure, and the board, who had suffered through this Then Sulzer Medica put their Intermedics pacemaker busi- long development cycle and cash starvation, among other ness up for sale, and that was a have-to-own property for

Guidant. Suddenly it was student-body-left, everyone focus which was a division of ThermoElectron at the time. You may on this instead. And so we got a call saying, ‘Hey, we’re not remember that ThermoElectron had this far-flung corporate going to do this deal. We have to do this other one and all structure with all of these public spinout companies, some of the same people are working on both. Maybe we’ll be back. which were majority owned, some minority owned. Thermo But best of luck.’ Cardiosystems was one of those, and they had a very large but implanted, electrically driven pump. MTS: If you were that close, did you have a break-up clause in the deal? “For us, it was a bet-the-company deal. Grossman: No, because nothing had been signed. We were about to sign the definitive agreement, and if they had Once we put the companies together, stepped away after the DA, we would have. But we hadn’t it was sort of do-or-die to get it executed actually signed the deal yet. the right way.”

MTS: What was the reaction within Thoratec? Was the board upset? And what happened to Thoratec’s stock when MTS: Large? And it was still implanted? the deal was pulled? Yes, but it worked well, and they had just Grossman: We had been pretty quiet. The deal wasn’t Grossman: started a clinical trial for permanent implantation, which going to be made public until the announcement, so there was called the REMATCH trial. We had been beating them was no backlash in the stock price. The board was of two commercially in the bridge-to-transplant market, in part minds: Some of the board members were disappointed because we had a device that was better suited to those because they saw the Guidant deal as the liquidity event short-term patients and in part because frankly we were just they had long sought. But other members of the board were doing a better job in the field. But we didn’t have a longer- excited about Thoratec’s opportunity long-term and the term implanted approach. strategic challenge in front of us, and they wanted to keep going [as an independent company]. Internally, the team They also had a small blood coagulation diagnostics busi- was getting a little tired with the discussions with Guidant ness that spun off a lot of cash and could pay for our R&D and so the fact that they went away was something we had efforts for a few years. So we went to them and said, ‘Why to get over but was okay. And thank goodness that’s the way don’t we think about putting these companies together? it played out. We’ve got the short-term implant and you’ve got the long- term implant.’ Importantly, they had also bought this little MTS: Was it discouraging for you personally? rotary pump company in Sacramento called Nimbus; we had tried to buy them previously but just didn’t have the Grossman: Briefly. balance sheet. This technology eventually became the HeartMate II and for a long time the standard-of-care for industry. MTS: So suddenly you found yourself having to run the company again. Was it hard to focus again on what The two companies just fit together beautifully. It took a you needed to do going forward? What was Plan B for while to get the deal done because we had to persuade the Thoratec? ThermoElectron board to do what was a pretty creative deal. But we wound up getting it done and for us, it was a bet-the- Grossman: It wasn’t that much of a disruption. Deals fall company deal. Once we put the companies together, it was apart all the time, as you know. Though usually when you’re sort of do-or-die to get it executed the right way. a day away from signing a definitive agreement, you feel you’re pretty safe. But it was more of a disappointment than a disruption. And it was short-lived because we didn’t have MTS: You did the deal in the form of a reverse merger, the luxury of sitting around bemoaning what happened. We right? still needed to run the company. What we did was to get back to work on finding an alternative [to the Guidant deal]. Grossman: Yes, they actually bought us on paper. They At the time, our only competitor was Thermo Cardiosystems, owned 57% of the deal and we owned 43%. Yet we were

DECEMBER 12, 2017 8 CEO PERSPECTIVES

able to persuade them to let us retain full management did a large convertible note not long after that deal. But we control and they only took one seat on the board. didn’t need to do it to fund operations.

MTS: How expensive and difficult was it for Thoratec? And MTS: HeartMate would soon become the centerpiece of why do it as a reverse merger? Thoratec. When did you do the Thermo Cardio deal?

Grossman: Oh, we had to be creative because we Grossman: It was completed in February of 2001. didn’t have a lot of cash. It was a stock merger of equals, and we had lots of accounting challenges that other mergers MTS: And soon after you would make an attempt to at the time didn’t have because it wasn’t poolable—there acquire HeartWare, which would eventually become were all sorts of penalties we paid for years from an Thoratec’s major competitor in VADs. accounting standpoint by doing this as a reverse merger that we wouldn’t have to pay today. We had to go through Grossman: That happened well after I stepped down a second request with the FTC on our Hart-Scott Rodino from my first term as CEO of Thoratec, though I was still on the Board at that time. “We owned about 90% of this nascent VAD MTS: You had spent so much time and energy and had put market after the deal... it’s a merger we could Thoratec on a path to success. Why leave? probably never get done today because of the market share concentration issues.” Grossman: I was coming up on my ten-year anniversary, and while the medical device industry is generally hard, there was something about creating the VAD market that was a tough, long pull for lots of reasons: trying to con- application because we owned about 90% of this nascent vince payors to pay $200,000 for a surgical intervention in VAD market after the deal. By the way, it’s a merger we a patient who maybe had days to live, getting FDA approval could probably never get done today because of the mar- and then getting users to adopt, and then figuring out the ket share concentration issues. infrastructure to support those patients. I had gotten to the point where I had been doing this for ten years and was MTS: After the deal you had 90% of the market. But only 45 and I just felt that I didn’t want to do this for the what was the market? Can you give us a sense of where rest of my career. the VAD market was at the time? Was this the beginning of the transition from bridge-to-transplant to destination At the same time, I didn’t want to just leave abruptly after therapy? Was that the ultimate rationale for the deal? creating the business, so I went to my board and said, ‘Look, at the ten-year point, let’s start thinking about a transition. Grossman: Well, yes. From an end-market and a I’ll stay on the board and do whatever I have to do to help. technology standpoint, that was the major rationale for the I’ll help find my replacement.’ That was at about nine years deal. We believed in the value of the long-term, destination into my tenure and sure enough, at ten years, we made the therapy market, and we also really believed that we would transition, and I stayed on the board for what I thought was need a portfolio of different products for different patient going to be a year or so, but ended up being the full nine categories. And we needed something that would spin off years until I came back into the CEO role for a second time. cash because [VADs] are expensive things to develop, with a lot of high- and late-stage risk. That’s why the little diag- MTS: Before we get to that, before you left you oversaw nostics business that nobody talked about at the time of the REMATCH trial, which you mentioned just before. I the deal was critical for about a five-year period. know that clinical trial was very significant, not just for Thoratec but for the entire VAD industry. What was the MTS: Did that generate enough cash by itself, or did you REMATCH trial and what was its significance? also have to raise capital? Grossman: We announced the REMATCH results later Grossman: We raised some capital, but from an oper- that year, right after the merger, maybe November of that ating standpoint it actually did generate enough cash. We year.

MTS: Did you know what REMATCH was going to show tion therapy. Today, we’re treating a different category of as you were completing the Thermo Cardio deal? Did you patients, with pumps that last ten to 15 years. We’re treat- close the deal knowing that when the data came out it ing patients who are less ill and will live for a long time. But would be great? when we started, to get a patient into that trial, they had to be within 24 hours of death as deemed by the surgeon. Grossman: It was a little bit of a black box, but we You can imagine the condition of these patients. Now we had a pretty good idea. treat a whole different category of patients, but it took decades for the industry to get there. MTS: So for those who don’t know, describe the REMATCH trial and tell us its significance. MTS: As you point out, I recall that REMATCH was considered something of a watershed for the VAD Grossman: If you trace VADs all the way back, long industry. Suddenly there was compelling evidence of their before my time, they really came out of the artificial heart clinical value, but I also recall that payors were worried research that was done early on. Most of those involved because, as you say, they were expensive devices and decided that developing an artificial heart was too hard they didn’t extend life all that much. After the release of and that we should try something easier, like a VAD. Instead the REMATCH data, what happened to the industry and, of taking the heart out and trying to replicate its function, more importantly, what happened to Thoratec and its let’s just assist it in parallel. share price? That’s how VADs got started, but as an industry, when we The stock did well after the release of took this idea to the FDA, they said that it sounded too Grossman: the results and we subsequently got FDA approval and risky. The agency wanted us to find a category of patients the stock continued to do well. But we did have a long for whom there was very little risk. Those turned out to be road ahead of us with the payors. The payors, I think, patients who were on the transplant list and were dying. looked at bridge-to-transplant and said, ‘So what? Prob- And so as an industry, we figured, ‘Let’s see if we can at ably not a huge indication.’ But they looked at destination least survive them to transplant.’ That was never our real therapy and thought it could be more of a break-the- aim, but it became the regulatory construct. bank indication if the industry could get the technology People naively, I think, agreed to that, thinking that it was a and the outcomes right. We had what amounted to a quick way to get regulatory approval and create a market. three- or four-year lift with CMS, eventually getting into Even today, it’s just beginning to change, but the feeling the highest paying DRG in the system, but it took a long was, we couldn’t get to this big market without passing time and lots of trips to Washington and a lot of invest- through the gates of bridge-to-transplant. But the real goal ment on our part. But for the first couple of years, [the all along was to get to a permanent implant use case or pushback from payors] really limited the market—that patients who don’t have a back-up plan. That’s what the and the stage of the technology at the time limited the REMATCH trial set out to prove. It was an NIH-sponsored number of patients we could treat. trial, and I don’t remember the exact number but there were around 120 to 150 patients or so. The control group MTS: By the time you decided to leave Thoratec, the was medically managed as they normally would have company was doing extremely well and was on a solid been, and the test arm got an implanted device. And the path forward. What was the board’s reaction to your trial primarily measured one thing: survival and how long decision to leave? You had told them early that you didn’t patients would live with an implant. That’s why it was such intend to stay forever. Was there confidence that having a sensational trial. put things in place, Thoratec could continue to thrive even if you weren’t there? MTS: And the results were great for patients in the test arm. Grossman: That was a real learning experience for me. I went to the board at the eight-and-a-half or nine- Grossman: Actually, the results were horrible for both year point with a very thoughtful plan that said, ‘By the arms, just because that’s who those patients are. It’s just ten-year point, this is where I think the company will be that the results were much less horrible for the VAD arm, in terms of financial performance, valuation, and mile- and that was the beginning of the VAD market for destina- stones.’ And, by the way, that’s exactly where we were at

DECEMBER 12, 2017 10 CEO PERSPECTIVES

the ten-year point. But I said, ‘If we’re not there, I won’t space. It takes a while to prove these technologies work step down.’ It was like someone dropped a bomb in the and develop the next generation. As I looked at Thoratec, board room. It took the board a couple of meeting cycles I thought that to really deliver the company to the next and probably six months to really get their arms around value inflection point, which would be around the next- the fact that I wasn’t going to be there forever and there generation pump, would take another six or seven years. I was a change coming, not for some horrible secret rea- wanted to stay involved, but I concluded that I just didn’t son, not because the company was going in the wrong want to run the same company for 20 years. direction, but just because it was time and the company needed to focus on finding a successor who would con- MTS: Eventually you hooked up with Texas Pacific Group tinue the progress the company had made. [TPG] to become part of a venture initiative they were launching at that time. How soon after you left Thoratec MTS: Who wound up succeeding you? Had you prepared did you join them and how did that connection come an internal candidate? Or was it an external person? about?

Grossman: We had a couple of internal candidates, but Grossman: Aside from some board work, I tried to then we decided as a board the timing wasn’t quite right. take some time off. My daughter had just gone to college, So we ended up bringing in a candidate from the outside. my son was still at home. I wanted to capture at least some of that time where some of the family was still around. MTS: So you’d given the board a sense of where you But I had been approached by a handful of private equity thought Thoratec would be in terms of some key metrics at firms to look at some things to do together. TPG had your ten-year anniversary, and you met them. Where was originally approached me to look at a specific deal. They the company in terms of valuation growth by the time you ended up not wanting to do that deal, but asked if I would stepped down? help them look at other deals, which I did. Then one day, they came to me and said, ‘We’ve got a healthcare ven- Grossman: The starting valuation is a little tough to peg ture capital fund. We’ve never done medtech, but we’ve because we had been de-listed when I got there. But it was just hired one partner and need somebody to co-lead the under $75 million, which is a bad place to be as a public effort. Would you come in and start a medtech venture company, even then. The valuation when I left was around investing practice?’ $1.3 billion. From a revenue perspective, we had a CE mark The timing, by the way, turned out to be horrible. This was when I got there and were doing a couple of million dollars. the fall of ’07 and we all know what happened in the finan- When I left, we were on a pace for $200-250 million in sales. cial markets just after that time. But the experience was So we were trading at about six-times sales, we were profit- invaluable. I spent about four years doing that. We finished able, and we had a healthy balance sheet as well. off a pretty large fund, around $500 million, and raised a third $500 million fund and put a fair amount of it to work MTS: Did you have any sense as you stepped down what in six or seven medical device deals. All of a sudden instead you wanted to do next? Or was simply a matter that you of being narrow but very deep, as I was as a CEO, I was knew you wanted to do something other than Thoratec? looking at hundreds of ideas a year, learning a lot about other segments of the industry that I never had time to Grossman: I think like most people who do these study before. jobs, you’re either idling or you’re going 150 miles per hour, and there aren’t a lot of gears in between. That’s where I had gotten to at that point. I found that I’d never done any MTS: Any notable successes that came out of that one job that long in my career; everything had always pro- portfolio that you were instrumental in investing in? gressed pretty quickly for me. I found myself starting to lift my head up, as they say, and it sort of worried me. I wasn’t Grossman: Well, part of the problem we had was sure I could continue to perform at the level I had been if I vintage. Valuations were very high, and then when it came were anything less than 100% in. time for the next series, there wasn’t any follow-on money because it was the ’08-’09 time period. One has gone pub- The other thing was, as you may have gathered from lic, one wound up, and the other four are still private and in my remarks so far, things don’t move quickly in the VAD various stages of development.

MTS: You came into venture capital during what was, the procedure, and the patient got higher efficacy rates almost without argument, the darkest days for venture with no scar and lower complications. So you’re thinking capital generally, but certainly for medical device investing. what could not work? Did that general climate color your experience? How frustrating was it to be investing in the middle of this MTS: Right, why wasn’t the company more successful? retrenchment? There were certainly lots of companies looking for money and you had capital. Grossman: Right, how could they be only 10% penetrated after 10 years? But it was even worse. When they Grossman: We could spend hours talking about operators who go into venture capital and investors who came to me, their sales had plateaued and started to go go into operations and how well that works. I found it negative. The company had never been profitable, despite really intellectually interesting but, from a process stand- those gross margin rates. The stock had gone down to point, very frustrating. As a CEO, you get, for good or bad, below their IPO price years earlier. And they were getting used to command and control. As a venture capitalist, some threatening activist letters from shareholders. This suddenly you find yourself in a partnership, and in our was the picture I was presented with, and I thought, it can’t case, we were a partnership within a larger private equity be this simple. There had to be something wrong with the fund. Not only do you have this distributed decision- product or the market. It can’t just be about execution. But making and control mechanism, but ours was under the after looking at it for two or three months, I decided that umbrella of the larger entity of a private equity firm. We it was just that simple: a flawed culture leading to flawed couldn’t even really run our own island the way a normal execution. It once had had a reasonable launch strategy, venture fund would. I found the whole governance struc- but when that no longer worked, they hadn’t changed. So I ture to be frustrating and inefficient, and I think a lot of said to myself, ‘There’s a little risk here, but this could actu- CEOs who go into investing probably have to get used to ally be a really interesting business.’ that model of doing business. It’s very different. MTS: Validating your view that Conceptus was largely an MTS: You eventually got back to Thoratec and we’ll execution play was your quick turnaround of the company get back to that story. But in 2011, you took a detour and Bayer’s offer to buy the company for more than $1 to Conceptus. Tell us about Conceptus. Were there any billion soon after. similarities between the Conceptus you joined in 2011 and the Thoratec you joined in 1996? Grossman: Yes.

Grossman: I spent the last year of my time at TPG MTS: To your knowledge, did the Bayer offer come out with a kind of split role. I had decided I wanted to go back of thin air or had Bayer been nosing around Conceptus to running a company, so while I minded my existing port- even before you got there? And sales started to increase folio, I also worked with the larger buyout fund to help significantly pretty quickly. What exactly did you have to them look at some ideas. do to turn the company around? Just about that time, I was approached by the board of Conceptus, a public company that had launched its Grossman: The Bayer offer did come out of thin air, Essure product, an implanted device designed for per- but the outcome was pretty predictable. By comparison, manent female contraception, in 2001, which meant Thoratec could have remained a stand-alone company, that it had already been on the market for ten years strategically speaking. Coming into Conceptus, I had a bit when I got there. But it had everything that you fanta- of a bias that at some point, the company should be part size about in a medical device company: it really didn’t of a larger company, that it probably wasn’t a stand-alone have any competitors, it had 85% gross margins, the company. Part of the reason was that the markets were market was only about 10% penetrated for the surgical very different. At Thoratec, the market was very concen- procedure it replaced, and it was a non-incisional hys- trated and competition fairly limited. At Conceptus, the call teroscopic procedure that took about ten minutes in the point universe was large and very distributed. There are doctor’s office. And the contraceptive efficacy rates were 40,000 to 45,000 gynecologists in the US alone and this is higher, believe it or not, than surgery. The doctor made an office-based procedure. Conceptus had to train every more money, the payors saved about 50% on the cost of new account to do a procedure that none of them had

DECEMBER 12, 2017 12 CEO PERSPECTIVES

ever done in their office before. The channel investment the way you don’t want them to go. And a company initi- was intense. We also had to educate the consumer and this ated auction is pretty dicey for all but the hottest assets. was my first real experience with a big direct-to-consumer With Conceptus, we put together a new strategic plan and investment. So, I didn’t really think it was a great stand- a forecast for the business, all of which took some time. alone business unless we spent a long time working on a But we felt that there would come a time when, if we did diversification effort. Conceptus had a super product, but I our job, we’d get the company back on track to drive up the went in with the idea that we were either going to have to valuation. The shareholder response would be whatever it diversify or become part of another company. And within would be, but at that point in time, we would need to make the first few weeks of my arrival, I was getting phone calls a decision whether to exit, if one was available, or to take from one or two companies who were looking for a deal the risk of diversification. because our stock price was very depressed. There were some interesting diversification opportunities out there, but those things always imply risk, especially for “I’m not a huge fan of negotiating with a single-product company; it’s do-able, but you never really just one company unless absolutely know how those things are going to go. So first, we wanted necessary. Maybe that’s because of my prior to drive the valuation as far as we could organically and then take a breath. If we generated any in-bound interest experience, but those can go the way you at that time, we decided we would quietly explore the mar- don’t want them to go. And a company- ket interest to see what it might turn into. If we didn’t like initiated auction is pretty dicey for all but the value for shareholders, then we would start the diversification efforts and build the company. the hottest assets.”

MTS: And of course you did drive the valuation organically, MTS: Mostly from value acquirers, looking for a quick, reflected in Bayer’s offer which was $1.1 billion. cheap deal? Grossman: Actually, Bayer didn’t start the process. Grossman: Yeah. There aren’t many value buyers in Somebody else did. medtech. Most companies are willing to pay for quality and growth; they’re not looking to get a deal. But we had a MTS: You mean another company made another offer couple of potential buyers who thought, ‘OK there’s a new first? CEO; maybe the board is signaling they just want to bail out.’ I took those offers to the board but persuaded them Grossman: Another company came in. The business that there was a lot of good work to be done. We felt we had gotten back on track quickly. The nice thing about Con- could still drive a lot of growth in our valuation organically. ceptus was that for as flawed as it was from an execution So we put those people off and started the work of improv- standpoint, because we had a fundamentally good prod- ing the company. uct, it responded very quickly to the changes we made. The sales growth ramped up faster than we modeled, and we MTS: You had two very successful exits in just the first also made the company profitable pretty quickly and for half of this decade, and you had gone through a deal with the first time. So this not only drove the stock price quickly, Guidant that came close but wasn’t completed. Before we but attracted strategic acquirers again. finish the Conceptus story and get back to Thoratec, let me ask you how you think about teeing a company up for an MTS: What exactly did you do? Was it simply a matter exit. Did you engage an investment bank? Are you a fan of of reconfiguring or re-incentivizing the sales team? What auctions? Or do you favor finding one buyer and working accounted, to your mind, for the fact that sales had lagged with that company toward an acceptable valuation? for so long and then suddenly began to soar?

Grossman: I’m not a huge fan of negotiating with Grossman: It was 100 little tactical things and two big just one company unless absolutely necessary. Maybe ones. The first big change was cultural—the company’s cul- that’s because of my prior experience, but those can go ture had just sort of eroded over time and it was very, very

unproductive. Changing the culture required a lot of tone- Grossman: They were busier, working harder, and setting, a lot of business process change, and also bringing being held more accountable. And the ones that were win- in a lot of new people. Fortunately, you can change the cul- ning were making a lot more money. ture at a company the size of Conceptus fairly quickly if you do it right. I was listening to Alex [Gorsky, CEO and Chair- man of Johnson & Johnson and the previous speaker at the MTS: The $1.1 billion that Bayer offered was more than Phoenix Conference] and, not that he spoke about needing triple the market cap of the company when you joined in to change the culture, but I imagine changing the culture 2012, and about seven times Conceptus’ revenues at that at a company the size of J&J must seem like an impossible time. task. Not at Conceptus. Grossman: We were on our way to about $175 mil- That was task one. Number two was changing the com- lion in revenue in 2014, and the deal closed about midway mercial strategy. Conceptus had a device with 40,000 through the year. customers, and the company had taken a first-come, first-served approach to training. Instead of segmenting MTS: I’m assuming that it was agreed upfront that you the market and trying to understand where the business wouldn’t stay at Conceptus post-deal. Your next move would come from, they went after any customer who was to go back to Thoratec. How much time had elapsed said they wanted to get trained to do the procedure. Cus- between leaving Conceptus and rejoining Thoratec, and tomer acquisition was expensive for Conceptus as it is in tell us why you agreed to go back? And as you fill in that most companies. piece of the story, maybe now is the time to plug in the Before I got there, the challenge was to train otherwise play for HeartWare that Thoratec made after you stepped rather conservative customers to do a brand-new pro- down as CEO. cedure in their office. Conceptus would do one or two procedures with them and then move on to train the next Grossman: I think there were about two or three customer. It was like a game of spinning plates; we were so years in between. When I left Thoratec in 2006, we were busy getting new plates up on sticks that we didn’t realize still what we had been for many years, at least in our pri- the old ones were falling off and breaking. To fix that, the mary market, which was the US, and that is a monopolist. company would just throw more people in the field. When I always thought that the biggest risk to our business was I got to Conceptus, we had something like 240 people in just the flab that you develop by being a monopolist for a the field just in the US. This for a $150 million revenue busi- long period of time. You have to work really hard to keep ness. That’s why we were never profitable. And every time your organization ready for the eventual competitor, but sales would start to slow, we’d throw more people into the it’s almost impossible to do that until you actually have field and start training more customers. competition. During the time that I was on the board, we got our first To change that model, we segmented the customers. We competitor, which was HeartWare. They were the first decided if we were going to be the standard of care, we had competitor with a viable technology that really took a run to do it one practice at a time. We defined the customer at commercializing that technology, and they did a good that we really wanted, downsized our sales organization job. There had been other companies before that had tried, by about a third, and started growing that customer base but HeartWare was our first true competitor. When they by focusing on one customer before we moved to the next appeared, we had to change the way we thought about one. And growth started to pick up. We became profit- our markets—the way we thought about reaction time, able, and by the way, interestingly, we were getting better about our R&D pipeline, and how we interacted with our outcomes because we were spending time with the right customers. We had to focus on fewer things and getting customers and making sure they were well trained. It all them out quicker. And in my view, we just hadn’t done that worked together. level of re-think. Those things touch not only tactics, but culture, people, organizational structure, etc. We expected MTS: And I’ll bet some of the sales reps found themselves the market to react to us the way it did when we had the with a third fewer colleagues and bigger sales territories whole market and really were the market. And it didn’t and more revenue in their own individual pockets. happen. And so things began to degrade a bit. We began

DECEMBER 12, 2017 14 CEO PERSPECTIVES

losing market share pretty rapidly in Europe to HeartWare do differently if back in the CEO role. I’d be lying if I said and were facing the oncoming wave of the same competi- that I’d never thought about it. But certainly, that was tor in the US. not part of my plans.

MTS: It should be pointed out that Thoratec;’s bid to buy MTS: In your view, what was the state of the senior HeartWare wasn’t successful and that left the company in management team at that point? You had been away eight a difficult position especially because HeartWare proved years. Was the management team largely the same one to be a pretty formidable competitor--the kind of company you left? Did you conclude that you had to bring on a new that could leapfrog a complacent market leader. senior team?

Grossman: Exactly. That was their narrative, and Grossman: Coming back to Thoratec was less about they had completely formed and captured the market the team and more about other things. Thoratec was then narrative. In my view, they had convinced the market that and had always been populated by really high-caliber peo- the product attribute that mattered most was product ple. We started in that direction early on, over-hiring and size and not patient outcomes. They were what we had encouraging people to do the same with their hires. Even been before in terms of the way they competed in the when we had a structure problem, we always had a really market, and they had really captured the attention of the bright group of people. public investors. I had been on the board much longer than I ever intended to be as an ex-CEO, and things had The day I came back I had something like 18 people generally gone pretty well, until this chapter. Suddenly I reporting to me, so of course, we did have to make some was faced with the choice of being the annoying former management changes. There were issues in marketing and CEO who was starting to complain about the way things the way we were dealing with our competition and facing were going and the way the company was being run, or our markets. There were also issues in our product devel- just stepping away. opment pipeline and the way we had lost track of urgency, focus, and accountability. We had to make some funda- mental changes in those areas. And when we made them, MTS: Did you have a rocky relationship with the then-CEO those changes bore fruit quickly. But a lot of that had to do of Thoratec? with leadership and cultural change—changing our expec- Grossman: No, he’s a great guy, and he had done a tations. In the case of Conceptus, we really had to convince really good job in that first phase. But when we got compe- the organization that we needed to change. In the case of tition and things started to change, that put us on our heels Thoratec, there was a group of really high-caliber, very hun- a bit and things just didn’t progress the way they should gry managers who wanted the change. have. Plus, he had a very different style, and I began to see that the culture was going in a different direction. Not nec- MTS: As mentioned, at one point after you left in 2006, essarily in a bad way; this wasn’t Conceptus. But in a very Thoratec tried to acquire HeartWare but wasn’t successful. different direction and I decided it didn’t benefit anyone Might Thoratec’s trajectory have been different had the for me to be a disruptive force. I felt that if there needed to company been successful in its quest for HeartWare? I be a disruptive voice on the board, it would be counterpro- know they had successfully launched in Europe. You told ductive if it were mine. me once that one of the things that made HeartWare’s So I went to one or two members of the board and said, success frustrating was that you were convinced that ‘Look, it’s time for me to step away. I’m frustrated and Thoratec’s technology was superior—in effect, that you I’m not going to be productive if I stay on the board. were losing share to a device that you thought wasn’t as I’m just going to become a pain in everyone’s ass. So good as Thoratec’s. I’m going to step off.’ That started a discussion about whether I would consider coming back. I had recently Grossman: I did believe it at the time and I still exited Conceptus and one of my board members at Tho- believe it. And there are a lot of other people who believe ratec had also been on the Conceptus board. And I have it. In fact, once we changed our execution model, we to say, there isn’t a former CEO in the world sitting on started gaining share back with the same two products a board who doesn’t think about what he or she would that had been competing with HeartWare’s. Thoratec’s

problem wasn’t technological; it’s that we lost the rela- generation technology around what we thought would tionship we had had with our customers.They stopped matter clinically. TheHeartMate III is now approved in the seeing us as a trusted advisor. And that allowed a good US and in Europe and it has re-captured market share. competitor with a good product to change the narrative I think before that, investors really didn’t know how to with our customers regarding product attributes and think about what the company was doing. They didn’t patient outcomes, and relative value propositions, and really know what to expect from the next-generation we started losing those debates. But our outcomes never approvals, whose would win or why. Plus, HeartWare had changed. We continued to show as good or superior out- a product and it looked pretty good, and Thoratec wasn’t comes in the things that mattered. We were just getting really positioning itself well. beat in the market. When investors saw growth coming back and execution MTS: Why did that original play for HeartWare not was improving, they began to understand how our next- happen? Was it blocked by the FTC for competitive generation product was going to do in the market and reasons? Or was it that the two companies couldn’t agree started to bid up the value of Thoratec based on what they on terms? thought the new valuation of the company should be.

Grossman: When the deal went to the FTC, we got MTS: Within a year of your return, St. Jude comes the same reviewer who had reviewed the Thermo Cardio knocking, in part because as the stock price rose, deal ten years earlier, and I think sometime early in the a company they really wanted was starting to get process, the reviewer said, ‘I let you guys pull one over on me the last time,’ or something to that effect. I think we all expensive. Did the fact that St. Jude came so quickly had a sense at that point that the deal was going to have a surprise you? Had there been any interest on St. Jude’s pretty tough go with the FTC. part prior to that? Grossman: There are always conversations, always MTS: During the time you were gone from Thoratec, the people wanting to talk. You expect that in any segment company’s share price hadn’t moved. It was in the same of the industry. But when you’re running a company in spot it had been in 2006. 2015 that was founded in 1976, you don’t walk the halls every day thinking someone’s going to call that day. It Grossman: Actually it had moved and had done just doesn’t work that way. I think we had hoped for really well for a while. But then it came back down; when some interest back in the ’90s, but eventually you get I stepped back in, it was almost to the dollar the same in terms of market valuation as it had been when I left nine to the point where you just say to yourself, ‘We’re in years earlier. this forever, and we have to build a business and create something excellent.’

MTS: And a year after your return, the company’s We did a strategic review when I got back and raised valuation had doubled. What were the keys to the the question during that meeting whether and when turnaround this time? we might get approached by another company. Because if we were, we’d want to be ready for it. And we actu- Grossman: I think some of it was confidence in us on ally pegged the time that we might attract some interest the part of the investment community. They had been, about a year further down the road, at a time when the maybe more so than I realized, sensing the same frustra- next-generation products would begin to declare them- tion that I had as a board member. Some of the rebound selves a bit more around clinical outcomes, de-risking us came early on simply based on what they thought would as an acquisition. When St. Jude made its bid, we were happen. surprised, but also because we didn’t see them as the But there were two things, I think, that really got their most likely buyer. But they were willing to take the tim- attention. One was that we quickly started to recapture ing risk on the next-gen products. They showed up earlier market share and to make growth part of the story again, than we thought and offered our shareholders the kind of as it had been for many years before it had just kind of value that demanded our board’s attention. And they also gone away. Two, we repositioned the company’s next- wanted an exclusive negotiation.

DECEMBER 12, 2017 16 CEO PERSPECTIVES

MTS: The value of a publicly traded company is set to in and make an offer, so that gave us plenty of comfort on some degree by the share price at the time of the deal. The our shareholders’ behalf. Thoratec deal was valued at around $3.4 billion. What was the premium on your share price? MTS: During that 30-day period, did you get any serious offers? Grossman: I think it was in the 50% range. Grossman: There were multiple companies that looked and were interested in the business, for sure. But “St, Jude Medical] really wanted an exclusive, no one topped St. Jude’s offer, which I think proved us right in our assessment that St. Jude had made a very compel- but we structured a deal that looked more ling offer. like a private equity deal, with a 30-day go-shop provision and a really small break- MTS: And we might point out parenthetically that a year up fee. It would have been very easy for or so later, Medtronic acquired HeartWare. It can’t have been a coincidence. Medtronic or anyone else to come in and make an offer, so that gave us plenty of Grossman: There’s no question. We were both public comfort on our shareholders’ behalf.” companies, and if you go back and read our proxy state- ment and theirs and put the timing together, there’s no question. HeartWare was the only meaningful remaining asset on the market in VADs. MTS: That’s not an outrageous premium.

Grossman: No, but you have to remember that the MTS: It’s just a fascinating story. I know it felt to you like stock a year earlier had been $23 and St. Jude’s offer was 20 years, but for most of us, the story is about two billion $63.50 a share. Our shareholders were happy. dollar-plus exits within a five-year span. I’ll conclude by saying that we tend to think about success in medical devices in terms of technologies, and the VAD story is MTS: I can imagine that Thoratec shareholders were certainly about great technology. But I think what your happy. Were St. Jude’s shareholders happy as well? career illustrates is how important execution is. You can have a great idea, but if you can’t develop the technology Grossman: Actually, if I recall, when the deal was and get it to market, what good is the idea? Do you have announced, St. Jude’s stock responded pretty well. any final thoughts on the keys to executing effectively?

MTS: Why did you agree to the exclusive negotiation? Grossman: Do we have another hour or two? Look, it How did you know that if St. Jude were willing to pay starts with the people. When you get to a company that is $63.50, Medtronic wasn’t willing to pay $66? not executing well and doesn’t have the culture to back up execution, you can sense it the minute you walk in. You can Grossman: It was a very interesting deal in the way it tell immediately if the company is on its game and has a played out. Where we came out was that if you considered real sense of urgency about what it’s doing. And if it’s not, the market and the risk that lives in every iteration of the you may quickly find that the company is heading down the technology and the investment required to get to each new wrong strategic roads as a result. I’ve noticed that a lot of generation, we looked at the initial offer and said, ‘No, it’s companies that aren’t executing well assume the problems just not where we thought it should be.’ Over the course of involve other things—the market isn’t there or the strategy several discussions, the offer improved pretty dramatically isn’t working. Nobody likes to point to execution, so they until we got to the point where we felt that the valuation, start chasing other strategies instead of fixing execution. on a risk-adjusted basis, made sense for our shareholders. It’s always interesting how complicated companies who They really wanted an exclusive, but we structured a deal aren’t performing well feel, even if they should be pretty that looked more like a private equity deal, with a 30-day simple. The truth is, they need to think about the people go-shop provision and a really small break-up fee. It would leading the culture, and if the culture isn’t right, they need have been very easy for Medtronic or anyone else to come to make a change.

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Ending the Year the Way It Started: by Strong M&A, Weak IPOs STEPHEN LEVIN

It is beginning to feel more likely notably strong follow-on offerings agnostics continuing to show minimal that Godot will appear before the US and convertible securities (see Figure dealmaking activity. As Mark Secrest, public market for medtech companies 1). And the prospects for medtech Managing Director of Healthcare In- re-opens; we’re still waiting. In what IPOs are sparse through the end of vestment Banking at BTIG, points out, has become a recurring theme in our the year. The silver lining, however, if you break out devices from diagnos- quarterly financing wrap-ups for the continues to be a strong M&A climate tics, the device deal count through Q3 past two years, the US medtech IPO (see Figure 2). of this year was up 25% over the same market for Q3 of 2017 was non-exis- period last year with 29 deals com- tent, despite positive signs from what As has been the case all year, the pared with 23. The total deal value historically have been leading indica- strength of medtech M&A comes pri- also increased from $43 billion in 2016 tors of a public market revival, most marily from the device sector, with di- to $54 billion this year. Excluding each

Figure 1 Device and Diagnostic Initial Public Offerings: 2010 – 2017 YTD (through Sept. 30, 2017) –

Aggregate Deal Value Number of Deals (US$ in Millions) AGGREGATE DEAL VALUE (US$ IN BILLIONS NUMBER OF DEALS

$1,400.0 20 Transaction Value

Number of Deals $1,216.7 18 $1,200.0

$1,051.6 16

$1,000.0 14

12 $800.0

$637.0 10 $600.0 8 Stryker, 8% $411.1 $327.8 $400.0 6 $284.0 4 $200.0 $115.0 $129.7 2

$0.0 $0.0 0 2010 2011 2012 2013 2014 2015 2016 YTD '16 YTD '17 # of 2 4 1 8 15 12 5 3 0 Deals

Source: BTIG

Source: Data per SEC filings, Dealogic and BTIG Capital Markets as of September 30, 2017 9

year’s single largest outlier deal (the see what dealmaking will look like when $30.2 billion Abbott/St. Jude Medical “If this is what that money comes back.” acquisition in 2016 and the $25.7 billion Becton Dickinson/CR Bard deal in 2017), constitutes a chill On the other hand, in diagnostics, the total deal value of all other device in the M&A market, the year-to-date deal numbers have transactions more than doubled from dropped to eight this year, compared $13 billion to $28 billion (see Exhibit 3). I can’t wait to see with 14 through Q3 a year ago. And “I have heard commentary suggesting what dealmaking will in terms of total deal value, even ex- that we are experiencing a pause in the cluding last year’s big dx transaction— M&A market while officials are waiting look like when that the $9.1 billion Abbott/Alere acquisi- for tax reform to find out what is going money comes back," tion—year-to-date diagnostics M&A to happen with the repatriation of cash,” amounts to only $3 billion, compared Secrest says. “If this is what constitutes a Secrest says. with $13 billion in the same period last chill in the M&A market, I can’t wait to year (see Figure 4). Secrest suggests

Figure 2 – US Device and Diagnostic M&A: 2000 – 2017 YTD (through Sept. 30, 2017) Aggregate Deal Value Number of Deals (US$ in Billions) AGGREGATE DEAL VALUE (US$ IN BILLIONS NUMBER OF DEALS

$80 100 Transaction Value $73 Number of Deals 90 $70 $67 $66 $65 $63 80 $60 $56 70 $49 $50 $50 60

$40 50 $34 $29 $30 40 $30 $28 $26 $27 $25 $26 $22 $22 26 30 $20 $20 $19 $20 Stryker, 8% $16 $13 20 $12 $12 23 $10 $8 $6 10

$0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD '16 YTD '17 # of (1) (2) (3) (4) (5) (6) (6) (7) 43 51 45 48 62 77 83 91 57 42 59 48 46 41 45 58 44 37 37 Deals Source: SEC filings, company press releases, SDC, Wall Street Publications and FactSet as of September 30, 2017. Note: Only includes U.S. domiciled target deals with announced values greater than $20 million and only includes guaranteed payments (i.e., does not include performance-based earn-outs); includes selected highly relevant deals with targets based outside U.S. Note:(1) IncludesOnly approximatelyincludes U.S. $12.4 domiciled billion Thermo targetElectron/Fisher deals Scientific with merger announced and $11.4 billionvalues Biomet/Buyout greater consortiumthan $20 (Goldman million Sachs/KKR/TPG) and only acquisition.includes Break guaranteed in bar delineates payments transaction (i.e.,value excludingdoes not the ThermoincludeElectron/Fisher performance-based Scientific merger and earn-outs); Biomet/Buyout includesconsortium acquisition. selected (2) Includes December 16, 2010 Novartis/Alcon acquisition of approximately $40.7 billion. Break in bar delineates transaction value excluding the Novartis/Alcon acquisition. highly(3) relevantIncludes April deals 26, 2011 with Johnson targets & Johnson/ basedSynthes outsideacquisition U.S. of approximately $21.5 billion. Break in bar delineates transaction value excluding the J&J/Synthes acquisition. (1) (4) Includes Includes April 15,approximately 2013 Thermo Fisher/Life $12.4 Technologies billion acquisitionThermoElectron/Fisher of approximately $15.4 billion. Scientific Break in barmerger delineates and transaction $11.4 value billion excluding Biomet/Buyout the Thermo Fisher/Life consortium Technologies acquisition. (Goldman Sachs/KKR/TPG) (5) Includes Becton, Dickinson/CareFusion acquisition of approximately $12.1 billion, Merck KGaA/Sigma-Aldrich acquisition of approximately $17.0 billion, and Zimmer/Biomet acquisition of approximately $13.3 billion. Break in bar delineates transaction value excluding those three deals. (6) Includes acquisition. Abbott/St. BreakJude Medical in bar acquisition delineates of approximately transaction $30.2 billion value and Abbott/ excludingAlere acquisition the ThermoElectron/Fisher of approximately $9.1 billion. Break Scientific in bar delineates merger transaction and value Biomet/Buyout excluding the Abbott/St. consortium Jude Medical an acquisition.d Abbott/Alere acquisitions. (2) (7) Includes Includes Becton, December Dickinson/C.R. 16, Bard 2010acquisition Novartis/Alcon of approximately $25.7 acquisition billion. Break in of bar approximately delineates transaction $40.7 value ex clubillion.ding the Break Becton, Dickinson/C.R. in bar delineates Bard acquisition. transaction value excluding the Novartis/ Alcon acquisition. (3) Includes April 26, 2011 Johnson & Johnson/Synthesacquisition of approximately $21.5 billion. Break in bar delineates transaction value excluding the J&J/Synthes acquisition. 4 (4) Includes April 15, 2013 ThermoFisher/Life Technologies acquisition of approximately $15.4 billion. Break in bar delineates transaction value excluding the ThermoFisher/Life Technologies acquisition. (5) Includes Becton, Dickinson/CareFusion acquisition of approximately $12.1 billion, Merck KGaA/Sigma-Aldrich acquisition of approximately $17.0 billion, and Zimmer/Biomet acquisition of approximately $13.3 billion. Break in bar delineates transaction value excluding those three deals. (6) Includes Abbott/St. Jude Medical acquisition of approximately $30.2 billion and Abbott/Alereacquisition of approximately $9.1 billion. Break in bar delineates transaction value excluding the Abbott/St. Jude Medical and Abbott/Alereacquisitions. (7) Includes Becton exIncludes Becton, Dickinson/C.R. Bard acquisition of approximately $25.7 billion. Break in bar delineates transaction value ex Includes Becton, Dickinson/C.R. Bard acquisition. Source: BTIG

DECEMBER 12, 2017 20 Q3 FINANCING WRAP-UP

that this may be the “new normal” for The string of billion-dollar-plus deals the immediate future in diagnostics, “There is a somewhat in medtech continued in Q3, with three largely the result of several previously limited list of acquirers such transactions led by Fresenius’s active acquirers being taken out them- in diagnostics, and that $2.1 billion acquisition of NxStage Med- selves through acquisitions, most no- ical (dialysis), as well as CooperSurgi- tably Life Technologies, which was ac- list has gotten smaller cal’s deal for Teva’s Paragard intrauter- quired by Thermo Fisher Scientific. In over the past decade. ine device, and Teleflex’s purchase of his view, “There is a somewhat limited So with fewer acquirers, NeoTract (urology/treatment for BPH), list of acquirers in diagnostics, and that both of which were valued around $1.1 list has gotten smaller over the past we’re probably looking billion. Secrest admits to being some- decade. So with fewer acquirers, we’re at fewer deals.” what surprised that both NxStage and probably looking at fewer deals.” NeoTract were taken out at this time —Mark Secrest since he says both companies appeared to have considerable runways for growth. He points to Figure 3 NeoTract in particular as an example of how the US Device M&A: 2000 – 2017 YTD (through Sept. 30, 2017) strong medtech M&A – AGGREGATE DEAL VALUE (US$ IN BILLIONS NUMBER OF DEALS market may be partially Aggregate Deal Value Number of Deals (US$ in Billions) responsible for the lack

$60 60 of IPOs. Secrest suggests Transaction Value $55 that “NeoTract could $54 Number of Deals have become a public $49 $50 50 company, but chose to $43 be acquired following $40 $40 40 an aggressive move by Teleflex.” $33 $32 $28 $30 $28 30 The NeoTract deal $24 marks the second con- $19 $20 20 secutive year that $17 $17 $15 $14 $14 Teleflex has done a bil- $13 $12 lion-dollar acquisition, $9 $9 $9 $10 $8 $8 10 $6 having acquired Vascu- $4 $3 Stryker, 8% lar Solutions in 2016. In

$0 0 Secrest’s view, Teleflex 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD '16 YTD '17 needs to maintain this # of (1) (2) (3) (4) (5) (5) (6) 25 33 28 29 46 47 57 60 40 30 44 31 32 27 26 45 29 23 29 Deals aggressive strategy in Source: SEC filings, company press releases, SDC, Wall Street Publications and FactSet as of September 30, 2017. Note: Only includes U.S. domiciled target deals with announced values greater than $20 million and only includes guaranteed payments (i.e., does not include performance-based earn-outs). Excludes diagnostics, molecular diagnostics and life science tools companies. (1) Includes approximately $11.4 billion Biomet/Buyout consortium (Goldman Sachs/KKR/TPG) acquisition. Break in bar delineates transaction value excluding the Biomet/Buyout consortium acquisition. (2) Includes December 16, 2010 Novartis/Alcon acquisition of approximately $40.7 billion. Break in bar delineates transaction value excluding the Novartis/Alcon acquisition. order to compete in the (3) Includes April 26, 2011 Johnson & Johnson/Synthes acquisition of approximately $21.5 billion. Break in bar delineates transaction value excluding the J&J/Synthes acquisition. (4)Note:Includes Only Becton, includes Dickinson/CareFusion U.S. ($12.1 domiciled billion) and Zimmer/Biomet target deals ($13.3 billion). with Break announced in bar delineates transactionvalues val greaterue excluding thosethan deals. $20 Excludes million Medtronic’s and $43.0B only acquisition includes of Covidien (classifiedguaranteed as a foreign target).payments (i.e., does not include (5) Includes Abbott/St. Jude Medical acquisition of approximately $30.2 billion. Break in bar delineates transaction value excluding the Abbott/St. Jude Medical acquisition. evolving hospital mar- (6)performance-basedIncludes Becton, Dickinson/C.R. earn-outs); Bard acquisition of approximatelyincludes $25.7 selected billion. Break highly in bar delineates relevant transaction deals value ex cluwithding the targets Becton, Dickinson/C.R. based Bard outside acquisition. U.S. (1) Includes approximately $11.4 billion Biomet/Buyout consortium (Goldman Sachs/KKR/TPG) acquisition. Break in bar delineates transaction value 5 ket. “They really have no excluding the Biomet/Buyout consortium. (2) Includes December 16, 2010 Novartis/Alcon acquisition of approximately $40.7 billion. Break in bar delineates transaction value excluding the Novartis/ choice but to continue Alcon acquisition. to get bigger. In terms (3) Includes December 26, 2010 Johnson & Johnson/Synthes acquisition of approximately $21.5 billion. Break in bar delineates transaction value excluding the J & J /Synthes acquisition. of their presence in the (4) Includes BEcton, Dickingson/CareFusion ($12.1 billion) and Zimmer/Bioment ($13.3 billion. Break in bar delineates transaction value excluding those hospital, they have to deals. Excludes Medtronic’s $43.08 acquisition of Covidien (classified as a foreign target). (5) Includes Abbott/St. Jude Medical acquisition of approximately $32.2 billion. Break in bar delineates transaction value excluding Abbott/St. Jude Medical keep acquiring because acquision. their primary competi- (6) Includes Becton, Dickinson/C.R. Bard acquisition of apporximately $25.7 billion. Break in bar delineates transaction value excluding the Becton, Dickingson/ tors keep getting big- C.R. Bard acquision. ger, and Teleflex has to Source: BTIG

maintain a comprehensive suite of nal otherwise. He points to OrthoPe- However, Secrest acknowledges that, products so that they can bundle and diatrics as an example of the type of as each quarter passes with little or continue to be competitive in terms company that, up to this point, has no medtech IPO activity, the question of pricing,” he says. Secrest describes successfully gone public and was well of whether the industry has a supply Teleflex as “a very disciplined, practi- received by the market. problem, i.e., a paucity of viable IPO cal acquirer that is not afraid to pay candidates, looms larger. He steadfast- aggressive multiples.” At this point, Secrest expects companies looking to go public to wait ly maintains, however, that this is not the case: “I think every company is an IPOs: until the first quarter of next year, when he anticipates—as he and oth- individual story as to what valuation Wait Until Next Year ers have previously predicted—that expectations or internal milestones When it comes to the public mar- the window for medtech will re- they are looking to reach before going ket for medtech, however, Secrest’s open. “I believe that investors will public, but the device industry has no advice is to wait until next year. In a be attracted to companies with good shortage of companies that the mar- bit of a spoiler alert (since this is a Q3 stories and good prospects,” he says. ket will welcome.” wrap-up), there was a medtech IPO in the fourth quarter with OrthoPediatrics (pe- Figure 4 diatric orthopedics) US DX M&A: – 2000 – 2017 YTD (through Sept. 30, 2017) going out in October. Aggregate Deal Value Number of Deals AGGREGATE DEAL VALUE (US$ IN BILLIONS NUMBER OF DEALS But Secrest does not (US$ in Billions) expect that transaction $40 40 to spark more deals. Transaction Value

Number of Deals “We haven’t had a De- $35 $34 35 cember medtech IPO since the early 2000s,” $30 30 he recalls, and doesn’t $26 expect that this year $25 $24 25 $22 will buck the trend. $21 That said and with- $20 $19 20 $17 out trying to draw too $16 $15 much from an “n” of $15 $13 15 one, OrthoPediatrics $11 $11 $10 $9 10 priced in the middle of $8 $7 the company’s range, $5 $5 $5 $4 $4 5 was up 40% on the first $3 $3 $3 $3 $3 day of trading, and has $0 - maintained its value. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Stryker,2011 2012 8% 2013 2014 2015 2016 YTD '16 YTD '17 of (1) (2) (3) (4) (4) 30 3 4 4 3 4 eals Secrest shares the

ource EC filings coan ress releases C all treet ulications and actet as of eteer 30 0. frustration that many in ote nl includes .. doiciled target deals ith announced values greater than $0 illion and onl includes guaranteed aents (i.e. does not include erforanceased earnouts). nl includes diagnostics olecular diagnostics and life science tools coanies. () ncludes aroxiatel $.4 illion hero Electronisher cientific erger. Brea in ar delineates transaction value excluding the hero Electronisher cientific erger. Note:() ncludes Only hero includesisherife echnologies U.S. domiciled acquisition of aroxiatel target deals $.4 illion. with Brea announced in ar delineates transaction values value greater excluding the than hero $20isherife million echnologies and acquisition. only includes guaranteed payments (i.e., does not include the industry feel for the performance-based(3) ncludes Merc aiga earn-outs);ldrich acquisition of includes aroxiatel selected$.0 illion. Brea highly in ar delineates relevant transaction deals value with excluding targets the iga ldrichbasedMerc outside a acquisition. U.S. (4) ncludes ottlere acquisition of aroxiatel $. illion. Brea in ar delineates transaction value excluding the ottlere acquisition. lack of a public market (1) Includes approximately $12.4 billion Thermo Electron/Fisher Scientific merger. Break in bar delineates transaction value excluding the Thermo Electron/ 6 Fisher Scientific merger. at a time when many (2) Includes Thermo Fisher/Life Technologies acquision of approximately $15.4 billion. Break in bar delineates transaction value excluding the Thermo Fisher/ of the traditional indi- Life Technologies acquision. (3) Includes Merck KGaA/Sigma-Aldrich acquision of approximately $17.0 billion. Break in bar delineates transaction value excluding the Sigma-Aldrich/ cators (e.g., robust fol- Merck KGaA/ acquision. low-on offerings, con- (4) Includes Abbott/Alere acquision of approximately $9.1 billion. Break in bar delineates transaction value excluding the Abbott/Alere acquisition. vertible securities, and valuations) would sig- Source: BTIG

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At NASS, Technologies March On —and so does Value-based Medicine

by KEY POINTS WENDY DILLER

n Innovations in robotics, expandable cages and surgical navigation attracted a lot of interest at NASS, as more competitors enter these fields. Surgeons, Wall Street analysts, and industry view NASS, the annual meeting of the North American Spine Society, as a prime oppor- n The MedTech Strategist caught up tunity for gauging the health of the spine industry. The consensus is with Mazor Robotics at NASS, which, that those organizations best equipped to weather the turbulence with cash from Medtronic, which has of the current healthcare market and the likelihood of its slow tran- taken over full commercialization of sition to value-based care will have broad, differentiated portfolios. Mazor X, Mazor’s latest generation In this climate, mid-sized players and small companies lacking in- robot system, is now working on its novation are at risk, as contracts sweep across product categories. next stage of innovative products. Key innovations showcased at NASS this year--surgical navigation and visualization, expandable cages, 3D printing, and robotics—were n At the meeting, expandable inter- all positioned to address these demands. In addition, NASS featured body fusion devices were touted as new tools and techniques—such as expandable interbody cages— one of the most vibrant sub-sectors that are helping some surgeons push the frontiers of endoscopic sur- of the spine surgery implant market, gery, traditionally controversial but now moving more mainstream, because of their ability to gain trac- particularly overseas. The goal for proponents of the newer technol- tion with surgeons and ultimately ogies is to move some hospital procedures to the outpatient realm, payors. This segment could be an and offer faster recovery and better long-term outcomes for patients. exemplar for companies on how to navigate innovative products through Despite the talk from the podiums and hallways of NASS, value- increasingly complicated healthcare based care is still in its infancy at many levels of the industry, and dynamics. its impact on innovation is hard to gauge. Some companies see the transition to value as a core, long-term driver of innovation while n Value-Based Care continues to others remain opportunistic and focused on near-term returns. be a frequent subject of discussion, but in spine, this model remains in its Analysts, for their part, felt NASS conveyed few definitive insights infancy. into concerns about the slowdown in spine procedure growth in the first three quarters of 2017. Initially flagged this summer NuVasiveby

Inc. CEO Greg Lucier, Wall Street pounced on the unexpected At NASS, the highlight of Zimmer’s offerings centered on speed bump as a sector overhang, and was hard-pressed long-term data around the side effect profile of its best-per- to identify its causes. (See “First-Half Results: Is Softening in forming cervical disc replacement (CDR), which centers on Spine a Bellwether of Things to Come?” The MedTech Strate- the Mobi-C cervical disc prosthesis, approved in the US for gist, August 31, 2017.) In a post-meeting note, Canaccord ana- both 1 and 2 levels to treat severe pain in the neck or arm lyst Kyle Rose estimated a growth rate of 1% or less for 2017, caused by certain spinal disorders or injuries. (See “Cervical a decline from recent year-on-year trends in the 2-4% range, Spine Market: After Years of Effort, LDR Sees Payoff Ahead,” and speculated that a mix of factors is at the heart of the prob- The MedTech Strategist, June 19, 2015.) A presentation at lem: pricing pressures (in the net 1-2% range); reimbursement NASS on the clinical implications of heterotopic ossification (varies regionally, more prior authorizations to crack down on (HO), a severe side effect that causes bone formation in non- wasteful procedures); and increasingly, seasonality. Some ex- skeletal tissues post hip surgery, demonstrated that seven ecutives reported more procedures moving into the fourth years following Mobi-C surgery, total CDR clinical outcomes quarter, but data is still out. were unchanged with clinically relevant HO. The study was the largest to date to report HO rates, as well as related out- NuVasive management expects a flat to slightly down comes and risk factors. growth rate in the US in the fourth quarter, signaling that the downturn is plateauing, without a significant seasonal- Indeed, the company is betting heavily on its CDR business, ity rebound, suggesting that the earlier softening was due which became part of its portfolio when it bought French to payor pushback and high-deductible plans pushing pro- medtech LDR Holding for nearly $1 billion in 2016. CDR is one cedures out later in the year. Lucier observes that surgeons of its three strategic pillars of growth for Zimmer Biomet—the are learning to better manage payors, and believes that new others are deformity and surgical robotics—and currently the financing options will emerge for cash-strapped patients, ac- only one that is currently outperforming the market. cording to analyst Richard Newitter of Leerink. In a recent write up, he observed that Lucier does not “believe the Also on display at NASS was Zimmer’s Rosa One Platform, industry is under assault,” although the CEO predicts that a neurosurgical robot that became part of its portfolio when increasing vendor consolidation is on the horizon as buyer it acquired Medtech, a French robotics company, also in trends favor large players and put smaller companies at risk. 2016. That deal was much smaller than the LDR acquisition and for a non-material price that has not been made public; Heterotopic Ossification Data for the product is also at an earlier stage of commercialization. Zimmer Biomet is selling the system for neurosurgery appli- Zimmer Biomet’s Mobi-C cations, and while it also has FDA approval for use in spine That said, these pressures have been ongoing for a while, surgery, it is not currently sold for that application. An inte- and the question of why the spine industry remains frag- grated neuro and spine system is expected to be introduced mented, even as other sectors of orthopedics have con- in 2018, a Zimmer Biomet spokesman said. solidated, remains unanswered. Johnson & Johnson and Zimmer Biomet Holdings Inc. can certainly attest to the For Zimmer Biomet, value-based care means working to tribulations that accompany large-scale M&A in this field; make all aspects of surgical procedures more efficient, -of both suffered sales force disruption and a loss of momentum fering, for example, streamlined instrument kits such as the and market share in the wake of large acquisitions. In J&J’s Vital Spinal Fixation system, which cuts the number of trays case, it is just now regaining momentum years after acquir- from 18 to two. This also includes increasing the profile of its ing DePuy, while Zimmer Biomet is still working to right the Signature Solutions consulting arm in spine to get involved ship following a merger in 2015. earlier in treatment with other surgeons and patients, including pre- and post-operative planning and monitoring. This year has shown little relief, as Zimmer CEO David Dvor- (See “Zimmer Biomet: Using Digital Technologies to Drive ak departed in July, and FDA manufacturing issues reared Value Across the Episode of Care,” The MedTech Strategist, their head at the company’s Warsaw, Indiana campus, where December 22, 2016.) it manufactures total joint implants. The latter has not af- fected its spine business, which it has fully integrated since What’s Next for Mazor Robotics? closing the merger. Even so, the spine business has under- The value-play in robotics for spine is still controversial, performed expectations in 2017, Zimmer Biomet’s acting but companies in increasing numbers see it as ultimately im- CEO Daniel Florin told analysts on the third quarter earnings perative for their portfolios. If Zimmer Biomet is just enter- call in November, which he attributed to “dis-synergies relat- ing spine robotics, Mazor Robotics, the pioneer in the field, ed to the commercial integration of our US spine sales force. is coming into its own. We are working diligently to mitigate these disruptions and to enable optimal cross-selling through increased training The 2016 deal between Mazor Robotics and Medtronic, and investments into working capital.” which put Medtronic’s deep resources behind a small pio-

DECEMBER 16, 2017 26 SPINE

neer in the field, as well as Globus Medical’s launch this year While the tiered deal between Mazor Robotics and Medtron- of its ExcelsiusGPS Robotic system, should provide more in- ic has been in place for more than a year, Medtronic only re- sight into clinicians’ appetite for expensive technology with cently (September 2017) gained full exclusive global rights to narrow applications. (See “Mazor Robotics Bets on Million- market Mazor X, Mazor’s next-generation robotics system for Dollar Spine Robots,” The MedTech Strategist, February 13, spine, and Mazor is beginning to feel the full impact of the deal. 2015.) Medtronic is now responsible for training and education of surgeons, as well as global sales of both capital equipment and The ExcelsiusGPS received FDA clearance in August and disposables. Now that it has relinquished market control over provides intraoperative automated navigation capabilities its most promising product, Mazor must re-direct its energies. that are used in the placement of pedicle screws and nails in trauma and spine surgeries. With a long sales cycle—Globus The company continues to service Mazor X customers and management estimates six to nine months—it is likely to be to market the Renaissance, a more limited earlier generation at least a year before the company reports meaningful sales, robotic system which it launched in 2011, and which strug- says Canaccord’s Rose. gled to gain broad traction. The partners haven’t stated their projected goals for placements or sales, but about 30 Mazor Although the ExcelsiusGPS is its first strong competition, employees joined Medtronic’s commercial and clinical sup- Mazor will continue to dominate the spine robotics market. port teams this fall to support the scale up. Initial uptake of Mazor’s first spine robotic system, the Re- naissance, was slow, even as the company worked for years The Renaissance will help to fill a gap in the market as a lower on a more sophisticated technology platform. Medtronic’s cost alternative to Mazor X for small hospitals and outpatient tranched infusion of $72 million in cash to date (in exchange clinics. With more than 100 systems in place globally, it has for an equity stake), as well as its sweeping and global market- been used in more than 20,000 surgeries and is still the coming channels, and breadth of complementary technologies, pany’s workhorse, with a devoted following, according to CMO such as its O-arm and navigation tools, appear to be chang- Doron Dinstein, MD, in an interview at NASS, but “there’s a cer- ing that trajectory, although the degree to which the partners tain glass ceiling that we’re not going to be able to penetrate can increase the adoption of robotics in spine remains to be with the Renaissance.” Interim data from the MIS ReFRESH seen. In the third quarter of 2017 alone, Mazor sold 22 robot- study, the first ever prospective study of robotic guided surgery ic systems, including 19 Mazor Xs, of which 11 are meant for using the Mazor Renaissance showed that patients in the non- Medtronic. The Israeli company’s sales for the quarter were robotic arm were 5.3 times more likely to experience adverse $17.2 million, up 126%. events and 7.1 times more likely to undergo revision surgery when compared to the Mazor Renaissance cohort. If Medtronic’s involvement has been a big boon for Mazor, with more to come if Medtronic exercises up to $53 million in In addition, at NASS, Mazor highlighted its newly branded warrants, such support is also a double-edged sword. With its Mazor Core, a portfolio of the four key, IP-protected tech- most promising product now under Medtronic’s control, what nologies that form the basis of its current robotics systems is Mazor’s next act? (to which Medtronic does not have rights). Mazor Core consists of what Dinstein describes as ‘active software,’ which enables Figure 1 recognition of specific anatomy, in- Interbody Device Market Breakdown, US 2016 cluding features of each specific ver- tebra, and shifts in position. Thus, the technology can break down a pre-operative CT into individual vertebrae and reconstitute them as the position of the patient changes without the need to retake an im- age. The biomechanical logic built into the platform can identify - flex ibility and rigidity in the spine, which allows surgeons to better plan their procedures, Dinstein said. Also included in Mazor Core are patented patient connection platforms, which differ from commer- Source: iData Research Inc. Stryker, 8% cially available navigation systems

THE MEDTECH STRATEGIST © 2017 Innovation In Medtech, LLC. All rights reserved. SPINE 27 that ‘track’ but do not connect with patients because of the of this subsector both drives and is driven by the increasing use accuracy with which they capture patient motion. Navigation of less invasive and minimally invasive surgery (MIS), which systems “look at motion essentially on a single plane, but pa- now accounts for roughly 30% of spine procedures. tient motion occurs in three dimensional space. And we are connecting with patients, not tracking them.” In addition, expandable cages are making it easier to do endoscopic surgery and could help to fuel expansion of what Mazor is now applying Mazor Core to platforms and applica- is a very select niche in the spine surgeon armamentarium— tions it has in development, which it isn’t ready to disclose. at least that is what proponents of endoscopic surgery “Mazor’s vision is healing through innovating and I can prom- hope. In a session on endoscopic surgery—one of the first ise you that we will continue to innovate,” said Dinstein. ever held at NASS—Chris Yeung, MD, a thought leader in the field, pointed to an “explosion of expandable implants” Beating Pricing Pressure: Expandable that allow surgeons to take “a ship-in-a-bottle” approach to surgery. While most expandable devices are designed for Cages MIS or open procedures because of the size of the implants, Expandable interbody fusion devices represent one of the some offerings from DePuy and Globus are truly percutane- most vibrant sub-sectors of the spine surgery implant market, ous due to specialized cannula systems. and multiple companies put them on display at NASS. The ability of these devices to gain traction with surgeons—and ulti- The key advantages of these over traditional static inter- mately payors—could make this product category an exemplar body spacers are less collateral damage to tissue, including for other companies attempting to navigate innovative prod- preservation of nerve roots in the intervertebral space and ucts through increasingly complicated healthcare dynamics. the vertebral bodies, resistance to disk migration, and improved fit. These devices also eliminate the need for the ad- Expandable interbody fusion devices can be inserted via a ditional instrumentation that is required in traditional fixation small incision, and once inside the intervertebral space, they procedures. Such benefits enable manufacturers to command can expand to conform better to the patient’s anatomy. Growth premium pricing for expandables over traditional cages.

Figure 2 Interbody Device Market by Segment, US, 2013-2023

Stryker, 8%

Source: iData Research Inc.

DECEMBER 16, 2017 28 SPINE

Expandable interbody fusion devices currently make up companies with expandable cages designed specifically for about a quarter of the total US market for spinal interbody endoscopic surgery. Meanwhile, NuVasive, K2M and smaller cages (not including MIS and LLIF [lateral lumbar interbody players are coming in with claims of better biomaterials that fusion]), but are growing at a faster-than market average- improve bone growth and speed up healing at lower costs. rate, albeit off a small base. According to iDataResearch, in 2016, the US expandable interbody fusion device mar- The vast majority of these devices are made of PEEK ma- ket was valued at over $280 million, a 15% increase over terial; only 15% of the devices are made of metal. Titanium 2015, and it is projected to reach more than $520 million coating, which is increasingly popular for interbody cages, is by 2023. Unit sales growth is expected to mirror market also used for some expandable cages, such as Globus Medi- growth. While iDataResearch hasn’t completed projections cal’s RISE cage. K2M has a hybrid 3D-machine-made expand- for 2017, historically, it says the US interbody cage market able cage, with one 3D printed component. produces 70-80% of the global market value for these de- Emerging Implant Technologies (EIT), a four-year-old Ger- vices (see Figures 1 & 2). man startup, for example, is betting that a living hinge tech- Since their introduction in the mid-2000s, expandable nology it in-licensed from Tennessee spine surgeon Morgan interbody devices have been approved for use in anterior Lorio, MD, will give it a leg up in 3D printed expandable cages lumbar interbody fusion [ALIF]; posterior lumbar interbody for spinal fusion. Current expandable cages often have “com- fusion [PLIF]; transforaminal lumbar interbody fusion [TLIF], plex designs consisting of multiple components that are -ex and cervical interbody fusion procedures, with PLIF and TLIF pensive to manufacture and are very difficult to remove if procedures the most common. iData projects that traditional they fail. This is why they are not being used for all spinal fu- static interbody markets for the ALIF and PLIF procedures in sions,” says Guntmar Eisen, CEO and co-founder of the com- particular will be heavily cannibalized by the expandable in- pany. (See “Emerging Implant Technologies,” The MedTech terbody devices. Strategist, March 18, 2017). Living hinges cannot be manufactured with traditional manufacturing methods, so the For these reasons, more companies are moving into the technology has not been used for spinal fusion implants so space. While Spine Wave Inc. was a pioneer when it intro- far (see Figure 3). duced the StaXx nearly a decade ago, it has slipped under the radar, as larger competitors have come into the fray. The Traditional expandable cage designs generally consist of recognized pioneer in this field is Globus Medical, which has multiple parts and complex mechanisms, but 3D printing en- completed over 120,000 surgeries to-date across 20 differ- ables the creation of designs that can’t be manufactured by ent implant systems. Now on a third-generation technology, conventional processes, he explains. The patented technol- it has a significant head start and a product line that covers ogy designed by Lorio enables construction of a one-part ex- all major applications; it and J&J are the only major spine pandable titanium fusion cage that consists of multiple integrated hinges. It is printed in one piece without any assembly and related cost. Graft- ing is possible through Figure 3 the insertion tool. Interbody Device Market Breakdown, US 2016 The first product, for a lateral lumbar cage, is currently in testing and will be launched globally in 2018. “The technology can be broadly applied to all approaches and re- gions of the spine,” says Eisen, who adds that because of the lower costs of the device, payors will also be interested. He adds, “The surgeon, at the end of the day, does not care how you manu- Stryker, 8% facture—he or she wants a superior product and Source: iData Research Inc. better pricing.”

Worldwide Registration of Medical Devices

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kno-1705-006_az_MEDTech Strategist_Medical Devices_rz.indd 1 12.05.17 11:45 30 DES MARKET UPDATE

US DES Market Braces for New Entrants, More Pricing Pressures The US coronary drug-eluting stent (DES) market will see the entry of one, by and possibly two, new competitors in the coming months and the impact is MARY THOMPSON expected to drive further pricing pressures in a space that has been bending to commoditization for some time now.

In late November, Israeli stent maker, Medinol Ltd., gaining access to several vascular interventional products. and its exclusive US coronary stent distribution partner, However, J&J/Cordis, an early pioneer in the field of DES, Cordis, part of Cardinal Health Inc., announced that FDA had by then already exited the DES arena (in 2011) due to had approved Medinol’s EluNIR DES; the device was ap- competitive pressures and unfavorable market conditions. proved for sale in Europe a month earlier. According to (See “J&J’s Cordis Divestiture Hints at Changes to Come in the companies, EluNIR, the first elastomer-coated DES, Medtech,” The MedTech Strategist, March 30, 2015.) The is designed to optimize flexibility and deliverability, with US launch of EluNIR will mark Cordis’ re-entry into the DES a novel metallic spring tip and the narrowest strut thick- market, but ironically, as a distributor rather than an inno- ness of any stent on the US market (40µm). In the piv- vator. The fact that medical products distributor Cardinal otal, randomized BIONICS trial, EluNIR was compared Health is entering the space at all illustrates the extent to head-to-head with Medtronic plc’s Resolute DES and which the DES market has undergone commoditization demonstrated similar clinical results at 12-months, with over the past decade. Cardinal, which of late has been a target lesion failure (TLF) rate of 5.4% for both devices actively seeking to bolster its coronary cath-lab offerings and a stent thrombosis rate of 0.4% for EluNIR and 0.8% through distribution deals, also distributes Medinol’s for Resolute. Those out- NIRxcell cobalt-chromium comes virtually ensure bare-metal coronary stent Figure 1 EluNIR a competitive in the US as well as Tryton spot in the US market- S DES Mt 2017 R Mt S Medical Inc.’s Tryton Side place, although Cardinal S Branch Stent. The Tryton Health/Cordis’ current device was FDA approved “modest presence” in this past March and is the the cath lab means that first US-approved coro- the device’s ultimate nary stent designed spe- market success will hinge M cifically for bifurcation le- on pricing, according to sions. Larry Biegelsen, an ana- Scientiﬁc lyst with Wells Fargo Se- Medinol has a long his- curities. tory in the DES space (the Abbott company had a longstand- In 2015, Cardinal Health ing IP dispute with Boston made a big play in the in- Scientific Corp. over that terventional device -mar firm’s Taxus DES), but it ket through its $1.6 bil- is far from the only OUS- lion purchase of Johnson *as of Q3 based company seeking to & Johnson’s Cordis unit— Source: Larry Biegelsen, Wells Fargo Securities enter the US DES market.

In fact, EluNIR’s US launch is likely to soon be followed Synergy DES. Synergy, which offers ultra-thin struts (74- by the entry of an even more formidable competitor, 81 µm, depending on stent size) and is the first (and Biotronik Inc.’s Orsiro DES, which is expected to receive so-far only) US-approved DES with a resorbable drug- FDA approval sometime in Q2 2018. Biotronik, which elution polymer, is designed for improved safety and is headquartered in Germany with US deliverability and has demonstrated ex- operations near Portland, OR, has little cellent clinical outcomes to date. As a presence in US cardiac cath labs today result, Synergy has carved out an admi- (it is best known as a supplier of cardiac New entrants rable 28% share of the US DES market, rhythm management devices, such as according to Biegelsen, bringing Boston implantable defibrillators and pacemak- could capture Scientific’s total US share in Q4 2017 to ers), and that will make DES market pen- 10% of the US DES an estimated 44% of the market, eclips- etration more difficult for the company, ing former market leader Abbott Vascu- Biegelsen points out. However, Orsiro’s market by 2019. lar, now virtually tied with Medtronic attributes, combined with a price incen- for the remainder (see Figure 1). How- tive, could enable it to carve out mea- ever, the entry of Biotronik’s Orsiro next sureable US share. Orsiro has a resorb- year will ratchet-up the pricing pressure able drug-elution polymer (a resorbable on Synergy, with Orsiro likely taking polymer that disappears after the drug is delivered is some share from Synergy in the process. According to considered by many to be safer than a durable polymer, Biegelsen, Orsiro currently holds about a 7% share of which can elicit an immune response), and it is the first the European DES market (the device was CE marked new DES to demonstrate superiority in a large, random- in 2011); he expects Orsiro and EluNIR, combined, to ized head-to-head trial (albeit, according to a post- capture 5% and 10% of the US market in 2018 and hoc analysis) over Abbott’s Xience device—long a top 2019, respectively, and Boston Scientific, Abbott, and performer in this field. (Biotronik is also developing a Medtronic could all feel the effects to some degree. polymer-free DES—a first-in-human trial of that device began in late September—and a magnesium-based, Although Boston Scientific has definitely benefitted in completely bioresorbable terms of market share from the money it poured into drug-eluting coronary scaffold—Magmaris, on the Figure 2 market in Europe—that the company says has proven S DES Mt t P R T, 2012022E safer than PLLA polymer- based resorbable scaffolds.) 1,327M 1,331M 1,22M 1,25M 1,16M EluNIR and Orsiro are ex- 1,10M 1,05M pected to add to the pricing 1,001M 1,261 50M pressure already impacting Average Sales Price ($)* 1,1 the US DES market, which 1,116 has been experiencing de- 1,06 clining revenues for the 0 past several years due pri- 31 Sales Revenue ($M) 5 marily to steady unit price 0 declines. That’s not to say 7 that investments in DES innovation can’t still pay off. Boston Scientific, for- ex 201 2015 2016 2017E 201E 201E 2020E 2021E 2022E ample, has gained signifi- Sales Growth -- 0.3 -2. -3.6 -6.2 -5.1 -. -5.0 -5.1 cant US market share over Price Change -- -5 -7 -6 -6 -5 -5 -5 -5 the past two years since the late 2015 launch of its next- *price as of Q for each year generation, premium-priced Sources: Larry Biegelsen, Wells Fargo Securities; The MedTech Strategist

DECEMBER 16, 2017 32 DES MARKET UPDATE

innovating the Synergy stent, the overall DES market re- and/or product bundling deals, will new DES technology mains under pressure (DES account for about 95% of the innovation continue to be funded going forward? coronary stents placed in the US). Biegelsen expects pricing pressures to drive a DES sales revenue decline of 3.6% That is a particularly dicey topic when it comes to this year and 6.2% the next (see Figure 2). And with no completely bioresorbable DES (also called bioresorbable turnaround in sight (the market is expected to continue scaffolds), still considered by some thought-leaders to to decline at about 5% per year, on average, through at represent the future of DES. Given the now well-recog- least 2022), the big question is, with the available devices nized difficulty of developing a resorbable drug-eluting now reaching virtual parity in terms of performance, and scaffold that is both safe and deliverable—based on Ab- market success in this space increasingly tied to pricing bott’s recent experience with its first-generation Absorb Bioresorbable Vascular Scaf- fold, which was pulled from the market earlier this year after serious safety concerns cropped up (the decision was based on low sales, the firm said)—it is likely that future investments into bioresorbable DES will be curtailed, or at least face increased scruti- ny. (See “Hot Topics in Cardi- ology: Bioresorbable Stents,” The MedTech Strategist, July 29, 2016.) Although Abbott has said it will continue to work on a second-generation bioresorbable device, and Biotronik has its own bioresorbable scaffold on the market in Europe, in July of this year, Boston Scientific made public its intentions to shelve its Renuvia bioresorbable DES development program. Against that backdrop, it is only natural to question the future prospects of the smaller competitors still - at tempting to innovate in this field. (Also see “Technologies to Watch in 2017. Bioresorb- able Stents: Are They Worth the Cost and Effort?” The MedTech Strategist, February 24, 2017; and “At EuroPCR, Innovation Overload…and a Possible Endgame,” The MedTech Strategist, May 31, 2017.) With bioresorbable scaffolds now on the back-burner, it’s looking more and more

like stents such as Synergy that are coated with resorb- cal coherence tomography showed statistically lower able drug-elution polymers will dominate the DES market obstruction volume and area in the MiStent patients, in the near-term, and that’s where much of the current in- suggesting the device may reduce the need for reinter- novation efforts are focused. The hope is that by reducing vention down the road (although definitively proving polymer exposure, these devices will be safer and will also such an advantage over directly competitive devices us- improve the durability of the stenting procedure (i.e., re- ing clinical endpoints would likely be a formidable task). duce late restenosis), which is a particular concern when MiStent is CE marked and distributed exclusively by treating complex, high-risk patients. STENTYS worldwide (with the exception of the US, Can- ada, China, South Korea, and Japan). The company has Synergy Orsiro In addition to and , there are a num- not yet begun US clinical trials. ber of such devices making their way through the pipeline. One in particular that deserves men- tion is the MiStent Siroli- START YOUR mus Eluting Absorbable Polymer Coronary Stent SUBSCRIPTION TODAY! System from Micell Tech- nologies Inc., based in Dur- ham, NC. MiStent is an ultra-thin strut (64 µm) stent Insights that fuel your coated with drug in micro- company’s growth crystalline form (via a proprietary supercritical fluid technology) combined with Superior content backed a fast-dissolving polymer; it was proven noninferior to by a writing team with Xience in a 1,400-patient, unparalleled industry randomized, all-comers trial (DESSOLVE III) published experience recently in The Lancet. According to the com- A level of coverage of pany, the MiStent drug the device marketplace coating technology “allows for a near linear re- broader and deeper than lease” of drug, rather than any other source the typical uncontrolled burst. This sustained release delivers “therapeu- tic drug levels well beyond the time it takes for the polymer to be absorbed,” the firm says, thereby pro- longing the anti-restenotic effect while significantly DON’T Kristy J. Kennedy reducing the potential for MISS OUT [email protected] an inflammatory response Bridget Kelly-Stoll to the polymer. Of par- ON ANOTHER [email protected] ticular note, a sub-study of the DESSOLVE III trial ISSUE! 888-202-5939 that looked at neointi- mal hyperplasia on opti- MedTechStrategist.com

DECEMBER 16, 2017 34 MEDTECH INVESTMENT TRENDS

by Early-Stage Deals STEPHEN LEVIN Attract New Investors to Emerging Sectors, While CV Declines

In the US, medtech fundraising and billion and may exceed the record $7.5 with medtech portfolios have recently investing for the first half of 2017 con- billion raised in 2015; indeed $5 billion raised new funds, including Lightstone tinued at a strong pace, particularly for was raised in the first half of this year Ventures, NEA and Versant Ventures, early-stage deals, according to Jonathan alone. One trend we’ve seen since the and will potentially allocate new dollars Norris, Managing Director of Silicon 2008 economic collapse, which also to medical devices. Valley Bank, in an analysis presented at saw the exit of many VCs from medtech, this year’s Phoenix Medical Device and continues: most venture dollars have Series A Could Top Last Year Diagnostic CEO Summit (sponsored by gone primarily to biopharma and Di- The early-stage funding gap that was The MedTech Strategist, Wilson Sonsini agnostics/tools. Norris suggested that created by the mass exodus of many VCs Goodrich & Rosati, Versant Ventures, the void is largely being filled by non- from medtech has been slowly being Lightstone Ventures, and NEA). traditional investors such as crossover filled over the last few years, as Norris funds, private equity, family offices, Norris pointed out that for the fourth noted, and that trend looks to continue angel groups and corporates. He also this year with 32 Series A deals done consecutive year, US healthcare ven- pointed out that several venture firms ture fundraising is likely to surpass $6 through the first half, possibly exceed- Series A MedTech Investment - Steadying 2016’s for total 2017 of 59 by year’s end (see Figure 1). The same is true with Series A U.S. Series A Investments by Disease Focus (2016 – 1H 2017) Figure 1 deal value, where the first half total of 2016 $1321H 2 0million17 may surpass last year’s to- US Series# of AU. SInvestments. Investments by Disease Focus59 tal value32 of $244 million, while the me- (2016 –1HStrate g2017)ic Investments % / # 4% / 4 dian6% round / 2 size has remained roughly Total Series A ($M) 2016 $244 1H 2017 the $132same at $3 million. # of US Investments 59 32 Median Round Size ($M) $3.3 $3.0 Strategic Investments % / # 4% / 4 6% / 2 One significant change, however, has Total Series A ($M) $244 $132 been the decline in cardiovascular in- Cardiovascular 13 4 $85M Medical Round Size ($M) $3.3 $3.0 vesting. While still the largest area of investment in terms of total dollars, through the first half of this year, there Cardiovascular Neuro 135 4 7 $17M $47M were four CV Series A deals, compared Neuro 5 7 $47M with 13 in all of last year. Neurology Orthopedic $58M and orthopedics saw increased interest Orthopedic 5 5 6 6 $58M compared with 2016. In terms of mo- Ophthalmic 6 1 $29M dalities that attracted the most Series Ophthalmic 8 1 $29M A interest, Norris pointed to imaging/ Respiratory 6 $20M monitoring, neuromodulation/electrotherapy, and surgical (see Figure 2). UrinaryRespiratory3 2 $30M6 2016$20M 1H 2017 “One interesting area that we’ve seen grow is connected care with care mov- Note: Series A Investments includes all US based first round investments from institutionalUrinary investors, and3 all first 2round investments$30M greater than ing outside of the hospital and the physicians’2016 1 H offices 2017 into the home,” he $2M independentN ooftes :investor type. Series A Investments includes all U.S. based first round investments from institutional investors, and all first round investnoted.ments greater than $2M Source: Siliconindependent Valley ofBank investor type. Source: PitchBook and SVB proprietary data. 6

MEDTECH INVESTMENT TRENDS 35 Figure 2 In terms of investors in early-stage deals, USSeries Series A InvestmentA Investments – Modalities by Modality in Focus Johnson & Johnson has led the way with (2016 –1H 2017) – seven new investments since 2016, three Neuromodulation/ of which focused on orthopedics. (J&J has Imaging / Monitoring Electrotherapy Surgical also been the most active medtech acquirer over the same period.) Norris noted that both KCK (family office) and Kohlberg Kravis Roberts (KKR, a private equity fund) have done recent Series A deals, although they typically focus on later-stage invest-

Johnson & Johnson has led the way with seven new *One financing value was undisclosed 7 Source: Silicon Valley Bank investments since 2016, 6 three of which focused

Figure 3 on orthopedics. Most Active New Investments* In Device by Indication 2016 –1H 2017

Early Stage Late Stage Undesignated ments. In the face of this positive trend, Norris cautioned that “While we see strong investment activity in company creation and Surgical 4 3 3 $157M funding commercialization, less new capital Neuro Non-InvasiveNon- InvasiveMonitoringSeries Monitoring Continues A4 MedTech Continues to See3 to$160MInvestment See - Steadyis available for forlater-stage 2017 development and Non-Invasive Steady Investment;SteadyMonitoring Investment; Cardiovascular 3 Cardiovascular Declines3 1 Declines $89M – clinical trials.” Most Active NewMost Investments* Active New Investments*in Device by Indication in Device 2016by Indication – 1H 2017 2016 – 1H 2017 Orthopedic 3 0 3 Early Stage Late StageEarly UndesignatedStage Late Stage Undesignated $110M Where Investors Are Putting Surgical CardiovascularSurgical4 4 32 2 33 $239M$157M 3 $157M Their Money Neuro Neuro4 43$160M 3 $160M ENT 1 3 $235M In terms of where the most active inves- Non-Invasive MonitoringNon-Invasive Monitoring3 33 1 $89M3 1 $89M Opthamology 1 2 $153M Financing Deal Size: tors are putting their money, Norris report- Orthopedic Orthopedic3 0 3 30 $110M 3 $110M Metabolic 1 2 $113MFinancing Deal Size : Financing DealAvg: Size $27M : ed that surgical devices lead the way, with Cardiovascular Cardiovascular2 2 2 $239M 2 $239M Avg: $27M AvgMedian:: $27M $21M Median: $21M Median: $21M most of those deals involving closure-based Vascular Access2 1 $33M ENT 1 ENT3 1 $235M 3 $235M technologies (see Figure 3). Non-invasive Ophthalmology 1 Ophthalmology2 $153M1 2 $153M monitoring, which uses sensor-based data Trends: Trends: Metabolic 1 Metabolic2 $113M1 2 $113M Surgical, Neuro and Surgical, Neuro and gathering technology, and neuro devices NonSurgical,-Invasive Monitoring NeuroNon-Invasive andCardiovascular Monitoring Cardiovascular Vascular Access Vascular2 Access1 $33M2 1 $33MNon-Invasive Monitoring are also sparking investor interest, with four of the seven neuro deals raising at least $25 Non-Invasive Monitoring,Non which-Invasive uses sensor Monitoring,-based which data gatheringuses sensor technology,-based data is sparkinggathering investor technology, interest. is sparking investor interest. million. Orthopedics is also attracting in- Surgical leads device investment.Surgical leadsMostNon-Invasive ofdevice these investment. deals are closure Most Monitoring, of-based these technologies.deals are closure which-based uses technologies. sensor-based data gathering creased investor interest, moving up from Orthopedic rises from #7 Orthopedicto #4. technology,rises from #7 to #4. is sparking investor interest. Four of the seven neuro dealsFour ofraised the seven at least neuro $25M. deals raised at least $25M. seventh to fourth in terms of investor activ- Surgical leads device investment. Most of these deals are *Most Active New Investors in medical*Most device Active defined New Investors as Top 21in medicalinvestors device based defined on new as Top 21 investors based on new ity, while cardiovascular investments have investments in 2016–2017. investmentsclosure-based in 2016–2017. technologies. Source: PitchBook and SVB proprietarySource: data. PitchBook and SVB proprietary data. Trends in Healthcare Investments Trendsand Exits in MidHealthcare-Year 2017 Investments9 and Exits Mid-Year 2017 9 declined both in terms of the total number Orthopedic rises from #7 to #4. of deals and the amount invested. Four of the seven neuro deals raised at least $25M. Norris points to artificial intelligence and *Most Active New Investors in medical device defined as Top 21 robotics as emerging areas that are attract- investors based on new investments in 2016–2017. ing increased investor interest. “In terms of AI, these are not necessarily the compa- Source: Silicon Valley Bank 6

nies that you would think we’d be talking about Figure 4 here,” he explains. “Most are software-enabled Global Investments by Disease Focus companies, which we break into two catego- FrontiersFrontiers(2016 in MedTechin –1H MedTech 2017) – Artificial– Artificial Intelligence Intelligence ries: broad, focused medical imaging types of software plays, and then really focused compa- – – Broad Focus Specialized nies like HeartFlow” (see Figure 4). In AI, cardio- # of US Investments 18 12 vascular leads the way, although that is skewed Strategic Investments % / # 0% / 0 3% / 1 by HeartFlow’s recent $100 million round. Total Series A ($M) $92 $138* Medical Round Size ($M) $3.1 $3.4

Notable Companies: In medical robotics, Norris notes that “It’s no surprise Cardiovascular 1 6 $141M that these round sizes are Ophthalmic 3 1 $17M pretty large,” averaging in the Oncology 4 $8M Broad Focus $20+ million range. Neuro 2 $22M Specialized *Includes a $100M round raised by HeartFlow In medical robotics, Norris notes that “It’s no Source: Silicon Valley Bank 6 surprise that these round sizes are pretty large,” averaging in the $20+ million range, compared Series A MedTech Investment - withSteady $3 million for AI (2017see Figure 5). The revival 10 of10 interest in robotics has been generated pri- Figure 5 – marily by US start-ups, although companies Global Investments by Modality and by Geography from Israel and the Netherlands have also at- FrontiersFrontiers(2016 in MedTech –1H in 2017) MedTech– Medical– Medical Robotics Robotics tracted investment. Most of the investments have gone into surgical robotics and less into – – bionics/cybernetics technologies. Development Commercial # of US Investments 8 4 Strategic Investments % / # 25% / 2 25% / 1 Cautious Optimism Total Series A ($M) $409 $180 Looking ahead, Norris is cautiously optimistic Medical Round Size ($M) $21.7 $23.3 about medtech investing for the next couple of years. He expects to continue to see the inter- section of devices and tech, pointing specifically Notable Companies: to AI and robotics as areas of continued growth. He also highlights drug delivery and non-inva- Modality Geography sive monitoring as other areas to watch.

Surgical “I think device investment is going to stay 5 3 $337M 4 4 $535M Robotics fairly stable, but I would caution you about looking at some of the data that’s out there Bionics/ because you’re seeing what’s happening in the 3 1 $252M 4 $54M Cybernetics tools/Dx market getting lumped in with devices, which inflates the total number of dollars in the sector,” he advises. “I still think devices Commercial Development are stable and are having a good year, but not a banner year.” Source: Silicon Valley Bank 6 11 11

“There was something The US launch of EluNIR will about creating the VAD mark Cordis’ re-entry into market that was a tough, the DES market, but ironically, long pull...trying to as a distributor rather than convince payors to pay an innovator. $200,000 for a surgical (page 30) intervention in a patient who maybe had days to live...”

KEITH GROSSMAN, quoted in “Medtech’s Billion-Dollar Man” Patient (page 4) outcomes after arterial The DES market is expected to Heard at the NASS meeting: embol- decline at about Expandable interbody devices will ectomy 5% per year, help fuel endoscopic surgery, according haven’t on average, to Chris Yeung, MD, who pointed to through at least changed an “Explosion of expandable implants” 2022, so the that allow surgeons to take a in 30 years: big question is, with the “ship-in-a-bottle” approach to surgery. 30-day available (page 24) amputation devices now reaching rates are as virtual parity high as 30% in terms of 8,000 PATIENTS performance, and $1 BILLION and 30-day market success mortality in this space COST TO INSURERS OF increasingly SPINE FUSION FOR YOUTHS rates are tied to pricing WITH ADOLESCENT IDIOPATHIC and/or product SCOLIOSIS 15-44%. bundling deals, (page 40) (page 38) will new DES technology innovation continue to be About that public market for funded going forward? medtech....we’re still waiting. (page 30) (page 18) 38 START-UPS TO WATCH

ICHOR VASCULAR: MINNEAPOLIS Bringing the Benefits of a Minimally Invasive MINNESOTA Procedure to Arterial Embolectomy contact Timothy Blair, CEO Acute limb ischemia, the sudden occlusion of a peripheral artery by clot in Residence or other embolic material, is a life- and limb-threatening condition that by affects a significant number of people. Less than stellar outcomes after [email protected] MARY STUART surgical arterial embolectomy haven’t improved in 30 years, despite the implementation of multidisciplinary team approaches to managing the year founded condition. ICHOR Vascular hopes to change that with an easy-to-use, 2014 one-size-fits-all percutaneous device. Troy Long, MD, an interventional radiologist time, and collateral circulation often takes up the who’s behind it at Minneapolis Radiology Associates, is part of slack to protect tissues from ischemia. Such is not Founders are Troy Long, MD, a practicing a multidisciplinary practice where intervention- the case with an arterial occlusion caused by sud- vascular interventional alists work alongside vascular surgeons. He has den embolization or organized clot. The nature of radiologist at participated in many surgical arterial embolec- the clot is different as well, tending to be more Minneapolis Radiology tomies over the years, procedures that treat soft and fresh than the lesions treated in CLI, and Associates, and patients with acute limb ischemia whose arteries also different from clots in the brain. chairman Jeffrey Blair, formerly the CEO of have become suddenly occluded by blood clots Corpak MedSystems or other embolic materials. Despite the team’s Long set out improve outcomes by developing and the contract efforts to refine the procedure, Long says patient a percutaneous procedure that would avoid the research organization outcomes haven’t changed in 30 years. In these complications of a surgical incision and general NAMSA anesthesia in these patients, yet achieve the procedural success of surgery. He says, unmet clinical need “We know the Fogarty balloon works. A nonsurgical way Despite efforts to refine arterial But how can I replicate, without surgery, to treat acute the parameters that work well in surgical limb ischemia and embolectomy surgeries, outcomes embolectomy?” significant embolic haven’t changed in 30 years, events Long says he was able to identify a solu- Long says. tion on paper, but the real challenges came solution after a few prototypes were built by his Panacea, a own efforts. “I could see how the technol- percutaneous one-size patients, 30-day amputation rates are as high as ogy would work, but the engineering artistry in fits all (above-the-knee 30% and 30-day mortality rates are 15-44%. getting these components to work inside of a 7F and below-the-knee) system became the real challenge, not to men- arterial embolectomy system Acute limb ischemia (of the lower limbs) has an tion the funding challenges that come with build- incidence of 9-16 cases per 100,000 people and ing prototypes and testing them repeatedly.” is different from critical limb ischemia (CLI). (See funding “New Interventions for Critical Limb Ischemia,” The With working prototypes in hand, he began to $15 million from MedTech Strategist, November 27, 2017.) Acute consider manufacturability, regulatory strategies, Cleveland Clinic’s the cost of the system vs. reimbursement, and Global Cardiovascular limb ischemia often arises secondary to athero- Innovation Center and sclerosis, when clots break off and embolize to the other commercial considerations normally -out private individuals periphery (or less often, from the embolization of side a physician’s purview. “While I had working other materials), completely occluding an artery. prototypes and intellectual property I had no idea what to do with it, and none of the big companies There is an urgency to rapidly treat the patient, had any interest in a prototype, my napkin, or my as compared to CLI, because CLI develops over IP,” says Long.

That’s when he reached out to his old posable and recoverable 10 mm nitinol able to maintain sheath and wire access, acquaintance, Timothy Blair, who is a funnel-shaped basket; and an 014 rapid which is not always true of other aspira- 25-year veteran of the medical device exchange compliant balloon that can tion technologies. The clinician observes space and managing director of strate- expand up to 10 mm (a 10F system will what’s been removed and makes gic partnerships at the global medical also be available for the venous indica- repeated sweeps if necessary, followed research organization NAMSA. “NAMSA tion). It’s a single-procedure, one-size- by angiography to determine whether supports medical device companies all fits-all device for treating vessels above there is reperfusion (which is not an over the world through preclinical test- and below the knee. option for surgical embolectomy). If not, ing, biocompatibility, clinical research, the basket is rinsed out and the proce- and regulatory/compliance services all dure can be repeated as many times as aimed at bringing medical innovations Blair is leading some necessary to get the vessel cleared of to the bedside more efficiently, with less debris until reperfusion is achieved. risk, and with more predictability to the new models for development process,” says Blair NAMSA, organizing Blair notes that the device has been studied in four in vivo models to chal- Blair is leading some new models for global disciplines and lenge the device in different sizes of NAMSA, organizing global disciplines resources to better vessels and clot types. ICHOR is also and resources to better support early- developing novel clot models that allow stage medtech innovation invented by support early-stage it to use fewer animals in comparing the physicians or other entrepreneurs. The medtech innovation effectiveness of Panacea against other goal is to help them develop those ideas invented by physicians devices. “We can look at time to reper- in a time- and cost-efficient process to fusion, amount of clot retrieved, distal the point where a multinational might or other entrepreneurs. embolization rates, and amount of blood want to co-develop the project, or to loss to begin understanding how it will perhaps de-risk the project enough to work in the real world,” says Blair. “We’ll attract investors. The sheath enters the vessel via per- even apply some translational science, cutaneous access, and its occlusion bal- taking these endpoints from the bench Blair took Long’s project under NAMSA’s loon is inflated to control and regulate into in-vivo models. Upon market clear- wing, helping him found ICHOR Vascular arterial out-flow. The 7F guide cath- ance we expect to translate this into real Inc. in 2014, and began mapping out a eter is inserted through the sheath and world clinical data,” he adds. The com- detailed plan for commercialization. deployed in a manner similar to a stent; pany has identified four or five centers of “Medical device development is a high the operator pulls the sleeve back and excellence where it plans to start build- risk proposition in a highly regulated the basket opens to gain good wall ing these real world datasets, once it has industry. In my opinion, too many good apposition proximal to the clot. The 014 510(k) clearance for Panacea. ideas fail to reach the bedside because embolectomy balloon crosses the lesion the early planning is missing, the mile- and sweeps the vessel as far down as It’s unusual for a start-up to do these stones are misunderstood, inventors the ankle if necessary, just as the Fogarty kinds of translational studies at this miscalculate how far they will need to balloon would in the surgical procedure. stage, but, says, Blair, “When we sur- take devices before investors or stra- Instead of sweeping back to the surgical veyed physicians and multinational tegics take note, and inventors fail to incision, the Panacea sweeps embolic companies to learn what would help partner with “been-there-done-that” debris back to the recoverable funnel. them reach a ‘buy’ decision, they asked partners or leaders,” says Blair. Indeed, After sufficient thrombus is removed, for comparative effectiveness on differ- NAMSA embarked on its early-stage everything is pulled back into the sheath, ent types of devices in different types of strategy to help start-ups overcome out of the body into the sterile field, and vessels—arterial, venous, big vessel and their lack of experience. the angiogram is performed to check for small vessel.” Blair says the company is reperfusion. making sure to listen carefully to the mar- ICHOR Vascular’s Panacea technology, ketplace during development “to make is about six months away from market Probably the most frequent question sure we are testing and building the right clearance, according to Long. The Pana- the company gets from clinicians, Blair clinical data even before market clear- cea system has three components: a says, is “How much clot can I put in the ance.” That’s the leg-up an organization 7F sheath with a distal occlusion bal- basket?” The procedure can be repeated like NAMSA can offer to an early-stage loon; a 7F guide catheter with a dis- several times because the clinician is start-up.

DECEMBER 16, 2017 40 START-UPS TO WATCH

NEW HAVEN WELLINKS: CONNECTICUT

contact Applying Connected Health to Improve Ellen Su, Co-Founder the Efficacy of Scoliosis Braces & CEO [email protected] While bracing has been demonstrated to be as effective as surgery in correcting spinal deformity in moderate adolescent idiopathic scoliosis, by the bracing therapies suffer from compliances issues that keep them WENDY DILLER year founded from achieving optimal outcomes. Early-stage Wellinks has developed a 2014 wearable monitor to help patients comply with their therapy.

who’s behind it Ellen Su, formerly a For years, controversy has surrounded the use the New England Journal of Medicine (NEJM) design fellow at Yale of bracing to correct adolescent idiopathic sco- and received broad attention in both the medi- University’s Center liosis (AIS). The brace, which wraps around the cal and lay worlds. for Engineering patient’s torso, aims to prevent further curva- Innovation and Ellen Su and Levi DeLuke were undergraduate Design, and Levi ture of the spine while children grow and ulti- students at Yale University when the study came DeLuke, co-founder mately reduce the likelihood that they would and CTO, who is a out. They, along with a fellow classmate Sebas- mechanical engineer need fusion surgery upon reaching maturity. tian Monzon, were already collaborating on an But hard evidence that it achieves these goals undergraduate project to find better treatment unmet clinical need was scarce and many experts considered it to options for scoliosis, and saw the study’s conclu- Adherence to a bracing be ineffective. sions as confirmation that their focus should be regimen correlates on improving bracing. heavily to successful treatment of As someone who suffered from AIS, Adolescent Idiopathic The 2013 landmark NIH-funded DeLuke, a mechanical engineering major Scoliosis (AIS) and then in his junior year, had first-hand expe- the avoidance of BRAIST study demonstrated that surgery, but is hard rience with ineffective bracing; despite on adolescents and bracing is as effective as surgery in wearing a brace for three and a half years, difficult for caregivers correcting spinal curves in moderate he ultimately wound up needing fusion to monitor adolescent idiopathic scoliosis, but also surgery. Su, a senior at the time, came at the problem from a different perspec- solution highlighted that compliance was a big tive; she was a graphic design major with A wearable digital hurdle to bracing’s effectiveness. coursework in product design and engi- sensor, embedded neering and exposure to startups through into a strap that wraps around the patient’s a summer internship. Sebastian was inter- brace, that tracks ested in the business and management daily details about the The debate raged until, in 2013, the landmark side, but ultimately left the company on good wearer’s compliance NIH-funded BRAIST study [Effects of Bracing in terms at the beginning of 2016 to pursue a dif- and provides seamless ferent career path. feedback to caregivers Adolescents with Idiopathic Scoliosis] laid nay- and patients, with the sayers’ qualms to rest. It demonstrated that During a summer engineering fellowship, the potential to improve bracing is as effective as surgery in correcting compliance and team researched the field extensively, including ultimately outcomes spinal curves in moderate AIS. It also high- talking to patients, parents, and doctors, as well lighted, however, that compliance was a big as the researchers who led the BRAIST study. This funding to date hurdle. The study, led by Stuart Weinstein, MD, led to the idea of a compliance monitor for sco- $200,000 in grants chair of the department of pediatric orthope- liosis braces that measures the tightness of the and awards, plus $1.2 dics at the University of Iowa, was published in brace as well as the duration for which it is worn million in convertible notes

using a technology borrowed from the length of time it is worn daily--is diffi- of brace wear, or the extent to which sensors built into luggage-scale tension cult, but research shows that when the variations in prescriptions yield -differ straps. Another stint at Yale’s Entre- adherence of patients is tracked, the ent results, and thus provide only crude preneurial Institute summer program treatment is more effective. For exam- estimates. provided the support they needed to ple, a study published in Spine found that design a prototype and begin turning Some newer braces are more comfort- their concept into a business. able, but still fall short of ideal. The small CINCH Strap is a ‘smart- size of the scoliosis market has deterred Wellinks Inc. opened its doors in 2014, strap sensor’ built into innovation and start-up activity, says Su, and has quickly gained traction both in who is now CEO of the company; she the financial and medical worlds. Michael a scoliosis brace, which estimates that about 150,000 to 200,000 Vitale, MD, at Columbia University Medi- is designed for the custom-fit braces are made each year, cal Center, one of the world’s leading connected health age. and that 8,000 adolescents undergo pediatric spine deformity surgeons, and spine fusion for the condition at a cost a tireless researcher on improving the It takes frequent readings to insurers of roughly $1 billion. These quality of life for his patients, learned of how long a person numbers include not only new diagno- about the device through a patient advo- has been wearing the ses, but, routine, mostly annual, adjust- cacy organization and is now Wellinks’ ments to the braces, which are needed chief medical officer. Garry Schafer, a brace and how tight it is. because the wearers are still growing. seasoned software programmer, is the Every six minutes, it col lead developer. Well-heeled financers, Those numbers still leave plenty of including Yale University and the State of lects data on the average room for other solutions. Working ini- Connecticut also jumped on board. tension in the strap and tially with advisors from Yale’s medical school and legal affairs offices, the found- the orientation of brace, AIS is an abnormal curvature of the ers of Wellinks refined their prototype, spine that typically occurs in late child- as well as the ambient filed for patent protection, and began hood or early adolescence and affects temperature and whether the arduous effort of raising money. The one in 10 children in the US. The spine original sensor morphed into the com- develops a side-to-side S or C-shaped wearer is standing, pany’s own processor chip and an inte- curve. The treatment for moderate cases moving or lying down. grated circuit board, for which patents (curves of 25 to 45 degrees) commonly are pending. Experts at the Yale School consists of a hard-plastic back brace, patients who were notified that they had of Medicine provided clinical feedback which is worn in most cases for 18 to 24 a monitor in their brace demonstrated and supported a pilot study. “There is hours a day until the child hits puberty significantly increased compliance - dur a huge potential for wearable medical and stops growing, which can take 2-4 ing the first 14 weeks of treatment com- devices,” says Su. years. The physician, typically a pediat- pared with those who were uninformed The device they are selling, now ric orthopedic surgeon, determines the (85.7% vs. 56.5%, P = 0.029), correspond- branded CINCH Strap, combines a ‘smart- tightness by pulling the strap and marking to a mean difference of 5.24 hours of strap sensor’ built into the brace, which ing it with a permanent marking pen. daily brace wear (“Electronic Monitoring frequently takes readings of how long a Improves Brace-Wearing Compliance in person has been wearing the brace and Compliance is hard. The patients— Patients with Adolescent Idiopathic Sco- how tight it is. Every six minutes, it col- the vast majority of whom are adoles- liosis: a Randomized Clinical Trial,” Spine, lects data on the average tension in the cent girls--aren’t the most complacent April 2012). group; they are typically 10 to 14 years strap and the orientation of brace, as old, and balk at the restrictions of a That said, most monitoring is cur- well as the ambient temperature and device that covers their entire torso, rently done the old-fashioned way: give whether wearer is standing, moving or curtailing movement and affecting their and take among parents, children and lying down. That raw data is uploaded physical appearance. physicians. into a secure server in the cloud, and can be then downloaded onto a computer or Tracking the degree to which they Temperature monitors embedded into mobile app for caregivers and patients. adhere to the treatment regimen–the the brace can tell how long a patient has That way, everyone involved can track tightness or tension of the brace and worn it, but do not address the quality how patients are doing.

Online print subscriptions, reprints, and web posting and distribution licenses are available. DECEMBER 16, 2017 Contact BRIDGET KELLY-STOLL at 888-202-5939 • [email protected] 42 START-UPS TO WATCH

The founders, in tune with the digital While not necessary for FDA approval, Manuel Rigo and Jacques Cheneau health age, have developed programs the studies aim to support efficacy to and is one of the newer, custom made that can sync the information among support reimbursement. braces that aim to be more comfort- devices such as cell phones, for the ben- able, thinner and correct rotation as efit of assorted caregivers and patients. well as curvature. Distribution of the Doctors or orthotists who fit the braces Distribution by East NYRC with an embedded CINCH sensor will be able to get more detailed infor- Coast Orthotics will begin in the first quarter of 2018, mation between patient office visits, says Su. and if they detect problems, they can and Prosthetics In addition to introducing the young adjust their approach. Compliance of the first brace founders to the complex world of build- problems, for example, can be due to with a CINCHStrap ing a medical device company, Yale has poorly fitted braces. Doctors are often been a big financial supporter. Through too busy to undertake routine monitor- embedded into it its incubator program, the university ing, but orthotists, who spend a lot of will begin in the first invested in the company via convertible time with patients, are likely to be very quarter of 2018. notes, which will become equity at the attentive. “There’s more transparency next funding round--validation of the in the process, so orthotists and doctors competence of Wellinks’ team, given can see problems as they come up,” The sensors are manufactured in that the university has invested in only says Su. Connecticut by a local medical device a handful of the companies that run through its entrepreneurship program. Inexperience was a big challenge for manufacturer using injection molding The State of Connecticut through Con- the founders, who overcame a steep techniques. While the upfront cost of necticut Innovations, which is essen- learning curve to understand FDA reg- injection molding is hefty, this approach tially a government-run venture capital ulations around manufacturing and enables the inexpensive mass produc- fund, invested $650,000. device approval. CINCH Strap is a Class tion of sensors. The company’s custom- 1 FDA-regulated device because it does ers are brace manufacturers. The first “I grew up in the Bay Area, sur- not contact patient skin or change how partner, East Coast Orthotics and Pros- rounded by entrepreneurs and all of the brace is used. That said, the com- thetics (ECOP), is the brace provider that experience, but I intended to be pany has IRB approval to conduct two for Columbia/NY Presbyterian Hospital, an art major,” says Su. “Through a IDE studies at the New York Presbyte- where Vitale is on staff. ECOP makes the roundabout way, I wound up in entre- rian Hospital, where Vitale works, and NYRC Smart Brace (from NYRC Brace), preneurship anyway, so it’s been an the Children’s Hospital in Philadelphia. which is based on the principles of Drs. interesting experience.”

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