Given the amount of uncertainty that exists in the medical device industry’s landscape, as well as the direction that current market trends within it appear to be pointing, it’s really no surprise that med-tech investors are, at best, hesitant.  After all, hospitals are exerting ever-increasing power via their group purchasing organizations in medical device price negotiations while continuing to hone their ability to garner support from their physicians in an effort to drive supply cost savings.  Throw in imminent comprehensive health care reform, the fact that the FDA is reviewing the 510k approval process, physicians’ relationships with medical device manufacturers are under scrutiny, consumer driven health plans are becoming more popular, and that bundling of reimbursement payments is under serious consideration by CMS and you have a veritable ‘perfect storm’ of risk for med-tech investors and entrepreneurs to contemplate.  However, in spite of all of this or perhaps as a direct result of this, investors and med-tech veterans, alike, are adapting, and a relatively new operating model is gaining traction and evolving in the medical device industry: the virtual medical device firm.

Often employed in the information technology industry, the virtual firm’s success heavily relies on a lean, well-thought-out and skillfully executed operating model.  On the one hand, the key drivers of the firm’s valuation and how those drivers will be developed into a core competency (i.e. a specific sales channel) must be predetermined and, on the other hand, the non-core activities that will be handled by area experts via strategically outsourced relationships (i.e. product development) must also be carefully weighed.  This plan, its inherent value and its specific benefits must then be persuasively communicated to potential investors.  A few of the general benefits of this approach for the firm are:  intense emphasis on developing and maintaining a core competency to drive valuation, keeping management teams small and focused on achieving milestones, relatively low overhead costs, ability to leverage experts in required fields without employing them, and the ability to orchestrate and build scalable products on limited dollars over relatively short periods of time that have exceptional quality.  For investors, the appeal of this model, aside from some of the aforementioned, is its inherent ability to turn resources that are associated with key milestones on, when appropriate, and off, when not required.  This type of approach allows for effective management of the burn rate, thereby achieving capital efficiency:  the effective and dynamic management of the cost needed to efficiently produce upside valuation for a firm, thus maximizing return on investment upon exit.

While managing the cost side of medical device development is certainly one way to increase confidence that an exit will be relatively attractive, it isn’t the only consideration, of course.  Assuming an exit by acquisition, corporations that are interested in acquiring technologies are becoming increasingly selective.  More (as detailed in an earlier post) are walking away from deals unless the firm can convincingly illustrate how the device has:  an unmet clinical need; the ability to solve this need; solid, broad IP protection; a well-defined and explicit reimbursement strategy; evidence that it is cost- or comparatively-effective; a clear, unambiguous FDA path; and been developed under a certified quality system.  While the rationale for most of these may be self-explanatory, the last point-developing a device under a certified quality system-may not be completely intuitive.  Aside from assuring compliance with stringent FDA requirements, firms who are acquiring medical devices must integrate the purchased technologies into their companies.  If the device has issues relating to the comprehensiveness of its design history file or device master record, for example, this is expensive and time-consuming to fix and, as one can surmise, decreases-or worse, eliminates-the likelihood of the device becoming an acquisition target.  Additionally, and more importantly, the FDA and hospitals have made risk management a priority in medical device design.  With more deaths occurring in hospitals-due to medical errors-than highway accidents, breast cancer or AIDS, the rationale for this emphasis on safety is easy to comprehend.  One of the ways by which the FDA is addressing this issue is by providing guidance on human factors (to learn more see: http://www.fda.gov/MedicalDevices/DeviceRegulationandGuidance/PostmarketRequirements/HumanFactors/ucm119185.htm).  The thought is that if devices are easier and more intuitive to use, less errors will occur when physicians use them.  The FDA has approved ISO 14971-1 2007 as a recognized standard for human factors but only a handful of medical device design firms are actually certified.  [Here’s the gratuitous Devicix pitch…]  However, Devicix is 13485 and 14971 certified to 1) address these concerns head-on, 2) illustrate our commitment to patient safety and to the physicians treating them, and 3) provide our clients with devices that only those who strive to lead the industry in quality and service can provide.

While it is difficult to assess just how well virtual medical device firms are performing as compared to their traditional brick-and-mortar colleagues, there are plenty of companies who are using this model convincingly, obtaining funds, entering markets and exiting successfully.  One example, OrthoAccel Technologies, Inc-a firm that was initially engendered by licensing university-based research at the University of Illinois, Chicago under the direction of Jeremy Mao, DDS, PhD-adopted a virtual model.   OrthoAccel used Devicix as their design and development partner, attained CE Mark, is currently selling product in the UK, achieved clearance in Australia, and is undergoing clinical trials in the US in pursuit of FDA clearance.  To learn more about them visit: http://article.wn.com/view/2010/06/09/OrthoAccel_Technologies_Inc_Selected_to_Pitch_at_the_2010_WB/