The Unique Challenges and Differences for Investing in the Medical Arena
By Steve O’Hara, CHAIRMAN, New World Angels
New World Angels has and will continue to make significant investments in medical and health care technologies. Here’s what you should know about our search for medical investments. First, one third of New World Angels deals involve the medical arena, including devices, tech services and pharmaceuticals. Also, a significant portion of our members have medical and health care backgrounds, and they are eager to look at emerging innovation in this world. To round out New World Deal flow, another third of our deals revolve around some improvement due to technology innovation. The balance of our deals range from consumer products to manufacturing to advertising services.
What should you know about a New World Angels evaluation of your medical or health care endeavor? While the general principles of business analysis apply across all these fields, there are unique challenges in the medical arena. Determining whether there is a meaningful investment opportunity differs whether it is a tech or service, a medical device or a pharmaceutical/therapeutic.
Like every business seeking investment from New World Angels, we start with seeking to understand the:
- Customer
- The problem being solved for the customer(s)
- How the solution compares to the competition
- The likelihood the product will ultimately achieve its goals
- The plans to get approved to go to market
- The plans to gain adoption of the product
- The financial requirements for achieving all of the above
However, the complexity begins beyond the general definition. There are almost always at least two, and usually three or more, distinct customers for medical innovation and they vary by type of innovation. Perhaps the simplest innovation is the service or technology innovation that improves hospital, clinic or practice management. This may simply require acceptance from purchasing (and perhaps a group purchasing organization (GPO)). However, more often than not it might require acceptance from infection control, regulatory compliance and ultimately doctor or nurse usage. The more complex the group being addressed, the more proof of traction we as investors will require. Here’s where New World Angels focuses.
1. We focus heavily on barriers and inertia to adoption especially around devices and pharmaceuticals/therapeutics. NWA member and spinal surgeon Dr. Ken Jarolem notes, “Physicians are notoriously resistant to any changes from their established patterns.” NWA’s Dr. Ken Kessler agrees, citing the challenge doctors face staying current when innovations are happening daily. NWA member and cardiologist Dr. Andrew Yin concurs, saying “we are definitely late adopters.” As the group of approvers for purchase extends beyond hospital administrators to include doctors it needs to be identified and addressed in investing.
2. We focus on the value proposition across every party the new technology touches. Part of the key to doing this is to clearly define and understand the problem being solved for the customer(s). Interestingly, often a medical device or therapeutic is solving different needs for different customers. For example, for the patient a therapeutic might offer a more effective cure or a device might be an improvement on quality of life during treatment. The same drug or device might not only offer doctors better patient outcomes (always a goal) but also less complex and therefore more efficient treatment plans. Finally, often the hospital or practice will be looking at the economics of the solution and doing a cost benefit analysis.
3. We focus on the magnitude of the impact from the new technologies. Small improvements versus the current gold standard treatment from competition are difficult to move forward in the industry. NWA member Dr. David Schimel wants to know, “Is it better, faster, safer? Is there scientific support to back the claims made by the entrepreneur. Have key opinion leaders (KOLs) advocated for this improvement?” If the product doesn’t achieve these targets, will it be meaningful enough of a change to gain adoption and succeed? When we hear an entrepreneur talk about gaining adoption via a price advantage without a clear underlying cost advantage plus some benefit above, we tend to run for the hills.
4. We focus on the new technology’s regulatory path. The investment challenge for medical devices and therapeutics versus non-medical products is that the angel investor has to place his bet before market validating regulatory approval and a proof of concept. As a late seed or early Series A investor usually investing $0.5 to $1.5 million in a round, NWA normally has marketing and sales data for non-medical products. Although this may be expected for medical services or technology platforms, this is rarely the case for medical devices or pharmaceuticals. If a device or pharmaceutical has progressed further down the development path with, for example, FDA approval, it becomes a VC versus an angel deal with higher valuation and raise amounts. Therefore, NWA is often investing before there is a final device or before a pharmaceutical or therapeutic has much, if any, human trials. Dr. Jarolem notes that for devices, he zeroes in on the predicate device being cited by the entrepreneur, which also helps him identify a key competitor and the device benefits. NWA member Bob Williamson (who is also a pharmaceutical entrepreneur backed by NWA) focuses on the magnitude of the projected improvement in patient health to evaluate the risk and reward. Looking at the underlying science and animal studies becomes critical.
5. We focus on the market size and scope. After a medical product surpasses all these hurdles, understanding their market size and potential versus competition needs to be assessed in a few ways. Does the go to market plan address the multiple levels of customers and barriers to adoption? Dr. Schimel asks questions that include: what’s the stimulus and impediments for the medical community to adopt this innovation? Are insurance reimbursements and CPT codes in place and are they adequate to achieve the plan? What’s the regulatory approval plan and how well thought out is it? What feedback has been received so far on the predicate device for a medical device or for an IND for approval to bring a drug to clinical trials? Do they have the expertise for clinical trials and the resources?
Quite frequently, we find there is too much optimism associated with gaining FDA approval and/or the ease of adoption simply because it is a better mouse trap. When we blend this time risk with the proposed financial plan, we can see how well thought out the whole strategic plan is and whether it is worthy of our investment.
Medical investing is the same as other investing – except where it isn’t. These are some the of the areas New World Angels spend a lot of diligence time on whenever tackling a medical opportunity. Based on this, you might wonder if we do many medical deals? Well, two of our last three new company deals have been for therapeutics and about one-third of all our deals are in the medical field. We think it is worth the effort.
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About New World Angels: New World Angels (NWA) has 75 Florida-based accredited investor members who pool their resources to invest as one group. Members come from a wide variety of backgrounds. We are doctors, lawyers, big company executives, and entrepreneurs with technical backgrounds, financial capabilities, manufacturing expertise, and marketing experience. When we look at a deal or industry, we usually have a few members with direct experience in that industry. To date we have invested over $25MM in 30 portfolio companies.