Reinventing Life Science Startups – Medical Devices and Digital Health

What if we could increase productivity and stave the capital flight by helping Life Sciences startups build their companies more efficiently?

We’re going to test this hypothesis by teaching a Lean LaunchPad class for Life Sciences and Healthcare (therapeutics, diagnostics, devices and digital health) this October at UCSF with a team of veteran venture capitalists.

In this three post series, Part 1 described the challenges Life Science companies face in Therapeutics and Diagnostics. This post describes the issues in Medical Devices and Digital Health.  Part 3 will offer our hypothesis about how to change the dynamics of the Life Sciences industry with a different approach to commercialization of research and innovation.  And why you ought to take this class.


Medical devices prevent, treat, mitigate, or cure disease by physical, mechanical, or thermal means (in contrast to drugs, which act on the body through pharmacological, metabolic or immunological means). They span they gamut from tongue depressors and bedpans to complex programmable pacemakers and laser surgical devices. They also diagnostic products, test kits, ultrasound products, x-ray machines and medical lasers.

Incremental advances are driven by the existing medical device companies, while truly innovative devices often come from doctors and academia. One would think that designing a medical device would be a simple engineering problem, and startups would be emerging right and left. The truth is that today it’s tough to get a medical device startup funded.

Life Sciences II – Medical Devices

Regulatory Issues
In the U.S. the FDA Center for Devices and Radiological Health (CDRH) regulates medical devices and puts them into three “classes” based on their risks.

Class I devices are low risk and have the least regulatory controls. For example, dental floss, tongue depressors, arm slings, and hand-held surgical instruments are classified as Class I devices. Most Class I devices are exempt Premarket Notification 510(k) (see below.)

Class II devices are higher risk devices and have more regulations to prove the device’s safety and effectiveness. For example, condoms, x-ray systems, gas analyzers, pumps, and surgical drapes are classified as Class II devices.FDA approvals

Manufacturers introducing Class II medical devices must submit what’s called a 510(k) to the FDA. The 510(k) identifies your medical device and compares it to an existing medical device (which the FDA calls a “predicate” device) to demonstrate that your device is substantially equivalent and at least as safe and effective.

Class III devices are generally the highest risk devices and must be approved by the FDA before they are marketed. For example, implantable devices (devices made to replace/support or enhance part of your body) such as defibrillators, pacemakers, artificial hips, knees, and replacement heart valves are classified as Class III devices. Class III medical devices that are high risk or novel devices for which no “predicate device” exist require clinical trials of the medical device a PMA  (Pre-Market Approval).Life Science Decline

  • The FDA is tougher about approving innovative new medical devices. The number of 510(k)s being required to supply additional information has doubled in the last decade.
  • The number of PMA’s that have received a major deficiency letter has also doubled.
  • An FDA delay or clinical challenge is increasingly fatal to Life Science startups, where investors now choose to walk away rather than escalate the effort required to reach approval.

med device pipeline

Business Model Issues

  • Cost pressures are unrelenting in every sector, with pressure on prices and margins continuing to increase.
  • Devices are a five-sided market: patient, physician, provider, payer and regulator. Startups need to understand all sides of the market long before they ever consider selling a product.
  • In the last decade, most device startups took their devices overseas for clinical trials and first getting EU versus FDA approval
  • Recently, the financing of innovation in medical devices has collapsed even further with most Class III devices simply unfundable.
  • Companies must pay a  medical device excise tax of 2.3% on medical device revenues, regardless of profitability delays or cash-flow breakeven.
  • The U.S. government is the leading payer for most of health care, and under ObamaCare the government’s role in reimbursing for medical technology will increase. Yet two-thirds of all requests for reimbursement are denied today, and what gets reimbursed, for how much, and in what timeframe, are big unknowns for new device companies.

Venture Capital Issues

  • Early stage Venture Capital for medical device startups has dried up. The amount of capital being invested in new device companies is at an 11 year low.
  • Because device IPOs are rare, and M&A is much tougher, liquidity for investors is hard to find.
  • Exits have remained within about the same, while the cost and time to exit have doubled.

Life Sciences III – The Rise of Digital Health
Over the last five years a series of applications that fall under the category of “Digital Health” has emerged. Examples of these applications include: remote patient monitoring, analytics/big data (aggregation and analysis of clinical, administrative or economic data), hospital administration (software tools to run a hospital), electronic health records (clinical data capture), and wellness (improve/monitor health of individuals). A good number of these applications are using Smartphones as their health flow

Business Model Issues

  • A good percentage of these startups are founded by teams with strong technical experience but without healthcare experience. Yet healthcare has its own unique regulatory and reimbursement issues and business model issues that must be understood
  • Most of these startups are in a multisided market, and many have the same five-sided complexity as medical devices: patient, physician, provider, payer and regulator.  (Some are even more complex in an outpatient / nurse / physical therapy setting.)
  • Reimbursement for digital health interventions is still a work in progress
  • Some startups in this field are actually beginning with Customer Development while others struggle with the classic execution versus search problem

Regulatory Issues

  • Digital Health covers a broad spectrum of products, unless the founders have domain experience startups in this area usually discover the FDA and the 510(k) process later than they should. 

Venture Capital

  • Seed funding is still scarce for Digital Health, but a number of startups (particularly those making physical personal heath tracking devices) are turning to crowdfunding.
  • Moreover, the absence of recent IPOs and public companies benchmarks creates uncertainty for VCs evaluating later investments too

Try Something New
The fact that the status quo for Life Sciences is not working is not a new revelation. Lots of smart people are running experiments in search of ways to commercialize basic research  more efficiently.

Universities have set up translational R&D centers; (basically university/company partnerships to commercialize research).  The National Institute of Health (NIH) is also setting up translational centers through its NCATS program.  Drug companies have tried to take research directly out of university labs by licensing patents, but once inside Pharma’s research labs, these projects get lost in the bureaucracy.  Realizing that this is not optimal, drug companies are trying to incubate projects directly with universities and the researchers who invented the technology, such as the recent Janssen Labs program.

But while these are all great programs, they are likely to fail to deliver on their promise. The assumption that the pursuit of drugs, diagnostics, devices and digital health is all about the execution of the science is in most cases a mistake.

The gap between the development of intriguing but unproven innovations, and the investment to commercialize those innovations is characterized as “the Valley of Death.”valley of death

We believe we need a new model to attract private investment capital to fuel the commercialization of clinical solutions to todays major healthcare problems that is in many ways technology agnostic. We need a “Needs Driven/Business Model Driven” approach to solving the problems facing all  the stakeholders in the vast healthcare system.

We believe we can reduce the technological, regulatory and market risks for early-stage life science and healthcare ventures, and we can do it by teaching founding teams how to build new ventures with Evidence-Based Entrepreneurship.


Part 3 in the next post will offer our hypothesis how to change the dynamics of the Life Sciences industry with a different approach to commercialization of research and innovation. And why you ought to take this class.

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10 Responses

  1. After 30 years of experience starting and growing healthcare companies, I can attest to the fact that the lean start-up methodology is the perfect way to deal with the unique (but not new) problems of building successful healthcare companies. We are currently succeeding with healthcare IT and healthcare service companies that are careful to integrate all of the stakeholders (patients, physicians, managed care organizations, insurance companies, regulatory agencies) into the value proposition, make sure that the distribution channels are all on board and incentivized, work with key partnerships to add value to their existing companies, and to maintain a cost structure that is low. The constant feedback and input of all participants in the process is critical to avoiding costly (and potentially fatal mistakes). The real issue is not trying to fix the problems with huge amounts of money. It’s about using a process that permits you to validate (or not) the business model quickly and inexpensively so you can either move forward with the existing model or modify it without spending a great deal of time and money.
    Steven Meyer M.D., J.D.

  2. Wonderful, applause, finally medical … thank you
    Please read this!
    “Medical devices prevent, treat, mitigate, or cure disease by physical, mechanical, or thermal means (in contrast to drugs, which act on the body through pharmacological, metabolic or immunological means). They span they gamut from tongue depressors and bedpans to complex programmable pacemakers and laser surgical devices. They also “include” diagnostic products, test kits, ultrasound products, x-ray machines and medical lasers.”
    Your statement is historically correct. Why continue to support an irrational “also”? I propose a new category Part II A: Imaging Devices and Digital Imaging Devices. The value of imaging is …diagnostic ….early diagnosis, managing chronic conditions, living well and long.

  3. Steve et al. , I would add that startups need to consider the ‘health economics’ of their intended products early in the development process and execute a value demonstration strategy in parallel . When asking payers to reimburse new technologies, startups need to provide high quality evidence that demonstrates improved outcomes, cost-effectiveness (usually in Europe but elsewhere as well) and affordability. Pharma develops tools like these for this purpose and med device is following suit. Here is a very detailed example of such a tool from a respected consulting firm (which I am not affiliated with). ( I realize startups don’t have resources, but thinking about evidence requirements is the new reality.

  4. Perfect timing; we’ve put together a well-balanced team with healthcare, product and engineering backgrounds and previous entrepreneurial experience for the Lean LaunchPad program at UCSF. Looking forward to participating and getting out of the building.

    We are going initially after the oft overlooked “wellness” market by focusing on the whitespace between doctor visits. The goal is to harness mobile and big data technologies to help drive lifestyle changes that can have significant effects on managing or reducing chronic illnesses. These affect more than half of Americans and by some calculations are costing the economy more than $1 trillion annually. This focus on wellness should also limit the impact of FDA, HIPAA, HITECH and other regulations.

  5. Great article with great insights (as always!)

    As mentioned Class I and Class II are the “easy” paths through the FDA, and in my opinion are the most apt to lean acceleration. That is why we started an accelerator focused on these companies here in Memphis (one of the “secret” med device hotbeds in the US):

    Three months of highly focused training and mentoring and $50,000 of seed capital for six brand new companies.

    We just finished our second cohort and things are looking great so far: last year we had 5 out of 6 companies receive follow-on capital. By now one of these companies is in revenue stage, one is just about the get their 510(k) (knock on wood) and one is in an IRB study and has treated its first patients. All companies are still alive and “working it”.

    This year’s cohort had three companies get follow-on capital. All three companies are Class I devices.

    Folks have applied from Johns Hopkins, Duke, Georgia Tech, Vanderbilt etc… There is an unserved need out there!

    Are these companies for typical VCs? Nope, probably not – some of these companies don’t serve markets large enough to “move the meter”. I used to tell that line to many entrepreneurs when I was at a large fund… Now I’m co-leading a true seed fund, and guess what – turning $1M into $5M moves our meter just fine!

    Also, let’s not lose sight of the fact that the universe of potential acquirers is much larger when selling a company below $50M, vs shooting for the multi-$100M exits.

    Again, great piece and I love that this might bring more capital back into the device world!

  6. Hey Steve! I’m from Brazil and very anxious about when you are going to provide this class online, so that we can get out of the building being out of the US too.
    I belive the impact of new technologies and business in healthcare are even more disruptive in development countries!
    Congratulations for approaching such a relevant subject and hope to read more about this in your blog (and, again, to have access to an online course).

  7. […] 1 of this post described the issues in the drug discovery. Part 2 covered medical devices and digital health. Part 3  described what we’re going to do about […]

  8. […] Part 2:  medical devices and digital health […]

  9. The “big unknown” being reimbursements is what scares me most about the ACA. I’m uncertain–and I think everyone else is, too–about how this is going to work exactly.

  10. […] Part 2:  medical devices and digital health […]

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