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Medical device firms can improve their chances of success13/07/2005. Source: Israel Venture Capital Journal. Dr. S. Morry Blumenfeld
 In this Israel Venture Capital Journal article, Dr. S. Morry Blumenfeld looks at the sector for medical device start-ups, and the pitfalls that can often plague VC firm's aspiring companies in this area of their portfolio.
Dr. S. Morry Blumenfeld of MediTech Advisors, discusses several dangers that young firms can encounter and cites two successful Israeli companies that were adept at averting some of the most common mistakes.
Israel's medical device industry received some well-deserved recognition in the past few months. Two Israeli companies, Given Imaging and InSightec, picked up the silver and bronze medals of the prestigious Wall Street Journal 2004 Technology Innovation Awards. These awards are open to the full panoply of what might be termed "high-tech".
While the gold medal was won by Sun Microsystems for a concept that is still in a very early development stage, unusually enough, the silver and bronze were won for medical devices, and both by Israeli companies with products that are well into commercialization. Given Imaging just announced revenues of $65 million and net income of $2.9 million in 2004, its second full year of production and marketing. InSightec received FDA approval for its first application, the non-invasive treatment of uterine fibroids, and is beginning its first year of production and marketing in 2005.
Common characteristics of two successful ventures
It might be instructive to examine these two companies to understand if there are common characteristics that explain their successes, and how they avoided some of the pitfalls that can plague start-ups in this space.
The most obvious common characteristic is that they are both Israeli companies. While this may seem trivial or coincidental, it is not so regarded by end-users and patients, and it provides a "cachet" of technological excellence that can be exploited by Israeli companies. I keep getting impressed by how the innovative skills of Israeli companies are taken for granted in the US market.
The next common characteristic is "game changing" technology. In each case, the products appears to have come out of science fiction. Given Imaging's miniaturized imaging capsule seems in the spirit of the 1966 movie "Fantastic Voyage", and InSightec’s ability to do surgery without opening the body recalls the way Dr. McCoy did surgery in the Star Trek television series.
However, "game changing" technology also has a negative aspect. We want our new technology to be "market-driven" rather than "technology-driven". We have developed great tools for making sure that this is so – focus groups, medical advisory boards, customer interviews, competitive analyses, etc. We don't have equivalent tools and customer understanding for a really revolutionary concept that affects what has not previously been recognized as a market need. There are some very good examples of this in the history of medical imaging in the past 100 years. No one used a focus group to urge Roentgen to create X-rays. There was no customer demand for CT before it was developed by Hounsfield and his colleagues at EMI. In fact, even after its development, CT initially received poor recognition of its impact, with EMI estimating the ultimate market to be 25 units per year. GE's estimate in 1972 was even lower.
Unfortunately, entrepreneurs, and particularly inventors and developers, sometimes expect that the marketplace will want any innovative tech-nology that might be described as "game changing". The key is to realize that "game changing" should refer to the application and not to the technology.
Two separate barriers may stand in the way of the product being used. The first is that the product may not be addressing a real application problem. Or it might address a real application problem but be more expensive than current solu-tions, even though it may approach the problem in a more "elegant" way. In these cases, the product does not stand a chance. It is up to the investors and the board of directors to make sure that the product fills a real application gap, and that it does so economically.
Sensitivity to turf battles
But there is another barrier that is becoming increasingly common in medical technology and which is evident when the application is "disruptive". Turf battles can occur between two or more medical disciplines, each of which is required for the successful application of the product. As an example, both Given Imaging and InSightec have blurred the well-defined borders between different medical disciplines. In one case, it is radiologists versus gastroenterologists, and in the other, it is radiologists against gynecologists. Not under-standing this issue in a sophisticated way can exacerbate a turf battle, which could seriously impact product success.
In both cases, the potential problem occurs because imaging is a key component of each product. In general, imaging is performed by more than one discipline. We are all familiar with radiol-ogists who read X-rays, CTs and MRI images. However, for the most part, radiologists do not have their own patients. They are "advisers" who look at images and provide an assessment to the clinician (surgeon, oncologist, gynecologist, gastroenterologist, etc.) who is the patient’s doctor. With the advent of CT, imaging became more lucrative. Images became easier to interpret so that, in many instances, the clinicians who control the patients began doing their own imaging. Clinicians believed that they could correctly interpret images in their own specialties and would not need a radiologist.
On the other hand, radiologists – usually called interventional radiol-ogists – are performing therapeutic procedures that require imaging to guide, monitor and control the application of the therapy. This is the basis of the "turf battle" between interventional radiolo-gists and traditional clinicians. It is important to be sensitive to this issue and to try to avoid the pitfalls, particularly when the product disrupts the way things had been done in the past. Fortunately, both Given and InSightec have recognized this potential problem and have acted in a way to lessen the adverse effect of a potential turf battle.
Management challenges
Management is also key. It is important for top management to have a good track record and have capabilities in non-technology areas. The product has to be one that the customer wants – not only the concept of the product, but all the nitty-gritty details. And top management must recognize that distribution is at least as important as innovation and plan for marketing and distribution with as much attention as is given to technology. Perhaps the most important ability of management is to understand when development should stop and to freeze product design. There will always be pressure from engineering to continue to innovate and make the product better.
But at some point management has to say "stop" and ready the product for production. It is best to understand that a product’s research and devel-opment phase is quite different from the engi-neering phase, and that success in each usually requires completely different personalities. It is a mistake to make the person responsible for R&D also responsible for engineering the product. These are separate disciplines.
Both Given Imaging and InSightec have skilled management and are led by experienced CEOs with track records of successful operations. In each case, the CEO had founded the company, and because of previous experience had been able to steer the company around the potential hazards. While these are common characteristics, there are clear differences as well. For Given, the product is a consumable. InSightec, in contrast, developed expensive equipment with virtually no consumable. However, the InSightec product requires a service contract, which results in a continuing revenue stream, making up for the lack of a consumable.
Distribution is also different. Given has set up its own distribution network, as its product is rela-tively simple to distribute once the doctor is trained and the reviewing computer console is installed. The InSightec system will be distributed, at least in part, by one of the large imaging companies, which provides the MRI on which the system is installed.
No formula
The point is that there is no set formula for success. Successful companies, particularly those that create products that can disrupt the normal way of doing things, need to be very sophisticated in their market approach. Not only must they produce a product needed by the marketplace, but their approach must keep all potential end-users happy.
This article first appeared in the Israel Venture Capital & Private Equity Journal. IVC Research Center publishes the Israel Venture Capital & Private Equity Journal (IVCJ), a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit http://www.ivc-online.com
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