The following is an interview of Sofinnova senior associate Katie Ellias by John Gridley, the co-founder of BSG which has developed a functional brain monitoring system (www.microeeg.com) which has received FDA 510(k) clearance.
Which segments of the French medical device industry are attracting the most startup venture investment? What are some startup companies to watch in those areas?
In general, the French market is a rich place for medical device investment. The major categories are similar to those outside of France, across Europe and the US, and tend to center on cardiology, vision, and other therapeutic devices, as well as a larger trend towards e-health and consumer health, including mobile apps and mobile enabled devices to help diagnose or track health issues. For vision, we have been particularly impressed by Pixium Vision, (we are also investors here), which is a group formed out of the Institute de la Vision and Centre Hospitalier National d’Ophtalmologie des Quinze-Vingts in Paris. The group is working on a very futuristic implant that will help patients who are blind due to a rare condition (retinitis pigmentosa) regain some sight and independence. There’s another group out of Lyon that’s working on a novel non-invasive approach to treating glaucoma patients without the need for surgery or lasers, called EyeTechCare.
In the cardiac arena, not talking about Carmat, we are bullish on a small French startup called CorWave, that is working on a very new way to build a heart pump (cardiac assist device) for patients with very severe heart failure that may allow more patients who currently are on the transplant waiting list to supplement their failing heart with a pump that is more physiologic (works more like the native heart) with the aim of preventing some of the side effects (bleeding risk) that come with the current technologies. This company is very early stage, but has demonstrated some very promising data already. There are also a few startups in France working on technologies, which would be minimally invasive heart valves to repair or replace the mitral valve, failures of which are devastating for patients, and for whom no minimally invasive product really exists. These patients often have to have open-heart surgery to correct their valves, or due to being very sick, aren’t eligible for any therapy today. One to watch is Highlife Medical, the founder of which helped found CoreValve, a company that is the market leading technology for a similar product on the aortic valve side and was bought by Medtronic in 2009, one of the major medical device companies globally, for more than 500M Euro. There are other academic groups in France working in a similar field, Invalv and Mitricares, demonstrating that this space represents a major unmet clinical need.
For the more consumer/e-health field, we were impressed by and took a look at Withings, a web-enabled suite of consumer medical products such as baby monitors, scales, and other products to allow parents and consumers to track easily online different aspects of life. The group is already selling pretty significant volumes of product, in France, but also in the US.
What are some of the strengths and weaknesses of France as a location to found a medical device startup?
The good news for France is that it is an attractive location in terms of hiring people and convincing them to live here (vs. Germany) from around Europe. There is also increasingly a focus on medical devices from the French government innovation funds, including BPI France, which has recently announced a very large (~500M Euro) fund to invest in medical technologies and healthcare in France. There is also a range of generous public grants to help companies who set up shop to get tax credits for R&D done in France and job creation in France. There are also some creative grants companies can access for collaborations between 2 or more French startups in this sector (called an ISI grant) to access public monies. We also have a healthy French VC and healthcare oriented investment community in the form of groups with traditional investors as Sofinnova has, as well as those who invest FCPI funds. There have also recently been a slew of medtech companies going public in the last few years, demonstrating investor openness to support this industry locally.
Cons are that as I’m sure most people know, employment laws are very employee friendly and very costly for companies here, as well as of course the taxation in France that tracks above several other countries in Europe. But this isn’t specific to medtech. We do hear entrepreneurs complain about the costs of setting up shop here in France but in the end there is a pretty healthy start up community here in the medical industry.
According to the latest PwC Money Tree report on venture capital investing in the US, venture investing in the Medical Device industry fell 17% in dollar terms in 2013. At the same time, it’s been especially difficult for device startups there to raise Series A financing. Why do you think this has happened, and is the outlook any brighter for raising venture capital money for medical device startups in France?
Part of the issue is that VCs have been having a much tougher time raising money since the 2008 financial crisis than other asset classes in general (riskier investment class and not all funds performed well). Add to that, the challenges of the medical device industry, which is a pretty specialized domain vs. pharma, with fewer exit options for companies (relatively speaking) since the US IPO market has not been available for medtech, vs. being very hot for biotech in 2013. Additionally, remaining VCs have been tending to invest in later stage companies, hoping that this will mean greater certainty of a return (though possibly a lower ROI multiple); we have not embraced this approach for our fund, however – we still believe in the traditional VC model: “buy low, sell high”. As a result, VCs are investing money in the sector, but they tend to be reinvesting in their existing portfolio rather than in new companies, hence the challenge of raising money for Series A deals. One positive factor has been that large Corporates in the medical device field have been partially filling the void, investing more in earlier deals through their venture teams/funds. We at Sofinnova are definitely an unusual breed, we are Series A focused, life sciences dedicated (with a significant portion in medical devices) and focused on Europe – these things have definitely become less common in the VC industry consolidation that has occurred in the last years. Our belief is that the medical device industry is still a great opportunity to make money, we’ve done a number of new investments in the sector in 2013 out of our current fund (Sofinnova Capital VII), where we believe that investing in breakthrough medical technologies will have the potential to earn very handsome returns (as they have for us in the past). There are certainly some benefits to raising money in France, one major impact is the fact that the public markets in France have proven to be a lucrative financing source for companies (pretty much all the medical device IPOs globally in the last several years have been in France, STENTYS (one of our companies), SpineGuard, Vexim, Mauna Kea, EOS Imaging, Carmat, and more recently Medtech. Additionally, there are a number of funds, including ours who remain excited about this sector locally (Truffle Capital, OMNES, Edmond de Rothschild, Seventures, and of course BPI France, just to name a few that have been active recently). Finally the PIP breast implant scandal in France a couple of years ago hasn’t really helped things…while this was a case of fraud, not, in our view a failure of the regulation of the medical device arena, it has certainly raised the attention of the European Parliament and stakeholders to consider much stricter requirements for approving medical devices. In our view, this will not be good for innovation and investment in the sector if overly strict procedures are implemented.
Regarding strategics getting involved and setting up venture funds themselves, as an entrepreneur taking investment from a strategic venture fund wouldn’t a concern be that down the road it will make the company less marketable when it comes to an exit?
That’s the key question. I used to work at one of those corporates in business development (Medtronic) and we would look at companies to invest in and we always are motivated to ask for strategic rights which say right of first refusal, right of first offer etc. and that is inherently at odds with the interests of the VC and the entrepreneur who are trying to keep all options open to maximize valuation. It really depends on how competitive the deal is. We from the VC side would always love to have a corporate involved because you can get their expertise, if we can manage that with no rights. For example if we do have a corporate investor and they are on the board, we exclude them from any business development and M&A discussions to make sure there is no competitive conflict…our view is it would be great to have two corporates, neither of which has rights and they kind of neutralize each other and you get different views.
You were talking about the possibility of regulatory changes in the European Union. Are you seeing that uncertainty already impact willingness to invest in device deals and/or the deal terms that are being offered?
Investors probably are thinking differently about the traditional strategy in medtech, which was kind of a “CE Mark/European commercial launch first, FDA/US second” approach. We don’t necessarily expect companies to have it all figured out as to how they are going to the US or other markets at the very beginning, but we want to see that on their radar screen. In the past maybe investors were a little more comfortable with a Europe-only strategy, whereas now that that approval process in Europe has a lot of uncertainty around it, we are more wary, and we have to think more globally. So that’s the biggest change. At the same time, before these changes were proposed there were a lot of US based VC’s saying, “We really want to get more tapped into things going on in Europe, can we partner together?” I would say in the last year since these changes have been bubbling around we hear a little bit less of that.
How do you assess the prospects of French medical device company Carmat, which has developed an artificial heart and recently implanted the device in a patient for the first time?
We are all for companies attempting to bring breakthrough therapies to the market, and the Carmat artificial heart is a very ambitious project in this regard. They have also managed to raise an outrageous amount of money on the public market in France (current market cap is ~400M Euro) despite being very very early in terms of the proof of their device clinically. Unfortunately, the first patient had a number of re-operations and recently died. Our view in general is that we take a steady and conservative approach to developing medical technologies with our patients, to ensure the greatest possible chance that the products work as intended before they are implanted in patients. If Carmat manages to continue to improve their technology, it could of course be a very interesting therapy.
Consumer healthcare technology has been an area of considerable interest and investment recently: Withings raised $30 million here in France last year; Jawbone recently acquired wearable health monitoring company BodyMedia for reportedly over $100 million; Google’s Android Wear is to include health and fitness monitoring; and the US Food and Drug Administration reported that its staff met with Apple executives in December to discuss mobile medical applications. Do you see any of the big medical device companies trying to get involved in this market, and if so what hurdles do they face?
We mentioned Withings, a very ambitious company that’s managed to do very well already, both in terms of financing, and actual revenues. It is clear that consumer and mobile health are both hot topics right now, which is exciting, but may also be creating a bit of a bubble environment (particularly in the US) where valuations are a bit excessive in our view. One dynamic that is evident is that it is people with IT backgrounds, not healthcare backgrounds launching and investing in these technologies. How the medical device heavyweights will view these products remains to be seen. We do see signals that they are moving this way, or at least away from just being focused on gadgets. Though this has more been in the direction of data-driven services companies, than consumer health. For example, Medtronic, the largest pure play medical device corporate globally, acquired Cardiocom in August, a disease management services company, and DaVita, a corporate focused on the dialysis market, acquired a physician group (again services model).
Getting directly involved in consumer health tools is a pretty big jump for most of the corporates, as the customers they call on today are almost exclusively physicians, not patients/consumers. This is different from pharmaceutical companies, who, in the US, have been doing direct to consumer marketing for a number of years now (this is still illegal in France). Exceptions are things like the sale of insulin pumps or other diabetes technologies by companies (like Medtronic, Abbott) or other companies like Johnson & Johnson who do have direct to consumer experience with their pharma and other divisions. Basically it is a market that they don’t really have experience with or teams that are trained in managing this. My view is that will take a while. However we do see companies like Philips, who make baby monitors, breast pumps and all kinds of other consumer health devices, being more likely to jump into that space. They are effectively already there.
How is the general trend towards greater connectivity showing up in medical devices?
An interesting example of this is seen in an emerging therapy for obesity, from a company called Intrapace. This group has an implantable device that “paces” the stomach to help control obese patients from eating by making them feel full. One very interesting aspect of the device is that it is “smart”, it knows when the patient is eating based on a sensor in the stomach and records and transmits that data to the patient’s doctor. This enables the doctor to intervene with a patient and say, “hi, I can see you’ve been getting up at 3 AM and having a snack…that isn’t what we agreed on in your treatment plan.” It allows doctors (and eventually patients) to have more data about their behaviors and make real time adjustments to their therapy.
What is the typical time to exit for a medical device venture capital investment?
I don’t know if there is really an average. In our ideal world we’re talking 3-5 years. As is the case for most VC’s, when you have a ten-year life cycle of your fund, you make most of your new investments in the first 2-3 years of the fund, and as you have ten years, so you aim for things that can return within 3-5 years. Then obviously some of them do and some of them don’t, but by ten years you really need to be out. When you ask the people who have been doing this for 15 to 20 years about deals they did and whether they were right about which ones would have a 3 year exit time horizon and which ones would take 10 years, they say that they often got it totally wrong. And that’s the reason we make more than one bet. Things happen that are unanticipated like external environment changes or something about the technology or competition or many things you can’t predict. Testing something out in the lab is not the same as testing it on a sick patient population. As you get into your clinical trial you learn things about your product that there is really no way to have known before.
