From big bang to profitable business

Although a number of global organisations are based here, the UK medical device industry is comprised primarily of small specialist companies, often developing single product ranges. In 2008, Eucomed estimated that there were approximately 11,000 medical device companies in Europe; more than 80 per cent of these were Small and Medium Sized Enterprises (SMEs), of which over 2,000 were registered in the UK. Yet for all the small companies who achieve commercial success, many do not. So what barriers stand in the way of expansion from seed idea to successful and profitable market launch, and how do medical device companies overcome them?

Profitability and continued expansion

A key success factor is a commercially viable product, supported by an effective sales, marketing and distribution strategy designed to achieve penetration into, and growth within, a target market.

In order to achieve prolonged sustainability, SMEs also need to plan beyond any initial financial success. Anticipation of change — and response to it — is crucial, especially in an industry dominated by high levels of technical innovation and a constantly developing regulatory landscape.

In 2008, Eucomed estimated that there were approximately 11,000 medical device companies in Europe

For many organisations, however, the next product enhancement or new development may not be of immediate concern. The period of time immediately following the launch of the first device is usually one of consolidation, debt repayment, and a steady progression towards overall profitability. The business plan should anticipate this transitional stage in order to avoid a number of potential failings, including:

• over-optimistic estimates of market penetration
• inaccurate predictions of manufacturing and distribution costs
• unrealistic timescales or inadequate levels of financing.

One common area where business plans can go wrong, especially if the understanding of the medical device industry is limited, concerns the costs and timelines relating to regulatory approval.

Regulatory approval and clinical trial

Obtaining and maintaining regulatory approval is a business imperative as without it there is no business. And although the path to approval is highly dependent on device type and classification, it invariably requires significant effort to deliver the right technical documentation, manufacturing controls, risk management and human factors engineering. Many medical devices will also need a clinical trial, and this can often be the largest single barrier between a device and its appearance on the market.

Clinical trials can be extremely expensive and time consuming to organise, carry out, and report, and the impact of failure on a small company is potentially catastrophic. Having to postpone a trial, due to delays in the design verification phase for example, can be extremely damaging, and having to repeat the trial for any reason could bring a halt to a development programme in its final stage.

Understanding the different potential regulatory pathways for a medical device is therefore vital for success, and many SME failures result from insufficient knowledge of how to commercialise technology and how to execute the most appropriate route to market².

Pre-launch growth

The period leading up to product launch is frequently characterised by rapid corporate growth and activities including:

Device development and design verification: The device technology at the heart of the company will need developing to the point of design verification, requiring expertise across a range of disciplines including engineering, industrial design, and human factors, plus programme and risk management. Depending on the growth model, this expertise must be recruited or bought in as an external resource.

Establishing operational systems: The necessary development of a quality system and procedures, regulatory and quality assurance functions, and business development capabilities also requires the right expertise. Relying on technical staff to take on roles to which they are ill-suited should be avoided.

Manufacturing scale-up: Devices supplied to clinical trials will need to be manufactured using production systems representative of those to be used for the launch product. This scaling of prototype manufacturing lines frequently presents issues and exposes gaps in a company’s understanding of the device design envelope.
At this stage, there is a risk that companies lose the broad perspective required for long-term success as they focus on developing the infrastructure and capability required for clinical trials, often with only limited resources. Millward and Lewis (2005)³ reviewed case-studies of small UK manufacturing companies and found that such resource-constrained environments led to owner/managers focusing on short-term issues, often resulting in effects such as:

• development handicapped from the outset by unrealistic expectations
• decision-making hijacked by short- term considerations
• quality improvement activities, such as iteration and evaluation of alternatives, considered unnecessary
• quality compromised, and key development stages, such as market research, omitted.

The commercial viability of the proposal will be challenged just as strongly as the technical feasibility.

This research covered new product development in SMEs as opposed to newly formed device manufacturers, but the findings are applicable in both fields. A balance is therefore required to ensure companies focus attention and effort on both short and long-term objectives.

Financing

Most entrepreneurs typically start out raising a small amount of money to prove the feasibility of the product idea, and then raise more over time through various routes including Government grants, venture capital (VC), banks, angel investors, investment banks, corporations and customers. Typical fundraising stages include seed, start-up, expansion and mezzanine⁴ but this depends to some extent on the device technology in question.

To attract the significant funding required during pre-launch expansion, it is often necessary to develop the technology into a fully functional prototype. The amount of seed funding necessary to get to this stage will differ for, say, a novel device technology compared with larger more complex systems.

Charles Potter, founder and ex-CEO of Glide and inventor of their needle-free drug delivery system, experienced some difficulties in overcoming this funding gap: “In Europe there is a tendency to make smaller investments and link further investment to good progress. There are fewer VCs in Europe now compared with five years ago and although it is possible to secure angel funding this is often not so suitable for biotech or MedTech companies where larger cash sums are required. VCs frequently prefer to syndicate to share the risk, rather than backing something they really believe in by themselves, and they often like to invest in stages, and later rather than sooner; it is normally the last investor in a company that gets the best return!”

When developing a new medical device in the drug delivery sector, alternative funding can come from a collaboration with a pharmaceutical company, as they are continually looking for improved ways to deliver existing or new formulations. Negotiation of such deals can be difficult, though, as Matthew Young, founder of Oval Medical and inventor of the injector technology on which it is based, comments: “The difference in size between a start-up and its customers can be huge, and it is sometimes difficult for either side to empathise with the other. The kind of people who thrive in large institutional organisations tend to be different from those who thrive in start-ups. Culture and character type are very different.”

Whether the negotiations are with pharmaceutical companies or VCs, having a clear and accurate picture of the level of funding required is an imperative, as is having a robust and effective demonstrator of the core device technology.

Demonstration of feasibility

The extent to which feasibility must be demonstrated in order to secure funding will depend on many things including the level of finance required, the innovation management skills that you can convey, and the technology in question. The commercial viability of the proposal will be challenged just as strongly as the technical feasibility, as will the strength and capability of the management team in charge of the company. As Charles Potter puts it: “It is about management, management, management. There are plenty of mediocre ideas that have succeeded due to good management, just as there are fantastic ideas that, saddled with poor management, have failed to make it to market successfully.”

For a device-based company, even the best management team must be able to demonstrate that the core technology is viable; investors always want to ‘see something working’. As a result, it is sometimes easier to develop a variant of an existing – and hence proven – technology, rather than a totally novel ‘disruptive’ technology which can be seen as carrying more inherent risk. In this respect, close competition can be a good thing, though it is important to be able to demonstrate freedom to operate and, ideally, to achieve some level of protection for the idea.

Protecting the idea

Some technology businesses protect an idea with secrecy, while others decide to stay ahead of the competition through speed to market and/or the quality of their products, however most rely on patents – sometimes combined with Trademark and Design Right – to defend their market position.

Decisions around IP strategy are made very early in the life of a technology company, and often represent one of the first challenges that an inventor faces. Mistakes include divulging too much before filing, or not appreciating the full scope of the invention, resulting in filings that are too narrow. Limiting the regions covered, usually in order to preserve an equally limited budget, can also greatly reduce the potential value of a technology innovation. And all this can happen before the device has even been fully realised.

The Big Bang…

But the biggest barrier to developing and commercialising a new idea is being able to have the right idea in the first place. From that moment of inspiration onwards, it is possible to identify the robust approaches and processes which give the best chance of success. But just as we might now know what happened one trillionth of a second after the big bang, yet not what caused it, it is very difficult to plan for that moment of inspiration (which is another challenge altogether).

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References
1. Eucomed European Trade Association for Medical Technologies Industry, 2008.
2. Quotec, Commercialising Medical Devices, 2010.
2. Millward, H, Lewis, A, Barriers to successful new product development within small manufacturing companies, Journal of Small 4. Business and Enterprise Development, 12(3), pp379-394, 2005.
5. Bottorff, L, Funding a medical device start-Up, Medical Device and Diagnostic Industry Magazine, 2000.