Medsider: Learn from Medtech and Healthtech Founders and CEOs - What it Takes to Get a Medtech VC to Say Yes

Episode Date: November 23, 2020

This interview is a continuation of a throwback mini-series that I’ve been releasing over the past few weeks with some of my favorite Medsider guests of all time.One of which is Lisa Suennen, who was then a Managing Member of Psilos Group, a healthcare-focused venture capital firm with approximately $600 million under management. Although this discussion is several years old and the audio quality isn’t the best, the insights Lisa provides are timeless. Here are some of the things we covered:What does Lisa think when the goal of physicians is to “dagger historical price lists."Why Lisa and her partners at the Psilos Group favor late-stage deals.Corporate venture capital arms: friend or foe? And if you’re an early-stage medical device company, what is the best way to get the attention of Lisa Suennen and her peers in the VC world?See more...

Welcome to Medsider, where you can learn from a mix of experienced medical device and med tech experts through uncut and unedited interviews. Now, here's your host, Scott Nelson. Sequoia Capital, Thrive Capital, and Greylock Partners reportedly made a 2X ROI in just two weeks when Facebook acquired Instagram for $1 billion. Yes, that's 2x in two weeks. With that said, why in the hell are VC firms still interested in funding? funding med tech companies when only 50% of all reported exits are less than $100 million, and the average cost of attaining a PMA is approximately $94 million. More importantly, what does it take for medical device companies to get a yes for those VCs

that are still interested in forking out some cash? Good questions, huh? Inner Lisa Sounen, co-founder and managing member of SiloS Group, a healthcare-focused venture capital firm with approximately $600 million under management. She also serves as a director on the board of several silos portfolio companies, including Angioscore, Patient Safe Solutions, Omni Guide, and Verlite. In this interview with Lisa Sunan, we learn how and why medical device companies will need to adjust and modify their business models in order to succeed in today's healthcare environment. Here are a few of our discussion points. What does Lisa think when the goal of physicians is to, quote, dagger historical priceless, unquote?

Why is health care the red-headed step? child in the world of venture capital. Key action items for early stage med tech companies. Why Lisa and her partners at the SiloS group favor late stage deals in our current economic environment. What's more important in the eyes of MedTech VCs? Quality improvements versus cost reductions versus reimbursement. Corporate venture capital arms, friend or foe.

And if you're an early stage medical device company, what is the best way to get the attention of Lisa and her partners at the silos group. Of course, there's a lot more valuable information we're going to uncover in this interview with Lisa. But before we dig in, you need to listen to these brief messages from our sponsors. And by the way, if you're interested in becoming a MedSider sponsor, go to medsider.com forward slash sponsor. Again, that's medsider.com forward slash sponsor.

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is one that you really don't want to miss. So listen up. Hello, everyone, and welcome to another edition of MedSider. Of course, this is your host, Scott Nelson. And for those of you who are familiar with the program, thanks again for joining us. And for those of you who are just maybe your first or second time listening, this is a show.

It's pretty simple. So the goal is pretty simple. I bring on interesting and dynamic medical device and med tech stakeholders in order to learn, learn as much as possible, learn about their past experiences, what they're doing now, things they've learned, things they've learned themselves along the way. So we can take these concepts, these insights home with us, and become that med tech or that medical device linchpin in your own little ecosystem. That's the goal. It's really simple.

And today's guest is Lisa. soon as she is the co-founder and managing member of the silo school, which is a healthcare-focused of venture capital firm with approximately $600 million under $600 million under management. I got that straight from the official bio. So welcome to the program, Lisa, I appreciate you coming on. Thanks very much, Scott. And before I forget, Lisa writes a very popular blog,

or she blogs, I said, at a very popular website, Venturevalky.com. Why do you spell that domain before we get started, Lisa? Sure, it's Venture, like Venture Capital, V-E-M-T-T. B-U-R-E and then Valkyrie, V-A-L-K-Y-R-E.com. All one word, Venture Valchre Valchre. Venture-Valcary. And for those of you listening, I hate, I hate, like, I'd go along with everyone else, really despise information overload, but Lisa's emails to her blogger that are the few

they get in my inbox, well, so I encourage everyone to go check that out. So Lisa, let's start out with this quote from Josh. Macauer, I think that's very fast. Yeah, you're probably more familiar with him. Yeah, you're probably more familiar with his work than I am. But a net tech entrepreneur does an investing as well. But a recent quote that I picked up is the average cost, taking a product to the 5K process is approximately $31 million,

and the average cost of getting a product through, getting a PMA out of product is currently estimated to be around $94 million, excluding reimbursement, sales and marketing activities, et cetera. 31 million for 5K, 94 million approximately for a PMA. As a med tech, do that scary when you hear those tests, when you read those steps? They may be correct on an average. They probably are, Josh, as well knowledgeable and educated about the topic,

and some lot of research on it. But I don't think that they are, the law of averages is helpful to the analysis because the investments you make are on a one-by-one basis. Nevertheless, there's no doubt that the cost of getting a medical device onto the market to sell has gone up and is going up more and more, particularly as the FDA has become more stringent and as the medical device tax comes to be real, if it does come to be real, it's a much more difficult time, and the thing that most people forget about altogether or underestimate is the cost of operating your business when you don't have a reimbursement code

in the U.S. or any other country where you need one. So, yeah, it definitely gives one pause. medical device deals today versus what they look like, you know, five or ten years ago. I always want to start because it's obviously eye-catching to operate within this space. And I know your firm, not only in medical device companies, but also kind of in healthcare IT as well. But with those pleasing the met, that environment right now, you find yourself fleeing more toward light of the Instagram, you know, the one bill, the one-billion-dollar acquisition of Instagram by Facebook, et cetera, you find yourself sort of biasing and maybe trending towards

site health IT slash health care kind of services versus and we do the other. And I don't know. You know, I suspect it will get a little more, you know, trended in that direction in the next few years. Gosh, they're really, it's really a function of, you know, the potential returns, the difficulty in the market, the size of the markets, the changing, you know, dynamics and reimbursement.

It's a complicated set of issues, whereas the market right now is really demanding methodology to reduce cost. If you look at the health reform law, probably many of the actual outcomes of it will survive because action occur. If you look at that, you know, the place that people with money, and I mean, by that, I mean, customers, productivity, improve revenue, and, you know, reduce the cost delivering services. So that lends itself to things like IT and services more than it does medical devices. Nevertheless, there's always going to be some good medical device investments. And those are going to be the ones that figure out ways to deliver quality improvement, you know,

on an evidence-based, pro-quality improvement, eliminates other costs, you know, by using this device or that device, what have you. So there's always going to be an opportunity there. I think it's just becoming more clear what kinds of opportunities those are. Gotcha. Okay. Very good. And that provides for a little bit of the same way because I'd like to focus most of this interview

on not only the current trends, but also these changing business models, some of them to fit the current funding and investing environment. And so one of those growing trends, you mentioned a couple, but one of those is the fact that physicians, they definitely still have a large, you know, a large, their opinion definitely counts. I certainly don't want to make light of that. But because more and more of the practices are being acquired by, you know,

by the providers, by the health care systems, by, you know, individual, I mean, is mattering less and less. And, you know, the cost of these health care systems are becoming a really big, issue. And some of the quotes, I think actually that you blogged about in one of your recent posts, you know, I think that he mentioned taking a dagger to historical price list, reducing the number of vendors, volume purchasing discounts, evidence-based decision-making, as you just mentioned, thinking twice about using advanced technologies when older, cheaper version is available. I mean, those are kind of shocking. And for those of us who are kind of

at the field level within some sort of sale to marketing capacity, it may not be news to us, but interesting nonetheless to hear, you know, someone like that speak on the stage about issues like that. That's a huge trend. And so with that, some key characteristics when a medical device company comes and pitches the silos group on this next new device, the key criteria that you look at them. Yeah, I thought those comments by Dr. Spurling were really interesting. You know, he's a professor of orthopedic surgery at Mayo, and Mayo is generally believed to be, and I think is, you know, one of those organizations that really advances the science and tries new things.

And yet the fact that they believe their revenue is going to change from a 70% fee-for-service model, you know, or, excuse me, 100% fee-for-service model now, to 70% full-risk capitalizing. Because, you know, my background is, I did this job. And so I, you know, come out of a world. We're thinking about how you balance cost and quality. every day when you're delivering clinical services is paramount. And for us, as a firm, you know, that was sort of the genesis of very much in the forefront at the same time.

So when we look at medical devices, when they come in, the first thing we usually say to them is like, let me just assume the technology you have works for the minute. You know, don't tell me about what it's made of or all that. Just tell me how it saves money to the health care system while improving or maintain quality. And the ability for them to articulate the economic story behind their device is the number one gate they have to get through to get us to pay more attention.

And I'll look at these deals. It leads us probably to do some of the different kinds of deals and some of the others have done. But if you walk through our portfolio, I could tell you that story on each one of them. That's what we look at first. And we've always believed, and, you know, I think time has caught up with us. It didn't always, it wasn't always true that people cared about that. But now I think time is cut up with us. And if you look at, you know, the kinds of things, Dr. Spromley, said it's very clear how much, you know, sort of the development of Me Too types of products is just not going to be sustainable. I teach a class at Berkeley on Healthcare Venture Capital.

One of my colleagues from the field came in and brought a picture with them and put it up on the screen and asked, can anybody tell the difference between these things? They literally looked identical. It was like one of those, you know, kids games where you look at six pictures of a pig and try to figure out which one is different, you know. They all looked exactly the same. we're all, you know, sort of CEOs of the companies that sell those six products, and very few of them, almost none of them could identify their own product.

Guys can't even tell the differences in their own product. The market certainly doesn't want to or care to unless they're really profound. And I think, you know, they have to be profound from a care standpoint and from a cost standpoint for anybody to want to support them as businesses. Right, right. And I think actually, I think maybe you even quoted, I can't remember exactly what publications but maybe quoted as saying true innovation versus these incremental advances that don't really justify either commercialization or even an uptick in the ASP. That's a great story that even the CEOs couldn't correctly identify the, you know, maybe their artificial need that was shown up on the screen.

That's an awesome story. Oh, yeah, yeah, no doubt. hasn't even, maybe they're still in friends and family sort of angel money, right? So they're at the early stages of thinking about this. But what about those companies, maybe some of those that are in your portfolio that's on your, you know, the Silas Group website, silos.com, GSI, LOS.com, like Angioscore or OmniGide, etc. Is that, I mean, are you seeing it within some of these companies, too, having to sort of pivot to a certain degree with their innovation versus those incremental advances as we just

talk about? Well, yeah. I mean, I think, yes, absolutely have to think about that. I mean, an advantage, of course, these companies have is they already started from a place of thinking about they need to tell an economic story to get ahead because, you know, otherwise they wouldn't be on our website. So from a mindset standpoint, they're already thoughtful about these issues and I've sort of been working on them for some time.

But, you know, but things change around them and make that even more poignant. You know, I think, for instance, of angioscore, a great company with, you know, tremendous success and big revenue now, but they have recently had to think about, you know, what changes they need to make in light of the fact that new Medicare guidelines have come out and reduced the number of percutaneous interventions, you know, angioplastys that are getting paid for by Medicare, you know, for the first time now, if you want to have an angioplasty, not that anybody really wants to have one, but if you're recommended to have one, you're going to get required to have a particular measurement, fractional flow reserve is called. And if you don't, you know, kind of hit the right number on that, you don't get one.

You have to try and fail on a medication regimen first. That's a good business, you know, for the health care system. I mean, there shouldn't be unnecessary angioplasties if you can do it cheaper and without the risk of side effects and all the rest. So when the procedures get done, when a device gets chosen, a balloon catheter in this case, you know, they have to be standing there with a story, a convincing story,

then they've been able to do that that tells why their device should be the one picked up off the shelf as opposed to something else when the time comes to actually do the procedure. Yeah. And maybe the better question is, are some of these sales and marketing messages changing and incorporating that cost,

Not just the cost of this can potentially reduce costs down the road. Maybe that's an aspect that you're seeing changing. Yeah, well, I mean, I think they are finding, and, you know, they've done a lot of clinical work to show the advantages of their device. And, you know, when I invest in companies, I encourage them strongly to do not just clinical studies, but economic studies. You know, what costs are you offsetting, whether it's other tests or other interventions or hospital days or whatever that make your product desirable, not just clinically,

but also financially. It used to be that when people come into our office and pitched to us, and I said, I asked them that question, you know, what does your product do not just clinically but financially for the health care buyer? They look at you like not speaking English, you know. I mean, it's starting to become the thing that they need to answer for everybody, not just me, so it's starting to change. And is that something that you can early on,

you're initially getting the beginning to structure clinical trial. Is that something that's fairly easy to factor in to a study, the economic value of a particular device? It's not easy. It's hard because some of these economic impacts are long-term in nature. You know, some of them accrue to different people than who pay for the actual device, which means they're not important to the people who are paying. You know, they're complicated thoughts because you have to really convince yourself that what you're doing directly offsets, you know what you think it offsets, and that something else would have been, it's got to get done.

Yeah. And so it's almost, this isn't going to be easy, but it's almost, do you think it's almost a must anymore to incorporate some sort of economic? I think it's been a must for some time, and now it's, you know, like do or die. Yeah. I think with your background in managed care kind of before the silos group, and then even in looking at some of your other, you know, portfolio companies in health care, IT, health care services, you find it easier to kind of,

you know, because you could pull kind of from a different angle. And maybe you're working with these companies, and they're addressing certain, they're trying to disrupt, you know, the market to a certain degree in an effort to reduce inefficiencies, reduced costs, et cetera. So can you, do you find that benefit to kind of bring that in when you're, you know, working with, you know, your companies on the medical device side? Absolutely.

Because while companies can get through the FDA eventually, unless they really have a flaw, Humana, a lot of work. If you don't get reimbursement, and I don't mean a code, because a code is hard enough, you know, getting an AMA code, getting a CPC1 code,

that ain't easy. But it doesn't, in the end, answer the question as to whether you're going to get paid for. It may get answered the question of whether you're going to get paid for my Medicare, but it doesn't answer the question

you're going to get to commercial markets pay. And you've got to have both, really. And so we have a really great, you know, sort of relationships and access to the guys on the payer side, to talk to their medical directors and say, hey, is this something you'd ever pay for? Or what would it take for you to agree to pay for this? And then you can go back to the companies and say, okay, this is what you're going to need to demonstrate.

So it's really helpful, I think, from our standpoint, is that we spend as much time thinking about the ultimate reimbursement system as we do about the clinical and the technical and the other stuff. Okay, so looking at some of the other criteria, late stage versus early stage. And I know I think you've written and also been quoted at saying that you typically, maybe not even typically, maybe all the time, your focus is on late stage. Is that true? I have done more early to either companies at revenue or on the cost of launch, but really over the last several years we've moved later.

And it has a lot to do with this reimbursement issue. You can spend a lot of money for reimbursement. Hey there, it's Scott. in so far. The rest of this conversation is only available via our private podcast for Medsider Premium Members. If you're not a premium member yet, you should definitely consider signing up. You'll get full access to the entire library of interviews dating back to 2010. This includes conversations with experts like Renee Ryan, CEO of Cala Health, Nadine Miarid CEO of CVRX, and so many others. As a premium member, you'll get to join live interviews with these incredible medical device

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