Monday, July 31, 2017

Alfidi Capital at 4th Annual Rosenman Symposium

I attended the 4th Annual Rosenman Symposium in my ceaseless quest to understand the health care sector. I arrived at the UCSF Mission Bay conference center too late to score the hot lunchtime snacks they laid out. If I had known there would be free food, I would have arrived much earlier for check-in. I had lunch before I got there, so it's not like I was starving, but I do kick myself whenever I miss a free meal. Here comes my bonanza of health care sector investing wisdom.

Alfidi Capital at the Rosenman Symposium 2017.

There are some universally acknowledged good things for health care startups to have. The good stuff includes royalty agreements with Big Pharma and grant support from big name institutes. The National Institute of Biomedical Imaging and Bioengineering (NIBIB) and UCSF Clinical and Translational Science Institute (CTSI) are undoubtedly among those big names.

Highway1 and Breakout Labs help incubate startups in biotech. I must inform the startup community that not all incubators are created equal. The ones run by serial entrepreneurs and advised by VCs who have realized returns are very selective but worth the effort to apply.

One conference speaker helpfully identified a 2x2 matrix that health care corporate development executives use to decide whether to develop a project internally or pursue an external acquisition. It reminded me of a similar matrix I saw years ago for corporate development in the telecom sector. Those corporate development types sure do get around. The corporate development approach to strategic M+A varies but does have some big common factors: synergy with existing product lines; de-risking regulatory approval; ways the target can add value or accelerate growth. Difficulty in getting reimbursements from big health care buyers like Medicare leaves incentives for corporate development to pursue startups that reduce costs. IMHO that reimbursement inefficiency is exactly why US health care is so expensive, before we even consider the costs of malpractice insurance and litigation.

The STEM pipeline for the highly skilled people needed to work in health care startups runs through multiple organizations. The ARCS Foundation pays top students to make new tech and the ARCS Foundation Northern California Chapter is their local presence. Research grants can turn a bright idea into something ready for further pre-market funding. Entrepreneurs should max out such non-dilutive investment wherever possible. Startups execs can also get non-financial inspiration from MedtechWomen, and the world certainly needs more women driving change in health care.

Medtech startups should segment their CustDev by patient type, i.e. old/young, male/female, etc. because drugs and devices will affect different sub-populations in different ways. Noting cost of delivery and value recovered by patient type will aid in establishing metrics that matter to large buyers' reimbursement plans, especially as the health care sector completes its transition away from fee-for-service and towards value-based health care. Corporate development people also want patient data that de-risks a potential startup investment even if it has not yet undergone clinical trials, so early CustDev validation really matters.

I don't have a perfect explanation for why medtech investing is trending down. I do not know if the ACA's rules or its tax on medical devices are affecting this trend. Whether federal government spending on health care will decline depends very much on whether the current Administration gets its wish for an ACA overhaul.

Consolidation among big medtech corporations may be one reason why medtech early stage funding for innovation is slowing down. On the other hand, health care is heavily regulated with big entry barriers, thus it's hard to innovate even if there's no consolidation trend. I could not discern a consensus answer on this topic from any of the conference's panelists.

The EU's medical device regulations (MDR) sets a higher bar for medical devices entering the EU market, forcing companies to revise their marketing strategies. Product development will be more costly, especially for startups. Market strategies for product launch are now likely to focus on the US market first thank to the MDR. Hey, I always knew America was number one.

I got to hear pitches from the 2017 Rosenman Innovators, a crop of promising medical device startups. The whole event reminded me to spend more time meeting people at the QB3 life science incubator in San Francisco. I have been there before and they serve decent coffee. I shall return to the Rosenman Institute's future symposiums as well, so don't forget that I was here in the first place.