Due Diligence for Investors New to MedTech How to Assess and Validate Startups

Hello, and welcome, everybody, to, Due Diligence for MedTech Investors. Our special guests today are Dr. Mudit K. Jain and Renee Franz, and we're very lucky to have them both here. I'm going to let them introduce themselves. A couple housekeeping announcements while we're waiting for everybody to, log in. This call will be recorded, and the recording will be available, tomorrow, along with the slide deck. Is that correct, Renee? The slides?

renae franz: Yes.

Yes, and there will be a certificate of attendance available to those of you that would like one. Put your name and your… as you would like it to appear on the certificate, and your email address in the chat. Use the chat function, for our communicating with me and or the speakers, but use the Q&A function, to ask questions of the speakers. It's just easier if the… if you keep the Q&A separate from the chat. What am I forgetting? Please join us, this Friday on Friday in Focus. Next week, we have two more webinars. One, I believe, is on electronic instructions for use in the EU, the new legislation, with five experts, and then we're also having,

Pre-market clinical studies in the EU. On… the 29th or the 30th, or something like that. So, yeah, keep your eyes out for those announcements. I'd like to thank you, and let's get started.

renae franz: Okay, great. Thank you, Sean. Thanks, everyone, for joining. And Muda, what an absolute pleasure to be doing this… this webinar together. I really appreciate your time. renae franz: For some background information, Muda and I met 25, 30 years ago in a cardiac electrophysiology development program. We've both stayed in med tech, but our careers have taken different paths. renae franz: And so we're going to talk about what that… what that looks like today. But as far as… for those of you who are new to investing in med tech, what we'd like you to walk away with is a real-world understanding of this market, the different types of devices, the risk levels.

renae franz: Whether you're investing in, you know, 10 million or less, which tend to be the devices I work on, or hundreds of millions, which tends to be the devices Moodit works on, we want you to feel more confident in the investment that you think you may make in this space. renae franz: So, with that being said, briefly, my background, I'm with LeanREQA. LeanREQA does medical device, for the most part, regulatory and quality consulting. renae franz: I'm the oddball, I'm the general manager that oversees operations, but I also do commercialization and product development, consulting, and executive leadership consulting in this space. So, over the course of over 30 years.

renae franz: I've helped bring over 200 different medical devices to market, most of them much less of a risk class than what Moodit has worked on. renae franz: And so, with that being said, Muda, I'm going to turn this over to you to introduce yourself and go through your slides.

Thanks, Renee, what a pleasure to be here, and, for that, Look forward to the session, and good morning, everyone. I have half an hour, so I'll keep it relatively high level, but please feel free to ask questions, any specific questions that you may have. So, Renee, if you can go to the next slide. slide. I'm an electrical engineer by training, grew up in India, and after my undergrad, was very fortunate to get a scholarship to come and get my PhD at Duke in biomedical engineering. Then worked with a couple of startups in Silicon Valley, and then moved to Guidance, which was the second largest pacemaker company, and that's where Renee and I actually met, almost, as Renee pointed out, 25 to 30 years ago.

Decided to switch gears after product development experience and went to business school, from where I went and joined J&J's venture fund. And left that venture fund in 2007 to start my own fund called Synergy Life Science Partners in Silicon Valley. We had 4 unicorns come out of it, a company called Inspire, which is in the sleep apnea space, a company called iRhythm and cardiac rhythm management space, Aptis and Tricenterix, which was a surgical robotic. 2019, I started Trejo Ventures, along with NuXL, which is a virtual accelerator of sorts to focus on neuromodulation. So, besides being a venture investor, I'm also an entrepreneur, and have started 4 companies over the last 5 years, and have now raised close to $175 million in venture financings for those companies. I bring a little bit of mix of founder, entrepreneur, and an investor mindset.

to this panel. If you go to the next slide. So this is perhaps a little bit of an extension of my background, showing where we invest. We truly play at the intersection, and when I say we, I'm talking about Trio Ventures, the venture fund that I'm, that I founded. We truly inter… invests at the intersection of biology, what I call deep tech, a big portion, I would say 80% of our portfolio. is focused on leveraging high-tech, deep-tech technologies for medical devices. And obviously, all this has to make sense in the context of health economics, considering the environment we are in. So when we think about the biology side, we are focused on big therapeutic areas, like cardio. Neuro. Neuro includes multiple therapeutic areas. As you can imagine, brain and the nervous system controls pretty much all the major organs and the functions in the body.

Orthopedics, inflammatory disease, Name a big disease area, and we have probably invested in that. On the technology side, when I'm talking about deep tech, we are talking about devices which have their own chips, sensors, batteries, power management, communication systems, algorithms, and so forth. So, actually, AI is sort of embedded in these devices. And as I mentioned, healthcare economics obviously has to be a critical part of what we invest, and has to make sense. If you go to the next slide… So what do we look for? I think one of the things, if I can… walk you through what MedTech investing truly is. It's really about needling your way through a complex web of risks.

that we… Believe will yield appropriate risk demonstrated rewards. So, we as venture capitalists, are ultimately measured and rewarded for returns we generate for our investors. This is a high-level list of what are the things we focus on during our diligence. It's a laundry list, but it's a fairly nuanced, because it's more of an art than science, and you really have to work your way through assessing risk for all of these elements that are associated with medical device development and commercialization. You'll hear me say two words very often, time and money. Those are the two things that everything listed here ultimately has to translate to, and that's how we assess an opportunity.

So what are we looking for? Big unmet clinical needs, or in other words, big markets. We focus on markets that present an opportunity of a billion dollars or more annually, so we are really looking for big, unmet clinical needs. The other element that we'll really focus on is the team. we are looking for stage-appropriate domain experience teams. For example, if we are developing an implantable device. I would prefer to see an R&D leader in the early stages of the company who has actually taken multiple implantable devices. through product development and FDA approvals. If it's a commercial or clinical stage company, then we'll be actually transitioning over to a different kind of leader. So stage appropriate and domain experience are the two key words when we are looking at the team that is going to be working on these products for either development or commercialization.

Third element, and this is obviously the product. And the technology has to be highly differentiated, provide distinct advantages over an existing solution, or if it's a new market, then it has to be a very Easy-to-use device, relatively speaking, in the hands of a physician. We spend a lot of time trying to understand what is the physician incentive, and how do they line up with the specific solution or the device that we are looking at. And how medicine is practiced overall. It's very difficult to change the practice of medicine, so ideally we would like things to fit in the current workflow.

Payer dynamics is extremely important. On the regulatory side, you know, we want to get a really good estimate of what a clinical trial would look like to get this product through FDA approval. How many patients? How long a follow-up? Ease of recruiting the patients. This, again, translates… all of this translates to time and money, and the clinical trials in our situation for Class 3 devices is probably one of the most expensive phases of the medical device investment, besides commercialization. So again, this is… this is an area we spend a lot of time understanding what will it take to convince FDA to approve this product.

renae franz: And Moodit, before I go to the next slide, if I could just comment, with the lesser risk classifications, we look for all of these things as well. Some of them will be very different, and I will talk about that later in the presentation. I know we only have 30 minutes with Moodit, so…

True, that makes sense. And as I emphasize, this is for Class 3 devices, what I'm talking about.

renae franz: Yeah, yeah.

Reimbursement, you know, while we don't have this fully sorted out in early stages. We do want to see a roadmap as to how we will ultimately get paid for these devices, and I would say this is becoming a bigger part of diligence early on. And then, in the end, it's all about the exit. Exit potential and the time to get there. It's all about how much dollars for all these activities that I talked about, product development, clinical trial, reimbursement, and so forth. How much money will it take, and what time, and what are the comps that we see in that specific therapeutic area? To really understand, is this investment worth

worth our while to make to get the appropriate returns. If you go to the next slide. As I mentioned, it all comes down to time and money for investors, which I'm sure you all can appreciate. We are constantly weighing an opportunity from its upside versus how much time and money will it take to risk retire a company and exit it via an IPO or M&A. Again, I can't emphasize enough that, you know, when you think about product development, clinical trials, regulatory approvals, reimbursement, etc, everything has to be synthesized down to ultimately how much time, and how much money will it take, and what's the potential exit.

So, on a risk-adjusted basis, you have to generate attractive returns to compensate for a relatively illiquid asset class here. Different funds have different tolerance for different kinds of risk, but you'll see them weighing most of these risks in some shape or form. If you go to the next slide. So this is… this is… now I'm going to take a little bit of how the investors, or the VCs, look at risk and how entrepreneurs see it. And there's a little bit of difference in how, especially early-stage entrepreneurs see the risk versus an investor does. Entrepreneurs tend to see it as more linear. and limited up to clinical trial stage. Again, I'm talking especially for Class 3.

We see, on the other hand. See risks compounding and layering on top of each other. So that's why you see a big divergence in how people perceive this risk, and as a result, what they would see as an appropriate reward to be had for that. A lot of things have to go right over a long period of time for a company to be successful, and that's how VCs look at it. So it's really important to understand where the investors are coming from. They have several opportunities, we see a lot of opportunities, and we tend to gravitate to ones where we see either lower risk or same reward. Or where we will see disproportionately high risk, What are relatively high.

Relatively high reward for a high-risk opportunity. Once you understand this mindset from an investor perspective, your business plan, your thought process tends to evolve, and you connect a lot better with potential investors or the venture capitalists, and really gives VCs more confidence that you have a good grasp of the underlying risk. This is, again, part of our assessment of the team. How well does the team that we are investing in really understands this risk as a plan to tackle these risks in a timely manner? If you go to the next slide.

renae franz: Before I do, I did want to comment that this curve that we see here, that Mooditz put in this graph, also actually applies across all devices. And, we talked… Michelle and I, the founder and principal at LeanREQ, I talked to renae franz: New investors and or people who are new to MedTech. renae franz: about the fact that once you get your, for example, regulatory approval with the devices we work with, not a lot of our devices have to go through clinicals, most people think that's the end of the race, and it's just going to be smooth sailing from there, and that is not the case. renae franz: that is just the beginning. It's the commercialization piece that is the highest risk, and takes the most amount of money and work. And later on in the presentation.

renae franz: I will take you through commercialization journeys based on the type of device and how it addresses the market, and how to level set your expectations around timing for the type of device you may be investing in.

So, you know, as I said, risk isn't either be older, but so is the valuation. And just like you would compare your home value to a similar home in a similar neighborhood. Be sure you do really good research on appropriate comps, and the keyword is appropriate, implying similar stage, similar market focus, similar therapeutic areas, similar class of devices, and so forth. When you're raising money, and this is, again, one thing we see with a lot of entrepreneurs and early-stage investors, angel investors. that… Effectively, when you're raising money, you are selling a portion of the company and some control to the other investors.

This implies dilution in your ownership and also control. Unfortunately, it's a fact of life. And again, I am an investor, and I'm also a founder, so I feel the pain on the founder's side when I have to raise venture money, but that's just the fact of life. I do find that founders often hesitate to raise adequate capital, And or seek unrealistic valuation. And we'll hold off financing. Say, hey, I'll come back later when I think I'll get better valuation, I would have accomplished more milestones. The reality is, depending on the class of devices, you're most likely going to need investor capital.

And so there's just no way around it. And in the end, a X percentage of something is more valuable Then 100% of nothing. So just keep that in mind as you think about valuations and keeping that somewhat realistic. Let me go to the next slide. So this is just a concluding slide. We are part of a highly interdependent ecosystem where we work very closely with each other. The ideas, the entrepreneur, the capital, academia and the research, big companies from an exit perspective, we all need to work together. And just like any other industry, there's good players and bad players, there's a lot of, you know… so there's a mixed lot out there.

There'll be good VCs, there'll be not-so-good VCs, and it's equally important as you are looking to… if you're an entrepreneur, you're trying to work with VCs to your… to do your diligence on that particular venture fund. And make sure that that's the type of people you can work with, because it's gonna be a long journey. Before you… so you better partner with good people. So that's kind of my portion of the presentation, and I'll take any questions. We have a few minutes here, Renee.

renae franz: Yep, so you have about 12 minutes till you have to leave. Any questions for Moodit before we move on?

Let's see some cushions here.

Yeah, there are a number of questions in the Q&A, I can read them. The first one is, Mooded, how do you think About high-risk device that still needs a few rounds of animal studies and product development before those pivotal studies can be done. if… The… if the box… is Ray. Financial potential is checked. Would this be in your scope?

Yeah, I mean, you know, from the accelerator, we actually start companies where we basically have some Very strong proof of concept in preclinical work. We typically like to see at least that as a bare minimum, but then also want to see some literature around the basis of that mechanism. So we have done companies where there's very strong literature that says that if you do XYZ, it'll lead to this outcome. Then we like to see some preclinical work around it, and that is good enough basis for us, if it's an attractive opportunity, obviously, to invest in those. So the answer is yes, that would be within our scope, but again, it all depends on

how I perceive the risk, that it has been answered, and how somebody on the other side of the table will perceive the risk. Does that… Hopefully that answers the question.

I think so. There's another question. With exits being scarce over the last couple of years, and portfolio companies lingering, how does your risk tolerance evolve? Do you have any build-to-buy appetites?

Yeah, so that's a great question. I mean, definitely the exits have… gone slower. One of the things that, at least with how we look at investments, we don't… as much as we focus on what the potential exit is, to understand what's the upside with a particular opportunity. We actually don't plan for an exit, because you can never plan for an exit. So when we invest in a company, we take the mindset that we have to invest all the way to cash flow break-even. It could be cash flow break-even being a private company. So we've actually built in multiple rounds of financings. So that's kind of one way where we go, hey, if we can't exit at a certain time frame, we will have

Accomplished enough value-inflecting milestones to keep attracting additional capital. Built-to-buys, you know, that's… that's definitely something that few strategics have done. Not every strategic does that. So it just depends on the therapeutic area, on the specific type of device, and the strategics in that therapeutic area. So you do see quite a few of those. we are always open… as an entrepreneur, for my companies that I co-found, I'm always open to looking at bill to buy, because that's a little bit less dilution to me. It caps my upside, but it also provides relatively lower dilution. With a potential to exit.

Next question is, what timeline do VCs typically operate and expect returns over?

Yeah, so, you know, there's… I mean, I'm a stage agnostic VC. I invest very early stage, and I've done crossover rounds. So, for… different funds have different philosophies about it. we take a portfolio approach that we need to have some late-stage companies that we can exit in the 3-4 year time frame, and then bulk of our companies will be probably 7 to 8 years, because we are doing Class 3 devices. There'll be funds which do only late-stage, post-approval, so they're looking 3-4 year exit time frame. So it just depends on the specific fund that you're talking to, but it's a spectrum. I would say most Class 3 medical devices, from start to finish, you're talking about 7 to 10 years.

Thank you. Coming to the team, what are the potential critical aspects we should be aware of beyond expertise? What is the role of the cap table distribution, and how… Much should we weigh this in?

you know, the team, I think, again, integrity, transparency, kind of… the kind of people you want to work with. That is the softer side of the team, how well they communicate. All those things matter. But, at the end of the day, this is a pretty complex space. You have to weave your way through a lot of complexity in product development, regulatory, reimbursement, and so forth. So, domain experience to us is very, very important. I'm not going to take a technology entrepreneur and put him in charge of a class 3 medical device product development. It's just a very different mindset, it's just a very different environment that they have to work in.

Cap table distribution, I'm not sure I understand the question, so I'm…

Okay.

renae franz: I think I might moot it. A lot of times, especially with, the Class 1, Class 2 medical devices, the lower risk, you have big cap tables, because people have went to friends and family for money. renae franz: angel investors. renae franz: A lot of times, the people who found the company, are a clinician or an engineer, or a combination of both, and so they have excellent understanding of the market need and the technology, but not always the ability to commercialize. It's a different skill set, and you mentioned that before. So therefore, they do lots of rounds of renae franz: funding, even before Series A, and so their cap tables are huge.

Yeah, so we are pretty averse to very large cap tables, because Whenever we… whenever we come in, if there's a long list of individual investors, we will actually, before we invest. We will form an LLC where we'll pick one member. to represent all those investors in the company, and that becomes one line item. Because it becomes very difficult for the management to be chasing 100 people, 150 people to get things approved, and so forth. So, as a rule. if there's… A lot of individuals on the cap table. Before we invest, we will make sure that That all gets simplified. Your ownership remains the same, whatever it is, the economics don't change, but we don't want to be chasing 100 people for approvals and things like that, signatures. So we want to see one LLC being established, and all of those individual investors getting to, like, one person who can represent that LLC.

Thank you. What risks do you see for FDA versus CE mark approval for FDA Class 3 devices?

Yeah, it used to be CMARC was all about proving the safety, and… Establishing that the device is doing what's intended to do. So, if you have a device that is supposed to stimulate the heart. Whether it's effective to to actually treat something, CMR didn't care about that. All it cared was, is it safe, and can you show that you're actually stimulating the heart? So it was a lot lower hurdle, but with the MDR coming in. There's a lot of uncertainty around Class 3 devices in the European marketplace with the CE mark, so we actually have stopped… we used to go and get the CE mark on the way to FDA approval.

none of our companies now pursue CMARC, because there's no value in it. It has the same regulatory hurdles as FDR more, because it's a little bit uncertain what they're looking for. And on top of it, Europe is not a homogenous market. So Germany is very different than Switzerland, which is very different than the UK, and these markets are not worth U.S. is still the dominant market for Class 3 devices, so we actually have stopped doing CMARCs for our plastic companies.

renae franz: And that actually holds true for Class 1 and Class 2 devices, too, and these lower rounds of investment, folks renae franz: that are experienced just across this industry now, say U.S. first, and if you see a company that says, we're going to Europe first, there's red flags there, because of all the reasons that Moodit just listed.

Where would companies such as recently acquired Shockwave or Next Generation Technology Histosonics map to your screening process?

Yeah. So, you know, if you look at both these companies, I mean, Histosonics, I won't do it. It's a great company, and I have very good friends who are investors in it, and I've looked at it. It was a capital equipment-based company. I just don't do capital equipment, so I'm very clear about our criteria of investing. I can't choose every opportunity. So I tend to focus on mostly implantables. Histersonics, again, a great outcome for investors. A lot of my friends were investors in there. Shockwave? We looked at that. I've rather invested… I ended up investing in Inspire. So again, move to an implantable rather than a capital equipment with catheter. So, it just… there's… I'm gonna miss some opportunities, I'm gonna hit some opportunities, just the nature of the way this industry works. Either with them was a disposable device, you know, it's around a $6 billion company now, so…

you have your… you lose some, you… you win some. So these would be… these would be high on my list of companies to keep an eye on, but I did not end up investing because of the capital equipment.

renae franz: add to that, too, Moodit. I mean, you are very clear about what you do invest in, and you go narrow and deep into those channels, and, it's my understanding that, for example, you know, you… renae franz: you know the risks, and you'd like to have control over the whole process, from product development to regulatory to quality to manufacturing, so none of that's outsourced. You actually fund all of that and keep it in-house, is that correct?

Yeah, we keep it in-house, but we do work with, you know, consultants, because we don't have always… we want to keep the teams lean, so I have one company, which is a classroom company, they are going through payroll trial. The total team size is 26 people, so it's fairly lean for conducting a trial that is close to 150 patients, and this includes R&D and the clinical team. So we, you know, for our regulatory We have internal expertise, but we always like to get some external sort of sounding boards, so we've worked with regular, you know, regulatory consultants in DC who have a lot of experience with Class 3 and plant boards.

So we do work with consultants, but it's on an ad hoc basis, but in general, we control all the major functions internally, and we have people inside who are responsible for those.

renae franz: Push up on your desk.

We have 3 questions in only a minute, so I'm gonna pick one. In case of successful clinical cases, just a few, of an implantable medical device bone scaffolds, what is the valuation? Impossible to say.

Yeah. Well, you know, it's tough for me to answer that with a specific valuation, but I would go and look at what were the other bone, scaffold devices or orthopedic devices. that have been funded over the last 5-6 years. Look at the Series A financings and so forth. Try to get a sense where they want, but I can tell you. If you are… the range I can give you, this will be somewhere between 15 to 20 million dollar pre-money valuation at most. It all comes down to how much more money has to be raised, because bone scaffolds can take a long time. Everybody wants long follow-ups, two years and beyond, big trials, so there's a lot of money that has to be allocated towards that, and then people want to make multiples on that.

So you have… you work your way back from that exit potential of, let's say, $300, $400 million, and work your way back to figure out, if you're coming in as an investor, you want 5X on it, what would that valuation be? But roughly, I would say somewhere between 15 to 25 million.

Well, I encourage everybody to submit more questions, even though he will not be here to answer them, we will try to get back to you with some kind of answer, and appreciate you joining us today. I'm gonna go ahead and launch the, poll question. If I can figure out how to do that.

renae franz: I just… while he's doing that, I just want to say thank you very much, Moodit.

Later.

renae franz: Your time, your expertise.

My pleasure, glad you could do this. Thank you.

renae franz: Yeah. Yeah. renae franz: Alright, take care.

Take care. Please take a moment to complete the poll questions, that you see on the screen. Wow, that was wonderful, Renee. Thank you for inviting him, and You know, I think that we'll get a chance to answer some of the remaining questions, maybe?

renae franz: Yeah, I think so. So what I'm going to do in the remaining part of the webinar today, and we can open this up, of course, to questions too, is to talk you through much of where Moodit was giving examples of things like making sure technology fits into a clinical workflow, that the clinicians have the right skill sets. renae franz: Those are all… those all translate across all medical devices, regardless. So I'm going to talk you through some examples, in those areas, as well as regulatory quality and others. And, you know, I feel comfortable answering questions with less risk renae franz: Of classification of devices and investment.

renae franz: But I think that if you do have additional questions for Moodit, we can get those over to him. renae franz: So, moving on in the presentation, you know, Moodit touched on this, and it's market size. So, he focuses higher risk, higher reward. So it takes a lot more time, money, and expertise to get those implantable Class 3s to market. renae franz: At Lean, we focus on… the devices are just as important in many ways, but they're lower risk. renae franz: there's a lower threshold for investment, there's a lower threshold for clearance with the FDA, and so you have lower reward. He has companies that have billion-dollar

renae franz: you know, revenue. Most of the companies we work with are tens to hundreds of millions of dollars in revenue, so there's a big difference there. renae franz: When it comes to validating an idea, though, we all go through the same process. Is it cheaper, faster, easier? These are very basic, but important questions to ask. renae franz: How do you know if an idea is worth investing in? renae franz: and then up front, tease out if it's just an idea, or a viable product. So Moodit pretty much has a blueprint for that, as he works through these implantable Class 3s. renae franz: And we do, too, in terms of if you are new to investing in med tech, we can help guide you through answering these questions. Do the end users really need it? This kind of fits into the clinical workflow.

renae franz: Is it appropriate for the target market? We have some examples of technologies in this area. Can it be made renae franz: Can the end users use it? renae franz: that very much, is about skill set, and we'll talk about products in that area, and is it at the right price point? Because at the end of the day, you could have a fantastic device that, let's say. renae franz: You know, you've designed and have to sell it for $20,000, a pop, yet the market will only bear 10. renae franz: And that unfortunately happens, so you need to plan for pricing, and if you're an investor in this space, really pressure test the cost and the pricing assumptions as you're going into making an investment.

renae franz: So, here's an example of, is this the right target market? Worked on a product, it was developed in Europe. It was a mobile app that could scan the skin and tell you if you should go see the dermatologist or not. renae franz: In Europe, at least in certain countries, that's important. renae franz: Because the wait time to see a dermatologist can be up to a year, so this helps triage and perhaps bring you in faster. Here in the U.S, when we tested this with dermatologists specifically, they asked, hey, can we use this app instead of doing a biopsy? renae franz: Absolutely not. So… renae franz: there was going to be trouble penetrating the U.S. market, because dermatologists are widely available, it's easy to get in to see one, and you weren't gonna… going to receive reimbursement for this device, because it's not a true diagnostic. It's just… it would almost be a wellness screening tool.

renae franz: So, we were able to help this company say, nope, don't waste your time, don't spend your money here. There's not a need in this market for it. renae franz: So, as far as skill set, this is a big one. renae franz: The first product I'm going to give you an example of was a treatment for acute wet macular degeneration, where they put radioactive seeds behind the eye to treat the blood vessels that are basically overgrowing. renae franz: They did their clinicals in Europe. renae franz: where they use a very different technique. Clinicians are trained there to do a subtenons anesthesia technique. So they did all their clinicals there, but their target market was the U.S. Clinicians here did a different procedure. It's called retrobulbular block. So the problem was

renae franz: The, fitting into the clinical workflow just wasn't going to happen in the model that they had. renae franz: Same with this minimally invasive cardiac ablation system. So, this is an interesting one. Mudit and I both had connections with this company, and Michelle, too, for those of you who know Michelle at Lean. So, it was a great minimally invasive cardiac ablation. renae franz: device, but the technique, the skill set needed was more for an electrophysiologist who works remotely inside of the heart, rather than a general surgeon. So they were targeting this device at general surgeons who are used to cracking the chest open and cutting the heart.

renae franz: So, this technology, though it was excellent, did not make it because of that. It had the wrong skill set, and they raised, I think, close to $70 million. renae franz: So, really important to understand the skill set of who's ever going to use your device. renae franz: Manufacturing. You need to be thinking about this as well, and probing on this if you're investing in a new med tech company. Is it possible to make, and can you scale it? So I'm going to give you an example of a device that used, radioactive material. renae franz: So, they used radioactive material, from… it was strontium, from…

renae franz: disassembled Russian bombs, and it was a very specific half-life of strontium that they needed. renae franz: Well, as you can imagine, there's only a limited amount of disassembled Russian bombs that had the right half-life for the strontium, so it was not sustainable to continue to make this product as it was designed. renae franz: So, I don't know if this is a good place to stop, Sean, and answer any questions as we move into the commercialization journey. renae franz: Because this is… so what we've been talking about up to this point is what Moodit showed on his chart. This is where we all know there's layering factors of risk until you get your clinical and your regulatory approval.

renae franz: And then, most entrepreneurs think, okay, risk goes away, the market's going to automatically adopt. It's not. renae franz: This is where it gets even more challenging. You need more time and more money, and we're gonna walk you through, adjusting, you know, kind of timelines in your head around, okay, what problem am I solving? renae franz: How long does it typically take to get this type of product commercialized if it's going to be successful? renae franz: So before we start that, Sean, is this a good time to stop and take questions, or should we keep moving?

Yeah, we can take a look at the questions, absolutely. Renee, one of the companies I work for has a low-risk device that fills an unmet need. I would think we are looking at a high-reward solution. How do you see this?

renae franz: So, that's a good question. There's a number of factors that we would need to take a look at, and actually, that's a great question leading into what I'm about to talk about. Part of it will be your commercialization journey. renae franz: and what that looks like. So, let's look at… if it's a known problem. renae franz: in this case, that you have, and there's a known solution. So, I'm just going to throw this example out there. It's a feeding tube. Everyone knows what feeding tubes are, and maybe you have a feeding tube that, is… renae franz: less expensive. Maybe it has some sort of addition to it that ensures that it stays in the stomach and the nutrients are absorbed. I'm just making these things up.

renae franz: But that's a known problem with a known solution. renae franz: And those products are the quickest to get into the market. For a low-risk device, depending on where you're at in your development cycle, validation, regulatory, clearance, once that type of product hits the market, if the commercialization is done right, it's usually 1 to 2 years. renae franz: Now let's talk about… You have a known problem. renae franz: with an unknown solution. So here's where I'm going to talk about renae franz: a problem that I think pretty much everyone knows we have, and that is there's IV medication errors. So, you could ask pretty much any clinician, hey, have you ever seen an IV medication error? They'll say, yes, I have.

renae franz: If you look at the statistics, 50% of all IVs placed have some sort of error. renae franz: But the problem that we were trying to solve here is that most folks didn't know what the solution was. They've made smart pumps, they've done… they've made advancements in many areas, but the most basic area that people renae franz: actually, are found to make the most mistakes in is just knowing what's flowing through the IV line. And so, when you have a known problem with an unknown solution. renae franz: once you press go on the commercialization button, if you do it right, your commercialization journey is usually 3 to 5 years, just to level set expectations for cost, timing. And again, there's no guarantees, but if you do it right and the market adopts, it's 3 to 5 years.

renae franz: What if you have an unknown problem with an unknown solution? This may sound ridiculous at first, but I've worked on a few devices in this area, and this particular one, was for nasogastric tube renae franz: So, most people at the time that I started working in this space didn't realize that 30% of nasogastric tubes intended for the stomach did not land or stay in the stomach. renae franz: Because they didn't see… the autopsy reports when people died from misplaced feeding tubes, just said that they died from cardiac arrest, their heart stopped. Well, your heart would stop if the nasogastric tube landed in your lungs, and you were fed into your lungs.

renae franz: So, when you have a product like this, maybe you're a clinician, in this case it was a clinician that saw this unmet need and developed this product, I'm going to take you through that. renae franz: commercialization journey. This was a lower-risk device, but it took a really long time to successfully commercialize. renae franz: So, in 2003, both the US and the UK acknowledged that the way we were placing or confirming placement of feeding tubes wasn't working. We were blowing air bubbles in. renae franz: By 2005, the UK said, stop blowing air bubbles, use pH. renae franz: By 2015, my client's product was on the market, and we started educating hospitals about these published studies related to nasogastric tube misplacement with auscultation.

renae franz: And by 2018, we were able to change national and global standards to use pH first. And we did launch, and it still is the only U.S. FDA-cleared device. renae franz: that uses pH to confirm nasogastric tube placement, but people were still hesitant to adopt. So, it took from 2018 to 2021 to really get that market traction. renae franz: So, this device actually started its journey closer to probably 2005 and 2006, and it took till 2021 to really get market traction. And so, this is, again, a lower risk device than a Class 3. renae franz: But it has just as long of a commercialization journey. And I think it's really important, you know, if you're looking to invest in these types of technologies, to understand what your commercialization adventure is going to be, so you understand that time value,

renae franz: of money. renae franz: And then this is the final category, and I'm imagining none of you are in this, but if you're an investor, this is one to definitely look out for. It's an unknown problem, renae franz: with a known solution. So what do I mean by that? This is where somebody has a great technology. renae franz: And they just don't know where it fits in the market. So they're trying to find how to adapt it into the market, and this is not something I would recommend investing in. This is the highest risk and will likely go nowhere. renae franz: Before I talk about how important a team is, any questions?

So there is a question. What are some of the standard ways to answer and validate the questions to ask? So, I mean, in a sense, you've just been going over that, But, you know, if you had to sort of enumerate, you know, like, Look first at, you know.

renae franz: I would say, okay, I would literally go back to… and this sounds so basic. renae franz: And a lot of this stuff is basic, but listen, hey, does the end user really need it? So don't go on an end value of 1. renae franz: Talk to… I would talk to, you know, voice of the customer groups, talk to at least 10 people, doesn't have to be expensive. renae franz: But if you can get access to 5 to 10 people that you think would use the device, ask them, hey, is this… let me tell you what I'm thinking here, is this something that would work? You're either gonna learn, A, it's not gonna work.

renae franz: B, it's going to work, but it may need to be adapted differently for the target market. renae franz: then also ask yourself, is it appropriate for that market? I did give that example about the one technology for skin cancer screening worked great in Europe. renae franz: because it helped triage and get people into the dermatologist faster, but wasn't appropriate here. So, really do your homework and figure out, is it appropriate for the target market? Hey, can it be made? You know, pressure test that, too, with the folks that are telling you, hey, we've got this renae franz: this great idea, this great product, you know, walk me through how you're going to make it, and how you're going to scale it. Because you want to understand up front if there's any rate-limiting factors. I gave you an extreme example of disassembled Russian bombs where they needed the strontium.

renae franz: But there's many other questions and ways that you can ask to understand whether it can be made. renae franz: And can the end users use it? That's where you talk about, can it fit into clinical workflow, and, do they have the right skill set? Again, go to the people who are going to be using that device, and ask these questions. This is so key. I see fantastic technologies, great ideas. renae franz: fall apart at the commercialization point, because the end users can't use it. It doesn't fit into their workflow. And the workflow here in the U.S. can be very different than the workflow in Europe, Japan, and other markets. So that's where you really have to take the time to understand your target market as well.

I would just like to take a moment to say, that if anybody would like a certificate of attendance, to please put their name and email address in the chat, not the QA in the chat, and we'll make sure that you got that in a few days. Let's see… So, yeah, that's… that, yeah, brought up a lot of interesting things, and I'm gonna let you continue.

renae franz: Okay. renae franz: So, the team. Moodit mentioned the team and how important it is for implantable Class 3s, and across the board, with any med tech investment, the team is critical. renae franz: The skill set that you typically need when… even for a less risk classified device is, not necessarily, as you're developing it, the same skill set that you need to commercialize. So. renae franz: I can't tell you how many times, especially at Lean, we work with a lot of clinicians that have excellent ideas, they understand where the unmet needs are in the market, and they themselves are either technical, or they hire a technical person or an engineer.

renae franz: To help them develop a medical device. renae franz: And with the right guidance of having folks around you that have done it before, you have a much higher success rate than if you are working as a clinician, or if you're investing in a technology that was invented by an engineer, clinician, or a combination of the two. renae franz: that don't have real-world MedTech experience, there's some… renae franz: yellow and red flags there. So make sure that the team that you're investing in has experience. renae franz: And then also, you can take the time to question expenditures, I'll talk about that here in a minute, and really challenge the experience validation, too, of the team. Like, somebody might say, oh, well, you know, I worked at DuPont.

renae franz: And that's, you know, that's all you know about them. Ask them specifics. Okay, well, tell me… how many medical devices have you personally developed? How many have you actually successfully seen commercialized? renae franz: You want a combination of, you know, as Mudit said, soft skills, people who are good to work with, but also you really need a proven track record. renae franz: So, when is it time to bring in the experts? I know we're… we're kind of running short on time here, but boy, regulatory's huge. This is an area that… that we can help you with as an investor doing due diligence.

renae franz: There's companies out there, see it all the time, that are making claims that they can't substantiate to the FDA. They're making claims outside of what their clearance is. renae franz: They're going into unauthorized markets. What does that mean? They've got clearance in the U.S, and they think, oh, well, I've got clearance in the US, I can go to Europe. renae franz: No. They're missing documentation in their files. renae franz: their strategy is misaligned between what they claim their intended use for the devices and what the reimbursement codes are for. And then there's a lot of just unresolved regulatory impacts. So.

renae franz: there's… this is a very technical area. Michelle actually does a whole webinar on this, and I suggest you can, you know, look at that on YouTube. renae franz: And, or, if you're seriously doing due diligence on a company, we're happy to talk to you about the services we can provide to help. renae franz: Identify issues in these areas. renae franz: And then equally important are quality system red flags. The design may be inadequate because they didn't follow the right design controls. They might… renae franz: if it's a low-risk device, God forbid, I hope this wouldn't be for a higher risk, but they might not have a quality management system, that's not okay. You have to have a quality management system, period.

renae franz: Again, leading back to the team, there could be a lack of understanding of a quality management system, how it works and how it functions. We see that all the time. They either overbuild or under-build. renae franz: And then, also a lack of quality system maintenance. renae franz: So, they may have put a quality system in place, but they didn't then follow it. renae franz: And finally, did they decide to use a very expensive electronic quality management system? There's… renae franz: a number of those on the market. We don't usually recommend using one of those till you hit about 20 to 30 employees, because they're very expensive and very burdensome if you're a very small team that doesn't need

renae franz: that level of control. So these are all red flags and things that we can help you look for. renae franz: Of course, don't forget clinical trials. Moodik talked about how important that is for Class 3 devices. It can be important, depending on your product code and where you fall with the lesser risk devices, but I won't spend too much time on it. renae franz: And then intellectual property. If you're looking to invest, you really want to know that that IP ownership is solid. You want to know that the company owns it. That's a very basic thing. renae franz: So make sure the company owns it. Make sure that, for example.

renae franz: Your… the best protection would be you're looking at investing in a product, and they have utility patents that sit like an umbrella over the whole concept of what they're protecting. renae franz: Much stronger than design patents. A combination of utility and design patents are great. Utility covers… covers you, and then design patents kind of fill in the gaps. renae franz: To cover the exact… Form and features of your design itself. renae franz: And then, you know, ask yourself, is the product differentiated enough? renae franz: reimbursement. renae franz: Know that up front, whether there's a clear path, if there is, and you can align your regulatory strategy with it, do it. If it's a new technology, there's not a clear path, you need to ask and challenge the group on, okay, how is this device going to be paid for? There's no reimbursement codes.

renae franz: Tell me how it's gonna be paid for. renae franz: And then manufacturing. This is huge, especially if you have a device that, you know, is just not software or AI. renae franz: and you're working with a company, maybe it's folks who are new to med tech. It's a new engineer, it's a new, clinician. Get… ask them for quote comparisons for really expensive devices. I've seen companies pay renae franz: $5 million for tooling, where we then got competitive bids, and it was $500,000. Not kidding. renae franz: It's that huge of a gap for the same quality. renae franz: And when you're looking at manufacturers, you know, or you're working with a company, you're looking to invest, challenge them on their manufacturers. Are they FDA registered? Across the board, doesn't matter what kind of device it is. You're selling in the U.S, it has to be FDA registered.

renae franz: For certain classification devices, they have to be ISO 13485 certified as well. renae franz: Another big thing here, too, in your partner selection, a lot of people don't think about this, but they get in big trouble. If you have tooling, make sure that you own it. I can't tell you how many times I've seen renae franz: Clients that come to us that have created very expensive tooling with a contract manufacturer, and they didn't own the tooling. renae franz: the relationship fell apart with the contract manufacturer, and guess what? They had to go make that huge investment somewhere else to get started over again. So there's a huge risk of outlay of cost and delay of getting your product either to the market or sustaining it in the market. Make sure you own the tooling.

renae franz: I say don't work with the partner who won't let you own it. And then finally, when it comes to target markets, if you're an investor and you're being told that this product is great for the U.S. Department of Defense. renae franz: Ask them where they're manufacturing the product. If you want to sell to the U.S. government, you have to make the product in a free trade country. So if they say, well, we're making it in China, well, China's not a free trade country. So these are the types of questions and the things that you need to be thinking about as an investor going into this space.

renae franz: So I know we have 4 minutes left, and I'm… I'm basically at the end of my talk here. Are there any… renae franz: Any questions?

I would… I would like to encourage everybody to take advantage of the 30-minute free consultation. If you want a regulatory consultation, put regulatory in the chat. If you'd like commercialization, reimbursement, etc, everything that investment that Renee is talking about, put put commercial in… in… in the chat. Let us know, someone will reach out to you, help you book the call. You know, we have all these expert webinars, and then it's like, oh, huh? You know, thanks, bye. So I would… I would like to encourage you to interact. You know, Renee is very friendly, and she would love to talk to you about your…

what you're… what you're working on, you know? Don't… don't be shy, people. Right, Brene?

renae franz: Exactly. Thank you, Sean.

Please reach out. Yeah, please, please reach out. So, you know, Here's a final question for you. How can a company be confident in their Class 1 device designation without a 510K? Is self-classification adequate? Is a pre-sub meeting with FDA better even if the device is 510 exempt? Just to tell them, we think it's Class 1, and do you agree? So…

renae franz: So that's… that's a very good question, and actually, we have a product for you at LeanREQA that can… that can help you with that. It's called a regulatory pathway assessment, and what we do is we look at all the potential predicate devices that are out there, so devices that might be considered substantially equivalent. renae franz: And if it looks like your device is a clear fit. renae franz: With something else that's already been cleared and has a product code and fits that regulatory path. renae franz: You can use that report with investors and say, yes, we're confident, we had a regulatory pathway assessment done, and this is what they said.

renae franz: Now, if we do a regulatory pathway assessment, and you don't clearly fit into a product code, there's some questions about whether you might be able to use a lesser product code. Not lesser product code, but maybe a Class 1 versus Class 2 510K exempt versus not. renae franz: Then we can… we can help you figure that out as well, and we can… we'll then make recommendations that maybe you should do a pre-sub with the FDA, maybe you should do a 513G. So, definitely reach out to us, put time on our calendar, renae franz: You can just scan that barcode there. renae franz: And I think it takes you right to our website, where there's a link where you can put time on the calendar, or just respond in the chat, and just say, hey, I need some regulatory guidance.

renae franz: Take advantage of that 30 free minutes.

Absolutely. I encourage everybody to reach out. Well, Renee, it's 6pm Rome time. And, I won't…

renae franz: I could say that.

I want to thank you again, and everyone who gave up their time today. This was a fantastic session, I have to say. I think this is going to be really popular when it hits the YouTube and, the replay, and you know, thank you for bringing such an excellent guest with you today. The two perspectives together really, you know, solidified my understanding of investing, and yeah, awesome webinar. Thank you.

renae franz: Sean, and thank you, everyone, for attending. Hope to be speaking to you soon.

Yeah, yeah, thanks. Cheers.