The Challenge and Promise of Pediatric Device Innovation

This article originally appeared on Med Device Online.

By Matthew R. Maltese, The Pennsylvania Pediatric Medical Device Consortium, and Daniel Henrich, Archimedic

As a society, we seem to regard the lives of children as more innocent, precious, and worthy of protection than those of adults. This superior valuation of child well-being is not limited to people with children of their own, or those in attendance at pediatric device conferences: in an ongoing MIT study of human perspectives on how autonomous vehicles should behave in the event of an unavoidable collision, respondents regularly indicate the vehicle should be programmed to spare child passengers or pedestrians over adults.[i]

However, the medical device marketplace for children does not reflect these values. There are far fewer pediatric devices than adult devices on the market, meaning one of the most vulnerable patient populations also is one of the most underserved.

In many instances, this reality forces pediatric specialists to find alternative uses for adult devices to treat their patients. One example is a pediatric cardiologist using an adult biliary stent off-label to treat a four-year-old patient with congenital heart disease.[ii] A device designed specifically for that application would, of course, be preferable, but pediatric specialists have to make do, even if the available devices were approved by the FDA to treat a different condition in an adult population.

While devices designed for adults often are repurposed and adapted to treat children out of necessity, this off-label model comes with significant disadvantages. Adult devices often are ill-fitting in pediatric applications and, while physicians follow best practices, consult available literature, and take precautions to protect their patients, the safety and efficacy of devices used off-label has not been established through normal regulatory processes. Innovation or even design iteration of off-label devices is limited, as convincing investors to support a novel device with no regulatory or reimbursement pathway is challenging, to say the least.

Obstacles to Development, Testing, Regulatory Approval, And Reimbursement

The challenges of developing devices specifically for children are primarily market-driven. Objectively, we may believe children deserve access to the best and latest healthcare technologies, but the patient population of children with a particular condition (i.e., the market size) is comparatively small. This is not to say that viable business models do not exist for small medical intervention markets; certainly, compelling value propositions have been developed and come to fruition in orphan drugs.[iii] How to stimulate such an innovation and discovery storm in small medical device markets is an ongoing debate.[iv]

In addition to market challenges, some pediatric device concepts present unique technical challenges that can slow the development, testing, and approval process. A child may depend on a device to perform for a much longer time than an adult patient, and under different — often more active — conditions. A child’s growth also may pose a problem for the device’s function over time, especially an implantable device. Materials may be required that can stretch or be absorbed by the body, but this may not always be possible. Once implanted, a device’s performance may need to be monitored for years before its long-term safety and efficacy can be documented.

These challenges can make it difficult to offset the costs of developing, testing, obtaining regulatory approval for, manufacturing, marketing, and distributing new pediatric devices. Devices for larger adult patient populations typically are more appealing — especially to an institutional investor with a fiduciary duty to its clients — since they offer lower risk and promise higher return due to market size and time-to-market factors.

The good news is that a number of trends are emerging, and initiatives are underway within the industry and at FDA, that focus on enabling pediatric device innovation and smoothing some of the bumps in the road to market.

Pediatric Device Consortia

To help spur innovation in the pediatric device space, the FDA started the Pediatric Device Consortia Grants Program in 2009, with several pediatric device consortia spawned around the United States. In Fiscal Year 2018, the program funded five nonprofit consortia around the U.S. with grants of $6 million (up from $3.6 million in FY2013).

The consortia function in unique ways suited to the approach and capabilities of each member, but also share common characteristics. The first is a common mission to bring new pediatric devices to market to address unmet clinical need. The method to achieve that mission varies by consortium but, in general, each consortium a) oversees disbursement of seed funds to device innovators through an open competition, and b) provides expert advisement and in-kind services to assist innovators along the commercialization pathway.

Such advisement and services include assistance with clinical trials, regulatory strategy, value proposition validation, grant-writing, prototyping, and testing.  Each consortium is made up of industry and medical experts, who evaluate the merits of individual proposed projects and assist with decisions and commercialization.

Real-World Evidence (RWE)

As we collect, store, and analyze more data through the healthcare chain, the use of real-world evidence —“information on health care that is derived from multiple sources outside typical clinical research settings, including electronic health records…and data gathered through personal devices and health applications.”[v] — is gaining momentum throughout the device industry, which could pave the way for additional, faster approvals of devices intended for pediatric populations and indications, as well as inform innovators designing new pediatric devices and device trials.

Both the FDA and industry players see the promise of these initiatives. In the past three years, FDA has issued two guidance documents on RWE[vi] and its applications to pediatric devices.[vii] RWE also was the theme of the 2018 Pediatric Device Innovation Symposium, hosted by the Children’s National Sheikh Zayed Institute for Pediatric Surgical Innovation.

Though the use of RWE comes with its own challenges (e.g., conformance to data quality, reliability, and privacy standards), the RWE initiative holds promise for pediatric device and drug developers as we explore more ways to collect and use healthcare data to inform clinical and regulatory practices.

Humanitarian Device Exemption

Similar in many ways to the FDA Orphan Drug program, the Humanitarian Device Exemption (HDE) provides a shorter regulatory pathway for devices intended to treat rare diseases or conditions (8,000 or fewer cases per year in the U.S.). This program exempts devices from certain effectiveness (but not safety) evidence requirements of the FD&C Act.

While there exist limitations to this program, HDE still provides a way to bring devices to market for very small (often pediatric) patient populations that would otherwise be commercially unviable.

Additive Manufacturing / 3D Printing

Additive manufacturing (AM), more commonly known as 3D printing, is changing the way medical devices are produced within and beyond the pediatric sector. Rather than maintaining an inventory of devices in every possible permutation of size and shape, manufacturers and hospitals can invest in on-demand manufacturing.[viii]

Using 3D printers, devices can be produced in a growing number of materials, at comparatively low cost, and in very small quantities. Devices even can be customized to a particular patient (i.e., “patient-matched devices”), which can be especially helpful in applications like prostheses, where needs vary greatly between patients and change rapidly as a child grows.

According to FDA guidance issued in late 2017, “AM has the advantage of facilitating the creation of anatomically-matched devices,” as well as facilitating the creation of device structures “that would not be easily possible using traditional (non-additive) manufacturing approaches.”

That said, the newness of AM-produced devices, and their lack of clinical history, introduce certain unknowns into the highly controlled process of device manufacturing. Specifically, the FDA’s 2017 guidance notes that the “innovative potential of AM may introduce variability into the manufacturing process that would not be present when using other manufacturing techniques.”[ix]

Conclusions

Though advances are being made, many of the initiatives above are in their infancies, with much more progress needed before we can declare them successful. Solving the problems of pediatric device commercialization will take more great ideas and initiatives than those discussed above. We need clinicians, engineers, entrepreneurs, impact investors, regulators, and legislators working in concert to build on our progress in this area. All of these players, and others, must come together to develop creative solutions to overcome the market challenges that derail so many promising pediatric device projects in today’s environment.

This article is based on a Archimedic podcast interview between Matthew Maltese and Daniel Henrich about pediatric device innovation; you can listen to the conversation here.

About the Authors

Matthew R. Maltese is the Founding Executive Director of the Pennsylvania Pediatric Medical Device Consortium, where he works to support early stage pediatric device teams as they progress towards commercialization. He is also Chief Innovation Officer at X-Biomedical, a medtech startup.

Daniel Henrich is Director of Marketing at Archimedic (formerly Smithwise), where he works to educate industry members about medical product development and how Archimedic can help their organizations advance healthcare through breakthrough medical technologies.

About The Pennsylvania Pediatric Medical Device Consortium

The Pennsylvania (formerly Philadelphia) Pediatric Medical Device Consortium connects Children’s Hospital of Philadelphia (CHOP) with the McGowan Institute for Regenerative Medicine and sciVelo, both based at the University of Pittsburgh. This new partnership comes on the heels of a five-year, $5 million grant renewal from the Consortium’s sponsor, the U.S. Food and Drug Administration. The mission of the PPDC is to support the development and commercialization of promising medical devices that address unmet clinical needs in children.

Written by Daniel Henrich

Written by Daniel Henrich

Director of Marketing at Archimedic

MedTech Mindset Podcast: Securing Funding with Adam Dakin, Part I

EPISODE 9 – Securing Funding, Part I

In this episode, Adam Dakin, Managing Director of Dreamit Health, covers funding trends in medtech and how to pitch to institutional investors. (Part II available here.)

Adam and Dan discuss:

  • Medtech funding trends and how they’ve changed in recent years
  • Investor perspectives on medtech vs. digital health
  • How to be build value to make your startup attractive
  • Tips for success at the pitch table

During this episode, Adam references some great resources available from Dreamit for startups preparing to pitch.

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Episode Transcript

Dan Henrich:     Hey Adam, how are you today?

Adam Dakin:      Doing great, thanks.

Dan:       Hey, thanks so much for joining us. Funding is a topic that we wanted to cover early on in this series, almost every one of the med tech entrepreneurs we talk to is struggling to raise funding to get their project off the ground but before we get into it, maybe can you tell us a little bit about Dreamit and your role there?

Adam:   Sure. So real briefly, my background and thanks so much for this opportunity. It’s [inaudible 00:06:10] to chat with you. My background, I’ve been doing early stage health tech companies really almost since I got out of school. So 25 plus years started out in sales. But since then, I’ve co-founded five health tech companies, served as the CEO of three of those, raised a lot of venture capital across those five companies. Some of those companies went well, some of them did not. So I have both perspectives. Then, about a year and a half ago, I moved really from a career as an operator to the investment side. I joined Dreamit Ventures, which is a venture fund located in Philadelphia.

Adam:   Our focus is digital health and med tech. We’ve been around for over 10 years. We’ve worked with over 130 companies in the health tech space. Our model is a little bit different than traditional venture in that we run what you might loosely describe as an accelerator alongside of our venture fund. That accelerator exists for the sole purpose of generating deal flow into our venture fund. We only invest in companies that go through that program. We are super selective. We take 3% of companies in that apply to that program. So in the health tech [vertical 00:07:25], we work with about 15 to 20 companies a year. We have urban tech and secure tech verticals as well.

Adam:   Model is exactly the same in those verticals, but what is unique about us compared to other programs or accelerators is we don’t take a big chunk of equity up front. There’s no co-location involved. I prefer to describe us more as a sleeves up venture fund because we work very intimately with those select companies that come into the program and we are all about helping them acquire customers. We have an incredible stakeholder network of over 30 enterprise healthcare partners, payers, large multinationals, big Pharma partners who know how well vetted and well prepared our companies are. So they’re willing to engage very closely with those companies.

Adam:   We’re getting access to decision makers for them to accelerate commercial relationships. Then our second big value add is access to capital. We reach out to over a thousand venture funds each cycle. Again, those funds, no, we’re only bringing them the best of the best. So they look very closely at each cohort and then they decide which companies within that cohort they want to get face to face with. Most of our teams will get 15 to 25 face to face meetings with venture funds across a two week period that we call investors sprints.

Adam:   Our track record’s pretty good. Over half of our companies will close around within six months of getting through the Dreamit program and then we will call, invest in the vast majority of those programs. That’s pretty important for us because if we don’t co-invest, we don’t get paid. You’ve kind of gone through the program for free. If we never write a check that aligns interests very nicely between us and the founders of the company.

Dan:       Great. Great. So one of the reasons we thought you’d be such a great guest for this episode, it is just that fact that you’ve been on both sides of the pitch table a bunch of times. And so we want to just give people an idea of realistic expectations. What it’s like to be pitching your medtech company and how you have to think about the investor’s perspective as you go through that process. But maybe before we jump into the nitty gritty of what to do and what to expect in fundraising. Can we just talk about kind of trend of current funding and med tech and digital health and how has that changed if at all in recent years?

Adam:   Sure. The reality is it’s gotten tough for early stage med tech companies to raise capital. There are a number of headwinds that the space has faced in the last few years. There are fewer acquirers now than there used to be. When I started out 25 years ago, if you were orthopedics or you were cardiovascular company, there was a hit list of 20, 25 companies that would acquire you and they would acquire you relatively early. You could have just a limited amount of human data and maybe a little bit of IP around your concept, and the big guys were willing to come in and go, “We get it. You proved at least at works. We’ll take it from here. Here’s a nice check.”

Adam:   Yeah. You may not have raised all that much capital at that point. So exits in the 50 or a hundred million dollar range were still very pretty nice exits for your investors. They were still getting a nice multiple on their invested capital. So what changed? Well, a few things. First, there’s been so much consolidation in the med tech space that now if you’re orthopedics, cardiovascular or other spaces, there might be five buyers for you. Well, the real value creation comes from creating an auction. You get something far enough along that you can get several acquirers interested in buying you, and that’s what obviously bids up the price.

Adam:   So fewer buyers supply and demand. It’s just tougher to get the valuations and the exits that we used to be able to get. The other force is that these companies are waiting to buy things at much later stages, so they’re not willing to take a lot of that early risk. They want things de-risked much further than they used to. They’re willing to pay a bigger price for it, but they don’t want to take clinical regulatory market risk the way that they used to. That’s because they got burned. There were so many bad acquisitions of early stage med tech companies over the last 20 years that if you’re somebody in business development at a big company like Medtronic, do you want to take career risk on something that’s not really proven? Probably not. You don’t want to underpay for something that doesn’t work.

Adam:   You’d much rather overpay for something that does. So the mindset has really shifted. What are the implications of that? As investors, we know we’re going to be in it for the long haul, right? We’re not likely to get a quick exit. We’re going to … it’s going to be a much more capital intensive process to get that company to the milestones where it becomes, an attractive acquisition. So that’s one of the reasons why it’s gotten really tough for early stage investors, right? Assuming you’re not going to get an early exit. And that’s a very dangerous assumption that a lot of entrepreneurs make. We’re going to need a lot more capital along the way.

Adam:   So if you come in early, you are at risk for heavy dilution and it only takes one ugly financing along the way, to essentially wipe out or greatly diminish the equity stake for the early investors. As an early investor, you take clinical risk, you take product risk, regulatory risk, but you’re also taking huge financing risk because if that company has trouble raising capital in the next round, I mean worst case, they don’t raise capital, your investment gets wiped out or they raise capital, but they do it on what might be perceived as very harsh terms. You’re going to get heavily diluted, right? And your equity stake we’ll get either wiped out or dramatically reduced.

Adam:   So unfortunately those are some of the factors that have really made it less interesting. The other big factor is that large sucking sound you hear is the money moving over to digital health. Why is that? So digital health requires … It’s a lot less capital intensive. We just talked about med tech is capital intensive, right? If most medical devices, if I’m going to take them all the way from development, through clinical trial, through regulatory approval, through market launch, right? Those are expensive. There’s a lot of money to be spent before I even know if my product actually works. So I don’t even get to turn the first card over in terms of does it work and is their product market fit until I’ve spent significant amount of money probably over several years.

Adam:   That’s very different from software, right? A couple of guys who are smart with a couple of laptops can build an MVP type product pretty quickly. And you can assess that. So it’s been alluring for investors to go into a space where they think, “Oh, the time to market short, it’s a lot less capital intensive. These guys will be selling a few million dollars of capital there in the market. While that’s true, there’s a flip side to that, which I think a lot of investors who are health tech investors but maybe not experience digital health investors don’t understand because you give that back on the sales side, the sales cycles are very long in digital health. I mean it is not [crosstalk 00:15:25]

Dan:       This is only in the hospital systems and …

Adam:   It’s an enterprise … It’s a system sale, right? Medical devices generally have a relatively small universe of decision makers and it’s a very reasonably well defined process in terms of what the hospital has to do, which committees they have to go through, what budget you have to get approved in. So it’s not fast, but at least it’s reasonably well defined. Selling software to an enterprise healthcare system, we say when you’ve sold a one enterprise healthcare system, you sold the one enterprise healthcare system. The problem is it’s not a scalable sales cycle. It’s a constellation of so many different stakeholders that touch you because it’s software, right? So it might be the patient, it might be the family, it might be the head chair, the clinicians in the department. But it almost inevitably includes the IT department.

Dan:       Where things go to die.

Adam:   Exactly right. We call that the wood chipper in digital health, right? Because you see that long line down the hallway, that’s the line of companies waiting for their product to get integrated into the EHR. I was just talking to one CIO. I was asking him what’s the timeline look like? He said at a large Philadelphia based enterprise healthcare system, 12 to 18 months, if you need a full integration. Now that can be accelerated. If somebody high up once to move you to the top of the pile, it can be done more quickly. But if you just walk into the IT department and say, “We need this integrated.” And they say, “Great, we’ll put you on the list. We’ll talk to you in a year.” Because almost every healthcare system is doing some sort of large scale, Epic, Cerner, large EHR integration, and that’s where their focus, so helping a small company or a startup integrate, not on their priority list.

Adam:   I think that’s frustrating for a lot of investors who go in thinking, “Oh, this is software, this is a SAS type business model. Great margins. We’ll just run out to the market because this solution is so clever and innovative and solves a real problem.” Which it very well may. But the process of adoption is very slow because so many stakeholders have to weigh in. One of our companies in their CRM had 30 different decision makers that they were managing every single day to get through the sales cycle at that hospital. That’s a pretty heavy lift. And by the way, of those 30, five had veto power.

Adam:   So at any moment through that sales cycle, if one person raised their hand and said, “I’m out.” The sale was over. That’s like walking through raindrops. I mean, that’s a difficult sales process, which unfortunately a lot of investors don’t appreciate and ultimately that actually creates some tension between the investors and the management team, which may be a conversation for another day. But it suggests that entrepreneurs should be thoughtful about who they bring in as investors and who they have on their board.

Dan:       Yeah. So do you think there’ll be a pendulum swing back towards the middle or back towards med tech?

Adam:   I’m very optimistic actually because med tech solves [inaudible 00:18:37] there’s generally a clearly defined clinical problem. You’re targeting that. So yeah, I think …

Dan:       And once you show that your product can actually improve patient outcomes, it’s pretty straightforward type of business case to make.

Adam:   That’s right. I mean it’s easier to define the impact on outcomes. One of the things we talk about, not so much in Med tech is ROI, right? Return on investment. You talked to a digital health company, you cannot get 10 minutes in without saying what’s the ROI and what’s the impact on work flow? How does it fit the system? And how can you quantify if the healthcare system sends a dollar on you, they’ll get five back. We don’t really have those discussions in med tech so much because it’s really much more about the clinical outcome. And if there’s a really compelling dramatic patient benefit or provider benefit, they sort of stipulate that there’s an economic benefit.

Adam:   Now that said, there’s still a burden on companies to prove that medical economic benefit, but it’s generally a little bit more straight forward. So yeah, I think right now actually because of the forces we talked about, the reality is med tech company valuations have gotten very depressed. If I put my investor hat on, that creates an opportunity to invest in companies at what feels like relatively low valuations. The exact opposite is happening on the digital health side. The valuations have gotten, in my opinion, ridiculously inflated. Pre-revenue companies that we talk to have a swagger and an attitude around what they think their valuation should be before they sold one dime of product to anybody. And they are raising money at those valuations, which is great for them, for the founders, not so great for us as disciplined investors.

Dan:       Yeah. Okay. I think that’s a great way to frame this discussion. Can we talk maybe about ballpark valuations for a young med tech company. Before they reached their various milestones of de-risking their device and the way to market. Often when we talk with med tech entrepreneurs, they’ve really put their heart and soul into a particular project perhaps for for years but that gives them a very different and perhaps inflated perspective on the value of their idea versus how investors in the outside world are going to see the value of their idea and their project.

Dan:       Say we have a device, it’s going to come to market through a 510K pathway, but it’s connected. It’s got sort of maybe a digital health element to it. It’s fairly complex and it’s going to be say, used to remotely monitor a chronic disease. So it’s not a simple path to market. This is a pretty complex development process. You have that idea and you’re filing for your provisional patent. What’s that idea worth to an investor at that point?

Adam:   Right. So look, as investors, we get the fact that entrepreneurs are passionate, they’re all in. It’s a very emotional connection to the intellectual property or the idea that they’ve developed and they have a vision and hopefully that vision goes beyond the financial returns. It really is a commitment. I mean, we’re in health because we want to help people, right? That’s why most people come. That’s why most inventors dedicate themselves to these types of inventions. The reality is an idea and even a patent, and frankly, even in an early prototype, doesn’t have a whole lot of value from an investor’s perspective. That doesn’t mean it doesn’t have value. It has a lot of value, but investors are looking at things through a purely financial lens. At the end of the day, we’re going to put capital in and we’re going to take capital out and we want a significant multiple on that capital, right?

Adam:   So we want things de-risked pretty much all directionally pointing towards market adoption, right? What’s the process to … How much is it going to cost and how much time is going to take to get it into the market, and then what’s it going to prove that the market will buy it and use it? And the reality is an idea, even a patent and even a prototype doesn’t really help us de-risk that. What we need to understand is how much time? How long is it going to take? What is the process? What’s the regulatory risk? What’s the clinical risk? And then at end of the day, we’re really trying to figure out, well, you know, what’s the market adoption going to look like? So lots of factors come into that. How big is the market? What’s the potential profit margins on your particular product? What’s the sales cycle look like? Et cetera.

Adam:   Are there cost effective distribution channels for this stuff? That all comes into play. We see a lot of med tech stuff that’s really interesting, but it has no economic distribution channel, no way to get to the market cost effectively. That’s a problem, right? That’s particularly true for low cost accessory type items that have potentially a lot of value, but you can’t justify direct sales force to sell those products, which means you’re forced to find a channel partner on day one.

Adam:   Well, if you’re finding a channel partner, they’re going to take a big chunk of the margin, and they may or not be committed to effectively selling and marketing your products. So there’s a lot of distribution risk for those types of companies. There’s a lot of de-risking to be done. The idea, the prototype, the IP, that is the very beginning of a long journey of de-risking the technology.

Dan:       Sure. So it sounds like a VC firm obviously is not going to typically get involved at at this point in investing. So where’s that money coming from at that stage?

Adam:   When you’re at that stage, that’s founder money, that’s friends and family money who are generally investing in you. They believe in the team. Yes, they probably buy into the market opportunity and your vision, but at that point, as I said, there’s little of substantive value from a professional and investor’s standpoint. It’s really friends and family at that point. Once you get a little bit further and at least you have, let’s say, some bench data, then you can start thinking about grant funding. But again, you’re probably …

Dan:       So we’ll call that milestone two, maybe you have a working prototype proving out technical feasibility and you’ve got some bench data to maybe show that it meets the standards for the predicate device maybe.

Adam:   Right. Exactly. So that brings you to the STTR/SBIR potential, for funding to get it to that next level. Then where do you go from there? I mean, at the end of the day, most professional investors want some evidence that the product actually works and somebody’s actually going to buy it, right? In Med tech universe, that’s generally, not always, but that’s generally at minimum some compelling animal data. Really, it’s first in human data, right? That is usually the big trigger and by the way, concurrent with that first in human data, hopefully there are some clinicians who are nodding their heads going, “I used it and I really like it and it seems like it works.” That’s a huge de-risking milestone and we talked to a lot of companies who I don’t think they understand that they need to be laser focused on getting there on his little capital as possible because they’re thinking, “Oh, we got to get the 510K, we got to get regulatory approval, we got to do all these things.” And of course the 510K or the PMA is a very important milestone.

Adam:   This matter if it doesn’t work, like spend your focus and your limited dollars building a product that works and people love, right? You need to understand what the regulatory pathway is. Absolutely. If you’re not an expert in regulatory or there isn’t a really clearly defined pathway, you need to work with people who are experienced and understand how to build a regulatory strategy. But in the beginning, you have to be laser focused on building something that actually works and creating at least a small body of data to support its efficacy and safety.

Dan:       Yeah. I guess another important thing to point out there then is that if you have regulatory approval, that’s the FDA giving you your stamp saying this works to some level, right? You can treat a condition with this, but that doesn’t mean it works better than the standard of care. That doesn’t mean that that it works for an investor or for a clinician to the level that there’s market demand for it, right?

Adam:   Yeah, exactly right? So there’s two crucial [crosstalk 00:28:44].

Dan:       Let’s call that milestone three. You have regulatory approval but …

Adam:   The reality is it does not prove that it works. You can get a lot of 510Ks, with no clinical data whatsoever. I showed it was from a bench top standpoint, it’s equivalent to a predicate device. That doesn’t mean it works.

Dan:       I guess what I mean is that the standard right from FDA is if you get regulatory approval, that means the FDA said you’ve shown to our satisfaction that this is safe and effective, but that’s not … their standard of effective is not the same as what you’re saying that this device works.

Adam:   If you get a PMA, you are correct. You have shown to the FDA satisfaction that your device is safe and effective. If you get a 510K, you’ve shown that you are substantially equivalent to a predicate device. That predicate device may or may not safe and effective, but it was cleared by the FDA before 1976, you know, a strange set of laws, right? Kinda bizarre how this whole 510K system works and it’s all based on predicate devices. But I think your a bigger point is the important one, which is getting regulatory approval does not provide validation of market acceptance [crosstalk 00:30:03]. It doesn’t prove that people will want to use it. It also doesn’t prove at all that you’ll get paid for it. It’s a prerequisite. People won’t use it and you won’t get paid for it if you don’t have regulatory clearance. But the converse is not true. Just because you have that doesn’t mean people will use it. And that’s really the biggest de-risking component that institutional investors are focused on. That’s what they want to see.

Dan:       Okay. So say we’ve cleared milestone three, which is, we have regulatory approval and therefore we’re able to conduct post-market clinical data collection. Then is that the point at which institutional investors may really become involved and what do you call that from a serious perspective?

Adam:   Yeah, I mean, so the reality of where we are today in the funding cycles, in the med tech spaces, the vast majority of investors want to see their money going toward commercialization. So while you might not necessarily be on the eve of commercialization, you haven’t hired sales guys, the manufacturing plants not chugging away for spitting out products and in creating inventory for three shifts a day. You might not be at that point, but investors want line of sight to that. They want to believe that my money is going to get you to that point and at least you will be funded for an initial market entry. So that varies widely, right? If you have a very simple widget, with a very straight forward regulatory pathway, it doesn’t cost a lot to manufacturer. Then that kind of accompany may very well be interesting. Whereas another company, it’s still going to take a lot more money to get to the commercialization point even though it might have it in really compelling market opportunity.

Written by Daniel Henrich

Written by Daniel Henrich

Director of Marketing at Archimedic

Building a Better BOM

How a detailed bill of materials sets you up for success in manufacturing transfer

How medical device startups should evaluate contract manufacturers is a topic we frequently address with clients. Selecting a manufacturing partner can be an intimidating process and a lot rides on making the right decision. Developing a detailed bill of materials (BOM) will position you to receive a set of high-quality quotes from prospective manufacturers and conduct an apples-to-apples comparison before moving forward.

Imagine this (or maybe you don’t have to):

You’ve invested countless hours and many shekels of hard-won capital refining your medical device design and preparing to move into the manufacturing phase. You’ve been through multiple rounds of prototyping and bench testing. As a next step, you want to obtain production quotes for manufactured units. You call around to industry colleagues and receive some recommendations for contract manufacturing organizations (CMOs). You pair this effort with some independent research to come up with a list of CMOs to approach and find the appropriate point-of-contact for each. You then go through the process of executing confidentiality agreements with each CMO before sending over your engineering data. The whole process of requesting quotes has been much more involved and taken a lot longer than you originally thought. You eagerly await replies from the CMOs, bringing you the numbers that will inform so many of your decisions down the road.

Over the next several days, instead of quotes, most of your CMO contacts get back to you with a polite “thanks-but-no-thanks” type of reply. The project “isn’t the right fit” or they’re “not set up to meet your specifications at a competitive price point.” The few that do respond take forever to do so and the numbers they give are much higher than you were anticipating. When you ask for details on how they arrived at those figures, they’re elusive and you get the impression they don’t really want you to accept their proposal.

What went wrong?

Simply put, the CMOs got the impression this project might be more trouble than it’s worth. Startups are notoriously difficult for CMOs to work with. They come with the same (or higher) sets of management costs as larger, more established clients, but with lower volume production runs and higher associated risks (non-payment, for instance). The manner and content of your request for a quote communicates to the CMO how easy you will be to work with and how likely it is this will be a profitable relationship for them in the long term. The single best thing you can do to position yourself for success in this process is to invest time with your design team in building a comprehensive bill of materials. A complete and detailed BOM will make your life a lot easier in the following areas:

Procuring Quotes

Your BOM is like a table of contents for your design transfer package. Along with your toleranced drawings, 3D CAD files, work instructions, and other materials, it telegraphs to a CMO your overall level of organization and professional competency. A detailed BOM (or lack thereof) tells a manufacturer how much “handholding” (i.e. non-billable up-front costs) a client is likely to require during the design transfer and pilot production phases. If you give the impression you’re disorganized or your project has been messy up to this point, you may receive a no-quote or inflated pricing in place of the information you were hoping for. Leading the conversation with a well-constructed BOM improves your chances of favorable responses from CMOs.

Additionally, procuring component and subassembly quotes and incorporating them into your BOM reduces the amount of legwork required by a CMO, making the prospect of taking you on as a client more palatable.

(By the way, along with your BOM, you should share details with prospective CMOs that will build your credibility: funding milestones met, management team backgrounds, etc. Think of this as a mini investor pitch–remember, you’re soliciting a strategic partner for your business!)

Deepening your Understanding of Cost Drivers

A BOM should be more than a list of components and their respective quantities. It should include part numbers, materials, processes, secondary operations, vendors, costs, and many other details. Supply chains are best built from the bottom up. By requesting production quotations for each custom component and assembly, the design team deepens its understanding of the drivers behind the final price tag on their product. This allows teams to identify and concentrate on the components that can have the greatest impact on their cost of good sold (COGS).

Identifying cost drivers will foster helpful relationships with specialty suppliers including machine shops, injections molders, and PCB manufacturers. Often, these organizations can provide expert feedback on your design, helping you select components that will not only reduce production costs, but also improve the quality of your product.

Mitigating Costs of Change

Hopefully, you’re able to find a single CMO that can meet all your requirements and form a long-term relationship that benefits all parties. However, if a time comes when your CMO relationship isn’t meeting your needs, you’ll have to be able to pivot to working with a new partner (more on that below). If your CMO has compiled and controls the whole BOM–supplier list, component pricing, and other details–your task will be much more difficult. Building a BOM in advance of forming a relationship with a CMO is your insurance policy, in case that relationship doesn’t work out in the long run.

Reducing Supplier Risk

Maybe your product contains components requiring specialized materials or processing. The number of potential suppliers for these components may be quite small–exposing risk in your overall design you haven’t yet appreciated. Building a BOM is an exercise that will help you identify and reduce these risks, forming contingency plans to mitigate potential issues. A design team that builds and controls its own BOM is much better positioned to control supplier risk than one whose BOM is assembled for them by their CMO.

Understanding Scale

Startups usually begin their product’s production phase with a small number of units. This may require finding a CMO that specializes in launching production with low volume runs. However, that same CMO may be not be set up to produce the same product cost-effectively at scale.

Horizontally-integrated CMOs have established broad networks of suppliers, assembling the subcontractors they need on a project-by-project basis. Such a CMO might focus solely on assembling the finished product, depending on other organizations for fabrication. These CMOs tend to be on the smaller side, allowing device entrepreneurs direct access to the CMO management team throughout the manufacturing planning process. The per-unit pricing of a horizontally-integrated CMO is usually higher, since it includes the cost of sourcing and managing subcontractors.

Vertically-integrated CMOs have expansive in-house capabilities, such as injection molding, machining, PCB fabrication, and precision assembly, all in a single location. These are typically large organizations with high minimum order quantities. Usually, this type of CMO won’t be a good fit for a startup just entering into production for the first time. A detailed BOM, including component and assembly pricing information at different volumes, will allow a device startup to understand the point at which it may outgrow its first horizontally-integrated CMO, moving to a vertically-integrated partner for larger runs at lower unit prices.

In Conclusion

The points above are laid out to convince you that it’s worth taking the time to build a proper BOM prior to forming manufacturing relationships. They shouldn’t cause you to adopt an overly-defensive posture when interacting with potential CMOs. You’re forming a partnership that can literally make or break the success of your company, so tread carefully and protect your interests, but remember that trust between your organizations will be vital to your success. Developing a BOM isn’t the most exciting part of the product development process but it is a critical one you shouldn’t skip!

If you need help with your BOM or have other design-for-manufacturing questions about your medtech project, contact our team using the form on this page. We’ll be happy to talk with you.

About the image above: Exploded view of the DxTER orb from Basil Leaf Technologies. You can learn more about this project here

 Written by Eric Sugalski

Written by Eric Sugalski

Eric Sugalski is the founder and president of Archimedic, a contract medical device development firm with offices in Boston and Philadelphia. Sugalski has led the development of a novel pediatric life support system, cardiovascular implants, laparoscopic surgical devices, and an array of wearable diagnostics. In addition to his technical background, Eric provides companies with product development strategy that encompasses regulatory, reimbursement, and fundraising requirements. Eric obtained a B.S. in mechanical engineering from the University of Colorado Boulder and an MBA from the MIT Sloan School of Management.