Medical Devices: Costly, Time-Consuming but Worthy

Building a successful medical device startup is more expensive and time-consuming than building other types of small businesses, but the potential return on investment is higher, according to founders and investors in Arkansas.

The goal for most medical device startups is to be bought by larger players in the market for several times the startups’ annual revenue, industry experts told Arkansas Business. And there’s another benefit, they said: helping humanity.

The United States has the largest medical device market in the world, valued at $156 billion and representing 40% of the global medical device market in 2017, according to SelectUSA, a program led by the U.S. Department of Commerce.

Patent filings in the industry have recovered from a slight dip during the Great Recession and have been trending upward ever since.

At least a dozen medical device companies now operate in Arkansas. Vance Clement leads one of them, Lineus Medical in Fayetteville. The company’s CEO, he has two decades of experience working and investing in the industry.

“It’s not like a restaurant, where you open it up and, in three months, you can be making a profit and start paying back investors something if you wanted to. It’s not like that at all,” he said. “You have to be in it for the long haul. But the good news is that medical devices can be lucrative. The payouts are much bigger if you’re successful.”

He warns investors that the average time to get a medical device to market is five years, and the average investment is $5 million, largely because inventors must work to get Food & Drug Administration approval for their products. The failure rate for medical device startup companies is the same as for other startups, so there is just as much risk, Clement said.

It can be cheaper and easier to commercialize a medical device that was invented by someone who works for a university or studies at one, said Hari Eswaran, a professor at the University of Arkansas for Medical Sciences.

The inventors or those who want to commercialize their inventions would have access to the time of other researchers at the university and additional resources are available in that setting. However, the FDA clearance process would still take four or five years, Eswaran said.

‘Fraught With Challenges’

The medical device Clement’s company makes, the SafeBreak Vascular, has yet to make it through that process.

The single-use SafeBreak Vascular connects the IV in a patient’s arm to medicine. If the IV is pulled on, the device breaks into two pieces, but it has a valve on each side that closes to prevent the IV needle from coming out of the patient’s arm and prevents the medicine from spilling.

Jeff Standridge, co-founder and managing partner of Cadron Capital Partners in Conway and Fayetteville, said the SafeBreak Vascular is the first medical device his firm has invested in.

“From an investor perspective, investing in a medical device is something that I do very, very cautiously, and it’s predominantly because it takes such a long time to get to market, and it could be fraught with challenges, trying to get to market,” Standridge said.

However, “obviously, any venture investing, the anticipated return has to be greater than just the standard, in the general market, or we’d just invest in a much safer alternative called the general market and large cap stocks,” he said. “Instead of a percentage return, we’re generally looking for a multiple return, in other words, a multiple on our invested money.

“So one of the criteria that we use is, is this a company that we feel like we could get three to five times our money in three to five years? For a medical device company, that return, the time frame is longer, so we’re thinking about do we think we could get seven to 10 times our money in five to seven years?”

Most of the time, the end goal for a medical device startup is to be bought, industry experts told Arkansas Business.

Clement said medical device companies sell for three to seven times their annual revenue. They sell for more if the device is difficult to duplicate.

He estimates that Lineus Medical’s device falls somewhere in the middle, that the company will sell for four or five times its revenue. A sale is likely a couple of years away, though.

The big reason for that wait is that many devices must be “cleared” or “approved” by the FDA. Clement hopes the SafeBreak Vascular will be cleared by the end of this year through the federal agency’s 510(k) process.

That process is less rigorous than the “approval” process and results in a “cleared,” not an “approved,” device.

To be “cleared,” the startup must prove its medical device does the same thing or does something very similar to an existing FDA-approved device.

The 510(k) is the pathway most medical devices take, Clement said.

His company first submitted its application in May 2018.

Once an application is submitted, the FDA has 60 days to notify the startup of “deficiencies” — elements that must be changed within 180 days.

Some deficiencies can add months and hundreds of thousands of dollars to the cost of getting to market, Clement said.

“It’s not uncommon for a medical device company to burn anywhere between, I would say, $60,000 and $150,000 a month.”

Clinical trials, or testing, are part of that process, and the extent of those depends on the medical device. Drugs have phase I, II and III trials, and devices implanted in the body have more requirements than something external like the SafeBreak Vascular, he said.

Lineus Medical was not able to meet the 180-day deadline, so the company resubmitted its application (now more than 1,200 pages) and paid that application fee again in May 2019.

Even though the 510(k) is an abbreviated pathway, it will have taken Lineus Medical more than four years and $4 million dollars to get its device on the market if things move along as Clement expects them to.

In that time, he said, he could’ve bought five or six franchised, profitable restaurants.

Making Life a Little Easier

But there is a quicker path than the 510(k), and it’s the path Staley House of Helena took.

Staley House is already selling a medical device called the FreeArm, which holds feeding pumps and bags used for bolus feeding, a feeding method that uses a syringe to deliver formula through a feeding tube. It is also called syringe or gravity feeding because holding up the syringe allows formula to flow down using gravity.

Misti Staley, who is a member of this year’s class of Arkansas Business’ 40 Under 40 honorees, and her husband, Will, invented the FreeArm. Because it doesn’t come with pumps, bags, medicine or anything like that, her device is considered a “Class I” medical device by the FDA, Misti Staley said.

Most Class I devices don’t have to be FDA approved. Instead, they must be registered with the FDA.

The FreeArm was tested for safety as part of that process, and the company hired a consultant to help it submit all the paperwork necessary for registration.

The Staleys’ story best illustrates the altruistic reasons for founding a medical device startup.

Their son, Freeman Ellis Staley, died of pulmonary hypertension when he was 10 months old.

He was born in 2016 and spent three and a half months in the newborn intensive care unit at Arkansas Children’s Hospital. He was discharged and spent five weeks at home before returning to the NICU, where he died.

During that five weeks, the Staleys had to tube-feed their son, which was challenging because there wasn’t a portable holder on the market that could hold everything involved in tube feeding. Their experience inspired the FreeArm.

“We want people to not feel the burden that comes with being tethered to tubes. We hope they can use their FreeArm and enjoy life to the fullest,” Misti Staley said. “We are so thankful to be able to give back and make life just a little bit easier with the FreeArm. We are forever thankful for everything that Freeman taught us. He will forever be our small and mighty hero.”

Clement also enjoys helping people through his involvement in medical devices. As an engineer, he could have worked for Tyson Foods, J.B. Hunt or Walmart. “I always worried about, for me, that I might wake up one day 20 years into my career and say, ‘Oh, my gosh, what have I done with my life?’” he said. But after he got involved with medical devices, “I never, ever had to worry about or think about that. Whatever I do and whatever I’m trying to do, I’m trying to help people” and it’s “very rewarding.”

Help Is Available

When the Staleys decided to help others like them, they went to the Arkansas Small Business Technology & Development Center on the University of Arkansas at Little Rock campus for help.

The Staleys already worked for themselves: He runs a nonprofit graphic design firm and she’s an artist who teaches. But having a medical device company seemed “more daunting,” Misti Staley said. “We were really scared with all the red tape.”

The center helped them create a “lean canvas,” a simplified, one-page business plan chart, and recommended that they apply for the Delta Innovation Fund (Delta I-Fund) accelerator.

Another accelerator and investment fund based in Arkansas is HealthTech Arkansas, which is in its second year. Lineus Medical graduated from that program.

Medical device development is one of three areas that the accelerator targets, said Director Jeff Stinson. (The others are digital health and diagnostic platforms.)

Accelerators are designed to give startups access to prospective investors, customers and mentors, and most offer an initial infusion of funds.

The Staleys had already been speaking to prospective customers, such as doctors, nurses and parents, before their company participated in the Delta I-Fund. But they gained access to even more of those people through the program.

They found that 87% of the people they interviewed “had the same pain points as we had with tube feeding: not enough hands, inconsistent feeding method and lack of mobility when tube feeding. It was then that we knew we were in the process of making something that could help a lot of people,” Staley said.

The Delta I-Fund also introduced the Staleys to investors to mentors and prospects to pitch their product to. The company won money in pitch contests.

Staley House has received $61,000 from the Delta I-Fund, through the Delta Regional Authority, IberiaBank and Winrock International.

The company was also helped by Innovate Arkansas and the Arkansas Regional Innovation Hub in North Little Rock, as well as by individuals they knew who had invented other things.