"In 2014, I read the book ‘Start-up Nation’, I was enthusiastic, and I gave it to my partners to read. The next day we were on a plane to Israel”, says Dr. Ariella Golomb, a partner at the American InnovaHealth Foundation, who has her own Israeli roots. “We went on a scouting trip, which ended with 200 presentations”.
The fund's first investment in Israel, following that trip, was in OrthoSpace, which develops an orthopedic device to treat shoulder injuries, as an alternative to surgery. The fund invested $10 million in the company for a 75% stake. In March, it was sold to Stryker for $220 million.
Now, InnovaHealth, which invests in late stage medical device companies, with an emphasis on orthopedics and women's health, is looking for further investments in Israel. About a month ago, Golomb visited here, and she is optimistic. In her estimation, by the end of the year, InnovaHealth will make at least one investment in at least one other Israeli company.
"We invest only in medical devices, and not in digital medicine unrelated to surgery", Golomb told "Globes." "This focus distinguishes us from many funds today. For various reasons, medical devices have been under the radar in recent years, and we have created a variety of opportunities”.
The medical devices that the fund invests in are usually not revolutionary or are backed by massive experiments and promise to change the face of common diseases. On the contrary, the fund prefers to invest in products that require smaller clinical trials but good marketing capabilities, because they are designed for competitive markets that already have medical equipment. This field has been neglected in recent years.
"Traditionally, we have only invested in the fields of orthopedics and women's health, areas that my staff have known well", says Golomb. "Since then, we have expanded to areas, such as neurology and the digestive system. Although we believe strongly in targeting, and the orthopedic market alone is enormous - $60 billion a year - but we realized that the relationships we built with the potential buyers are suitable for other areas”.
Golomb says the fund's average investment is $10-20 million, at the stage after the clinical trials and before the start of marketing. For the most part, the fund leads the investment. "That's what's needed, no less, but not much more. For larger funds than us in the US, it's an amount too small to bother, and if they invest more, the exit or the market outcome will often not justify the investment. For angels or accelerators, it's already too much. From our point of view, this is precisely the amount that enables us to be involved in a company at the strategic level. We know all the companies in depth, we have a relationship with them and we bring our network of connections to them”.
The stage in which you invest, and entering the market, are considered by Israelis to be very difficult for a medical device company, like the ones you invest in. What led you to choose at this stage?
"Israeli CEOs have not always had the opportunity to experiment in this field, but we know these steps and know how to move forward in the face of marketing challenges. We prefer the implementation challenge and not the technological challenge. We have a network of contacts with doctors, with insurers, with hospitals and with purchasers.
"We enjoy the fact that Israel has capabilities that complement us: smart people, a culture of problem solving, and a lot of team work”.
Israeli companies see marketing in the US as a market failure. The large companies have their own marketing systems, and after the company is acquired - it is clear that this is the direction of a company that develops one product - the marketing system that has already been built will be dismantled.
"Companies are still expecting startups to prove marketing capabilities for most products. If companies do not operate in a market where your product is sold, they will also purchase it for your marketing system. If they have a marketing system in the field, you will have to set up the marketing system, but you will not really receive compensation for it in the exit deal. However, it is worthwhile to create an independent marketing system and not rely on an early marketing deal with a strategic factor, not to lose independence, do not get married before you are married, as they say.
"However, there is a possibility to work in depth rather than across, in some products and in some areas. That means that the company must show strong adoption of technology, reuse and savings in a small number of hospitals, but by different physicians in the same hospital. This way, proving marketing feasibility rather than revenue of 10-20 million USD. Proof of marketing feasibility is a narrative with many layers.
"The most important layer is the receipt of the insurance indemnity, which is meant to show that there are those who are willing to pay for this product. In order to obtain the indemnification, the company must show the insurance companies how it builds value. I recommend looking at the site of the American Organization for Medical Devices - Advamed, documents they wrote about building the value equation to obtain indemnity”.
How we sold OrthoSpace
"OrthoSpace is an excellent example of the type of company we are looking for”, says Golomb. "When we found about the company, it had already gone through the entire regulatory process for registration and marketing in Europe, and we were able to examine the quality of the product in the real world very well. The entire management group in the company was excellent. They knew how to divide the work between them. Itai Barnea, the CEO, impressed us all. He had valuable experience in his work at Johnson & Johnson, and he certainly set a high standard for what we are looking today from the Israeli manager.
"The company needed us to market in the US. After investing in it in its third financing round, there were three things we wanted to work with management. The first thing was to set up an activity in the United States that would conduct the clinical trial and expand the approach to strategic investors, that is, the companies that might buy the start-up. You need to know these companies over time and show them that you're doing what you promise, like 'credit history’.
"The big companies are hardly developing new products themselves. They must buy the innovation from the outside, but they must believe that the product will work and that it can be charged.
"The next step was to build the marketing channels. That was not a small challenge, because development of a company is a new medical procedure and the doctors must be trained to do it. The advantage of OrthoSpace is that the procedure is simple and the training is short.
"The third challenge was to sell in countries other than Europe or the US, where it is even more complicated to give training. We decided to open these markets, that is, to obtain marketing permits and to establish ties with opinion leaders, but to market only through distributors, with the understanding that in most of these markets we may not register significant sales, but as far as the strategic partner is concerned, it is important that we open the market for it.
"These three things we did for the Israeli company, which led us to build revenue and eventually sell it”.
"You need more products for women"
What caused the field of medical devices to cool off for a while, and what is heating it up now?
"The big players in the field have gone through a period of consolidation. Now it is over and they have again cash available for purchases. There is competition again among purchasers over existing products. However, there are fewer companies, because some of the funds moved to invest in digital only and there are no good investors or managers left to the classical medical equipment companies. That is why whoever is successful is acquired.
"From the market point of view, there is a great need for medical devices that will allow patients to be rushed out of the hospital: minimally invasive technologies, postoperative treatment, rehabilitation. All these products have a digital interface. We do not rule out investing in products that have a digital component, provided that the person making the decision is the surgeon. These are the areas in which we are strong.
"For example, we invested in a company called Blue Belt Technologies, which was sold to Smith & Nephew for $275 million. The company developed a robotic system for artificial knee implantation. The system itself is more based on software than on hardware, but it is a medical product purchased by the hospitals for surgeons, and therefore suitable for us”.
What other successes did you have?
"Our control of Biohorizons Implant Systems, which operates in the field of dental implants and tissue regeneration, has been sold to the leading dental company, Henry Schein. Another company, OrthoAccel, is developing a dental bridge that improves the movement of teeth by vibration, and significantly shortens the time it takes to assemble a bridge to achieve the desired alignment of teeth”.
What are the trending areas that you think are in the medical device sector?
"I believe that the combination of alternative biological tissues or innovations is the next thing, alongside women's health - that is underfunded where new products are needed."
Published by Globes,, Israel business news - en.globes.co.il - on June 6, 2019
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