What I Like About You…

While our partnership operates as a collection of generalists, each of us have taken on specific areas of investment focus based on personal interests and where we collectively see an ability to generate above average returns. One of the specific areas I am spending a lot of time on is the diagnostics field. I believe we are witnessing a renaissance in the diagnostics industry given the convergence of a set of advances in computing power, sequencing, imaging and a much greater awareness of biological pathways as they affect disease states – not that insightful admittedly – but many investors have historically struggled with the diagnostics space given it has historically had “biotech risks” with “medtech upside.” I happen to believe that sentiment is dated.

As exciting as all of this sounds let me flag one real substantive concern which I am increasingly struggling with – regulatory and enforcement issues. For those diagnostics entrepreneurs raising capital you need to have a bullet proof assessment of these risks to investors. The situation appears to only be getting worse. Specifically I am very worried about:

  • Longer review cycles for 510(k), IDE and PMA submissions
  • Higher data thresholds for clinical data
  • Greater scrutiny of the relationship between the company and investigators

All of these issues imply greater development time which directly translates into more money. My rule of thumb is that the monthly burn rate per FTE in diagnostics companies runs anywhere from $25k to $30k – very scary amounts. The increased R&D expense, coupled with the heightened uncertainty around reimbursement rates, directly impacts ROI calculations. This lack of clarity is forcing VC’s to assume the worst and that the increased regulatory burden will lengthen product development cycles and increase the level of clinical data required.  Lower approval rates will reduce innovation getting to market and ultimately hurt patient care.

So as a diagnostics entrepreneur – if we are going to meet – please walk me through how you are poised to manage through this increasingly more complex and onerous regulatory environment. Specifically I would welcome a discussion around:

  • Clinical utility of your products – which really is a discussion of the data
  • How you are positioned in an environment of “risk based assessment” by the FDA
  • Role of CLIA lab in your strategy (full disclosure: I chair the board of Predictive Biosciences – a very exciting cancer recurrence diagnostics company which recently purchased a lab to provide a fully integrated lab model with proprietary markers)
  •  Samples – banked versus prospective samples

But ultimately it will all come down to the quality of the data – is it clinically actionable and relevant? The most effective counter to the FDA’s more onerous regulatory posture is to have tremendous data which address large markets.

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