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| Innovative Products, Innovative Strategies |
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Israel has numerous medical products companies that produce and sell their wares in the world market. While some of the products are recognized the world over, the companies themselves are far from being household names. Nevertheless, experts in the industry agree that maybe this is a good strategic approach.
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"Israel's medical device industry benefits from the fact that we are innovators in a number of areas: medical sciences, clinical expertise, materials sciences, electronics, hardware and software," says Ehud Geller, general partner at Medica L.P., Israel's leading VC firm focusing on early-stage medical companies. Israel generates many innovative ideas, but transforming those ideas into a profitable business, however, presents many challenges.
A few of the more highly recognized Israeli companies that have taken their successful idea and translated it into actual sales include Tuttnauer (producers of sterilization and infection control products), Oridion (involved in safety monitoring and point-of-care diagnostic testing), and Truphatek (manufacturers of laryngoscopes sold in the United States, Europe, Southeast Asia, China, and Japan). In addition to these success stories, the country boasts a large number of start-ups and a number of smaller and larger medical products companies.
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| The Earlier the Better |
Geller says that it is often easier for early-stage medical device companies to attract the interest of investors compared to bio or pharma because they are easier to understand and can show significant progress faster and earlier. "The industry has a substantially shorter time to market when compared to bio or pharma, although, interestingly enough, bio and pharma are able to achieve value earlier — even before sales. "Medical devices tend to become interesting to investors once they are already showing sales," he notes.
In order to establish a firm foundation, companies need to build up capital through sales, which presents the first challenge to an Israeli company: the domestic market is too small to really count on. As a result, any company that hopes to succeed must immediately look beyond Israel's shores to foreign markets. Setting up a marketing network of distributors and partnerships abroad requires a considerable amount of funding. Raising money, especially in today's market, is not easy.
A company needs to be a really exciting early-stage company in order to attract financing. In some sectors, the number of potential corporate partners is very small. For example, in cardiology, there are only four to six major players. "This is a post-traumatic market," notes Geller, describing it as a pedantic, particular, and reticent market, one that is very conservative and slow to make decisions. Very few companies with an exceptionally high product potential, such as Given Imaging, may be able to raise sufficient capital.
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| Two Ts and an M |
Geller identified three factors that determine a company's ability to raise funds: technology, team, and money.
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| |  | Essentially, technology answers a question, solves a problem or meets a need. The medical products market does not really care about incremental improvements. It seeks a major change or a paradigm shift in an area (or issue) that requires a solution and that also shows major market potential. The company has to show strong and solid proof of principle/feasibility/efficacy to show that its technology works.
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The company must have a credible and effective management team to move its technology or product ahead. Not only does the team bring a thorough understanding of the technology, but it also understands what it offers the market and the players. The team must possess the ability to choose the proper positioning and establish the right priorities.
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There's no question, companies need money! Excellent technology and an expert team might make getting the money easier, but Israel's ongoing geo-political situation and the general softening of the worldwide economy have greatly affected the country's overall economic situation. Companies are only managing to raise money piecemeal, if at all. This general lack of capital affects planning and implementation and means that coming out of the starting gate, the company may not have enough stamina to maintain momentum and make meaningful progress.
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| | Reality Check |
In order to be realistic, most companies need to partner with a large, established company in their market.
Herein lies the Israeli company's second dilemma: While the partner company helps the Israeli company enter the market (through its own marketing and distribution network), the Israeli company will not be able to develop its own brand and become well known in its own right.
Such is the case with Truphatek, who partnered with leading medical supplier Rusch Inc. in the United States. Its Shucman and Green Spec products are recognized names in the industry, but the name Truphatek is not.
Truphatek's CEO, David Grey, suggests that partnering with a large company is nevertheless a worthwhile business strategy. The Israeli company maintains its R&D and possibly its manufacturing capabilities — Grey points out that very large companies are not keen to get into production of new products — while the strategic partner assumes responsibility for the marketing and distribution.
But the relationship has its drawbacks.
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| | | Restricted growth. The partner may restrict growth of the company by controlling the formation of other relationships. When drawing up agreements with strategic partners, the consequences of any restrictions imposed on the Israeli company must be carefully thought through as to how they affect future growth and development. As often as possible, the partner company should be restricted to certain geographic areas, or market areas (for example, ORs or ERs), so the Israeli company will be able to form new relationships later on.
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Removed from market. The partner may effectively remove the Israeli company from direct contact with its market, so the Israeli company is unaware of new trends or end-user preferences. This tactic may limit the company's R&D effectiveness. Truphatek tackled this problem in two ways: (1) cultivating relationships with a number of doctors in Israel to provide consultation and (2) insisting that when Truphatek's marketing manager visits client countries, she is taken out into the field (in their case, hospital ORs and ERs) for a first-hand look at what's happening.
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| | Wide Open Spaces |
Choosing a new company's initial geographic market may also pose problems. Grey says he is surprised at the number of start-ups that are daunted by the regulatory climate in the United States and concentrate their initial marketing efforts in Europe. He says that the United States is by far the largest market and is often easier to penetrate because European countries, especially Germany, prefer to buy local products.
However, new restrictions imposed by the Food and Drug Administration (FDA) require Israeli and other foreign medical device companies to appoint a representative in the United States who will be legally responsible and accountable. Other restrictions include stricter QA procedures at foreign manufacturing facilities that will also be subject to FDA inspection, as currently required in the pharmaceutical industry.
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| A Case in Point |
A company starting out in medical products needs to define its marketing strategy very carefully and to develop a rugged marketing plan that takes into account the pitfalls that may appear along the way.
WaisMed, developers of an automatic mechanical intraosseous device, has developed a strong plan to avoid the pitfalls. (Intraosseous, or IO, refers to the bone cavity. Intraosseous devices inject fluid directly into the bone cavity.) The company completed its incubator period with a partially completed device, then took five years to finalize development of its product and receive FDA approvals. Mickey Flint, the company's CEO, took over three years after the incubator period at a time when WaisMed experienced financial difficulties. Incredibly, he found private investors within two weeks, a feat unheard of in today's climate. Flint emphasizes that if a company has not completed its development and gotten its product ready for sales by the end of the incubator period, its chances for success are poor.
With initial sales in Europe, Flint decided to concentrate on building that market and forming a firm base where there was already some penetration as opposed to trying to generate sales in a completely new market.
He found himself in a unique position. Use of the device changes many of the conventional concepts of emergency medicine. By identifying and contacting end-users through professional organizations and associations, the company embarked on and initiated an extensive education program. At the same time as setting up training centers for the emergency personnel, the company's marketing team targeted the purchasing decision-makers via a PR program, show participation, product samples, and recruitment of product champions.
Having built a solid base in Europe, WaisMed has now turned its attention to the United States, where it uses distributors for sales. WaisMed supports its sales initiative with intensive marketing activities.
Flint believes that start-up companies consisting of entrepreneurs from the medical or engineering fields but lacking a business manager must be prepared to hand over part of the company to a suitable manager or they will not be able to succeed.
In Flint's view, some companies spend too much time looking for a strategic partner at the expense of building up a strong company. "Many young companies spend too much energy wooing strategic partners, only to find that they have not paid enough attention to building a strong company, firmly planted on the landscape of the chosen industry." Flint adheres to his own philosophy. He builds a strong company from the ground up and develops it slowly and sensibly — not greedily. "To succeed, entrepreneurs must build a strong company based on traditional business values rather than popular get-rich-quick models," Flint concludes.
Even the best idea, the most innovative technology, and the brightest management team might not have the ability to push an Israeli medical products company into the mainstream. Some Israeli medical products companies find it difficult to sustain their R&D, production, and marketing efforts by going it alone, leading them to partner with an established industry player. Partnership carries a price but often paves a successful path for breakthrough Israeli technology to reach the global market.
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The Trendletter team welcomes your comments.
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Naomi Alper
Senior Project Manager
The Trendlines Group
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