Q&A With Nadim Yared: AdvaMed's Next Chair On Capital Formation And Global Challenges
Nadim Yared is set to become the first small-company CEO ever to chair AdvaMed's board of directors in March. The CVRx executive spoke to Medtech Insight about what that means, the challenge of raising funds in medtech, and AdvaMed's role in the current political environment in the US and abroad.
Nadim Yared has been fighting the good fight of a medtech startup for the past 10 years as CEO of cardiovascular neurostimulation firm CVRx Inc.More recently, he has taken on a more prominent role in policy advocacy for industry, first as chairman of AdvaMed Accel, the division of the industry trade group that is focused on emerging-growth companies. And now he has been elected as the next chairman of AdvaMed's board of directors.
When Yared takes on the board chairman role next March, it will be the first time an executive of a small company has filled a post traditionally reserved for the Medtronics, J&Js and BDs of the world. His appointment is no accident, Yared affirms. It is meant as a signal by AdvaMed of the organization's commitment to small-cap company issues and concerns, a message the trade group has been trying to drive home for years.
Yared says as board chair he will continue the priorities already set by AdvaMed, pointing out that all companies, no matter their size, face the same regulatory and reimbursement challenges. But there is no question that he has thought deeply about the capital-formation challenges particular to startups and that he has a lot to offer on that issue.
"Ten years ago, with those same leadership skills, it may have been still difficult to become the chairman of AdvaMed as compared to today."
Yared spoke to Medtech Insight about what's on his mind as he prepares for the high-profile role. A portion of the interview, lightly edited for clarity, is below.
However, smaller companies do have some unique constraints, as well, particularly ones related to capital formation. I don’t think Medtronic needs to raise money to develop the next product line, right? Most profitable companies don’t face that; but most startups are still in a mode of heavy investment and they need access to capital. That is one of the unique elements.
From AdvaMed’s perspective, we’ve been catering to the needs of smaller companies for a while now. About four years ago, we created a special board of directors—we call it Accel —that serves the needs of smaller companies, and I think as an industry trade association, we wanted to send a stronger signal here that everybody counts, that every vote counts, every single company counts. There are no smaller issues.
The current chairman of AdvaMed, Vincent Forlenza, the chairman and CEO of BD, is coming from the diagnostic world and that is new to AdvaMed, as well. Now, between the traditional mid-cap and large cap medtech companies, diagnostic companies and now smaller companies – we are showing that any one of those companies can take the leadership here and guide the trade association.
"Companies right now require more capital from inception to exit than ever before, and the amount of capital available is less than half what it used to be before."
I wish I can tell you that it is all about me. It is not. Part of it is about me, but the rest, the big part, is about the industry and the trade association, and where everybody wants it to go.
With regards to MDMA, I think there is a role that they can play. Over the past five years, MDMA and AdvaMed had played together very well. You cannot see the light between these two organizations. Many companies are members of both at the same time.
But what we’re trying to avoid is having any perception that AdvaMed is for large companies. AdvaMed is for everybody. It’s not a competition. It’s not about who becomes the largest, just ensuring that, as an industry, we have strong advocates for us on the Hill and worldwide, as well.
"In the device space, Wall Street does not reward at-risk behaviors, so we need to educate the market. We need to educate the investors to give more leeway for those large consolidators since there are very few of them right now."
We’ve seen also CMS deploying some efforts. It’s still at the beginning. I think there’s still more progress to be made on the coverage and payments of novel, innovative technologies. On the capital formation side, the market is still challenging. It is a buyer’s market right now, so investors can dictate valuation of medtech companies. It’s a great time to invest in the medtech space from a venture perspective.
But the fact is, companies right now require more capital from inception to exit than ever before and the amount of capital available is less than half what it used to be before. You add those two together and you’ll see why we’re facing here still a dramatic shortage of creation of medtech startups. If you look at the number of series A funding in the medtech space, it is still about 25 percent of what it used to be five years ago.
Another concerning statistic: last year, we had more exits in the medtech space than company formations. Usually you need a ratio of about 2.2-2.4 between exits to company creation to sustain a market. Here, we had more exits than company formation. We still have some challenges here that we need to work on. Like you said, we’re better today than where we were two years ago. The suspension of the device tax is helping tremendously. We need to make sure that it becomes permanent. There are some other areas of weakness that we need to work on; reimbursement and coverage by CMS and capital formation for the medtech startups.
We need to have more parallel pathways between FDA and CMS for reimbursement. We need to figure out ways for CMS to be able to commit to reimbursing a product earlier because that is what’s holding venture funds, or pension funds, and so forth from investing in the medtech space – the fear that those products, even if they are successful, they may not be reimbursed down the line. We need to figure out a way with CMS to work on a preapproval, or pre-coverage of technologies. There’s still a long road ahead of us here.
Finally, we need to create an environment within Wall Street and outside of it, to reward publicly traded companies that are taking innovation risks, whether it’s organic innovation risks, trying something new and failing, or inorganic – like giving larger medtech companies some breathing room to do more acquisitions earlier.
Let me give you an example and expand on this for a second. If you look at the past decade, from 2004 to 2014, it used to take a small company $32 million on average to go from inception to exits. This is an average, meaning you’ve got some companies, most of those will be 510(k) pathways and smaller product lines, but still, it’s $32 million on average. In 2014, that became a $72 million average cost from inception to exit. For the same amount of money available in the market, we can have less than half of the companies created. That’s number one, but we also have less money, so the issue is even more compounded.
Compounded with that is that some of those large medtech companies would prefer to acquire de-risked assets, i.e., a smaller company that has proven not only that the technology works, but that it’s approved with the regulatory agencies and thus, being reimbursed, but also retire the adoption risk by demonstrating that the product can be sold. Some of the $72 million on average has been used to develop salesforces; to start selling the product to demonstrate attractiveness, then to be acquired by consolidator, and then those salesforces will be either merged or dissolved. That’s money that should have been used to develop new innovations.
And with consolidators, can we give them the air cover they need to be able to do those at-risk portfolio acquisitions? When you say, “Well, you know what? Valves are strategic for me, so I’m going to go and buy three or four technologies. One of them will be successful. That’ll be plenty enough. I don’t need to have 100 percent batting rate here in my inorganic investment.” On the pharma side, they do this a lot. Wall Street rewards them for it. In the device space, Wall Street does not reward the at-risk behaviors, so we need to educate the market. We need to educate the investors to give more leeway for those large consolidators since there are very few of them right now.
On Brexit: "We need to be there to guide them and give them the information they need about the implications of the changes they want, whether it’s positive or negative."
A last one would be to invest in more research; to look at the data and be able to communicate the data. There is nothing that speaks better to Wall Street than data. If we can provide them valid data showing that large- or mid-size medtech companies were successful in doing those at-risk acquisitions. You know, look at Edwards buying the first transcatheter aortic valve company. People looked at it like, “Wow. You’re paying $300 million for this?” Now we look at that and say, “Wow, this is the smartest thing Edwards has ever done.” This was way before they got FDA approval, way before they even started doing major clinical trials.
We need to be able to demonstrate that this behavior is actually the right behavior for mid-sized and large-sized companies to try to create an environment where they keep doing what they’ve done in the valve space. They’ve done a fantastic job, by the way, in the valve space. If you look at the 2015 statistics, most of the acquisitions that have happened were in the mitral valve-replacement space, trying to mimic what happened on the aortic valve a few years before.
That said, AdvaMed used to have a research arm called InHealth. We remerged it back inside AdvaMed so we do have the capability to conduct or fund research from within AdvaMed, either through our usual operating budget or through special assessments. That is something as well that one can look at.
There are a lot of things that, frankly, I don’t know yet. I’m using the next few months as the chairman-elect to learn as much as I can.
We have a sister organization called Eucomed. Eucomed and AdvaMed, we work very, very closely together. With regard to Brexit, Eucomed will be the primary contact point following up on what would be the implication if this proceeds. If Brexit proceeds, what will be the implication on the regulatory pathways and reimbursement pathways in the UK? Would they still follow the CE marking? Would they be like Switzerland? Switzerland is not part of EU, but they do abide by the CE marking, so when a product is CE-marked, it has access to the Swiss market. (Also see "Brexit: What Now For Device Notified Bodies, CE Marks And The Future MDR/IVDR?" - Medtech Insight, 30 Jun, 2016.)
Or would they use this opportunity and approach FDA and try to harmonize their regulatory pathway in the UK with FDA, or who knows? We have to engage contacts at the highest levels as they navigate through all of this. We need to be there to guide them and give them the information they need about the implications of the changes they want, whether it’s positive or negative.
We have to be out there educating all of the politicians about the implication of that to ensure that the device tax suspension is either prolonged, but better off, if we can make it permanent and totally repeal the device tax.
From the editors of The Gray Sheet