Health Investing: Assessing if good regulatory processes are in place
Five health investors explain how they assess whether good regulatory processes are in place before they invest and how the current regulatory environment affects their decision-making process.
Damian Lamb, Managing Director, Genesys Capital
Nilay Thakar, Associate, ARCH Venture Partners
James Hardiman, Partner, DCVC
Scott Kaplanis, Partner, Epic Capital Management
Brenda Irwin, Managing Partner, Relentless Venture Fund
Transcript with timestamps (click here)
How do you assess that good regulatory processes are in place before you invest? Damian Lamb, Managing Director, Genesys Capital [00:10] Regulatory is a huge part of what we do just because healthcare products are so heavily regulated, be they, you know, traditional pharmaceuticals or medical technology products. So, you know, first you demonstrate safety and then you demonstrate efficacy. Safety will get your product to the market; efficacy will get that product bought and paid for. And we spend a significant amount of time in our due diligence going through what ultimately is going to be required from a regulatory perspective to bring those products to market.
One of the challenges with really innovative stuff is there may be no precedent. So I mean, the easiest way to do due diligence on regulatory: so look at a product, like the product you’re going to be looking at. and establish a precedent, you know, where you’ve got an established precedent right at the market. Where you get into difficult things is the really new and innovative stuff. And that’s a difficult one to provide due diligence for. And I would say if you’re a founder or scientific entrepreneur with that type of technology, you probably need to spend a huge amount of your time preparing to discuss that with investors. Because if you can’t convince people there’s a path to market, then you’re never going to get capital.
Nilay Thakar, Associate, ARCH Venture Partners [01:14] The scientific innovation has to be safe and effective. How do we determine it at ARCH if something had good regulated process in it? It depends on the stage, again. Since we invest pretty early-stage, from a therapeutic biotech pharma context, it’s not essentially possible at that stage, because most of our research is in an in vitro stage or “my six mice experiments in my studies.” Essentially, we like to see the data at that point. See if it’s valid enough. Ask our network of KOLs or experts in the space what they think of the scientific teams involved and their quality of their data and the reproducibility.
After that we give them a very, very tiny sum of the money, essentially to a contract a CRO [contract research organization] and have them reproduce the same experiments. And if that meets the checkboxes, then we go ahead with the seed series A rounds and invest in it.
Obviously, as the company scales and grows and there’s products in clinical trials, or approaching clinical trials, you go through the standard processes of making sure that the clinical endpoints are defined for an indication and what you’d need in terms of a clinical trial design to meet those endpoints or test those endpoints. And for that, you’d have your clinical team in place to study those results.
James Hardiman, Partner, DCVC [02:27] When it comes to regulatory processes, as a financier, I don’t see my place as ensuring that those are, kind-of, in place and appropriate. I usually leave that up to government. And it’s just my expectation that any company that I invest in, would be aware of what the regulations are for the therapeutic or the device that they’re developing and would comply with those regulations.
Now for first-time founders, my expectation is that they’re at least aware and have done some reading in early education. But it’s not uncommon for founders to engage regulatory consultants. So people who were maybe formerly at the FDA or who specialize in consulting companies with how to approach the regulatory framework in which they’re operating in and how to maximize the company for success, kind-of, given that framework.
How does the current regulatory environment in health affect your decision-making process? Scott Kaplanis, Partner, Epic Capital Management [03:20] Safety and efficacy are, of course, things that we look at when we’re making any type of an investment. Different types of sectors within the healthcare space have different regulatory processes that have to be followed. Obviously, they’re governed by very strict requirements. Most of the investing that we tend to do is either on the device side or the healthcare IT and digital health side that tend to have less rigid requirements from a regulatory perspective.
Where we do follow the processes, we follow them as outlined by regulatory bodies. And if a process doesn’t need to be followed, we certainly make sure that the management team is especially taking into consideration safety with respect to its patients as a primary objective. And so what we do is we really look at the team that is surrounding the organization. Have they surrounded themselves with the appropriate advisors, the key opinion leaders? Has their board done work in the clinical space before? To make sure that they’re at least thinking through the right questions and challenges when they are building their product or solution to get to market.
Brenda Irwin, Managing Partner, Relentless Venture Fund [04:20] One of the exciting things about being a healthtech investor these days is the FDA is actually catching up with innovation that’s outside of drug development, devices, diagnostics.
So it has now been almost two years that the FDA introduced pilot programs for software as a medical device, and that included lesser-known suspects. So you did have J&J in that pilot, you also had Fitbit. And what they did was work with these groups. So now that instead of everything that we’ve gone through for decades with the FDA, where you have a very specific protocol—you submit for approval for a product, a therapeutic, a new drug, a new device. The SaMD—so, software as a medical device—now allows for approval of a company and their processes, so that as software is iterative and is very integral to a lot of the healthtech businesses and the collection and use of data, it’s just, it’s great, it’s groundbreaking. It’s changing the paradigm.
It also makes it much better from a from a healthtech investor’s perspective to have confidence that the capital that’s being invested in early-stage company is going to be able to get to a place where there is going to be sustainability because there is a defined regulatory protocol.
There’s a second piece that is great. As a healthtech investor now, there’s new reimbursement codes. So for years, entrepreneurs have been creating products, whether it’s a certain type of wearable or an app. And it’s like, we’ve got all this data, we want the clinician to be able to use this. It’s like, well, who’s paying for it? And now clinicians have the ability to bill for remote monitoring, for example. So one of the new codes is providing compensation to doctors to actually look at the data that has come from a sensor or a certain software application. And it doesn’t always even have to be the doctor. It can be their team and this is paradigm-shifting.
So from a regulatory environment, those two areas—both software as a medical device and the new CPT (current procedural terminology) codes—are game changers and entrepreneurs need to know those. They need to know where the opportunities are and they need to be able to speak to them. Because for me as an investor, if I think you should know it, you better.