Paul LaViolette
Partner, SV Life Sciences

Paul LaViolette, a partner at venture capital firm SV Life Sciences, has more than 28 years of global medical technology marketing and general management experience. A former COO at Boston Scientific Corp. (NYSE:BSX), LaViolette spent 15 years at the Natick devices giant, with stops as president of the cardiology and international groups. His resume also includes stints at C.R. Bard (NYSE:BCR) and the Kendall division of the erstwhile Tyco Corp. He served on the boards of Urologix (NSDQ:ULGX), Percutaneous Valve Technologies and AdvaMed and currently serves on the boards of Cameron Health, CardioFocus, Conceptus (NSDQ:CPTS), DC Devices, Direct Flow Medical, DJO Global, Thoratec Corp. (NSDQ:THOR), Trans 1 ValenTx and the Medical Device Manufacturers Assn.

We asked LaViolette for a single-word description of the investment climate for medical devices. Although his emailed response was, "Depressed," his summation of the climate going forward is decidedly sunnier:

"Within a larger environment that is exerting unprecedented pressure on the medical device development infrastructure, and related investment appetite, there remains substantial opportunity for upside if we target properly. The hurdles are greater, and thus the returns potential has to rise accordingly."

Here’s the full text of his reply, edited for grammar and clarity:

Depressed. The metrics of medtech investing clearly support this categorization. We’ve seen dramatic reductions, starting in 2008 but carrying forward through 2010, all facets of the investment chain, including: IPO, exits, exit values, venture investing and public and private company valuations. There is little debate that the financial measures of investment are down, often materially, from past experiences.

I believe “depressed” is also an appropriate characterization of the psychology of the market, and of the investment outlook for the near term. Investors are concerned about underlying fundamentals in health care market returns as they see the compounding factors of health care delivery reform and regulatory reform creating uncertainty and sustained downward pressure on market health.

HC reform theoretically adds demanding patients to the system, but it is widely held that most patients who really needed care — particularly involving procedure-based medical devices — received it through one form or another of uncompensated care. As such, the industry is generally not anticipating a spike in demand but is viewing that the aggregate economic pressures of reform, government involvement in programs, emphasis on cost effectiveness, reduced hospital operating margins, reduced physician economics, etc., will combine to create inevitable downward pressure on the economics of the device sector.

Lastly, there is a widely held industry belief that FDA, through its science and reform initiatives, is both “raising the bar” on approval requirements while also pulling back from industry interaction. This combination of lost transparency and protracted approvals extends the pre-market status of technologies, which in turn creates higher operating costs for large companies or protracted holding periods for venture portfolios, and each of these further dilutes investor returns in the device sector. So, while the broader economy may “bounce back” from its significant financial sector and unemployment set-backs, the medical device investment category faces an alignment of forces that make a bounce back from the abrupt financial market meltdown highly improbable.

Reguatory and payment reforms weigh heavily in investor calculus, and are unlikely to settle with either sufficient speed or clarity to be helpful to investor mindsets in 2011. FDA’s 510(k) reform initiative is a great example. The industry depends upon the Agency to approve 15 new 510(k)s each day, and the 510(k) process is applied to well over 90% of all device approvals. Any significant alteration to such a vastly relied on system will send powerful reverberations through the industry. When considering the number and scope of changes being contemplated, it’s easy to understand why the investment community is frozen in anticipation of what the next, improved system will require and how it will be implemented. We also have operated on the presumption that review times and evidence burdens should be proportionate to device risk, and that new scientific evidence should not be required for devices that neither create substantial risk nor make new indications claims. These assumptions are currently being challenged, and there are very clear signs that the core basis upon which lower-risk devices have historically been approved may be overturned, despite data showing that the overwhelming majority (99%+) of all approved 510(k) devices in the past decade have never been involved in a Class I recall. We know that 510(k) approval times have doubled from 1999-2009. That said, overall timelines remain reasonably short and the process is today quite navigable for most. The changes being contemplated to this system are, in the view of most industry experts, severely threaten the functionality of the system that today produces the majority of all new devices for use in the health care system.

Despite these macro systemic and economic factors, I am optimistic that new technologies will be an important source of vitality for the health care system and a vital component of our future requirement to treat more patients to a higher level of care while consuming fewer resources. We are clearly worsening our own system burdens with diseases derived from obesity, including diabetes, hypertension, osteoarthritis and vascular disease. New treatments in these areas are going to provide important solutions. We are faced with a demographic boon for aged patients having general health but losing quality of life, for whom prosthetic devices in vision, hearing and ambulation will play a major role. We still invest inordinate amounts in chronic diseases in the form of low-value maintenance costs (best examples: Chronic Heart Failure, chronic wound management and limb ischemia from diabetes). These dollars can be “converted” to a higher value purpose by intervening with medical technology to actually change the course of the disease rather than palliating symptoms. This approach to medical markets can create major new device market opportunities while adding zero expense dollars to the health care system.

I hope to convey that, within a larger environment that is exerting unprecedented pressure on the medical device development infrastructure, and related investment appetite, there remains substantial opportunity for upside if we target properly. The hurdles are greater, and thus the returns potential has to rise accordingly.