Early Stage Medical Device Companies

Malin Bergquist has a deep understanding of the unique issues faced by early stage medical device companies, gained through our experience and interaction with companies in the life sciences field.  We have worked with numerous companies in this space, and have seen firsthand the dynamics and rapidly changing environment in which they operate.  In our role as an independent outside auditor, we have the benefit of critically and objectively evaluating the factors that contribute to the success for our clients.  We have found that a “better mousetrap” is really only the first step, and that oftentimes factors completely outside of the underlying product have just as much impact on the ultimate success of the organization.

Particularly in the last few years of global recession, our clients have been navigating extremely challenging times as they seek to commercialize their products.  Many in the life sciences industry saw extreme contractions in valuations due to the changes that occurred in the overall economy, and how investors viewed and were willing to take on risk.  Venture capital groups retreated from new investments and focused on maintaining their existing portfolio companies, hedge funds disappeared, investment banks halted loan programs, and mezzanine financing options could no longer be found.

In addition to the overarching impact of the macroeconomic environment, companies in the life sciences space are dealing with the uncertainty surrounding health care reform domestically and the harmonization of global regulatory requirements globally.  As a result, companies are facing unknown competitive forces as they always have, but the hurdles for market penetration now include not only safety data and strong marketing / distribution resources, but also true confirmation of clinical and cost benefit to the patient through comparative effectiveness type models.

These business challenges manifest themselves in the audit environment with frank discussions about a company’s ability to continue as a going concern.  Early stage management teams must emphasize controlling spending through focused and disciplined research and product development.  The company’s burn rate and runway are always considered when evaluating the time it will take to get to the next value inflection point and potential exit.  Likewise, determining when and how much investment to pursue are critical decisions in light of the great degree of uncertainty involved.  Ultimately, if a company can’t get funding and/or partners that will carry it through regulatory approval, going concern becomes an obvious issue.

Our knowledge and understanding of the business challenges early stage medical device companies face allows us to provide higher quality and more cost effective audit and tax services.  From an audit and accounting perspective, there are also several common issues that we frequently encounter which are somewhat unique to the industry.  These include the differing forms of equity and debt and rounds of financing, including differences in rights and preferences, and the sometimes conflicting interests of existing and potential new outside investors.  The collaborative nature of many development endeavors results in joint venture and licensing agreements that must be critically evaluated.  We also typically see forms of compensation that include equity or stock options that require calculations of fair value.  In addition, the legal protection of a company’s intellectual property is a critical factor, while breakthrough technologies from competitors can greatly diminish the value of a company’s existing portfolio of intangible assets and result in impairment charges.

Representative Clients:

Medical systems company - The client was founded by a renowned cardiologist who is a thought leader in interventional cardiology and a medical device inventor with more than 25 issued and pending patents. His goal was to change how innovative ideas in the medical device industry move from concept to reality.  The company develops medical devices for the treatment of cardiovascular and peripheral vascular disease.

In 2008, the company restructured from a limited liability company with seven subsidiaries, to a single C corporation.  In addition, the company completed a Series A equity funding round of $24 million to execute on development and clinical trial plans for the company’s coronary stent system. 

In 2009, the company entered into a license agreement with a third party to collaborate on development of a novel stent system for the treatment of renal artery disease.  This agreement was in addition to a prior agreement announced in 2007 to develop a novel stent system for coronary artery disease, which was in clinical trials at that time.

Biosciences company - The client is a leader in the emerging field of bioanalytics. It develops new technology for the identification, characterization, and quantification of biologically-important molecules for basic research, pharmaceutical development, and diagnostic applications.

On September 2, 2011 the company completed a reverse merger, and is now an SEC reporting company.  A form 8-K was filed on September 9, 2011 disclosing the details of the company and the transaction.  The client is currently prosecuting several patent applications, and has licensing agreements with Johns Hopkins, George Washington, and West Virginia Universities. 

In December 2010, the company successfully completed a first-in-man, phase I/IIA clinical trial for a recombinant lipase pharmaceutical jointly developed by their wholly-owned French subsidiary and a European pharmaceutical company.  The therapeutic protein is an enzyme produced by the pancreas, and has been shown to be 50 times more potent than currently available treatments.

Therapeutics company - This client was founded in 2007 to commercialize technology developed jointly at Carnegie Mellon University and Allegheny General Hospital.  The proprietary technology enables the manufacture of biologically-active plastics from blood plasma for treating injuries to bone and connective tissue.

In 2011, the company completed a Series A financing to establish a pilot manufacturing facility and collect data for early clinical validation of the company’s first products.

Three Rivers Venture Fair - Malin Bergquist has gained many insights into the early stage life sciences space through its annual sponsorship and committee participation in the Three Rivers Venture Fair. Partner Peter Kern served on the fair’s “Boot Camp Committee," working closely with the CEO of Thermalin Diabetes, LLC, a Cleveland-based biotechnology company developing a portfolio of next generation insulin analogs, which recently closed on a $2.9 million Series A round of financing. 

Peter also served on a panel with attorneys, venture capitalists, and university leaders to critique and evaluate the “pitches” of several participants at each fair.

For more information, contact Peter Kern, leader of Malin Bergquist’s Public Company/SEC Group, at pkern@malinberguist.com or 412.364.9395.