October 25, 2010

Four Critical Disclosure Considerations for Medtech Companies Seeking Investors

Emerging medtech companies often use private placement memorandums (PPMs) or other disclosure documents to raise the funds necessary to grow their companies. These offering documents provide potential investors with information about the company, so they can determine whether to invest.

PPMs require companies to make significant disclosures that enable investors to make educated investment decisions. Under the federal securities laws, companies must provide investors with sufficient information such that the disclosure did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading at the time of the investment

While putting together PPMs, or when responding to specific due diligence requests, medtech companies face unique disclosure issues regarding whether, and how much, to disclose about FDA status, clinical studies, and reimbursement plans.

Despite these challenges, there are ways to navigate disclosure landmines to position your company for success.

Tell Your Story

While each situation is different, the best approach is typically for companies to disclose serious shortcomings and then explain how they will overcome those challenges. As long as your company lays out a viable path to overcoming these tests, investors will still be interested in investing in your company.

Investors in private medtech companies are looking for large returns. And they will only find such returns in companies that carry some risk. Therefore, the key to a successful financing is in the story your company tells; particularly, how you will confront the challenges you face.

Share Your FDA and Marketing Clearance Strategy

Research, pre-clinical development, clinical studies, manufacturing, marketing and distribution are all subject to FDA regulation. Medtech companies should disclose their regulatory strategy for dealing with the FDA or other regulators in their PPMs. In particular, achieving marketing clearance from the FDA is a large milestone for any medtech company and is of high importance to investors.

Under the FD&C Act, medical devices must receive marketing clearance through the section 510(k) notification process or through the more lengthy pre-market approval (PMA) process before they can be sold in the United States. For medtech companies without FDA approval, there are several steps to take in a PPM.

Ideally, the shorter 510(k) process will be available to your company. If so, disclose the timeline for achieving any necessary goals to finish that process. However, if your company believes it will need to go through the more lengthy PMA process, than it is necessary to disclose this in your PPM. Most importantly, it is critical to assess the possibility the PMA process will be necessary even if 510(k) is anticipated. This can be a significant area for liability due to the increased time and cost if PMA is necessary. The timeline and steps toward marketing clearance your company should disclose are closely related to clinical studies, which are discussed in the next section.

Some medtech companies that experience difficulties with the FDA enter into strategic partnerships with established medical device manufacturers to hone their regulatory strategy as it relates to FDA approval, clinical studies, and other issues. Companies should also consider bringing someone with FDA experience into their company—whether as an employee, board advisor, or in another role.

Finally, companies that need to go through the PMA process, and therefore foresee a long time to take their product to market in the U.S, may need to consider focusing formal clinical studies on obtaining the CE mark. This mark allows companies to sell products in Europe and several countries in Asia and Latin America—and may involve shorter regulatory pathways.

Whatever your company's regulatory strategy, be sure to tell your investors a compelling story about how and when you anticipate receiving marketing clearance and any other necessary approvals, as well as the timing risks and cost risks in not receiving the approvals as anticipated. Sensitivity analysis can be helpful here.

Be Transparent About Clinical Studies

Closely related to FDA status, clinical studies are also important to potential investors. In the FDA-approval context, the key to disclosing clinical studies is to walk through the studies you anticipate will be necessary for the regulatory approval you seek . Show what your company has achieved to this point, then describe how your company will arrive at your goal.

In telling this story, consider using a quarter-by-quarter timeline of each study completed, in progress, planned, or necessary in the future. While it is generally recommended that companies provide an appropriate amount of detail on each trial—including what is being studied, how far each trial is from completion, and what preliminary results of the studies look like—consider whether results of your studies could be poor from an approval standpoint and whether you would take actions such as shutting down a study prior to publication.

If your company has numerous clinical studies underway or completed, focus on the most important studies—whether they had a positive or a negative outcome. Always remember that the point of the disclosure is to show investors how and when your company will receive FDA approval to sell its product.

Many companies perform clinical studies for reasons other than to achieve regulatory approval. If your company is collecting clinical evidence to help drive adoption of your product (or any other means) consider disclosing this as well. Sophisticated investors in medtech companies will analyze the results of your clinical studies, so there is nothing to gain by hiding information.

Show How You Will Improve Reimbursement

Reimbursement is another chief concern for medtech companies. Your company should disclose your current reimbursement coverage and reimbursement strategy—with an eye toward showing investors how your company will improve its reimbursement coverage.

First, medtech companies should disclose the current state of reimbursement for their product. Consider giving details on the billing code for your company's devices, the average reimbursement, and your reimbursement success with significant private insurers for your devices. For example, if your company is successful in obtaining an average reimbursement of $10,000 per unit from 40 insurance companies, including most of the large insurers, then include this in the PPM. Additionally, describe your company's current procedure for appeals and your company's success on appeal, particularly if you are concerned about reimbursement. Finally, include other relevant details in the PPM, such as whether your company plans to apply for your own specific reimbursement product code and if and when you anticipate declining reimbursement amounts or success rates.

Second, medtech companies should consider implementing and disclosing a reimbursement strategy. Not only can this increase a company's bottom line, but potential investors will take note of the reimbursement strategy. Quality disclosure will often include stock of what claims are being denied, how resources are allocated to appeals, why claims are denied, and your company's approach for improving reimbursement rates and amounts.

Proper Disclosure Is Key to a Successful Financing

When putting together a PPM,  think critically about other unique issues you need to communicate to investors to alleviate their potential concerns. Intellectual property is a good example. Many medtech companies provide details on what patents the U.S. Patent Office has issued to the company and what those patents cover (and don't cover). If a company has not yet protected its intellectual property, then it should create and disclose a plan for doing so.  

Investors are typically less interested in investing in medtech companies that don't provide  information on FDA status, clinical studies, reimbursement, and other important issues upfront. Furthermore, it is better to control the information than to have investors discover it on their own.  

Investors will recognize that with every challenge there is an opportunity—whether  it is increasing revenue by improving reimbursement  or by implementing a new strategic plan for clinical studies and FDA approval. But failure to disclose material risks can lead to significant liability under federal and state securities laws.

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