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Building MedTech businesses

If a person is operated on using the latest techniques in keyhole surgery, there is a high chance that they will recover more quickly, leave hospital sooner and get back to being an independent member of society. The same applies to someone who is fast tracked for an organ transplant or freed from the crippling pain and disability of arthritis. As healthcare costs have continued to spiral throughout the developed world, the rapid advance in medical technology offers an opportunity to redress the balance through innovation and a more holistic analysis of treatment and recovery.

Not surprisingly the rise in healthcare costs has provided medical technology companies with their own momentum. Keyhole or minimally invasive surgery is kinder to the patient but it can also save millions of dollars a year by cutting treatment costs – as well as getting people back on their feet and, in many cases, back to work more quickly. The same economic arguments can be made for a whole range of medical technologies which cost money to develop and purchase but can produce considerable savings over the lifetime of a patient.

According to 3i healthcare partner Allan Ferguson, “we’re reaching a stage where healthcare costs as a percentage of GDP in both the US and Europe are getting more expensive than we can afford. Our [3i’s] primary interest is trying to find technologies that enable treatments that will offer better solutions for patients and reduce costs.”

Enter a company like Small Bone Innovations (SBI), which develops and markets technologies that specifically focus on small bones and joints – particularly in the hands and the feet. Compared with the big company focus on hips and knees, this is an area crying out for attention, says Ferguson, and one in which 3i’s healthcare group has set out to play their part.

In the case of SBI, he says, “it has put together a plan to acquire small companies working in this area and extend its reach to parts of the world where it hasn’t been visible. The aim is to expand the company’s revenues by expanding the markets that these products are exposed to, which at some point will allow SBI to start developing new products of its own”.

For its part, 3i put up $12 million to co-lead a $42.2m investment in the company at the beginning of this year, the venture capital industry’s largest ever investment in an orthopaedic devices company. With SBI products already sold in 28 countries, the money will help the company achieve its goal of becoming a global business in an area of the medical technology market which has traditionally been fragmented and underserved.

“We [3i] were looking for a company like SBI in the orthopaedic area,” says Ferguson.“This is an area where there are plenty of small entrepreneurial start-ups with interesting products but by themselves they do not have the global reach.”

In fact, coming up with the cash is only a small part of what 3i does in a still fragmented medical technology market, where around 85% of participants are small and medium-sized companies. A key part of the mission says Ferguson, is to identify companies that can plug the gaps and then help them grow by providing support wherever it is needed.

“Most of our targets have got partial management and are likely to be in a position where the founder is acting as CEO. In some cases our job will be to coach the CEO and help him hire people with the skills and experience to complement his own.” For Ferguson and a number of his healthcare colleagues at 3i, that can mean ending up on the board of a company like SBI in order to provide the type of hands-on nurturing needed  to deliver the right returns.



“Because of our size and reach as an organisation we can help make introductions, help with negotiations and act at multiple levels. The majority of venture-backed companies in this market end up being acquired by one of the major players, and we have good contacts with all those companies.”

A chemical engineer by training, Ferguson himself spent 20 years at Johnson & Johnson before getting a taste for the venture process as part of a start-up. In addition to SBI he also sits on the board of TransMedics, an organ transplant company, Ulthera and Xthetix, which are developing ultrasound technology to provide a safer less invasive form of cosmetic surgery and aesthetic treatments.

“3i is a large source of capital but more importantly it acts as a multinational network of highly experienced individuals,” says TransMedics CEO and founder Dr Waleed Hassanein. “This is a great asset for us as it helps us execute our business plan, and we can continue to leverage that network.”

With European trials of TransMedics’ breakthrough beating heart transplant technology now reaching their climax, the 3i network has proved vital, as has its ability to lead two rounds of investment totalling nearly $60 million. “It was our advice that they should go to Europe where the approach to transplants is more aggressive,” says Ferguson.

In the case of Ulthera, he says “the technology was originally targeted at the treatment of cancer. We met the founder and saw an opportunity to use it in the area of cosmetic surgery. There have been other energy sources for this type of treatment such as laser and radio frequency but ultrasound offers the benefits without the safety problems”.

Ferguson is not alone in predicting massive market potential for Ulthera’s technology, which targets aging baby boomers that are not shy of new treatments in their efforts stay looking young. Marketresearch.com predicts that more than 21 million procedures, most of them simple injections for wrinkles, will take place in 2006 and, as far as the consumer is concerned, the less invasive the procedure the better.

“We’ve essentially set up a shell company that is contracting with the founder’s incubator to do the product development,” says Ferguson. “We’re working with the founder to build the management outward. The R&D end of the business will stay in the incubator for a period of time.”

Again, 3i’s support in helping to grow the business goes a long way beyond its $5.5m investment at the end of last year. In addition to assisting in the search for top management candidates – from CEO downwards – 3i is also helping to develop strategies for future partnering with larger firms and has been instrumental in spinning out a second company, Xthetix Inc, with this technology. This medical device company is targeting the expanding consumer aesthetics market. The company’s lead product addresses treatment and prevention of acne with follow-on devices for facial skin rejuvenation and other applications. The company believes that use of Xthetix devices by consumers to prevent the occurrence of acne pimples and blemishes will become as common as the use of a toothbrush to prevent tooth decay.

“In terms of the baby boomers this is a growing cosmetics purse and the adoption of products by end users is not dependent upon third party reimbursement by insurers. It’s a very lucrative area and at some point we could see Ulthera and Xthetix both having revenues of hundreds of millions of dollars.”

In the emerging stages is Endosense, a cardiovascular device company which received $20 million of funding led by 3i and joined by NeoMed at the end of last year. The challenge in this case, says Ferguson, was to try and find a technology designed to help more than five million sufferers of atrial fibrillation (irregular heartbeat). Endosense’s Force Sensor catheter TactiCath has the potential to dramatically change the field of percutaneous catheter ablation by increasing the effectiveness and the safety profile of
this emerging, minimally invasive procedure.

“With Endosense we were involved very early on – from the business plan development to financing represented nearly a year’s work. There have been a lot of attempts by venture companies in this area and a lot of failures.“ Analysts believe that in helping people who suffer from this type of heart problem to lead a more normal life the treatment of atrial fibrillation has the potential to exceed over a billion dollars of sales over the next decade. Once again, 3i has every reason to believe that it is backing a winner.

As ever, the challenge for 3i’s healthcare group is to keep looking hard at the cost benefit equation. How can a new technology improve patient treatment and care and what are the wider cost implications? In the case of potential heart disease, for example, it can cost more than $3,000 simply to test and monitor a patient who presents with chest pains. Anything that makes early diagnosis easier – for cardiac imaging – can cut costs dramatically.

“Increasingly,” says Ferguson “we are looking at technologies that are minimally invasive and that really do improve patient outcomes.” Companies like Endosense, Transmedics, Ulthera, Xthetix and Small Bone Innovations are all good examples of a healthcare portfolio that is entirely focused in this direction, he says.



Cosmetic surgery with minimum fuss is one way to describe Ulthera’s prime market place. If baby boomers want a quick and easy face lift then the ultrasound technology which has been developed by the Phoenix-based start-up may well provide the answer.

What’s clever about Ulthera’s device – apart from addressing society’s apparently insatiable quest for eternal youth – is its ability to combine both ultrasound imaging and therapy. This makes it safer to use as physicians can pinpoint exactly what they want to do throughout a treatment.

Ulthera, which has two 3i partners on its Board, Allan Ferguson and Paul Badawi, has entered what healthcare analyst firm Windhover Information describes as the fastest growing area of the cosmetic surgery market.

The big plus of ultrasound, says the company, is its ability to heat and destroy target tissue without damaging the intervening surface of the skin. Not only can you see what you are doing and where you are doing it, but you have the option of treating the skin either very superficially or at greater depths.

“The aging of baby boomers made this a very attractive investment for us,” says Allan Ferguson. “They don’t want to look older and they are willing to try a lot of new technologies.” In the US alone there are more than 78 million baby boomers – born between 1946 and 1964 – and the first batch of this sizeable group has recently turned 60.

Of the more than five million people suffering from atrial fibrillation, as few as 1% of them currently receive the specialist treatment that will allow them to go out and lead a normal life.

The treatment in question involves inserting a catheter close to the heart wall which can be a tricky business for the physician and a frustrating one for the patient. Too much contact between the catheter and the heart wall can result in a perforation, while too little means that the catheter is ineffective.

With its Force Sensor ablation catheter, the cardiovascular device company Endosense has come up with an innovative new approach to the problem. As its name suggests, the Force Sensor works by providing a real-time measure of contact between the catheter and the heart wall, helping the physician determine exactly how and where the catheter has been inserted and allowing minute adjustments to be made with confidence.

According to 3i director Dina Chaya, 3i worked extensively with the Endosense team to determine the type of technology that would work best and formed a company on that basis.

Endosense CEO Eric Le Royer believes that the Force Sensor approach will prove a major technological advance in the treatment of atrial fibrillation and provide a genuine alternative to the limited therapeutic impact of drug treatment. By allowing more sufferers to live a more normal life it should also help to reduce healthcare costs.

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