Valuing Early Stage Medical Technology Stephen T. Parente, Ph.D.

1. Valuing Early Stage Medical Technology Stephen T. Parente, Ph.D. Minnesota Insurance Industry Chair of Health Finance Professor, Finance, University of Minnesota Director, Medical Industry Leadership Institute April, 2012

2. Agenda • What’s the problem (and gamble)? • Can research universities serve as medical technology incubators? • One university solution: A Medical Innovation Valuation Laboratory • Valuation overview • Critical ingredients • Case example • Strategic metrics of success

3. What’s the Problem? • Medical Technology pipeline is not optimal at present. • Investors look to universities to be a possible channel for medical technology pipeline. • Investors frustrated by slow and diffuse innovation generation process at universities. • Universities (private/public) frustrated by budget challenges and prefer secure, diffuse funding sources.

4. Universities as Medical Technology Incubators? Past- Yes; Future- Gamble University Defined: An institution for higher learning with teaching and research facilities constituting a graduate school and professional schools that award master's degrees and doctorates and an undergraduate division that awards bachelor's degrees. ‘First’ American University candidates Harvard University: Medical school in 1780 gave it University status in 1781 William and Mary College: Law school in 1779 and first chairs in Medicine & Chemistry University of Pennsylvania: Pennsylvania state charter with University in its name 1765 Yale University: First doctoral degree granted in 1861 (though the dissertation was 6 pages long) Georgetown University: First graduate degree in 1821. Johns Hopkins University: First ‘research university’ .

5. First American Research University Transplant: Johns Hopkins University

6. Transplanted from Who University of Bologna, 1088 University of Berlin, 1810

7. What is the Purpose of a Research University Then & Now? • Government and Philanthropic resources provided for: • Education • Economic development • Societal wealth creation • All of the Above

8. A 21st Century Opportunity for Economic Development • The modern University Production Function • Education • Knowledge creation • Intellectual property (IP) and innovation for sale, license or use • Squaring with research university intent: • Revenue from IP and innovations permits tuition to be kept at a level affordable to all. • Students gain knowledge through coursework and creation of new knowledge & products

9. Knowledge Creation / Revenue Competition beyond University Walls • Common economic challenges • Revenues tied to fiscal health of region/state/nation • Workforce expenses hire than general inflation • Common solutions • University/corporate business park(s) • Bio-business parks galore • Executive/continue education • Activist philanthropic ‘sharp shooters’ • Global outreach / revenue seeking • ‘Soft money’ funding of research positions that are underfunded without continued funding

10. Land Rush for ‘Public’ Bio Science Parks Other U of M(I) U of M(N) Wisconsin Other other U of M(D)

11. Private University Competition U Penn Harvard Northwestern Yale

12. Gloves are Off: High Risk/Reward • National Institute of Health $$ to fund salaries and indirect fees. • Look for spin-offs from grant research. • Use ‘Technology Commercialization’ to sell/license for revenues. • Balance research/discovery/peer review against projection of IP • Incubator $$ can be tough. • Competition from corporate labs as well.

13. All Looking for a Prize in Crowded New Medical Technology Market Probably not this Want this

14. Q: Why a Medical Innovation Value Laboratory? A: Hedge the Gamble • What a quick way to validate early medical technology that is University based or related. • The Valuation Lab initiative revisits this original conception of the Publicly Research University – economic opportunity - where the combined talents of several separate colleges at the University would provide the human intellectual capital to identify opportunities in medical innovation that advantage economic development.

15. Medical Valuation Laboratory (MVL) Research University Core Parts • Signed memorandum of agreement from 8 colleges to engage students in their schools including: • B-School: Carlson School of Management • College of Liberal Arts • Institute of Technology • Law School • School of Medicine • School of Nursing • School of Pharmacy • School of Public Health • Full-time Laboratory managing director • Faculty co-directors • University faculty/expertise through ad hoc market rate contract consulting agreements

16. It only took 5 months to sign….

17. Laboratory’s customers • University scientists, physicians, engineers with new ideas for an innovation or a process. • Service/technology innovators, including: • Mayo clinic telehealth program to extend specialist consults • Insurer telehealth to provide cost avoiding dx management. • iPhone medical applications and services • Jacksonville engineer with a new polymer to reduce rate of tissue rejection of implantable medical devices • Since 2008, 95 laboratory projects have been completed • Current product rate is 30 valuations per year.

18. Range of Valuation Projects :

19. From Hypothetical to Real in 1 Year

20. Valuation “why does it matter”? “Absence of sufficient financial means will relegate the most promising business concept to the category of “great unrealized ideas”

21. Definitions Value: An amount considered to be a suitable equivalent for something else. Valuation: The process or method for assessing the value of something.

22. Current Medical Technology Trends • Money is hard to raise • Valuations are lower • Terms sheets are more complex • Expectations on “time to market” and “time to exit” are considerably longer • Exit options are essentially limited to M/A ______________________________________________ • Good ideas will get funded • Innovation increases during difficult economic times

23. Emerging Business “Blueprint” Late Stage Late Majority Customers Expansion Stage Early Majority Customers Early Stage Early Adopter Customers Seed Stage Innovation Customers Angels Public Market Friends & Family Institutional - VCs Based on “Crossing The Chasm” By: Geoffrey Moore

24. Medical Industry Valuation ExampleNeoChord Amy Raatikka Andrew Senn Ilya Pekurovsky Kimberly Beyer Kristen Spargo

25. Obvious Cautions from Lab Intellectual property rights are not the same throughout the world. Capital cost and investment has potential unfair subsidy in different countries. Human capital exchange could leave some countries winners and some losers. BUT, the humanity always benefits from competitive innovation.

26. Lab Strategic Metrics of Success Human capital to create extraordinary disruptive innovations increases Worldwide patents on extraordinary innovations increase Medical innovations that are not only cost-effective, but cost-saving Medical innovations that not only increase the longevity of life, but the quality of that longevity as well