[creativ_pullleft colour=”light-gray” colour_custom=”” text=”Episode 032″]
Gilde Healthcare Partner Geoff Pardo shares how the firm will invest its new $250 million in health care companies, including Medtech.
Tom Salemi: Hi, everybody, welcome back to the Medtech Talk Podcast. This is your host, Tom Salemi. Thank you so much for joining us today. We have a great talk. I got to speak with Geoff Pardo, who’s an old school device guy, who is based in the US, but happens to work with Gilde Healthcare, which is a European fund that closed on a fund just recently, a later state and growth capital fund at $285 million or $250 million euro, depending on your currency, and Geoff is in Cambridge, Mass., and he is going to be looking at medtech and digital health opportunities in the US. So I talked to him a bit about what Gilde is looking for in Medtech. And more specifically, and more broadly actually, why we’re seeing an appetite amongst European LPs for US medtech. It’s interesting. We’ve got Endeavor Vision raised their fund earlier this year; now Gilde Healthcare. We’re not seeing sizeable funds being raised on this side of the Atlantic for medtech. And Geoff has an interesting take on why Europeans or how Europeans view US medtech, and where they see the opportunity. We talked a bit also about digital health and whether it sort of shares some of the dynamics that medtech did a decade ago in terms of dollars flowing into the sector. So Geoff is, again, he’s been doing medtech for a long time. He was with Spray Venture Fund way back, invested in one of my favorite deals, which we’ll cover in the Podcast, and just a good guy to talk to. And if you’re an entrepreneur or an executive looking for capital in this space, you certainly should give Gilde a call. They’re making deals. So I hope you enjoy this conversation with Geoff Pardo of Gilde Healthcare.
TS: Hey Geoff Pardo, welcome to the Podcast.
Geoff Pardo: Great, Tom. Thanks for having me.
TS: IT’s a pleasure to talk to you. I’m obviously a fan of medtech and one of my favorite deals, I don’t know, I think maybe because Bill Gruber is such a nice guy, was Interlace. I know you were an investor in that at a time. Just seemed like such an old school medtech investment, you know, not a lot amount of money, sold for a decent return. Kind of what medtech maybe could and should be.
GP: Right. That’s the way – you kind of draw it up like Interlace, and that was a fun one to be involved with. It started when I was at Spray, out of our Spray offices, actually. Bill and the team were housed right at Spray and we really worked backwards in terms of identifying what the clinical and market need was and coming up with the right technology. And lucky for us, I think in some ways it foreshadowed a lot of what you see in today’s medtech environment is or what has become more popular in investing in today’s medtech environment, which is something that has a straightforward regulatory pathway, it was covered under existing codes, and was really riding a trend in the OB-GYN community to do more and more office based procedures, ultimately. So yeah, things came together very nicely. But obviously the leadership of Bill was – and identifying Bill as the CEO was one of the most important things.
TS: Have you heard the term “small ball” in medtech investing? And did that apply to Interlace? You know, the investment of a small amount of capital for a good return on investment, a good number of exits, but maybe not necessarily a huge payout?
GP: Yeah. I mean well, it’s interesting. I think that was, for Spray, not a huge amount of money, and there was not a huge amount of capital that went into that relative to other companies. I mean I’d say the return was pretty significant when you added in the earn outs. So it ended up being actually a big return I think even for the later stage investors. And yeah, if you can get away in this environment with investing a smaller amount of money and getting to the market and getting sales and getting acquired, I mean that is obviously the ideal. It is just more and more challenging to do that because of the regulatory hurdles, and even more important is getting through reimbursement and actually getting coverage for your product. Which is, with the exception of several very strategic sectors, it’s becoming more and more the norm that corporates are requiring. So I think that for that set of activities, you’re better off having at the very least a good syndicate around the table that’s willing to fund the company through some of those commercial milestones. And oftentimes, that requires a significant sum of money. I think that is different than what we saw maybe ten years ago, where the corporates were jumping in, or willing to jump in a bit earlier. I think reimbursement has become one of the key gating items, and I think the corporates have realized it. And in many cases, not all, but in many cases are really asking the companies to get through some of those milestones. So it’s harder and harder, in my view, to think about small ball. I think if you’re able to get to do it, that’s terrific. But I would say having the syndicate and having the partners with deep enough pockets so that your hand isn’t forced is probably a better strategy nowadays.
TS: And that is sort of where you’re coming into things now. You’re of course now with Gilde Healthcare, and it’s my understanding from reading and watching that Gilde is looking more at late stage medtech opportunities. Why don’t you tell us a bit about Gilde and what type of medtech companies it’s looking to invest in?
GP: Yeah, absolutely, I’d be happy to. So Gilde is actually a fund that started in Europe, in the Netherlands, in the early 80s, really more as actually a buyout, late stage private equity fund in the 80s. In the early 2000’s, we developed Gilde Healthcare Partners, and now that is completely separate from the Gilde brand, so we’re a completely separate fund, separate investors, separate back office. And we manage about 800 million euro across 4 different healthcare technology funds. We are now fully invested in our healthcare fund 3, which was 150 million euro, and we closed healthcare fund 4, which is a 250-million-euro fund. We looked to invest anywhere between 15 to 20 million dollars. A good up front amount would be on the order of 8 to 10 million. Of course there’s some latitude with those amounts, but those are good ball park figures. In the US, we really focus on medical device and digital health opportunities. And as you rightly point out, we are doing more in I’d say the commercial or commercial ready area. And but that can also include companies that are commercial in Europe and going through a clinical trial in the US, of which there are many companies out there in that sweet spot. Because we’re really of European ancestry, I think we have particular expertise in helping companies that are either commercializing in Europe or looking to move into the US now, given our US presence. So within medical devices, all the classics apply here in terms of the significant unmet need. We don’t want to risk stack things, so we do like to see that the clinical and technology has really been worked out, and that we’re investing with an eye towards getting this company to cash flow break even, and if they are clinical in the US, that would mean having a pretty substantial European base of sales, and some clear milestones in the US in terms of regulatory clinical pathway that we think will motivate a sale. And we tend to be pretty – you know, we call it exit-centric, which probably sounds pretty intuitive, but we really like to do our homework in terms of what the needs are for the big consolidators. And so we spend a lot of time building our relationships there, having regular dialog. While there is periodically that window of opportunity on the public market, we definitely see the more – and this is classic medtech investing – we definitely see the acquirers as being really probably the likely destination for much of what we invest in. So we want to make sure that we’re investing in things that could be desirable for them. I think that – you know, we spend a lot of time looking at are things in respiratory. In fund 3 we did 2 respiratory deals, InovaLabs which sold to ResMed, and also Vapotherm up in New Hampshire, which is doing quite well. And we still see that as an ongoing area of need, both in terms of device related products, but also in the digital health space. People with respiratory ailments like COPD are certainly high cost populations to deal with and manage. And that’s a good example of the things that we are looking for. We’re looking at things that cost the healthcare system a significant amount of money, obviously represent significant areas for clinical improvement, and things that will really benefit the stakeholders across the spectrum, be it the patients, the providers and the payers. And it’s the payers – you know, I referenced reimbursement earlier. Making sure that it’s something that can benefit the payers ultimately is, I think, the new axis of importance in medtech investing, whereas we used to think much more in terms of technology, clinical need, regulatory process. Obviously reimbursement has become a very important thing to consider right from the get go. So we look for things that kind of our mantra is better care at lower cost. And that’s I think – if there are technologies that can do that either on the medtech side or on the digital health side, we’ll be interested.
TS: Let’s go to your fund. You mentioned you just closed on your fund. It’s 250 million euro. I don’t know if this is just anecdotal or observational from my point of view, but it seems like we see Gilde, we see Endeavor Vision, we’re seeing some sizeable funds being raised in Europe with an eye toward at least putting some of that in medtech in the US. But at the same time, we’re not seeing the same commitment from US based VCs or their limited partners. What is the view of US medtech from Europe’s perspective? Is there an opportunity that perhaps others are missing? Is it – how are you able to raise funds of this size when it seems like local firms are having a little more difficulty?
GP: Well, it’s a great question. And I think some of that speaks to the US environment within healthcare venture capital. I think unfortunately US LPs have had – I guess they would argue that the returns maybe haven’t been there as much in that, and you’ve seen some rotation by US LPs out of that segment. I think part of that is a vestige of a lot of money going in, say, in the period of 2001 to 2008, into sectors which ended up being much more difficult. So you saw a handful of very noteworthy exits in, for example, spine. And all of a sudden you had a rush of capital into spine. Well, very few of those companies ended up being successful, and in fact, a lot of the big corporates were burned by some of those acquisitions, which really slowed down activity. But that had a very big impact on the returns of the funds that invested a lot of money in those sectors. Obesity would be another one. So you’ve seen, you know, I think in that period of 2001 to 2008, a rush of capital into certain segments where the returns ultimately didn’t materialize. Now probably luckily, out of luck more than anything else, Gilde was really not part of that era. So we had a chance to start fresh from our fund 3. We recognized that in fact there were a lot of companies that were funded during that era that were able to survive, produce good clinical data, actually get out on the market. And I think that was a theme that resonated with our investors in fund 3. We ended up having success over the course of fund 3 with those investments, and really demonstrating that this model of taking companies where a lot of the risk had been reduced, where you could get in at an appropriate valuation and drive a return for your investors works. The dynamics of medtech haven’t disappeared. I mean while you could argue maybe over how the money was spent in that 2001 to 2008 period, the over-arching dynamics are still there. The big companies need new products in order to drive their growth. The entrepreneurial activity and the activity around unmet clinical needs is still there. So there’s still plenty of deal flow. It’s just that we need to be a little bit smarter, I think, as investors in really targeting the areas which I think really resonate with the 3 stakeholders that I mentioned: the patients, providers and payers; and also, make sure we’re targeting areas that ultimately make sense to the acquirers. So I think some of this is motherhood and apple pie that I’m saying, but it’s definitely – if you can be pretty disciplined in how you invest, I think there’s a recipe for success here. And I think Gilde, because it was able to start fresh in the US, although we’d done some investments in the US prior to fund 3, but fund 3 was our first major foray into the US, and we weren’t really burdened with some of the – you know, maybe some of the history that US LPs had experienced in medtech. And our LPs, I think, have been able to benefit from a lot of the work and investment that the US medtech companies have put in over the preceding years.
TS: That’s a great point. I mean you could almost make an argument that US LPs are missing an opportunity, that they’re letting the fatigue and the hangover sort of keep them from benefitting. Do you, though, as a firm, are you benefitting, or are you investing more in the companies that have emerged as the winners or the likely winners in those sectors that had been perhaps over funded 5 or 10 years ago? Or are you finding companies or entrepreneurs that have learned lessons from that period, that are creating better companies, newer companies and better companies, again, based upon the experience of what the sector went through ten years ago?
GP: Yeah, we will – yeah, it’s an interesting question. It’s a mix, honestly. We certainly see companies – in fact, we’re looking at one right now which has had a lot of capital invested in over the years, has had a migration in its focus from certain blockbuster area to another blockbuster area. And without getting into any of the specifics, that is definitely an example of a company which has learned a lot over the past, say, ten years. And we’re able to really benefit from the lessons learned, and I think invest at a moment in time now, which is, you know, if we do end up doing this deal, we would obviously come to the conclusion that this is the right time to do the investment. So I think we do have the benefit of seeing companies that have been able to keep their funding and to keep progressing, and really, whether it’s sharpening their focus in the clinical indication, whether it’s actually making it through a regulatory process, whether it’s being able to build up a sales ramp in Europe that looks particularly attractive, all those things we can take advantage of. But I’d say it’s a mix because we also see a lot of companies that are just new companies. They may be established entrepreneurs, and we certainly look for that, but they’re companies that have been established, they’re able to amass a clinical data set, get to a regulatory approval, and come to us. But they wouldn’t fall into that category of sort of the block of companies that were invested in in that 2001 to 2008-time period. But nonetheless, I think everybody has adapted to the new environment. We rarely see people coming in now without a solid reimbursement plan. Or if they don’t have one, certainly we would demand one before we invest, or they’re able to come up with one. So I think entrepreneurs have adapted to the current environment. All entrepreneurs need to know are the rules, right? It’s when you don’t know the rules that you really get stuck. Entrepreneurs adapt very quickly once the rules are laid out, and I think we are seeing a little bit more – certainly more clarity on the regulatory side. Reimbursement I would wish for more clarity, more things that would promote innovation in our segment. I think you’re starting to see some forays into that, where there are bridges to coverage by the payers. But that is still the one thing that I think is holding back a lot of new companies from forming. So it’s a long winded answer, but I in essence, it’s a mix, and we certainly look for companies that – I think all entrepreneurs are learning the lessons of the past ten, 15 years, and we’re able to see some companies which have been able to survive that period which look particularly attractive now. And others we see new companies that have simply – are new, but certainly have learned from what happened in our environment.
TS: Hi everybody, Tom here. Just want to take a quick break to ask you to go to medtechconference.com. Sign up for the Medtech Talk Newsletter. You will get future podcasts like this one sent to you, right to your inbox, as well as our original content and our video reports from our own events and elsewhere in the medtech world. So go to medtechconference.com, please sign up for the Medtech Talk Newsletter, and enjoy the content that will come your way. Now back to this conversation with Geoff Pardo of Gilde.
TS: You mentioned that you’re also looking at digital health companies, and I’d like to hear about what kind. But I guess the question I would have is you were involved in medtech during that period. You mentioned Spray, you were with Cardinal, you were with Facet Solutions. Do you see any parallels between digital health investments today in medtech ten years ago, where you are seeing so much money going into so many me-too kind of companies? And how do you avoid what happened to the medtech investors from ten years ago?
GP: Yeah. And you can even look within each segment, right? It seems like sometimes history continues to repeat itself. When I came into Cardinal in 2001, actually there was quite a little – it wasn’t called digital health then, but healthcare IT boom at the moment. And a lot of money was lost during that period, too.
TS: I think we called it e-health at the time. That was –
GP: Yeah, right, right. But no, absolutely I think part of what is difficult in our sector sometimes is the groupthink that occurs. And I know entrepreneurs may refer to it as like lemming behavior. And I think you really have to stay disciplined. I think that’s something we spend a lot of time at Gilde is not getting caught up in the groupthink, really making sure we evaluate each company on its own merits. We don’t tend to do sort of big trend investing or anything like that. So I think it’s a very disciplined culture within the firm. But I think as a result, we really haven’t done any US digital health deals in the past couple years precisely because of what you mentioned. I think it was a very frothy period, and I think a lot of people were getting into the sector, driving up valuations. And we were quite careful. On the flip side, we did make a European investment in a digital health company called Qinec. And the idea about doing it in Europe is in fact the frothiness wasn’t there. We found a company with a very slick technology at a reasonable valuation that we think can find not only growth opportunities in Europe, but in fact can move to the US and find a very nice niche there. So we took a little bit different approach in that regard. Now, we have seen some pullback in the US in terms of valuations, really starting with the public market in digital health. And that is starting to trickle through to the private company landscape. So actually we think that the next 2 to 3 years there’s going to be some opportunities within digital health. But I think you can’t ever get carried away with valuation and with – you know, everything moves more slowly in healthcare, right? So I think you have to make sure that in digital health it’s not going to be any different. It’s not going to be software, consumer based software. It’s going to take time. The sales cycles are going to be long. And so you gotta make sure that these companies are positioned from a capitalization standpoint, but also from a valuation standpoint to raise money over a period of time so that they can stay capitalized and stay focused. So that’s a little bit of our approach. So I think yes, we tend to repeat these cycles every 5 to 10 years, and I think making sure that you don’t get caught up in the groupthink of our business is particularly important.
TS: And you mentioned the potential crossover of that company to the US. Does Gilde need to invest in companies that have some sort of presence or some sort of activity on either – in both Europe and the US in medtech or in digital?
GP: No. The short answer is no. However, I think we always look to differentiate ourselves and to provide the most value for our companies. And a very easy one for us to provide is that expertise in the European markets and then for European companies looking to come here, some expertise in the US market, be it from a clinical, regulatory, or commercial standpoint. So it is something we have to offer companies, and a lot of times we’re getting introduced to companies where that is a focus because of our expertise. However, we also invest in companies that really have a laser focus on a particular market, and they’re not looking to go over to Europe. So yeah, hopefully that answers that. But it’s not a prerequisite.
TS: Sure. You mentioned trying to understand what the corporates want. And you also talked about sort of what the payers are willing to pay for. What is the process like to understand the appetite of the corporates and how do you sort of record that or display that? Do you literally have some sort of spreadsheet or some white board or something somewhere where this company is looking there, that company’s looking there, and you’re very sort of clinical about it? Or is it more of a feel thing at Gilde where you’ve done your interviews, you’ve had your meetings, and you kind of know what each strategic is really looking for?
GP: Yeah. I’d say it’s a little bit of both for sure. We tend to be pretty analytical in the way we do things, so certainly when we get together as a partnership, we feel like we have pretty good documentation of what we think the strategies are for the major corporates. But we’re in enough informal dialog with the corporates that not everything is captured. And so then on an individual basis there’s a bit of feel and a bit of just experiential knowledge that comes into play. But as a partnership, we are constantly discussing where we think different products will fit, who the – there can be turnover at the big companies which really impacts the direction of different strategic programs. So we try to stay on top of that and know who is where and who the key decision makers are. And that’s probably as important as anything else. But yes, it’s a mix. The firm is Dutch, after all, which means that it’s in process and regimented in how it –
TS: No foosball tables there at the home office?
GP: What’s that?
TS: I said, no foosball tables there in HQ?
GP: No, no. But it’s a very rigorous, disciplined environment, which is great, and I think that’s really one of the things that separates us is the discipline we bring to investing. But at the same time, experience and relationships and the informal communication that happens as a result of that always plays a major role.
TS: Going again to the payer’s point, are you able to sort of apply that same tactic or that same approach to understanding what they might pay for? Or do you feel that the decisions really are kind of a case by case, company by company, product by product sort of decision process?
GP: Well, that’s a great question. I think that is something we try to do. I will tell you that it is harder. There is a playbook that’s well known to all the reimbursement consultants and the companies out there as to what you need to do to get reimbursement. My own experience has told me that there’s a lot of variety in that, and there’s not – the FDA, while you can argue over how conservative they’ve become or how the pendulum swings with the FDA, there are mandates that are set out and timelines that they’re really obligated to follow. And to me that is the harder thing with the payers. So you can do the interviews with payers, you can get some sense of what they’re looking for. But ultimately, the hardest thing to predict with a payer is the timeline where you can get approval. And of course that translates into burn rate for a company, it translates into risk mitigation for a potential acquirer or for how attractive it looks like on the public market. So those are the hardest things to glean from any payer. And I’m afraid just in the current landscape, and I would love to hear from other people on this subject, but my experience is that it is very hard to pin down a payer in terms of the timeline. It really depends. It is case by case. And it is one of the more difficult things in our business right now. What I do like seeing are things like the Allegheny Health Services and Highmark have a collaboration where they are sponsoring coverage for devices over a period of time in which they’ll pay for the device. You have to agree to also do – clinically study that device with them. But that is a program which does give more clarity. I think Medicare is offering similar type programs, and I think other payers are beginning to offer bridges to coverage as well. My hope is that that does provide that interim validation for a company. I think the device companies would all submit to being studied if they could get coverage over that period of time. We all believe in what we’ve invested in and they can benefit the stakeholders at this point. And but for the burden to fall all to the investors I think has been a difficult proposition because of the uncertainty over coverage at the end of the day. So yeah, I think I would love it if there was more transparency from the payers. But I think that has been a challenge. My hope is that there are programs underway which allow for more collaboration between manufacturers and payers.
TS: It is a different dynamic. I mean with the strategics, they want to buy that new car. They want the product in their sales peoples’ sales bag. Do the payers sort of have a natural reluctance to even talk about new technology because there’s an automatic assumption it’s going to cost more money?
GP: I think that has been a lot of what payers have felt. I think there’s a lack of conviction – but this is stemming back now many years – a lack of conviction that new technology is going to lower their cost. I mean I think that has certainly been their point of view. But I think, and like I said, I think entrepreneurs have already gotten that message years ago. Most of what we see today has a pretty strong health economic value proposition. And my fear is that the payers, by having sort of this very reactionary approach to new technology are actually missing out on things that could have a very nice impact to their bottom lines. You know, it’s really our mission at Gilde. But I would argue many of the entrepreneurs are out there not just trying to create new widgets that cost a lot of money and improve health. I think everybody right now is trying to find things that can ultimately reduce that cost of care. And so I think the time is right to have that collaboration with payers. But it’s difficult. I would liken it a little bit to ten years ago when you would approach a corporate about a potential investment, there was a little bit of tension. I think the corporates felt like well, why am I going to speak favorably about a particular company and bid up the price on something on myself. It wasn’t sort of the health ecosystem that has existed for a long time, I think, in pharma, and I’d say increasingly in the medtech world. I don’t think we’re there yet with the payers where we’ve created that same ecosystem, and I think it’s incumbent not just on the payers, but on the device manufacturers, on investors like Gilde and others to really foster that sort of collaboration with the payers so that they know that actually we’re aiming for the same thing that they are. We want devices out there that are really going to improve and strip cost out of the system because this cost curve is not, you know, been sustainable.
TS: Absolutely. Great thoughts. Just a final question, and a real simple one: you’ve got money to invest. If I’m a CEO, what’s the best way of getting a meeting with you?
GP: Well, I mean we’re pretty receptive and I think responsive. But certainly it always helps to reach out with an introduction to someone we’ve worked with in the past. That’s always is nice to see. But frankly, if you really hit on this theme of better care at lower cost, and you have the clinical data or the commercial traction to really demonstrate that, I don’t think it’ll be hard to get a meeting with us. We tend to be pretty responsive to everybody that comes to us. So yeah, think those are the two best ways.
TS: Excellent. Well, you were very responsive to putting this interview together. I’m grateful for you taking a few minutes to talk with us.
GP: Well, great. Well, thanks so much, and I really enjoyed it.
TS: Well, thanks, Geoff Pardo, for joining us on the Medtech Talk Podcast. Very happy to have Gilde investing in US medtech and medtech broadly, and also digital health. We’ve kept our digital health interest as well, including the upcoming Digital Healthcare Innovation Summit, which will be held on November second in Boston. So thank you to our listeners for joining us on the Medtech Talk Podcast. Hope you will sign up for the Medtech Talk Newsletter. Go to medtechconference.com or healthegy.com. That’s the word health followed by the letters EGY.com. Healthegy is the company that puts on the Medtech Conference, puts on the Digital Health Innovation Summit, and puts on the Ophthalmology Innovation Summits as well. So hope you will visit us at healthegy.com, enjoy our content from across healthcare, and of course join us next week for another tale of innovation on Medtech Talk.