Solace Therapeutics CEO Bill Gruber hopes to repeat the successful exit he helped execute when Hologic paid close to $300 million for his previous company Interlace.
Tom Salemi: Hi, everyone, this is Tom Salemi. I am the host of the Medtech Talk Podcast. Thanks for joining us today. We are visiting the corner office today. We’re speaking with Bill Gruber, President and CEO of the Solace Therapeutics. Solace is a privately held company that’s developing a device to treat stress urinary incontinence in women. And it’s an exciting field, women’s health. And Solace has a very unique approach to solving this chronic problem. Bill joined Solace in 2011. He came off a pretty big win. He had previously been CEO of Interlace, which had developed another women’s health product that was acquired by Hologic in 2011. Hologic paid $270 million ultimately after earn outs. And Interlace had managed to develop a product, get it on the market, and get a sufficient enough traction to attract Hologic, and it did it all on under $30 million. So it was quite a coup for a privately held medtech company to generate the 10X type returns that you don’t always see in this field, but we clearly need to see more and more of. So today we talk to Bill about his success, Interlace, what lessons he learned there, how he’s applying them to Solace, and what other medtech entrepreneurs and executives can do to help increase their chance of success. Hope you enjoy this conversation with Bill Gruber, President and CEO of Solace Therapeutics.
TS: Bill Gruber, welcome to the Podcast.
Bill Gruber: Thanks, Tom, it’s great to be here.
TS: Now you’re a medtech blueblood. You’ve been at Boston Scientific, so you’re part of that mafia there, and you worked at Cortek and did some work in vertebral compression, so you’ve been all over the medtech realm in some of the more interesting, I think, some of the more interesting spaces. So I think you’ve got credibility to answer the question. What’s the state of medtech today in your eyes? It seems to have a bit of a pall over it, but there certainly are bright spots, and obviously things to get excited about because people like yourself keep plucking away.
BG: Well, it’s a great question. I think we’ve seen a tremendous change here in the last couple of years, both a consolidation of the big companies, most recently the Covidien-Medtronic merger. But then we’ve also seen kind of a pause from the investment side from the venture groups, not really aggressively investing in seed stage startup med device. So while we’ve seen consolidation at the top end, we kind of see a sparseness from upcoming med device companies, in my opinion, just because they haven’t been getting funded over the last four or five years. So we kind of have this unique gap at the moment. Which is interesting. I think that right now it’s tough to raise capital for any medical device company, and I think that all of us have those same challenges right now. It’s tougher, it takes longer to raise capital, six to nine months, there’s just fewer people out there willing to invest.
TS: Yeah, we were talking about our Medtech Conference that we had in Minneapolis, which I know you were there; that’s where you and I reconnected. And we were talking about that with a VC who’s not in medtech, and he wondered what those events are like. Do people just sort of get into one room and just start crying together about the state of medtech? And that’s not it at all. There’s a lot of optimism and enthusiasm. And the fact is you have funding. Your company has funding. Does that – I mean your ability to raise the funding into – if you have the money behind you, it must be easier to push forward because there’s less competition from other startups like yourself taking up resources? Or is it even more challenging for you, even though you have the money that you’ve raised?
BG: Well, I think your point’s a really good one because wherever there’s certainly concerns in the capital raise, there’s also great opportunity. I think those companies that have been able to forge ahead and haven’t been folded up, if you will, for lack of cash, those folks do get a better look because there’s just fewer of them out there. Likewise, I think that the other opportunity is that we’ve got great consolidation by the big guys, like I said, but then the small companies that can actually get there, achieve the milestones, can achieve FDA approval, can ultimately work towards reimbursement – we’ll talk about that, I’m sure – but the shelves are barren when it comes to looking for small acquisitions or medium size acquisitions, if you’re the big guys. They do need to keep their product pipelines going. They, I think, are having a more difficult time finding small startups, venture capital funded startups to acquire, because there just haven’t been many, as we discussed. So I think for those companies like ours or others that can make it through the gauntlet of reimbursement or making sure your device gets FDA approved, I think that you can achieve a premium price. I think that you will be able to demonstrate that you’ve been able to do all the critical things necessary to get a premium price, and there’s less competition for you to sell your company.
TS: Bill, we’ll talk about Solace in a few minutes. I wanted to hit upon Interlace. That was the company that we had first talked about when I did an article about Interlace way back. And it was a company that raised roughly 30 million or so, and you can correct me on the numbers, from VCs, and ultimately sold, I know, for 125 million up front, and I’m sure there are some earn outs there too that you can tell us whether or not they actually materialized into some gains. But Interlace, to me at least, seemed to be a like a really prototypical medtech deal, what medtech should be: very little money or low money in, and a modest to generous payout on the other side. What was that experience like, and did you learn lessons from that that you carried over into Solace?
BG: It’s a good question. We were very fortunate. I think we certainly had some good luck on our side as well. I’d love to say we were the smartest guys in the room, but we weren’t. I think there’s to some extent with all of this, there’s luck to timing, luck to the market you choose, etc. But that company, as you mentioned, we had about 28 million invested capital. The upfront payment was 125. After earn outs, I think we cleared north of 270, something like that. And I think one of the keys to that was that from kind of beginning of the company to the exit was about 4 and a half years. And when we sold the company, although we had raised 28, we still had 10 million in the bank. So we only required 18 million in order to get a product from inception all the way to the market, and all the way to exit was really on the 18 million. So that’s just great work by the team here. But really efficient use of capital was the key, and I think it’s the key to all of these because that’s how we’re going to be able to provide the multiples that we need to provide these investors in order to keep getting capital and keep doing these companies. So not only being efficient, but also doing it really quickly because the IRR is certainly a function of time. So I think when you say did we learn anything, we learned a tremendous amount. Interestingly enough, we looked at 6 different areas in women’s health, and really whittled it down to one, which was the removal of fibroids from the inside of the uterus for patients with abnormal uterine bleeding. And in that situation, we basically went out and hired several different design firms, three design firms, gave them the marketing specification, and then had them come back with as many ideas as they could come back with that we could look at, and then also come up with a bread board prototype of the one they liked the best. So we ended up – and we were paying them each approximately $70,000, and we gave them 3 months to come back with the effort. So when they gave us all their ideas, we ended up with 60 ideas. We put in a huge provisional patent on those 60 ideas, and then we had 3 kind of crude prototypes that we had on the bench top. So we then picked the best one of those and started working on that, and ultimately were able to lay down a lot of intellectual property that would give us very wide protection, and we had a pretty good working prototype for $210,000. So that was one where we really didn’t start with a technology. We took the opposite approach and started with the problem, and then basically laid out the problem to the 3 design firms and let them come back with their solutions. We had all kinds of funky solutions that these folks were coming up with. And then we hired our R&D team and just plowed forward to develop these concepts that we had received. I think when we look at getting the market, I think the other thing that we learned that was extremely valuable was not to hire 20 reps once you have FDA approval. We went out with 3 reps into the field. We learned very quickly that we needed to change how we train, we needed to change how we set it up in the operating room, and it took us probably 6 months to figure that all out. After 6 months, these 3 reps really started to get traction. And again, these 3 reps were working in very small, distinct territories. And then we quickly hired 3 more, and those folks took off really quick. And then ultimately we were prepared to hire 10 more, when Hologic came in and made an offer for the company. I think the one thing that I would say that’s also important is talking to your potential buyers early. We had talked to a number of potential acquirers for probably well over a year before ultimately we did a deal with anybody. And I think that’s important. And think developing relationship with the acquirers, they want to watch you progress, they want to see you hit milestones, they want to get comfortable with you, they want to know whether you’re honest. Because these days, we just can’t build a house of cards company and flip it. It just doesn’t work. You have to have strong intellectual property, you have to have strong people, strong quality systems, you have to be scalable. I think all those things are really important for the acquirers to be able to come in and pick up a company and make it really plug and play for their organization.
TS: Is the identifying the problem and then seeking the solution, is that a common way of starting a startup? Can that be replicated? Or was that a situation where the problem was unique and significant enough that you could go at it from almost a reverse direction without the technology first, or rather looking at the problem first and having someone else help you develop the solution?
BG: I think that’s the way we should be attacking the problems, right? Because I think what happens is if we really dissect the problem well enough, sometimes the solution can be much more obvious. I think when we look at so many of the med device failures out there, and not all of them – I’m not certainly casting a broad opinion on it here – but so many of them start with a technology, maybe it’s RF, and then they run around and figure out where in the body they can cook something. And sometimes that can take you much longer, as opposed to if you really understand the disease state well, and then really take the blinders off. And that’s why hiring outside people who didn’t have all these paradigms, who can then figure out what some other unique solutions will be. And that’s really a huge benefit. So starting with really defining the problem well, I think, is so important in a medical device company. I think what ends up happening is the unique solution usually ends up being much more patentable, much more of a departure, and sometimes really elegantly simple. And I think that’s kind of what we ended up with, not only at Interlace, but ultimately that’s what has happened here at Solace.
TS: So in this environment, where value is being stressed, value of a therapeutic benefit that the device brings, are those sort of opportunities, where maybe they’re the short putt devices as opposed to the long drives, are those easier to get into the healthcare system, or do you really need to have some of those – a device that will significantly change the game to find a way into the marketplace?
BG: That’s a very good question. I don’t know if I have a great answer for that, actually. I think it’s a two-edged sword. For example, the best example I have is so at Interlace there was already a reimbursement code. There were predicate devices out there for 510K. So the regulatory bar was fairly low. The reimbursement bar was rock bottom because there’s already a code for reimbursement in the hospital. And you already have doctors who are very skilled at doing hysteroscopy, so we didn’t have to change doctors there. So the market was fairly low as well. And there wasn’t a lot of competition out there, and so you don’t have a really high barrier to entry into a market. And so I would say that one was kind of, as you called it, a short putt. That one wasn’t that bad, and that’s why speed to market was really good, we could do it on an efficient amount of cash, we were able to provide a very good return on it for our investors. Solace Therapeutics, and this was going many years before I joined – I’ve only been here 3 years – but this one is a PMA product. It, too, also defined – these folks defined the problem long, long before they had a solution for it. And it’s an elegantly simple solution, but it’s completely different than everyone else is doing here. So not only do we have PMA in front of us, but we also are going to need to get reimbursement and we’ll have to go work with the individual payers who are going to ultimately determine whether we need to get a category 1 code, and that may take a little bit more time. We have to have 5 – before we get a category 1 code, we have to have 5 peer reviewed, published journal articles. And so when you look at the cost to get a PMA and run multiple randomized, controlled trials and get 5 different trials published, and then ultimately have to get across the finish line from a reimbursement standpoint, the amount of capital and the amount of time it’s going to take to do that at this company is far, far different than Interlace. So then the question comes, OK, and now reimbursement’s even the long pole in the tent, if you will, because sometimes regulatory approval is easier than the reimbursement side. But I think when we look at that, my expectation and my hope here is that we get far greater value out of this one or an ultimate exit price here because it’s going to take more capital for us to get across the finish line. Also, it’s much more difficult for competitors to come into our marketplace because the bars are so high, both from a reimbursement standpoint, but from a regulatory standpoint. So my hope, and again, I don’t know the answer yet, but my hope here is that we’re injecting a lot more value into this firm than we were able to at Interlace, and hopefully can show that in the way of a return to our investors.
TS: What drew you to this opportunity? You had a good formula that worked at Interlace and you – with Solace, and you can tell us a bit more about what Solace does. As you pointed out, this is a more difficult climb, a bigger task. Were you at all intimidated by the idea of taking a device through the PMA route? Or did you see this as a challenge that you wanted to take on? It seems like you could have maybe found an Interlace-like situation and done what you’ve already done before successfully.
BG: That’s a good question. I think the challenge is the short answer to your question. I think for me it was a little easier. Spray Venture Partners was an investor in Interlace Medical. Spray Venture Partners was the primary investor in Solace Therapeutics. And once Interlace was on its way, they asked – Spray Venture Partners said, Hey, Solace Therapeutics really needs a shot in the arm. We need to raise some capital; we need to hire a team. And so I didn’t just jump right over blindly. I did a lot of research on the market size. I determined that the market size is absolutely huge. It’s for stress urinary incontinence, so when women laugh, cough, or sneeze, and they have urinary leakage. And once I looked at how huge the market was and the scarcity of alternatives to deal with it other than women just wear pads, I certainly found it very compelling and again stepped up the research. But then also looked at the technology. And everybody’s using slings primarily, or they use biofeedback or Kegel exercises to strengthen the pelvic floor in order to help these patients get improved continence from their stress incontinence. And this company basically has a completely different approach. Originally the were working on plugging the urethra with some type of urethral plug, but then went to a non-medical engineer who had a brilliant idea. He said that folks, you just have a hydraulics problem. So every time you laugh, cough or sneeze, that pressure gets exerted on the top of the bladder. Since fluid does not compress, all of that intra-bladder pressure gets pushed against the urethra and you leak. He said in hydraulics, to prevent seals from blowing out of a hydraulics system, you just need to add air to the system. So just air adds some, if you will, elasticity or compliance to the bladder. So all we’re doing is dropping off a detachable balloon in the bladder, consisting of 30 ccs of air, and it acts as a shock absorber, and it floats passively at the top of the bladder. It’s an office based procedure. It doesn’t take all that long to drop off. You just put a little Lidocaine jelly in the urethra and drop off the balloon. And then the patient would just come back every 12 months and have the balloon removed and a new one placed. And so what I started to look at is we’ve got 15 million women in the US, we have 15 million women outside the US who lead, so we’d get this potential population of over 30 million patients. And we’ve got a device that needs replacement every year, and basically over 90% of the population at least who are using pads to deal with it. So that’s what drew me here. And so it’s unique, like you mentioned, I’ve been in spine, I’ve been in women’s health with Interlace, and now I’m back in women’s health again with Solace Therapeutics. But honestly, I think there’s a huge market potential here, and the technology, we haven’t seen the technology really driven into women’s health, per se, like we have in cardiology or orthopedics or some of these other really great markets. And that’s another reason why I really like the women’s health space.
TS: Is women’s health an area that is going to see an explosion in medtech approaches in the coming years?
BG: I certainly think it can. And I think it can because we’ve done such a great job in other parts of medical device technology, if you will. We’ve done great things in other segments with great technology that I think many of those technologies can be brought to women’s health. You know, detachable balloons have been around for a long time. We’re not splitting atoms here at Solace Therapeutics. We just have a unique idea and a ton of great patents that allow us to do attenuation of a bladder. It’s a really simple solution. I think there are other really simple solutions out there in other segments, be they, like I say, cardiology, orthopedics or other things, that we might be able to transfer to women’s health in order to help some of these patients. I just think it doesn’t have as much technology or as much attention by both investors and small startup companies that some of these other segments have. And I think the market potential is just as big if not bigger than many of these huge markets everyone’s paying attention to.
TS: Where are you in your fundraising? How much you anticipate – how much have you raised? How much do you anticipate you’ll need, and where are you in that range?
BG: It’s a good question, sorry to cut you off. The company had a recap when I came on board. We raised $20 million from New Enterprise Associates, which have been just a fabulous partner. And we are plowing through that cash as we are in the middle, just actually wrapping up our enrollment of our 220 patient pivotal trial, which will support a PMA approval application that we will submit here next year. And yeah, we’re going to need some more cash because these are expensive studies. And so we’ll be out raising here probably in the fourth quarter to do another fund raise. And we’ll probably raise enough, somewhere in the 10 to 15 million range that’ll hopefully take us across the FDA finish line.
TS: Where are you in the engaging strategics stage of your approach? Have you done that? Have you talked to larger companies? Or is it too early for that?
BG: I never think it’s too early. I think one of the lessons I learned at Interlace is that you should be talking to them early. I think that – and so we’ve talked all of them, basically, and we have kind of regular discussions with them all, and we provide them all updates. I think the big companies, having worked for them and having been on the acquiring side at Boston Scientific, I think that nothing’s going to happen real fast with any of these big companies. They want to get comfortable with management. They want to watch you hit milestones. They want to observe the market, they want to talk to their key opinion leaders and get their key opinion leaders’ opinion of your device. They want to look at the literature that you’re putting out. And so I think you should be talking to them a year to 2 years before you sell. And that was certainly the case with Hologic. We had a very good relationship with Hologic, and they had a fabulous management team, and we had been talking for a year, year and a half before we finally got comfortable doing something. And so it was very easy for us to have those phone calls once, you know, with substantive discussions because we had been giving each other updates for the previous year. And it just makes the whole negotiation process so much easier because everybody knows each other, they know what you’ve accomplished, they know your struggles. And I think you should be open with these companies and share with them where you’re struggling, how you got over the struggles, and what your plans are going forward. I just don’t think things happen real fast on the M&A side, and so it’s all about the relationship. People still buy from people.
TS: But didn’t they happen fast for Interlace? I mean you were early on in your commercial release, you had a small sales team, you really hadn’t proven – you proved smaller scale what could work. But did they buy early in your mind? Or did they wait the time necessary to understand that this was going to be a successful outcome?
BG: It’s a good question. I think for us, we needed to show, and I think many of the companies, it helps if you can show traction. And so the real question is how much traction do you need to show. I think for us, we had 3 sales reps. They had watched those 3, but we were really just trying to get our feet wet with those folks. And then when we went to 6, and some things started to happen much, much quicker, it was clear Hologic was talking to their own key opinion leaders, some of which were using our device. So they were getting real time feedback from their guys as to how our device was working. And so I think that helped. By the time Hologic actually made the offer and we closed the deal, we had a little over $1 million in sales in the previous 12 months. Now I think what was obviously happening is that at the time, Hologic had well over 100 sales people, and we had 6. And they can run that math, that if your 6 are doing some percentage of sales that’s pretty aggressive, and you’ve got really good traction, and the doctors are coming back and using your device over and over again, that they can certainly plot out and forecast what their sales force, who have much better relationships than our folks do, and they have all the contracts with the hospitals, and they have access that we just don’t have, that those folks can really run with it. And they did. I think it’s been – I don’t know the actual numbers, but I guess? they have a very successful product for Hologic. And I think that Hologic did some really unique things – Hologic was very aggressive, I would say. During the negotiation, we were able to work with Hologic to set up a situation where they were willing to cover us for buying a lot of raw materials in advance of actually signing the deal, so that when the deal was signed, they could have a ton of product on the shelf, and they could hit the ground running. And I just thought it was really insightful of them to talk to us about that, which was hey, I know we haven’t signed a deal yet, but if you guys are willing to do some big buyouts on raw materials and start cranking up your production, if there is a deal here, then we can get rolling really fast. And it really worked well. I mean they were really smart when it comes to that.
TS: And with Solace, you mentioned on the clinical trials you’re doing, what will you need to do to demonstrate the value of the device, the economic value? That was something that came up at the Medtech Investing Conference, came up at the Piper Jaffrey’s Heartland Conference. I was there last week. What can a company like yours that’s going into a space where there’s really no single standard treatment, how do you go out and demonstrate that what you will do will present value for either the healthcare providers or the payers?
BG: It’s a great question, and certainly one of our challenges. And I think that’s the other issue, and the big change I’ve seen since I’ve been doing this for the 20 plus years that we’ve been doing it is that you used to be able just to launch a product, and you didn’t pay as much attention to reimbursement. It’s really a regulatory and a competitive look. And I think at your meeting, Paul Buchman?
said it best, where he said, It’s not competition anymore that you’re worried about. It’s not the FDA you’re worried about as much. It’s reimbursement. And because you really do have 3 plus constituents. We have the hospital that we really need to provide an economic answer for, and we also have something that we need to provide for the doctor. The doctor has to figure out whether this is going to make them money or cost them money. And then you have the payers now, which are certainly a gate keeper. And so all 3 of those people have an economic interest here. I think for us, the bar is a little different, too. So with a PMA product, you’re putting out a lot more proof of efficacy and safety before you ever get to market. And so that really answers a lot of questions, and that does help you with the payers. The payers do want to see randomized, controlled trials. It’s really tough if you have 510k product that didn’t require clinical trials, and does require perhaps a new code or something like that. So the benefit of being in a PMA realm is you’re generating so much data. And by the time we get to market, we’ll have 4 or 5 published papers that we can use to help us as we go talk to those payers. The other benefit for us that we’re very fortunate to have is that there’s been a tremendous amount of work done on how expensive an incontinence patient is to the system. So there’ve been NIH supported papers out there that demonstrate time and time again – there’s 3, 4, 5 papers out there – that doing nothing with an incontinence patient is really an expensive option for these payers, looking at comorbidities – these patients tend not to exercise because they’re fearful of leakage, so they gain weight, they don’t ambulate, they end up at times having higher levels of depression. And so again, all these comorbidities start to stack up to a pretty costly patient for the payer. And I think that all that is going to spell out in these other articles that we’ll certainly use to help us have those discussions with the payers.
TS: That’s fascinating. It’s really interesting how all these economic questions are really causing us to look at the human body and sort of how everything is interconnected, and how this one condition can lead to even more serious health problems down the line.
BG: And I think the payers are doing a much better job these days with all the data, looking at what it costs for these patients, right? All patients, right? So let’s look at the total cost of care, not just the cost related to this specific disease state. And I think that’s a smarter way to look at it as they’re trying to manage the overall care for the life years of those patients going forward.
TS: Great. And final question. Going forward, are you optimistic for medtech? Or do you have some lingering concerns?
BG: I’m optimistic, but I also have lingering concerns.
TS: You can have both.
BG: And I think those lingering concerns are fundraising. I think if I were starting a company tomorrow that was a seed stage company, I will tell you that the friends and family aspect of that and angel funding would really start to become an important role. And that didn’t necessarily used to be the case. I think it’s harder to raise capital. I think you’re going to have to be really resourceful to raise the capital. You’re going to have to show some early proof of principle that this works, and you’re going to have to have some pretty big markets that you’re going after. Going after a $500 million market’s going to be a stretch. I think everybody wants to see big markets, billion, 2 billion, 5 billion. And the reason is because you can make a lot of mistakes in a $5 billion market and still come out smelling like a rose. I think that’s much tougher in a $500 million market. So I’m optimistic that I think that if you can get these companies over the finish line, there will be buyers and the buyers will pay up. I think that the tough part is kind of getting there, doing all the blocking and tackling and to get your company and to keep it alive and raise enough capital along the way. And don’t make mistakes that cost you 5 years to get over, because you’re just going to eat up too much capital, and your return’s not going to be there. And then that certainly hurts the shareholders. So I am optimistic that good teams are going to get there. I have a little bit of concern regarding ongoing capital, and can we make med device still be an attractive place for venture capital to place dollars here. I sure hope so.
TS: That’s a great – and you’re completely right in your assessment. What happens to those patients who have the conditions that only fall within a $500 million market? Do they not – does innovation not look for new solutions for those treatments? Are we going to see some conditions that aren’t big market treatments go untreated?
BG: I think it’s a very good point, and I do think that’s, to some extent, that just because the economics don’t support companies digging into those markets, we may not see as much niche-y products to help those products with those conditions. Because the economic incentives aren’t there for us to raise capital, build companies and sell companies to provide a return on that capital unless the markets are substantive enough.
TS: Interesting times indeed. Well, congratulations on Interlace. I know it’s a few years ago, but it was a really great deal, so I can say it again. And excited to see what happens with Solace.
BG: Thank you very much, Tom. It’s always a pleasure to talk to you. I really appreciate it.
TS: All right, that concludes our conversation with Bill Gruber. Bill, thank you so much for joining us on the Medtech Talk Podcast. I always enjoy speaking with Bill, both in a professional and personal level. It was great to reconnect with him at the Medtech Investing Conference that we held in May in Minneapolis. Please tune in in 2 weeks for another tale of medtech innovation. And if you would like to have these podcasts and our Engagement Tech Newsletter sent directly to your inbox, go to Medtechconference.com, share your email with us, and we’ll make sure you’re in the loop. Thanks again for listening.