The Agony and Ecstasy of Doing Big Things in Medtech | LSI USA '24

David Hochman  0:06  
Good morning. That's working. Good morning. I'm David    Hochman from Orchestra BioMed. And I've got the honor and pleasure of moderating a discussion between these two esteemed gentlemen, we've got Howard    Levin, one of the most prolific inventors in our in our industry. And we've got Chris Cleary, who recently shed some major responsibilities at a big company that, you know, I think we're all familiar with. So I want to get things started, because late last year, we saw the approval after you know, a long journey of renal denervation. For Medtronic, I think Jeff, Martha cited a 17 year journey to that major event, we're all looking forward to, to what comes next. I thought we could start with you, Howard, because you began that journey, actually, more than 17 years ago, maybe you could tell me about how you and your partner Mark started thinking about taking device technology, interventional procedures into the treatment of hypertension.

Howard Levin  1:03  
Great, thanks a lot, really appreciate that. So we started off by actually, it was a heart failure play to start. And we're trying to hyper perfuse the kidney in order to fake it to believe that it should make urine. But when we got there, and we're doing it, in order to do it, to start, we had to cut the renal artery to put a Catherine because we're doing it surgically. And we're getting tons and tons and tons a year. And when we then went back and did it endovascularly, we were getting much less and we were trying to figure out why. And then all of a sudden, one day it said, you know, you cut the artery, you cut the nerves, etc. And we started looking back and literature, et cetera, et cetera. And we found that lo and behold, there were different reasons to believe that the renal nerves controlled the input to the kidney and blood pressure. And there were three things we were trying to shop it for. And this goes to the agony. The Agony was we had a deck for hypertension, we had a deck for heart failure, and we had a deck for end stage or chronic renal failure. And depending on who was crazy enough to listen to us at the time, we would pull out that particular deck and shop it. So we had the first clinical study we were doing, and we're doing it in China, or another piece of the the agony was, nobody was listening to us because we had preclinical data. Then we had one patient that were able to for totally different clinical reason. Under CT guidance, put a needle in inject lidocaine into Gerardus fascia, and block the nerves. And we saw a reduction in blood pressure and increasing urine output. And we then took that one, the X ray of that one thing, and now everybody said, Oh, well, you have human data. And so say, you know, what can you do? But the bottom line is that, you know, what do they say invention favors the prepared mind type thing. And it's just, it was a really hard slog early on, like I said, three decks, three different people. I still have a letter from j&j saying, No, we will not take it off your hands for $500,000. So,

David Hochman  3:29  
so that birth, I think, a whole field that we can talk more about it. I was our group was one of the groups that got all excited about by around 2008 2009, you had a body of clinical evidence, it led to a big transaction at Medtronic that predated you, Chris, I think you can't take either credit or responsibility for a transaction that really woke up the industry. And I think maybe you can comment on dynamics, but 2014 you take your position at Medtronic, I think it was right around the same time as some other data came out related to this technology that was a little surprising and maybe created some agony at Medtronic. Can you talk a little bit about that

Chris Cleary  4:13  
in between my offer letter date, and my starting date is when it didn't meet the endpoint? So yeah, that was like a January 2014 thing. And, you know, obviously caused a big stir right didn't 2011 It was 800 million upfront, I think. And at the time, it was the largest amount paid for pre revenue companies. So you know, that that's part of the it's funny this is we're talking about agony and ecstasy, but the ecstasy is like a future thing at this point still for Ardian but it was a lot of trouble for a lot of people. But, you know, we we were sitting there with a huge upfront you had Hawkins trumpeting the deal on CNBC shortly Before Omar came in, and then you've got the clinical guys looking at it saying, you know, we're going to need to run a trial that gets a label that can pay back that kind of upfront in the development that we had to run on top of that. And, you know, I think when you begin looking at all the pressure that comes in for high growth market, big Tam, you know, big price, you've start to layer on, you know, different different elements of, you know, the agony here, right, it did put pressure on the trial, they probably went for too big a label, they tried to do too much, with the trial really twice. And, you know, the whole time there was this great signal that no one really had any doubts about, you know, people, I think, from the beginning looked at it and said, This is good, right? This, this is going to, like help a lot of people and that's the, that's the thing, you got to kind of grab on to is your, your the core belief, right? Is this the right thing to do? Does it help patients? You know, is there a point where, you know, I don't care, I'm indifferent to some degree to the expense of it. And there are products that I think meet that criteria, they can't all hit that. But something like Ardian, I think really did hit it. And it was, you know, it engendered the response that we've had so far, ran a second trial. You know, we're pursuing labels in three major geographies. And, you know, we're we're determined to be in it all the way through reimbursement.

David Hochman  6:33  
Talk a little bit about that transaction, though. And we you and I were talking earlier, the dynamics around how decisions get made to take on pre revenue assets at a company like Medtronic or any of the strategics, I think it's something that this audience should be really interested in. Because most of these, this audience is entrepreneurs, eventually building towards an exit, talking about already in or other examples around which Medtronic bought pre revenue companies and it Bernard talked about yesterday, needing to pivot and adjust when sometimes things don't work out, what have you learned from both the decision to go decision not to go and, and how to deal with an RD in or something that doesn't go exactly as planned,

Chris Cleary  7:12  
I can talk about 12, because I have direct experience on that. But you know, for 12, we had, you know, a bunch of assets that kind of went on the market, at the same time, everyone decided that mitral replacement was a must have asset for structural heart, and you had four, sometimes five companies that were looking at all the properties, and they basically all traded within about a four month period. And you know, in general, you were paying hundreds of millions of dollars upfront with, you know, revenue earnouts for companies that find patients, you know, so the first thing you have to do is say, is this an existential asset that I've got to have? Right? And if it is, then you pay up, and this is one of the long term projects that you know, you're going to fund. And then you have to say, Okay, what's the cost and our estimate for 12, was probably 500 million, to do a US a European and ultimately a China trial, where we knew we wanted to bring the product out globally. You know, but in the intervening period, we had a hard time with our delivery, getting it down to a French catheter that was the right size. So we basically had to do a, back to the drawing board, on the delivery design, and you know, that that's kind of like spent a lot of money, back it up, spent a lot of money. And, you know, that's the nature of it, right. And if you're, if you're in it, then while you're making those decisions, where it's an incremental 200 $300 million, you know, you either have to get more money or cut something else, and you're making a lot of capital allocation decisions at a, you know, at the high level in the company, trying to figure out like, which are the, which are the five, seven programs that are must fund. And you know, the nice thing about Ardian is it stayed in a must fund category. And certainly for mitral valve replacement, it stayed in that category, too, from Toronto,

David Hochman  9:05  
I want to come back to you on some things that have worked out really well. But I want to come back to Howard on, you know, idea generation because I think, you know, you can speak to something that a lot of people appreciate, which is, I think one of the ecstatic moments when you really come to, you know, a discovery or an insight that, you know, you can think can birth a new therapy, talk about that process, but also, you know, to Chris's points, how to how to you and your colleagues think about from idea to how do we actually see this in patients and how do we bring this to value inflection point, where Medtronic or another strategic can get engaged,

Howard Levin  9:44  
but I think that value inflection point is very important, you know, the, and it you know, so maybe 1015 years ago, you get a Series A with, you know, a couple pigs and a provisional and now, you know, it's good To the point with venture capital, that you almost have to have 12 months of clinical data and then some number of patients to get the Series A, whatever the right answer is, from an ideation point of view, it turns out to be reasonably the same thing. You know, what you're trying to do is to understand, and we, we didn't to start, and that was sort of a downfall for us. You know, we, our first company was a company called CHF solutions. And we it was a great clinical thing. It only cost this $9 million to go from back in the napkin through 510 K. And we thought that everybody in their grandmother would use it. And I remember that we were at this coming out party at like heart failure, or suicide or something like that. And you know, we there were tons of people in the paint. And there's this walked up to this woman who was the head of heart failure at UCSD at the time. And she said, Oh, I'm gonna use this all the time. I said, Oh, that's really great. How often she saw at least twice a month. And I'm thinking, you know, we plan on twice a day. But so the the ideation process has to take in nowadays, you know, where, where it has to start with an unmet clinical need. But it has to be a real market to start. And everybody gets enamored with their ideas. And the agony part of the agony is realizing that what you thought of originally wasn't actually what's going to be the right thing to do. So you have to be flexible enough to change what you want to, you know, you're a person or something. But that's, and I wish I had a right answer for this. But it's also when do you quit? When do you give up and say, well, this idea is just not going to make it and move on. So it's not just ideating it, it's actually trying to know when to actually push really hard and change or when to kill it? I don't know if that's, I

David Hochman  12:16  
think that in Killeen. I think that technology is birth to other companies now that are well funded and pursuing different indications around the core technology. So there's still seems to be a lot of potential with it, we come back to christen on with something I think that's worked really well for Medtronic has had a big impact. Now, their big deal that I think predated your arrival, Medtronic, that you saw it but sure, was core valve, which I think is a great story of success, but also early adoption, big investment, but big impact and continues to be the key asset. He tell us about you know, that how your observations in that program versus others?

Chris Cleary  12:56  
Well, we paid for twice, right? We paid 800 million to, you know, Antoine, and everybody, and then we paid another 800 million to Edwards on IP. So no, no. And, I mean, I'm not even there. So I can't really help you. But look, it's it's still worth it. Right? I mean, the thing is, the it happened a lot later than we thought. So the revenue curve was like that. And the revenue curve we got was a lot further kicked out. But it went up higher. And it's been a principal driver for like year over year revenue growth for Medtronic over a 10 year period. So you really can't complain about it. Right. And, you know, we wish we were number one, not number two position on it. So you know, all these products have some limitations in terms of the addressable portion of the, you know, the TAM, that the product can get you. But it's been a fabulous deal for us. And I, you look around and say, Okay, what are the like really big products that are in med tech, that have that profile that take a lot longer, but they're worth the weight? You know, okay, mitral clip, no one thought mitral clip was going to turn into a billion dollar plus market, right? It took probably 10 years longer than anybody thought it did. No way that was the deal model when it came out. Yeah, it's a failed deal model, but it's good product, you know, libre, right? Nobody thought that that thing was that that took forever to figure out how to make that product. But now it's like 80% of the year over year growth for Abbott, when you kind of look at it. So there's a lot of products like this watchman, you know, third panel to finally clear it, and there's just no way that people anticipated that it would take that long, and yet it's a you know, $2 billion market growing in the 20s.

Howard Levin  14:43  
But you know, it's really interesting what he's saying. So, we had the original IP on mitral clip and did the original design before we spun it out and sold it on the the issue is that When you're so in the ideation process, you know, you can either be What do you say is one of the 64 that

David Hochman  15:09  
was yeah 64 startups that followed you into the in Arduino innovation journey at one point. And they're glad we demure adventure. Yeah, they're

Howard Levin  15:18  
only like three potential acquirers is the problem. And the so, you know, which side do you sit on? Do you sit on the fast follower side? And some people are very successful sitting on the fast follower side, do you sit on the early ideation side. And if you're going to sit on the early ideation, side, do you do pie in the sky, that's going to take 1020 years and require a strategic to have enough horsepower to be able to go through all those different market development processes. And, you know, as a early entrepreneur, at least, we never thought of that we never worried about that. We said, oh, you know, this is a great idea, whatever. And we and we had a big failure, one of them was called Sebium. And it was a great idea, it was a ablation of the carotid body in the neck to treat hypertension or to treat heart failure, right, because it reduced sympathetic tone. And the problem is, is that it came, it would have been a great fast follower. In hypertension, it had the same actual clinical reduction in blood pressure, that, you know, renal denervation had, and it was differentiated. But the problem is, you know, simplicity, three came out and killed the field for that amount of time, and we couldn't raise money on it. So you know, you can have a good idea and whatever, and it just doesn't, you're just at the wrong place at the wrong time. So

David Hochman  17:02  
clinical trials, clinical outcomes for trials, big role, and all the the products that we've talked about the successes, the challenges and orchestra, we talk all the time about unknowables, you know, things that maybe you could have known, but you only going to learn the hard way sometimes. You know, Chris Howard talked about, you know, the the journey of developing that late stage clinical evidence, how it relates to, in your case, Howard, the early clinical evidence, and what you think is most important these days to increase the probability of success, because, and just go back to your comments on Watchmen, Chris. And one of the fascinating stories there is, what people don't appreciate is how close it came to not actually being realized to the market that we all see evolving today.

Howard Levin  17:48  
You know, and I think there are similarities, but there are some differences. In early stage stuff, if you're trying to push something that's differentiated enough from the existing thing that people don't actually know, can't hang their hat on something that it worked somewhere else, then you're developing a better way. The only way that I've been able to explain it, and I don't know if this is a great words, but therapeutic magic, when you're doing something early on, you have to show something that's so much better than what exists out there, that people look at it and go, you know, or whether it's it's obvious to most casual observer, right, that this is a great thing. In that, in the absence of that, it's really, really hard to fund something new. And I think it's equally hard in different ways when you get to Chris's stage near the later stage, to do those, phase three trials for phase two, phase three trials, and because you're trying to get labeling, and you're trying to get a big enough market, that it's worth it. But you know, the problem is, a lot of times to start, you have to you no narrow and it becomes a I would imagine a dichotomy for a company like metrum Yeah,

Chris Cleary  19:19  
look, the stuff that we think about are, like you said, can it be the new standard of care? Right? So you know, Does it develop a market because people want to use it on a priority basis over the previous standard of care? That's a great leading indicator, then how big is the market? What do you think the growth would be, you know, in what does the reimbursement look like? And you know, and then it's like, what number are we going to beat the market will we be first will be second or third? And you know, there's we've done a lot of stats where you look at it and say, look, it kind of usually goes something like 5530 and 15 And for player number one, two, and three, when you get into a mature market with three equivalent products, doesn't matter when they come the mature run rate on that thing is that the first market entrant if they've got equivalent technology, or even a little worse, technology hangs on to almost two thirds of the share. Right? And when you look at the stats, and that's a, I mean, there's a lot of data around that unfortunately, being in there first matters. So you can't just cheap Chase reimbursement with your label, you've got to chase timing, and sometimes you've got to pay for time. And you know, you and I, David have had this conversation a lot like, you know that that's kind of really what we're doing with the program that we that Medtronic and orchestra have together, you're, you're really paying for time, how do you pull the introduction date for something that's like interesting forward, so that you can guarantee that you're the first market offering, with a great product that's out there, because that's what it's worth, it's worth about double of what it's worth to be number two into the market.

David Hochman  21:02  
With the pain we've talked about in terms of financing, and financing these ambitious programs, the time dilation that can occur if you get it wrong, talk more about what you started at Medtronic in terms of thinking differently about how to finance how to share risk, you know, we've done something interesting, but I know you've done other other work where you're trying to get to that point of advantage, but stretch and stretch, the p&l also the resources at Medtronic to be able to do more

Chris Cleary  21:35  
now that the dynamic that I was faced with, like, I don't know, 1617, was we had 7%, maybe six at that point of sales that we dedicated to r&d, and it wasn't enough. And then the the programs that we had that were under development, like already in like 12, they they eat up all the oxygen, the robot, you know, our 780 G program for diabetes. So when you kind of take the first couple 100 million each of that out of it, you're not you don't have enough left for kind of ordinary course, r&d. So I looked at what pharma did, were they, you know, I thought in my head, they had outsourced r&d to third parties. And you know, what they've really done was with Clarus, which was a fund that ultimately got bought by Blackstone, they did, like 23 deals over a five year period 18, of which Claris did, and fundamentally, they came up with a structured way to kind of give you off balance sheet money that you could use to offset your r&d expenses, so that it kept it off your p&l. And you know, what you wind up paying back was a multiple of their investment, but it was worth it because you were bringing products to market that you wouldn't have made it if you didn't if you didn't do the deal. So would you pay someone 3x their investment, to get a product to market and have a lot of revenue versus zero revenue. And that's the balance that you've got it so you feel you kind of feel bad because you're you're not paying 100, you're paying 300 for it, but at the same time, if you don't do it, you get nothing. So that was the operating theory that we had to do, it took me a year and a half to get people over the knee jerk sticker shock of the private equity returns that you had to come out of pocket for. But there were all future royalties that went out 10 years. And when you looked at the overarching percentage of the royalty was like mid single digits. So finally people kind of came on board. And since they initiated the program, Medtronic is done publicly, probably a couple of billion dollars of that stuff. And you know, these are products that would not have seen the light of day if we hadn't done it. We've done one with intrepid where we pulled the introduction date for the next version of it forward by a couple of years. And like I said that that really matters.

David Hochman  23:57  
Time and money. We had dinner last night, Howard, you know, to Chris's point, which is certainly near and dear to my heart thinking differently about how to create connection and collaboration with strategics. You have you've continued this work, you have an accelerator, you do new ideas. Where do you see today with opportunities of thinking differently, ways to bring that bring the resources to bear to accelerate a new idea how to engage strategics how to think differently than the traditional models that have become challenging, let's say to advance ideas independently.

Howard Levin  24:35  
I think their traditional models are very difficult today. You know, to go to the standard seed series ABC. The problem is there's not enough early stage investors to do the early stage stuff and there's more late stage investors but everybody is looking for returns that may may not be possible to do. I mean, I think you'll find organizations like yours, which have a very novel business model, or being able to work with strategics, early on strategics. And I may be wrong about this, but you know, strategics know, to a certain degree what they want. But, you know, yes, you can come up with really novel stuff, but like the strat bed program, that you guys have, or Medtronic has is, is actually very attractive, you know, to go and find something that is already within their strategic goals that you could help, you know, add to or work on, or, you know, if you have something that fits into that area, you know, think so, I know, this was not a very useful answer. But the the the the issue is that it actually turns out to be a question for you, right? So when when if people come to a fund or they come, yours is a little different, but if people come to a fund as early stage entrepreneur, like most of the people in your audience, the question is, what is the makeup, the likelihood of success versus agony in terms of getting a yes and some money? And I think that most entrepreneurs don't. And I didn't start for sure. Most entrepreneurs don't think of presenting it the way we're evaluating it the way that the VC needs to evaluate it in terms of, you know, unmet clinical need clinical risk, reimbursement, risk, engineering, risk, whatever. Everybody says, I have a better widget. You know, let's, let's go shop the budget.

David Hochman  27:01  
Well, I think the the forward lens is more important than the rearview mirror. You know, past performance is not a predictor of future success. When it comes to exits. Actually, my least favorite slide in any deck is the one that talks about the historical exits in the space, totally irrelevant at this point, because we've heard stories today about how some of those exits, biggest ones don't always work out the way they're expected. And the need to have an organization like Medtronic commit, and recommit, and, you know, do its own adaptation. So, I think that the problem solving for your eventual partner or buyer, is something we talked about yesterday in a panel that's critically important and bring it back to you, Chris, you guys are thinking creatively about how to empower, you did a lot of creative thinking in Medtronic about how to empower the future, through out of the box financial engineering. Our collaboration brings a lot of people resources and ingenuity to it. I guess, you know, thinking about some of the transactions you did more recently. What has you most excited about where that creative thinking creative work deals like let's say Cath works, things that you also do creatively that I've really worked out, like masoorie, the future for Medtronic in the industry of thinking differently so that we can reduce the pain points, and have more successes? What has you most excited about the future there?

Chris Cleary  28:23  
I'm going to answer your question, but I have to tell you a funny story. Because I like your stories. Investment bankers make the trip to see people that run corporate development all the time. And they'll show that page that you hate, right, the preceding comp page, and you know, inevitably on the left side is already in. And it's like an IQ test failure. You kind of look at them, you fucking kidding. You're showing me that this is like this great comp for something that we've paid for three or four times, where are the back end of like running the second trial, we might need to run a third. We don't have any reimbursement it happened before I was born in that your comp. Just so annoying. So glad I don't have to have those meetings anymore. God, did I forget your question. No.

David Hochman  29:13  
I'm gonna bring you to back to what you're excited about for the future. We have to leave, leave this panel, this discussion with hope. Look, i

Chris Cleary  29:22  
The number one thing I would tell you is that on a quantitative basis, the single largest driver of value for large cap strategics is revenue growth. Right? That's, you know, you do your statistical correlation. It's a 90% on the R squared when you look at it, like what are the things that drive it? Its revenue growth, its gross margin expansion and everything else has no correlation. They're down in the 50s. Right? So you know, if you want to know like, why strategics are always going to be in the market for it. Is that because if you buy something that's high growth, you get your value back plus in any thing that secrete have to, you know, the denominator and the numerator for that math is a good, it's a good thing. So you know what that means that if you're out in your startup and you're addressing a big market, and you know, IT projects, high growth, and it's it's solving problems and improving outcomes, there's going to be a market for that. And then you got to figure out a lot of the stuff that Howard said, right, which is, where do we fit in the scheme of things? Where are we with respect to the timing on the introduction of the product? Will we be first? Are we a fast follower? Or are we you know, someone that's out there. And I think the calculus gets more complicated. When you take away the IPO market. And you you take away companies that can't in the absence of strategic interest, take the company all the way out, and do it themselves. And yeah, the best example of that is probably shockwave where they didn't get the value that they wanted. And they they fundamentally believed that they could do better for reimbursement than people gave them credit for. And they could do better for indication expansion than people give them credit for. So they had to go do it themselves. And, you know, they're, they're gonna get 10x on that investment.

David Hochman  31:13  
It's pretty, pretty extraordinary. It really works. It works. Right. Yeah. You

Howard Levin  31:17  
know, it's, it's interesting, cuz I'm listening to I learned a lot by listening to Chris and, and you know, how to position things for strategics. But if I'm trying to position things for VCs early on, the the currency that you need to do is, in the ideal world, in order priority, it's clinical data, therapeutic magic, at least freedom to operate, and some good plan that could lead to IP, and a mechanism of action, that's believable. Because if you have a mechanism of action, that's believable, and you have something to support it either preclinically, or ideally, clinically, it doesn't mean you're going to get money, it means you're gonna get listened to. And you know, the more times you get listened to, the more chance you have of getting funded and avoiding agony. I'll

David Hochman  32:11  
take this last minute just to think about a frontier that you've spent probably more time in terms of innovation than anyone I know, which is heart failure. I think one of the great areas of unmet need is heart to heart failure. And you've been a prolific inventor there. And Chris, I know you you guys continue to look at and are continue to develop new therapies in that area. Howard, talk, talk about the future heart failure therapy just for the last minute and, you know, where you see that frontier in terms of creating impact, and, you know, creating solutions for patients that that really suffered. So

Howard Levin  32:45  
we're gonna see how V wave reads out in a couple of weeks. Right? The

David Hochman  32:51  
the issue of a fast follower area? Yeah.

Howard Levin  32:54  
So the the, I think heart failure is what heart failure is just such a huge unmet need. On in one sense. And in another sense, it's, it's almost like, nobody's been able to crack the code and stuff. So I think if somebody is eventually able to crack the code, we've got the early stage stuff, you know, you know, beta blockers, ACE inhibitors, diuretics, you know, interest or whatever work pretty well, in that up to maybe class three, a, you know, right at the beginning of starting to get bad way. At the end, we're pretty good, you know, we can put in a bad we can transplant people, we don't we can save those people. There's a huge group in the middle, that we just don't have the answer for. We don't have the answer half path, you know, or we'll find out it at, at ACC, but you know, right now, there's a huge opportunity. But it's, as you say, it's a huge risk. You know, if you can crack that code and find out what it is, you're a big winner. And so you have to decide, am I going to do something that's more, you know, there's already some information for and try and hang my hat on that in the fast follower thing? Or am I going to try and go pie in the sky novel and do it, but it's a big, do you think that the strategic still consider heart failure a big area? And is it interventional, or, but but

Chris Cleary  34:25  
it's a big area for venture at this point, right? I mean, it's it's so appealing, because it's big, you know, if you get one, it's a lottery ticket. But the you know, so the operating theory for a Venture Program is, I can't just invest in one, I've got to invest in five and spread the risk and be early and try to stay small until I get a signal. So you know, everyone is looking forward to the initial readout and the next couple of weeks for sure. Well,

David Hochman  34:51  
a lot more we could discuss but great spending the morning with you guys. And thank you guys for showing up. We enjoyed the discussion. Take care. Thank you.