Sky Medical Technology : Navigating the financial hurdles in a MedTech start-up

Introduction

The best ideas and the most innovative companies in the world fail if cash management is not at the heart of everything the business does.  Every business – particularly pre-revenue or early revenue start-ups – needs to understand the concepts of cash burn rates and its impact on the company's cash runway – the length of time left before the cash has gone. 

This is never truer than in the medical technology (MedTech) industry.  For many companies the gap between concept and product can be measured in months – particularly in the era of 3D printing, but in MedTech it can be years or even decades.  Supplying global healthcare systems with a new and innovative product is hard work.  First you need to persuade leading clinicians that your product is worthy of consideration and ask them to invest time and effort into understanding the product and its potential for patients.   But this is only the first step.

MedTech companies will need to navigate use in small groups of patients, efficacy trials, randomised control trials (RCTs) and regulatory and clearance issues.  All of these are significant risks to MedTech companies. Typically, these companies have little in the way of control over the timing and results of these processes but each can cause significant delays – and delays are the enemy of cash.

Avoiding the panic

Running low on cashflow is bad news for a business for more than the obvious reason: that it threatens the viability of the operation and the livelihoods of those within.  When cash is tight, flexibility is also lost: the business cannot make strategic investments it needs to thrive.  Panic fund raising is a certain way to destroy company valuations fast.

While it is certain that delays and unexpected risks will materialise in any MedTech company, it is impossible to know what they will be and when they will arrive.  It makes sense to brief investors so they understand and are supportive of the timescales and potential risks associated with the MedTech industry and accept that returns may take longer to achieve than with other industries.  An open and ongoing dialogue is critical: the more investors understand about the real picture of the business, the more likely they are to be supportive when the inevitable delays materialise.

To give one example, during the pandemic most outpatient facilities were closed for months, which impacted the speed of RCTs.  If companies need to hit certain milestones to trigger the release of funding and this is related to the progress of RCTs, it is important to know of delays in advance so the terms can be renegotiated, or alternative funding can be sought.

The finance function has a critical role to play here – not just as the guardian of cash but also in building a cross business commitment to transparency in risk management.  MedTech businesses need to be constantly scanning the company and its environments to ensure any potential risks and changes to a risk profile are identified and reported immediately so a full impact on the cash runway is analysed and actioned quickly. 

The power of the rolling forecast

We have found traditional annualised budgeting to be relatively valueless in the MedTech industry.  These budgets rely on historical events driving current events and can be too rigid (especially in uncertain times), reducing creativity and responsiveness. Annualised budgeting relies on figures put together the year before and often has little relevance to the current day.

In Sky Medical, we rely on a rolling 18-24 month forecasting process.  This approach has enabled us to remain in control of cash even in unexpected times – such as the Covid pandemic and the business risk that came with Brexit. As uncertainties have increased, we have moved from quarterly updates to monthly.  These are submitted by the department heads and collated and consolidated in the Finance department.  The review is not to pass judgment on how heads of department are spending money.  They are experts in their fields and will be judged on their performance from the decisions they make. Instead, it enables finance to review the forecasts with the functional department heads to understand any changes and to ask questions that can highlight if anything has been missed out or mistimed. 

Certainty through production

Even when MedTech businesses have cleared the regulatory and medical hurdles and are moving to production, new changes and uncertainties need addressing.  No business wants to tie cash up in an oversupply of components but equally no business wants to run out of stock.  The recent shortage in electronic components is a good example of where accurate forecasting can help deliver consistent supply in uncertain times - a particularly important issue in an industry where continuity of supply is critical to patient wellbeing. 

In reality, every part of the business forecast is linked to others.  The revenue Forecast has an impact on the manufacturing forecast – because it determines when goods need to be produced.  The manufacturing forecast has an impact on the revenue forecast – because it drives the need for manufacturing capacity and components.  Regulatory has an impact on revenue – you cannot sell products that are not approved. Clinical trials have an impact on the marketing forecast – because they determine the validity of the product's efficacy.

Cash in - cash out = cash you get to keep

MedTech companies present a unique set of challenges – even in the start-up world.  Early-stage technology companies can often bootstrap to get through difficult times, but in MedTech there are heavy upfront costs and often a long runway to profitability and shareholder returns. 

By having a flexible mindset, that is not bogged down in last year's budget, people can collaborate more effectively to minimise risk and mitigate the resulting impact on cashflow. Forecasting is by no means easy – the only guarantee will be that the forecast will be wrong! However, it is critical to the process of negotiating the various issues that MedTech companies will face on the road to delivering shareholder value.

About the author

Francis Cooper is CFO of Sky Medical Technology and has more than 15 years' experience in MedTech, pain relief and wound care. His experience in finance also spans companies varying from SMEs to multinationals across Europe and the US.  He is a Chartered Accountant and holds an MBA from Manchester University.

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