Navigating the financial hurdles in a medtech start-up

Francis Cooper, CFO of Sky Medical Technology outlines some processes and policies that can provide a longer, more accurate and more sustainable overview of a company’s cash position and the finance department’s key role in delivering stakeholder value in medtech.

A whole new world

The last two years have thrown up unforeseen challenges for many innovative organisations across the medical technology (medtech) industry; from slowed or stopped clinical trials and difficulty sourcing electrical components to Brexit-related delays impacting product shipments. This was at a time when the world needs healthcare innovation more than ever.  

Every business, particularly pre-revenue or early revenue start-ups, must understand the concept of cash burn rate and its impact on a company’s cash runway – the length of time left before the cash has run out. This is never truer than in medtech.  

The journey from idea to innovation in medtech can be a long and complicated one and even the best ideas and most pioneering companies fail if cash management is not at the heart of everything the business does.  

Climbing the medtech mountain 

Supplying global healthcare systems with an innovative and proven 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 in understanding the product and its potential for patients. Building strong relationships with clinicians is critical to taking the first step towards getting a medtech product adopted by healthcare systems.

Medtech companies have the added challenge of needing to navigate use in small groups of patients, efficacy trials, randomised control trials (RCTs) and regulatory and clearance issues; all of which pose significant risks. For medtech devices that incorporate electronics and batteries, devices will also need to comply with regulation around electrical safety, environmental legislation, and biocompatibility.

Typically, 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. For many companies outside of healthcare, the gap between concept and product can be measured in months, but in medtech it can be years or even decades. 

That elongated development period requires careful cash and resource management to ensure the business remains viable at every stage of the process. Running low on cashflow is bad news for a business: not just because it threatens the viability of the operation and the livelihoods of those within, but when cash is tight, flexibility is lost. The business cannot make the strategic investments it needs to thrive.

Navigating the unforeseeable 

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. During the pandemic for example, most outpatient facilities were closed for months which severely impacted the speed of RCTs. If companies need to hit certain RCT milestones to trigger the release of funding, it is important to know of delays in advance so the terms can be renegotiated, or alternative funding can be sought.

It makes sense to also 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. The more investors understand about the real picture of the business, the more likely they are to be supportive when inevitable delays materialise.

The finance function has a critical role to play here by building a cross-business commitment to transparency in risk management. Medtech businesses must live and breathe an agile mindset and 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 the full impact on the cash runway is analysed and actioned quickly. 

Flexibility in forecasting

Here at Sky Medical Technology, we have found traditional annualised budgeting of limited value 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. 

Instead, we have implemented a rolling 18-24 month forecasting process that has enabled us to remain in control of cash despite the huge challenges posed by once-in-a-generation events like the pandemic or Brexit. As uncertainties have increased, we took the decision to move from quarterly updates to monthly. These are submitted by the department heads and collated and consolidated within the finance department.  

The purpose of these monthly reviews 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 to understand any changes and to ask questions that can highlight if anything has been missed out or mistimed.  

Coordinating cash flows 

Ultimately, 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 as 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 and shape its go-to market strategy. 

In medtech, continuity of supply is critical to patient wellbeing. While no business wants to tie cash up in an oversupply of components, equally no business wants to run out of stock. The recent shortage in electronic components is a prime example of where accurate forecasting can deliver consistent supply in uncertain times. This close, constant collaboration across the business empowers us to be more dynamic and respond quicker to potential challenges or delays.

Collaboration brings certainty

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 important in the process of negotiating the various issues that medtech companies will face on the road to delivering value for shareholders, clinicians, and patients.

Medtech companies present a unique set of challenges. Early-stage technology companies can often bootstrap to get through difficult times, but in medtech there are substantial upfront costs and often a long runway to profitability and shareholder returns. While the road may be long and challenging at times, the impact – both on return on investment and patients’ lives – can be much greater than other industries. These rewards make it a road worth taking.