George Wallace and Andy Cragg collaborated for years successfully. But finding the right model for their collaboration was something else.

By David Cassak

George Wallace and Andy Cragg found early on that their collaboration on ideas for new technologies and companies could be fruitful, with Cragg supplying the technology ideas and the clinical bona fides and Wallace the business expertise.

The two met when Cragg, an interventional radiologist by training, helped vet the laser technology of a Midwest cardiovascular start-up Wallace had joined.

That company failed, but Wallace and Cragg would go on to work together on several successful companies, including neurovascular company Micro Therapeutics and spine innovator TranS1.

Those early collaborations were informal efforts, with each holding down full-time jobs elsewhere. When Wallace and Cragg decided to launch their own incubator, Intersect Partners, they found themselves having to re-invent the model.

If the current financing woes of many medical device start-ups are unsettling, it may very well be because, notwithstanding the once-in-a-century economic crisis that triggered it, the current depressing fund-raising climate isn’t so much unprecedented, but rather just the opposite. Compared with today’s chilly reception from private investors, many if not most medical device start-ups found fund-raising just as difficult a decade ago. The story’s well known: following an aggressive period of venture backing in the late 1980s and early 1990s, a large group of medical device start-ups went public in the mid 1990s, hoping to offer a robust exit for their investors who somehow missed the point that the companies weren’t ready to be public companies—with the implicit promise of predictable revenues and earnings that public status entails.

When the newly public device companies failed to deliver on the expectations of public investors, those investors fled the sector en masse. In turn, by the late 1990s, venture investors, too, were looking elsewhere for opportunities—in biotech, for example, for those enamored of life sciences, and in dot-com for those who believed, exuberantly, in the promise of the Internet—and device investing seemed to have fallen to nothing. The incredible recovery recently of medical devices as a venture opportunity—by 2004 to 2008, not only were venture capitalists pouring record amounts of money into the sector, but public investors had returned to the fold as well—only underscored how bleak the prospects were just a few years earlier.

There are lots of reasons and lots of people who deserve credit for helping turn around the fortunes of the device start-up world—highest on the list would be the large medical device giants who helped ensure investors would see a reasonable return by providing exits in the form of aggressive M&A strategies. But no small credit—if not for rescuing start-ups devices, then at least for providing life support while the larger economic picture improved—goes to medical device incubators. Backed by seasoned device industry executives who believed strongly in the value, both clinical and commercial, of new devices and who felt that they understood how to quickly and efficiently develop and bring to market important new clinical tools, incubators, like The Innovation Factory, The Foundry, and Synecor LLC, to name just three, represented one of the few bright spots in the device start-up world a decade or so ago.

More recently, as the fortunes of device start-ups turned up and money-raising seemed easier, the urgency of the incubator role came into question. More importantly, incubators themselves found their models more and more difficult to sustain, if only from the perspective of their own financial health. Indeed, for a while it seemed, the very companies that had done so much to prop up the device start-up world needed propping up themselves. Some incubators went out of business, having run their course; others faced the need to adapt, finding new models to deal with their own financing issues. One such incubator is Southern California-based Intersect Partners LLC, founded by two men who’ve turned a fruitful informal collaboration, with several successful start-ups to their credit, into a new model for device incubators, built on multiple projects, capital efficiency, and quick exits.

A Laser That Failed

Intersect Partners was the brainchild of two long-time colleagues who came to medical device start-ups from diametrically opposite perspectives: Andy Cragg, MD, who trained as an interventionalist at the University of Minnesota, and George Wallace, who began his career with American Hospital Supply Corp. in the early 1980s, just out of college.

While most young graduates recruited by AHSC went into the hospital supply (distribution) division, Wallace started out with the Edwards cardiovascular business (now Edwards Lifesciences Corp.), selling heart valves, Swan-Ganz catheters, and Fogarty embolectomy balloons and clips, among other products, in the Kansas City, MO area. "I didn’t even know the heart had four chambers when I started," he recalls.

Wallace was quickly promoted and after serving as a district sales manager, was invited back to Edwards’ Southern California headquarters to run the Swan-Ganz product line. Within a couple of years, he was asked to become director of marketing for all of Edwards, but refused, choosing instead, he says, to join a start-up in what was then an emerging device segment, interventional cardiology.

Interventional cardiology was proving to be an interesting technology space in cardiovascular devices, but Wallace had also grown concerned about the future of Edwards. The offer to head marketing came soon after Baxter’s 1985 takeover of American Hospital Supply. At AHSC, Edwards had a unique position. One of the few, if not the only pure physician-preference product line, the division represented 3% of AHSC’s total sales, but accounted for 13% of its profits. Even so—or because of that—Edwards wasn’t well understood within the distribution oriented, Chicago-based AHSC. "It was a profitable business on the West Coast with high-margin products that did not fit the AHSC distribution approach," says Wallace. "They kept trying to bring us into their distribution channel, and this did not make sense for a high-margin physician-preference product and this put us at odds with AHSC corporate management."

With Baxter, which was, culturally speaking, about as different from American Hospital Supply as one could imagine, the focus of the merged company would, Wallace believed, push Edwards even further from its core strategy, and he came to believe that the merger would not be good for Edwards. When Baxter executives came out for their first meeting, they spent a lot of time reinforcing the financially driven mandate of the company. "They talked about costs per million and I leaned over to the person next to me and said, ‘Do we make a million of anything?’ And he said, ‘Not even half,’" says Wallace. Convinced that significant budget cuts would follow, particularly within Edwards’ R&D department, Wallace headed off to his first start-up in coronary angioplasty, an Indianapolis-based company called [Vaser Inc.], founded by a former executive at Eli Lilly.

Brought on because of the extensive relationships with interventional cardiologists and radiologists that he had formed at Edwards, Wallace served Vaser first as VP of marketing and eventually as VP of sales and marketing. Developing a laser to remove coronary plaque, Vaser would eventually find that its technology didn’t work, but it provided Wallace with some early contacts that later proved critical to Intersect, most notably, an introduction to Andy Cragg, an interventional radiologist who had trained at the University of Minnesota and who was director of interventional radiology at the University of Iowa where Vaser had performed its early research. Cragg also had at the time a history of developing interventional products with many of the early companies in interventional cardiology.

An Interventionalist at Heart

Wallace says he struck an immediate rapport with Cragg and recognized in him some important skills. "He’s unique as a physician, a fabulous practitioner, and he knows more about engineering than most physicians," he says. "But he’s also probably the best clinical problem solver you’ll ever meet. We hit it off immediately."

A native of Minnesota, Cragg trained at the University of Minnesota with one of interventional cardiology’s founders, Kurt Amplatz, MD. Cragg says that after meeting Amplatz he never thought of doing anything other than being an interventional radiologist. "Interventional was the most innovative area of medicine, full of promise for medical device solutions," he explains.

This was in the early 1980s, well before interventional cardiology was well established--Cragg notes that when he started, "we were still trying to figure out how angioplasty worked." Cragg spent a lot of his time in research—he worked with Julio Palmaz, MD, and other angioplasty pioneers—and, just out of medical school, developed one of the first nitinol stents, which led to his early ground-breaking work in the treatment of abdominal aortic aneurysms (AAA) with catheter-based techniques. (Palmaz would, with Richard Schatz, go on to develop the first coronary stent.) Cragg spent several years in the early 1980s developing one of the first AAA stent grafts that would eventually be acquired by Boston Scientific Corp.

In 1987, Cragg left Minnesota where his early work had been purely academic and clinical for the University of Iowa to establish its interventional program. At Iowa he developed the clinical practice from scratch and found fertile ground for the research and development of new interventional products. In Minnesota he had learned to be "a meatball engineer," as he puts it, mechanically oriented, but without much sense that he ought to be developing products and procedures, let alone companies to back his ideas. The early stent efforts were "pretty much research projects initially," he recalls. "As you’d expect with any medical school student, I wasn’t very savvy in the area of IP and things like that." By the time he got to Iowa, Cragg had already begun to think about how he could convert his ideas into commercial success; when he met George Wallace around the Vaser project, Cragg says, he quickly recognized the ability to take his ideas further.

In fact, it was Cragg who ultimately did the research that convinced Vaser executives that their technology wasn’t going to work. "There was a huge craze around lasers," he recalls. "It didn’t make any sense to me that they would work as indicated, and our work suggested that they didn’t." Cragg’s conclusions were an important confirmation, though at the time, engineers at Vaser had already begun to point out that the technology was flawed. When Wallace approached Vaser’s CEO in 1989 to suggest that the laser was probably not the best approach and that the company should go in a different direction, he was, he says, "invited to find another opportunity," adding, "This was the first time that I had not been successful in business and to get fired was a new experience."

By 1991, Cragg was back in Minneapolis—this time in a private interventional practice rather than an academic setting—and while doing some development work, he says, "it was harder in the private setting," Cragg continued to generate new ideas about promising technologies. George Wallace, for his part, began looking for his next post after Vaser. And though Vaser didn’t work out, Wallace says the experience was helpful. "In addition to marketing and sales, I managed clinical and regulatory affairs, and I got to know how the FDA works very well," he says. Indeed, though a competitive athrectomy device from DVI was a 510(k), Vaser would eventually file two PMAs, one for peripheral applications, one for coronary. "I became very knowledgeable about FDA and the PMA process at that time," Wallace recalls. "And it really helped me to understand the [product] development process and gave me a much better understanding than I would have gotten as a classic marketing person." Not that Wallace’s marketing background wasn’t important. More than most clinical/regulatory people, he had spent most of his career working closely with physicians. While pure regulatory executives tend, not unreasonably, to focus on the end of the process—the approval or clearance itself—Wallace’s background led him to start at the beginning. "I started with the customer and worked backwards, which is how you’re going to do it if you’re trying to solve a problem," he says. Even today, he goes on, "That’s how we start companies. We begin with the problem and then back into the best solution."

Checks and Balances

Indeed, Wallace argues that sales is made up of two different components—a development component and an execution component--and, for a sales-oriented executive, he has always placed great value on the development part of the equation. Close contact with physicians was how Wallace knew Vaser’s laser wasn’t going to work and helps explain the critical role that Andy Cragg plays at Intersect. "If you talked to physicians, it was clear that the amount of time it was going to take [to deploy the Vaser laser] would make the procedure too difficult and way too expensive," Wallace says. It’s a lesson he and Cragg have brought to Intersect. Unlike most incubators, Wallace says, "we don’t start with technology; we go into the market, identify a problem, and come back and try to solve it." How did two cardiovascular veterans launch spine innovator TranS1 Inc.? "We started by looking at one of the biggest problems in spine and came up with what is basically an interventional solution," he goes on.

Rather than just following physicians’ lead, Intersect tries to strike a balance between the commercial opportunity inherent in a device and the clinical value. Andy Cragg says that when he comes up with an idea for a new technology, he and Wallace debate the merits, each from a different perspective. "It’s a system of checks and balances," he goes on. "If I get excited about an idea, George often has no compunction about saying, ‘That’s not going to fly.’ And if he comes to me with an idea, I have no problem saying, ‘That’s not going to work clinically. No doctor’s going to buy that.’"

Indeed, close collaboration among people from different perspectives is an important part of Intersect’s model, and for George Wallace, that, too, was a lesson learned at Vaser. "Vaser was the first project I was involved in that wasn’t a success," he says. "I was working 18 hours a day, six days a week, sometimes seven, and it all went up in flames. It almost killed me and I learned something valuable: that no one person makes the company successful, that it’s all about the team you bring together."

Wallace’s next experience would only reinforce that lesson. In 1989, out of work, Wallace hooked up with some former Edwards colleagues, including Said Hilal, Steve Gex, and Robert Cooper, and joined a small cardiovascular start-up called Applied Vascular Devices, selling a line of clips, inserts, clamps, and balloons that competed directly with Edwards, this time as VP of sales. When Wallace protested that, with no products on the market and industry veterans Steve Gex and Ed Chang handling marketing, the company was overstaffed and didn’t need a full time VP of sales, Hilal assured him that, if anything, within a short time, Applied Vascular would feel itself undermanned.

Wallace went on a hiring spree, bringing on two reps a month—within 14 months, he had a 24-person sales team that quickly began to take market share from Edwards. Within two years, Applied Vascular had taken significant market share and was nearing profitability. The lesson was that "it’s all about the team," Wallace recalls. "If the products are right, success builds on itself. I’m not afraid to over-man a project, even at an early stage, because if it’s a success, you’re going to need the people capacity for growth."

Applied Vascular had started as an accessories business in interventional cardiology, and this kept Wallace in touch with Andy Cragg, who helped out as an advisor. But as AV’s strategy shifted to surgical products, competing head-to-head with Edwards, the two drifted apart and would lose contact, with Cragg back in Minneapolis and Wallace on the West Coast. A couple of years later when, building on the success of its cardiovascular business, Applied Vascular spun off a sister company, Applied Urology Inc., Wallace ran it as general manager.

When, a couple of years later, Applied Vascular’s founders got into a disagreement about whether to merge the companies, Gex and Cooper left and started their own companies, taking key talent with them. (Today, Applied Vascular operates as Applied Medical Inc. and has three businesses, in cardiovascular, urology, and general surgery.) Wallace followed soon after. "My long-term goal had always been to start a medical device company, so now was the time. The first person I called was Andy Cragg to start the process."

Something Better

That company, launched in 1993, was stroke company Micro Therapeutics Inc., (MTI), and though the actual launch of Intersect was still some time away, it represented the first collaboration of Wallace and Cragg. Created initially to treat blood clots in the periphery, MTI would eventually shift gears and develop Onyx, a liquid embolic agent to fill aneurysms and AVMs (arteriovenous malformations) in the brain. (The liquid is injected into the aneurysm through a catheter and immediately begins to form a solid, essentially filling the aneurysm.) Says Andy Cragg, "We started with the concept that there had to be something better than coils."

Indeed, that seems to be a common theme at Intersect: a lot of the company and technology development starts with a huge market and an unmet need or undeveloped technology space and the notion that there has to be a better way to do things. Cragg says that when George Wallace called him up to talk about MTI, he (Wallace) told him that he was thinking of starting a company. "I asked him what the company was about, and he said, ‘I don’t know; you’re going to tell me,’" Cragg recalls. From then on, MTI established the model that would become Intersect. As Cragg puts it, "I would supply some ideas and George would run the company." In fact, at MTI and the early companies coming out of Intersect, Cragg’s role was to serve as a consultant, supplying ideas for product development and new technologies, but to have little to do with the day-to-day operations of the company.

MTI was started around a group of products which were 510(k)s and therefore quick to the market, products that were supposed to provide the capital to fund MTI’s neurovascular product development and the longer PMA clinical trials they would require. "We don’t do this very much anymore, but it was a very popular model for a while—developing other products that could more quickly be brought to market while we were waiting for our home run to be approved," notes Andy Cragg. "So we developed a line of thrombolysis catheters and spinning devices that would also remove clots."

MTI would in its time face just about all the problems device start-ups run into. For one thing, the company’s initial neurovascular product concept proved not to be viable. MTI "wound up looking at lots of different ways to treat aneurysms," says Cragg, before settling on the liquid embolic, only to find that it would be "very difficult to get the product approved because of the long time lines involved with injecting something like that into the brain." Indeed, Onyx didn’t come to market until 2005, well after MTI had gone public, almost all of the delay due to the regulatory process, notes Cragg.

Second, Wallace and Cragg soon realized that the peripheral blood clot therapy market was too small and fragmented to build a viable business, and MTI soon changed its focus to the neurovascular space. Much of the capital that funded MTI had been raised in conjunction with a number of corporate partnerships qua distribution deals. But, notes Wallace, "This proved to be a great way to raise money, but a very poor distribution model for a company with new and unique products that required significant execution."

Still, MTI was a success. The company quickly raised its first venture money—it took about six weeks from a finished business plan to its Series A—and would eventually net around $15 million in venture capital before going public in 2001. As part of its fund-raising, MTI also did a number of strategic partnerships, with Guidant Corp. (now part of Boston Scientific) [See Deal], Abbott Laboratories Inc., [See Deal] and Japanese distributor Century Medical Inc. [See Deal] All three brought limited distribution rights with them: Guidant in Europe, Century Medical in Japan, and Abbott for the company’s drug delivery catheters in the UK—though, as noted, two of the distribution deals foundered: the Abbott arrangement became moot when Abbott pulled its product from the market six months after the deal was signed, and even the Guidant deal was less than successful because Guidant wasn’t really ready at the time to sell neurovascular products in Europe.

In addition, MTI would eventually go public in a difficult market for device IPOs—a decade ago, public investors were still cool to small-cap device companies, with only a handful of such IPOs being pulled off that year, and the rebound in the IPO market still several years away. MTI went out at $6 and quickly shot up, reaching a high of $13.50. "If we had been able to sell our stock at that point, it would have been a great deal for everyone," George Wallace notes. But MTI insiders couldn’t, and the stock began a roller coaster ride, sinking to around $3 before rebounding to around $9.

Wallace says he liked the experience of taking a company public but pretty quickly realized that he "enjoyed developing new products more and didn’t really want to run a public company." He hired John Rush, who would eventually become CEO and began to talk with private equity firm Warburg Pincus about a deal that would see the investment firm pay $58 million for 51% of MTI, in the process making it the first of the companies to be rolled up into Warburg’s endovascular play, ev3 Inc. "It was a complex deal," says Wallace, who stayed on MTI’s board after he stepped down as CEO. "We were doing a change of control of a public company, putting it inside a private company. The Street gave us a lot of grief because we were all locked up. But we felt we needed to have the capital to manage the clinical and regulatory programs and upgrade our distribution." ev3 went public [See Deal] and eventually acquired MTI. Today, MTI forms the core of ev3’s neurovascular business, and its Onyx liquid embolic product remains a key part of its neurovascular product offering. (See "Ev3: The Virtues of Focus, IN VIVO, February 2007 Also see "ev3: The Virtues of Focus" - In Vivo, 1 February, 2007..)

Some Early Projects

In many respects, the ev3 deal illustrates another part of the Intersect formula: the value of strong industry ties formed over years. Both Paul Buckman and Jim Corbett, two of ev3’s founders, are people Wallace counts as friends. "Paul and Jim were instrumental in the MTI/ev3 transaction," he says. Corbett, acting chairman of MTI when it was part of ev3 and later CEO of ev3, was one of the first sales reps George Wallace hired when he was at Edwards; Buckman was also an Edwards rep at the time. In addition, Rick Randall, a former executive at neurovascular pioneer Target Therapeutics who would soon come over to run Intersect company TranS1, was also a former Edwards employee and was later brought on to the MTI board.

Though Cragg and Wallace were co-founders of MTI, MTI was technically not an Intersect company. Still, the genesis of Intersect is found in MTI. With MTI launched and progressing well, Cragg and Wallace began to talk about other projects. "We didn’t really know that you weren’t supposed to work on other things," Wallace recalls. "And during that time, Andy was coming up with multiple vascular product ideas, most of which didn’t fit our [i.e., MTI’s] existing strategy." In fact, MTI spun out three projects, not all of them based on Cragg’s ideas, one of which, a novel design for a AAA graft, was prototyped quickly and just as quickly (less than a year) sold off for a couple of million dollars.

The other two projects became actual companies, Genyx Medical Inc., developers of a unique urethral bulking agent (Similar to MTI’s Onyx technology) for urinary incontinence, later sold to CR Bard Inc., [See Deal] and Enteric Medical Technologies Inc., which developed a bulking agent to treat GERD and was later sold to Boston Scientific. [See Deal] The spin-offs of the three projects benefited MTI—the company took a percentage of the equity of each of the projects and wound up more than $50 million richer by the time the deals were done. But they also caused some friction. The company’s board frankly didn’t like that Wallace was managing multiple opportunities and wasn’t focused on a single opportunity (MTI). Wallace says he did present all of the projects to MTI’s board—though he did so "after the formation transactions were ready to complete," and he concedes he might have done a better job of communicating prior to presenting a proposal. "I did, however, learn that I could manage multiple projects simultaneously and get them all completed," he says.

Around 1997, with multiple projects brewing inside MTI and Cragg continuing to provide ideas that did not fit within MTI, Wallace suggested to Cragg that he develop those ideas outside MTI. "Andy was concerned that by going outside MTI with vascular projects, he would get on the wrong side of the MTI board and investors," says Wallace. "We put together a summary of all the ideas for the board and gave them first claim." The MTI board claimed a couple of the ideas and went to work on developing them; it released the others to Cragg. "This was the formal start of Intersect Partners," notes Wallace as he and Cragg each put in $50,000 and started looking for consultants to help them develop Cragg’s concepts.

The most important lesson, and the one that would lead to Intersect’s launch, was that by combining Cragg’s clinical insights and technology ideas with Wallace’s business expertise, "we could do multiple things at one time and would do them well—we wouldn’t get distracted," says Wallace.

Pointing to Onyx’s long approval process, Andy Cragg argues that MTI demonstrates why "the incubator model is a good one." Running a small company, "you basically have to learn all of the ropes as you go along," he says. At MTI, Cragg says he and Wallace "clearly underestimated the regulatory issues" around a new polymer like Onyx. Start-up CEOs "always paint a rosier picture" of the company’s anticipated development, Cragg goes on. And then when problems arise, they’re not ready. "One of the things we leverage in an incubator is experience," he says. "Hopefully we don’t make as many mistakes, which cost time and money." A space like neurovascular devices is especially prone to mistakes, Cragg goes on, "because there are huge hurdles both technologically and clinically."

That leverage is important because it helps keep costs down. Throughout its history, the key to Intersect Partners’ success has been its ability to get a lot done on relatively little capital. At Intersect’s launch, Cragg had teed up about 10 different projects and the incubator’s first challenge was to decide which to pursue first. It chose a vascular closure technology that would eventually become Sub-Q Inc. and soon hired a team to work on developing the technology. Relying mostly on angel investors, Sub-Q was launched with an initial investment of $250,000; spine innovator TranS1 would launch with $375,000 and complete all the preclinical work before raising additional capital prior to clinicals, notes George Wallace.

Key to keeping costs down is the ability to leverage time and expertise. While Andy Cragg was developing several new ideas all at the same time, George Wallace was turning the most promising ideas into companies—leveraging his role as CEO. Indeed, by 1998, Wallace was CEO of both MTI and Sub-Q—and, in fact, would soon be CEO of a third company at the same time, since TranS1 was launched soon after Sub-Q. "I was CEO of three companies," notes Wallace. "It really wasn’t a distraction, and MTI was doing well and knew about the outside activities. It was very much like what we were doing at MTI, working on different projects at once.

A Quick Flip?

Wallace notes that "the whole idea of the incubator is to do multiple things at once and do them not just effectively, but efficiently as well." As Intersect grew in its first couple of years, Cragg and Wallace, in particular, found MTI, where Wallace was still working, increasingly frustrating, both because the company required more and more focus—hence the board’s concern about Wallace being distracted by working on several projects at once—and because as start-ups evolve, they become less efficient—or at least, can’t operate on the shoestring they did in their early days.

Early on, it looked as if Sub-Q would be a quick flip. After launching the company with some angel money, Intersect raised around $6 million in venture money from Pacific Ventures and Pequot Capital, and by 2003 it had a deal teed up with Boston Scientific that could have been worth between $100 and $150 million. "Had it worked, it would have been one of the highest returns on a device deal ever," Wallace says with a sigh.

But the deal soon ran into troubles. The negotiations took place in 2002 and 2003, [See Deal] a time when Boston Scientific was doing a large number of deals, trying to stock its product pipeline and give its reps something to talk to interventional cardiologists about while they waited for the Taxus drug-eluting stent to be approved. But although Boston Scientific’s business development team and senior executives liked the deal, the executives within the operating company "were apprehensive," says Wallace. Femoral artery closure was proving to be a tougher sell to interventionalists and more competitive than originally thought, with Abbott/Perclose Inc. and St. Jude/AngioSeal dominating the market. Unconvinced that the technology improved the procedure, most interventionalists simply did what they always had done—in many cases, not using closure devices at all. For a small company, in particular, it was difficult. "We were competing well, but we had to continually improve the product to gain ground on the competition and we didn’t have a 150-person sales force out there," says Wallace.

More to the point, while Sub-Q’s second-generation product was a significant improvement, its first-generation product was, in Wallace’s words, "good, but not as good as it should have been." Moreover, the product required "significant selling time, which the BSC sales organization was stingy with," says Wallace. If BSC executives were looking for an excuse not to do the deal, that was it. Sub-Q soon began protracted negotiations with other device companies, but these, too, led nowhere. In the end, Sub-Q would eventually complete a sale to Boston Scientific in 2004, but, says Wallace, it wasn’t a great deal. "The transaction repaid all of the company debt, which was substantial, and returned some of the capital to investors." It "wasn’t a fire sale," he goes on, "but it wasn’t a success either."

Andy Cragg notes that one virtue of the incubator model is that you learn things in running one company that you can apply to other companies, thus, hopefully, avoiding major mistakes. And, indeed, it’s tempting to say that with each company launched all incubators learn things that make the next company stronger, the path to commercialization quicker, the trajectory higher. In truth, medical device development is a more serendipitous process, with unexpected obstacles and unforeseen successes. It’s not always clear why one concept proves a huge success while another fails.

That said, TranS1, Intersect’s second company, was in many ways an advance over Sub-Q. For one thing, says Wallace, the company’s managers and advisors were stronger. "We had more investors, a very strong board, and we brought in experienced management earlier at TranS1." In part, TranS1’s strong board was a function of the fact that the investors who came into TranS1 were, notwithstanding the out-of-the-box nature of TranS1’s technology, a particularly strong group. TranS1 was able to attract Mitch Dann of Sapient Capital, who invested in the initial seed financings with individuals. Dann, says Wallace, provided both "capital and expertise in sharpening the early clinical focus of the company." Dann and Jon Osgood of Cutlass Capital, whom Wallace had met while Osgood was head of research at Alex. Brown, came in on the company’s two-tranche $1.7 million Series A—with Sapient putting in just under $1 million and Cutlass the rest soon after clinical trials in Brazil suggested the TranS1 approach was safe. A Series B financing that raised $12 million was completed in April of 2003, [See Deal] two weeks after TranS1 did its first human fusion cases, and included venture firms Advanced Technology Ventures and Delphi Partners. A third round of capital was raised in 2005, led by Thomas Weissel Partners and some of TranS1’s existing investors, and netted $25 million. It was the last round before the company went public in 2007. [See Deal]

TranS1’s fund-raising was certainly helped by the fact that the company offered a novel—and thus highly differentiated—technology in a space that was very hot at the time, that is, spine, and the management team was led by Rick Randall, an experienced CEO. The technology also shows one of Intersect’s strengths—its willingness to look creatively at clinical solutions. At the hospital in Minneapolis where he practiced, Cragg says he would often lunch with the spine surgeons. (Among the surgeons was Steve Kusslich, MD, a founding surgeon of spinal cage company Spine-Tech, now part of Zimmer Holdings Inc.) One day, back in his lab, Cragg peered over at a skeleton and came to the conclusion that the surgical approach to spine therapy could be avoided through a different access approach than those used by his spine colleagues. "At that moment, I challenged myself to think about how you could do spine surgery percutaneously and in a more ergonomic fashion," says Cragg, who soon came up with the trans-sacral approach that is TranS1’s signature differentiation. "It didn’t take very long to figure out the access technology that makes TranS1 possible." (For more on TranS1, see "TranS1: Transcending the Surgeon/Rep Relationship, IN VIVO, November 2005 Also see "TranS1:Transcending the Surgeon/Rep/Relationship" - In Vivo, 1 November, 2005..)

As noted, TranS1 was in many respects an advance over Intersect’s earlier efforts, though it may not necessarily have been replicable. Notes Cragg, "All the stars aligned with TranS1. It’s rare to find something where the idea actually works and the intellectual property landscape is virginal. And we had a great management team. We never actually had anything really go seriously wrong—the animal studies, the human studies. It all just worked."

A New Model

Adoption has subsequently proven to be an issue for TranS1, especially in a space like spine, which is both crowded and hosts players with strong entrenched market positions and where surgeon attitudes on new technology tend to the conservative. "Adoption’s been the hardest part," concedes Cragg. But from a company development perspective, it was a success on a number of different levels.

TranS1’s management team was led by Rick Randall, and with Randall’s guidance, the company’s financing went about as well as could have been expected. For the Series B financing, after presenting the company to investors, Randall set a deadline of a week for interested investors to submit term sheets, and he wound up getting 12 term sheets. But the ease with which TranS1 raised money, helped both by the company’s novel approach and the particularly frothy time for medical device investments and spine deals in particular, underscores what has historically been a problem for incubators: money, or more precisely, surviving until the exits come.

Designed to help projects with novel technology get to proof-of-concept and early prototypes quickly and efficiently, most incubators find that it is the incubators themselves that struggle financially. Although the initial investments are, by definition, small, all early development and clinical work is done on the incubator’s nickel, with venture investors coming in only after the concept is proven and risk is mitigated. But the entry of venture investors means the incubators are quickly diluted. Worse, they won’t see any return for a while—not until the company exits. And all of this is made more difficult because incubators, by their very nature, are often working on—and therefore supporting—several projects at one time, including the earliest, riskier ones, many of which fail, thus increasing the early outlay without necessarily pushing exits forward.

Wallace notes that Intersect didn’t even see itself as an incubator until 2003. "Until then, we just saw it as the two of us working on projects," he says. But around that time, Intersect adopted a new model that, Wallace goes on, addresses the financial crunch most incubators find themselves in, while providing the return profile that venture investors are looking for—and it was all as a result of the failed Sub-Q deal.

Up to and including the Sub-Q project, Cragg and Wallace had been collaborating on a somewhat informal basis—with, as noted, Cragg spinning out new ideas and Wallace managing three different companies—and they had done well, with a handful of exits to their credit, while still holding down full-time jobs. When Sub-Q looked like it was going to be a huge success, both decided that they would turn their attention to Intersect and the incubator full-time. But when the initial deal with BSC didn’t materialize, everything changed. For one thing, says Wallace, "we suddenly realized we had to make a commitment [to Sub-Q] for a longer period of time in order to get the next product to the market," he says. More importantly, much as their earlier ventures had funded the early projects that came out of Intersect, Wallace and Cragg simply believed that the early exit for Sub-Q would fund their collaborations going forward; when the deal didn’t come off, the two had to re-think their assumptions about how they would finance their future companies.

Wallace and Cragg hit on a new plan: inviting experienced VCs to join them in investing in Intersect, providing a pool of capital that would be used to fund the projects going forward. After all, Wallace had rarely had trouble raising money in the past and had received backing from a number of top VC firms for the earlier projects he had been involved with. Who wouldn’t want to get in even earlier and back the guys who had launched MTI, Enteric Medical, Genyx Medical, and TranS1?, he reasoned. Wallace identified eight or 10 top VCs and put together a presentation. "We thought they’d all be interested," he says.

They were and they weren’t. All eight listened and even expressed enthusiasm. And all of them passed on the deal. "We were floored," Wallace recalls. "We couldn’t believe it." All of the VCs said the same thing: they liked the ideas they saw, but they didn’t want to invest in an incubator. Wallace says he knew executives from other incubators—from his early days in cardiovascular, he had gotten to know folks like Bill Starling who’s now at Synecor and Hank Plain and Allan Will of The Foundry—and came to the realization, as he puts it, that "venture capitalists don’t want to invest in a portfolio. They want to invest in [individual] deals."

The fact that the VCs felt this way not just about Intersect, but about all incubators, was little solace. But one VC, Boston-based SVLS (formerly Schroder Ventures), offered Wallace a twist on his idea: it didn’t want to invest in the incubator, but would he be interested in joining the firm part-time, helping with due diligence and sourcing deals? SV helped Wallace develop an approach that would allow him to work with the VC and continue to start companies more efficiently at Intersect Partners.

Under the terms of his arrangement with SVLS, Wallace spends half his time at the venture firm as a member of the device team and half at Intersect Partners. Though the deal with Boston Scientific for Sub-Q ultimately proved disappointing from Intersect’s perspective, it did bring one benefit: an introduction to David Milne, who was then in business development at BSC and would join SVLS as the head of its medical device investing effort soon after Wallace signed up with the venture firm. Milne together with Jim Garvey and the rest of the SV team would provide Intersect Partners with significant input on how to structure an efficient and effective incubator. (Indeed, the SV team has had a long history of working with incubators and was an early backer of Georgia-based The Innovation Factory. (See "The Innovation Factory: Re-Tooling Device Start-Ups," IN VIVO, January 2000 Also see "The Innovation Factory: Re-Tooling Device Start-Ups" - In Vivo, 1 January, 2000..)

There’s also an informal agreement that Intersect will talk to SVLS first when it goes to raise money for any new company being launched. Wallace and Cragg still take all of the initial financial risk of their projects in their earliest stages—much as any incubator would—but the arrangement with SVLS gives Intersect two things, says Wallace: "significant opportunity input from one of the leading VC groups and a very quiet and efficient financing process." Because of the close relationship with SVLS, "we don’t have to spend a lot of time shopping our deals around," he says, noting that Intersect’s newest ventures have typically taken about four weeks from the start of discussions with SVLS to the day the money’s in the bank. "And if SVLS isn’t interested for some reason, there are a number of other VCs we can talk to in order to raise the money," Wallace says.

Leveraging Time

Today, Intersect works on multiple opportunities at once to get to proof-of-concept, then it presents the best opportunity to SV to raise capital, with the understanding that the company will then contract with Intersect to do the development of the product. As the team’s portfolio of companies suggests, Intersect has no specific clinical bias. But says Andy Cragg, "I think the best devices are those that fit your core competency, and mine is solving problems that require putting big devices through small holes."

Cragg notes that during his early days as a medical student, he used to read surgical text books and ask himself, "How would you do that through a 6 French hole?" Such a take explains not just the technology of MTI and Sub-Q, but TranS1 as well. "It’s an interventional model, taking interventional medicine and seeing how it overlays other [i.e., non-cardiovascular] specialties," Cragg goes on. It also helps explain Intersect’s three current projects.

ReShape Medical Inc., developers of a non-surgical treatment for obesity built around endoscopic space-filler balloon technology, is the second company to launch out of the re-focused Intersect business model. Wallace says the model really began with TranS1 and describes it this way: "You start a company with some very experienced people working on a part-time basis. Once you get to clinical validation, you get a strong management team to take the company across the goal line."

And, in fact, ReShape tested the Intersect model early: Wallace concedes that Intersect actually brought dedicated management into ReShape too early and wound up letting them all go. "It didn’t work so we had to bring the project back into Intersect and get it further along before we brought in new management," he says; a new management team led by CEO Bill Murray was put together in the third quarter of last year.

The transition to management is a critical issue for Intersect. As noted, the premise of the business model at Intersect is "to work on multiple projects at the same time," says Wallace, something that "isn’t possible unless you can turn a project over to experienced management, which in turn allows Intersect to focus on another early-stage project." But Wallace also acknowledges that the flip side of working on several projects at once, "the Achilles’ heel," as he puts it, of Intersect’s model is "focus"—or rather, the risk of lack of focus, having people working on so many things, they don’t pay enough attention to any one. To Intersect, focus doesn’t mean dedicating time and resources to one project at a time, but rather, says Wallace, "keeping multiple projects moving forward together at the early stage and then making certain that each of the projects has a full-time, committed management once clinical validation is completed." "Early on we were using only outside consultants to manage the projects, and it wasn’t working," he says. When Intersect hired Steve Sosnowski, a former Edwards executive who worked with Wallace to manage the technical side of the projects, "everything began to click," Wallace goes on. Sosnowski in turn hired additional experienced project managers as the number of projects at Intersect increased, enabling Intersect "to maintain the focus and push toward clinical validation." Asked if Intersect’s conduction of multiple projects contradicts the notion of focus, Wallace insists it doesn’t. Intersect may be working on several projects at once, he says, "but every one of them is tightly managed and moving along."

Indeed, Andy Cragg argues that working on multiple projects actually enhances rather than distracts from the prospects of any one company. The furthest along of Intersect’s current companies, ReShape is an example of how the incubator model works well, insists Cragg "The early stage of starting companies is a messy process," he notes. "It’s filled with fits and starts. There are dead times when you’re waiting for prototypes to be finished and twists and turns in the intellectual property and regulatory path." Bringing the experience of past company launches through the incubator "helps to alleviate some of the risk," he goes on. But it’s not necessarily a serial process. "Working on multiple entities at once means you can get more done efficiently," Cragg says. "You’re leveraging time as well as expertise and experience."

A Regulatory Challenge

And, in theory at least, working on multiple projects at once also enables Intersect to start and stop projects more quickly and deftly. Cragg notes that Intersect has yet to shut down any of the projects it has gone ahead with. But he’s also cognizant of the fact that many if not most of the ideas he comes up with aren’t going to materialize into anything—sometimes because the technology doesn’t work, but just as often because the market for the device isn’t there. "A lot of physicians, when they have a problem, think it’s a big problem just because it’s their problem," he notes, talking about device development generally. "That blinds them as to whether their solution is a good one and whether it’s a solution that applies to large numbers of patients." For that reason, Cragg says, he tries to keep his own ego out of the actual design process. "If I start down a path and it becomes clear that it’s not going to meet our success criteria—if it’s not something our engineers can make or there won’t be enough people to buy it—we just won’t do it."

As noted, SVLS doesn’t have to back any of the projects Intersect launches, though it does have money in all three of Intersect’s most recent launches. The venture firm led ReShape’s Series A, and subsequent rounds were led by New Leaf Ventures and USVP. And early clinical results have been promising. The ReShape balloon procedure is simple, takes less than 10 minutes and is done with no cutting and no anesthesia, except where needed to place a small endoscope, which won’t be in every case. Once inside the stomach, the ReShape device inserts a space-filler for a period of six months, giving the feeling of satiety while the patient loses weight and re-trains his or her eating habits. "The idea is that if you fill the stomach, you decrease the appetite," notes Cragg.

ReShape is clearly positioned as an alternative to surgery. Cragg says that surgery "certainly has its place," but, he goes on, "it’s necessarily going to be limited because of its invasive nature." All evidence suggests that if you start people losing weight early, the weight comes off more easily and stays off. Starting early also likely means increasing the target patient population. Says Cragg, "The number of patients that could be treated with this approach is simply staggering."

In addition, says Cragg, the temporary nature of ReShape’s approach means that patients can undergo the procedure multiple times and/or revert to surgery at any point if it proves it’s not working, though early clinical studies suggest that’s not the case. ReShape has already done the procedure in more than 100 patients outside the US, with impressive results, says George Wallace. "With our device, patients are losing about as much weight as with [gastric] bypass, or banding," with little or no nausea or vomiting and without surgery. "That’s better than we had expected." ReShape is now getting ready to start its US clinical trial.

In addition to ReShape, Intersect has two other recent launches, both of which are still being managed within Intersect’s Orange County offices. One is MindFrame Inc., an ischemic stroke company, for which Intersect has hired two dedicated employees, though Wallace serves as CEO. The other is Altura Interventional Inc., a AAA repair company.

The three companies serve large markets—stroke, AAA, and obesity. But, interestingly, all are in segments that have given start-ups and investors fits and, generally speaking, have proven to be as disappointing as they have been promising. For Intersect, that’s part of the appeal. Wallace notes that each of those segments still has "significant [technology] needs that could double or triple the size of the existing markets or even, in some cases, create whole new markets if you were able to solve the problems."

That said, one of the challenges Intersect—or any incubator—confronts is that each of the companies faces somewhat distinct challenges looking ahead. For ReShape, the primary challenge is regulatory: the device is a temporary therapy, unlike gastric bypass surgery, or banding, and the FDA has yet to approve a temporary obesity therapy, making the regulatory path less certain.

Given his background, George Wallace isn’t minimizing the marketing challenges to gain adoption, but he notes that as a minimally invasive approach, particularly for patient population for whom surgery is difficult, ReShape’s uptake should be strong. "Right now, only about 2% of morbidly obese patients get surgical therapy," he notes. "We’re offering a non-surgical procedure, using an endoscope, that is an alternative to surgery, which means no pain and no anesthesia." Wallace estimates that some 28 million patients are candidates for quick adoption and predicts that a significant portion of ReShape’s market will be individual pay. But the market won’t really expand until there’s third-party coverage, and thus there’s a related reimbursement challenge: as Wallace frames it, "How do we position a temporary device against surgical alternatives? Can we position this as pre-surgical weight loss?" The company hopes that insurers will recognize that this therapy could bring significant savings in other health care costs, such as reduced incidence of diabetes and other complications such as stroke and heart disease. "There’s a lot of clinical work to be done because we have to demonstrate these savings before we’ll get credit for them," he goes on.

CPR for the Brain

The clinical burden speaks to what is both a challenge and an opportunity for ReShape: although there are many companies approaching obesity through drugs, nutrition, or behavior modification, there are only a few device therapies and, as far as Intersect knows, none with a temporary approach. And that raises another challenge facing ReShape: while obesity is on virtually every large device company’s radar screen, for many it’s still a white space, offering huge potential but no clear strategic link. Thus, the question is, is there a likely strategic buyer for ReShape—a company that will not only take a chance on ReShape’s novel approach, but pay the kind of premium Intersect would like because there’s a fit with an existing business? Says Wallace, "Every company has obesity on their bubble chart, but most haven’t yet figured out how to do it. We’re going to have to help companies build their strategy in obesity." Such a challenge doesn’t really confront MindFrame, Intersect’s stroke play.

Andy Cragg notes that one of the things that makes stroke so difficult to treat is that the brain "is extremely unforgiving, and so any insult tends to be permanent if not caught very quickly." Time, in fact, becomes the critical factor—Cragg likens stroke therapy to a "fire drill"--and MindFrame’s technology is designed to get blood flowing as quickly as possible to the brain after a stroke. "There’s a lot of whirring around and activity [in current stroke therapy]; if we could just re-perfuse the brain, we could take a breath and focus on treating the patient," he says. "We want to reduce the time between the catheter going into the groin and when blood flow is re-established to something as close to zero as you can." Current mechanical devices to extract clots "have some efficacy," says Cragg, who, after all, worked on MTI’s early neurovascular technology, "but it takes too long. In stroke, minutes matter, not hours." The goal of MindFrame is "to get blood flow going and re-start the clock," he says. It’s "CPR for the brain, if you will."

Cragg concedes that MindFrame is still in the proof-of-concept stage. That said, George Wallace argues that MindFrame is more of a marketing challenge than a regulatory or clinical challenge. Most stroke companies target hemorrhagic stroke; MindFrame is going after the ischemic market. "I don’t think the ischemic market is as clear to people," he notes. "It’s been very slow to develop." Thus, while there have been a significant number of start-ups targeting aneurysm therapies, "ischemic stroke has barely gotten started," says Wallace.

And unlike obesity, there are plenty of companies, large and small, in the neurology and neurovascular space, "always looking for more products," to add to their existing sales and distribution channels, notes Wallace. But in some respects, MindFrame is as much a financing as a market-development challenge: the opportunity in ischemic stroke is huge, with something like 85% of the market and much larger than the hemorrhagic stroke market, but until the ischemic stroke therapy market develops more clearly, Intersect wants to be cautious, raising as little money as possible. Wallace notes that the company has been cautious about clot manipulation approaches that other companies have pursued "because that increases the potential for complications" and drives up risk, from both the clinicians’ and investors’ perspective.

The Mindframe approach increases the number of therapeutic options available to the physician, all in one device. In addition, because other companies have focused on clot removal, they’ve also targeted the interventional community. "The neurologist has not been a big supporter of ischemic stroke therapy," Wallace continues. "But they have to be included in the process. MindFrame’s technology takes a different approach than other companies have taken and brings the neurologist into the picture."

Because of these market uncertainties, MindFrame has been cautious about raising money. (To date, it has raised a Series A round, taken entirely by SVLS.) Although Wallace notes that there are lots of neurovascular companies and all of them would like to add products to their offerings, "not all of them can or will do $200 million deals." That means that until the ischemic market becomes clearer, Intersect wants to be able to hedge its bets. If the market develops more slowly, MindFrame’s investors can still generate a reasonable return through a product-focused sale to one of the existing neurovascular competitors. If the market does develop, "we’ll be more than happy to wait this out, put together a sales organization, and build the company."

A Technology Challenge

If ReShape represents a regulatory challenge and MindFrame a market development challenge, Intersect’s third company, Altura, completes the trifecta: it’s more of a technological challenge. No one doubts the size of the AAA market and the regulatory path, "though long and expensive is absolutely clear," says Wallace.

In some respects, Altura is, at once, Intersect’s newest and oldest project. The latest company to be formed by the incubator, AAA grafts takes Andy Cragg back to his earliest research days. "I’ve done implants of endografts my entire career," he says. "It is the area I have the most clinical expertise in."

Cragg notes that if he did drift away from looking into AAA grafts over the last decade or so, so did most of the AAA companies, in a sense. "The major vendors came out with their first-generation devices 10 years ago, and they’re all pretty similar, with similar advantages and disadvantages," he says. Cragg concedes that the devices are good—"For what they are, they work quite well and clinicians are pretty happy with them," he says—but he goes on, "there really hasn’t been much development in AAA. There’s been only minor iterations on the technology within the [AAA] companies themselves."

That means that the devices have certain limitations, such as the inability to treat irregular necks. Cragg says that for as well as current AAA devices work, "many clinicians are still frustrated because they can’t use [them] if the aorta is too big or too tortuous." He notes that "we’ve learned a lot about AAA in the last decade but haven’t leveraged that" into the design of new grafts. Intersect’s goal isn’t so much to improve on existing designs—and therefore to take share from first-generation devices—as to greatly expand the market, an approach similar to its take on the obesity market with ReShape. Thus, notes George Wallace, if Altura can find a way to treat irregular necks, it could "double the size of the [AAA] market."

A second major unmet need: developing a truly interventional approach. Cragg notes that because all of the current AAA devices are so large, "they require a small surgery to get them into the groin. My thought was the market’s ripe for better devices—smaller devices that can be used on more patients." "We want to be the first non-surgical company in triple-A with an interventional approach that works," Wallace adds. Of course, Altura is young and still has to figure out if it can create such a device—it’s taken some seed money, again from SVLS, but is too early in the process to say with confidence that it’s solved the technology challenges.

Getting the Time Line Right

As noted, each of Intersect’s newest companies faces a different kind of challenge getting to the market, and one of the starkest contrasts lies in the different ways various clinical specialties look at new technology. Andy Cragg notes that some specialties, such as interventional cardiologists, are "voracious adopters" of new technology; others, like spine surgeons, are much more conservative. And with each, "you have to think differently about how to position the devices" when you bring them to market. Cragg concedes that in TranS1’s case, "getting surgeons to do a procedure outside of their comfort zone" has arguably been the company’s greatest challenge. Embedded deep and early in the development process, he goes on, "you have to ask, ‘Who actually is going to use this device? Which aspects of the device will appeal to them? Will we be selling to a new specialty?’"

Seeing Intersect’s three companies as three different challenges offers a clean, convenient way of looking at them. But there are overlaps and cross-overs: for example, Intersect officials are now assuming that MindFrame will face a relatively straightforward regulatory path; if it doesn’t and its clinical trials burden increases, with the company forced to do a PMA, MindFrame will suddenly face regulatory challenges every bit as great as its market development hurdles—with a commensurate increase in risk in its financing strategy.

For Altura, behind the technology challenge lies a related market adoption issue. Vascular surgeons tend to be conservative, notes Cragg, and early on "didn’t see the need to make the switch" to a AAA graft because open aneurysm repair worked well. When the first-generation AAAs ran into problems, it was easy to blame the slow market uptake on those problems. But conservative adoption styles certainly played a role. Cragg says that over the past five years or so, he’s seen a change in attitude on the part of vascular surgeons, and that’s part of Altura’s bet. "They now realize that there is a better way to treat patients if they just have the right device," he says.

Perhaps it all comes down to a financing challenge. George Wallace has great hopes for Altura’s AAA device, but he notes that if the technology development proves too difficult, Intersect has the option to shelve the project and move on to something else before a significant amount of capital has been invested. Mindful of the need to generate a return to investors, he notes, "Where most investors lose their shirt is when they invest too much money in an average deal. We address this at the very early stage and before it gets to that, we’ll go do something else."

Indeed, says Wallace, it’s the Intersect model to "develop a company twice as fast on half the capital." Thus, for all the technology development Intersect does, "working on multiple projects with experienced people is the best way to get results while keeping overhead low," says Wallace. Adds Andy Cragg, "There are a lot of people in this industry who know how to make a lot of things and [contracting with them] is a great way to not have infrastructure and not spend a lot of money."

That said, the timing of technology development presents what is arguably Intersect’s—and all incubators’—greatest challenge. Cragg notes that for all technology developers, "there’s always a tension between how much time and money you spend and when you commit to your design," especially since the longer you wait, the better the design is going to be. "You could tinker forever and come up with a perfect device," he goes on. But by the time you’ve done that, the economic viability of the device has been shattered. At some point, and arguably earlier than later, says Intersect, you have to trust the technology and start to build the company. Cragg concedes that in the checks-and-balances, physician-vs.-entrepreneur relationship that lies at the heart of Intersect, he tends to hold out for longer development times, whereas George Wallace pushes to begin raising capital and forming a company. "He trusts my opinion to make the call [as to when a prototype works] and I trust his on the other side of the equation," says Cragg. However that dynamic plays out, the key to Intersect’s success "is getting the [development] timeline right."

Following a period of more informal collaboration, Cragg and Wallace have launched three companies from Intersect in the last four or five years, and they believe they’ll continue at about a company a year for the foreseeable future. "The idea is to have at one time, one company graduating to professional management, one that’s taking full Intersect focus, and one that’s just starting," says Wallace. "Doing three companies at a time is about right for us."

That makes for one new company every 15 months or so, with some wiggle room since company development isn’t always linear or predictable, and Intersect is currently looking for its next company in one of a number of different clinical spaces. Intersect sees its strength as minimally invasive medicine and though that has historically meant cardio- or endovascular medicine, it’s just as clearly willing to tackle opportunities outside that space—for example, ReShape and TranS1. Given his background in interventional radiology, Cragg says, "We work everywhere: in the kidneys, liver, brain. It’s not that unusual for me to come up with something in the spine or stomach." If anything, it’s the less obvious clinical spaces that most attract Cragg: "I tend to look for what might be called the ‘Eureka’ ideas, the big opportunities lying just below the surface," he says. "I’m not that interested in a nuance on a stent."

Intersect, however, isn’t likely to go beyond minimally invasive therapies. Cragg says he’s had some ideas for technology in areas such as diagnostic equipment, but he goes on, "I worry that if you drift out of your core expertise, the learning curve can be long and difficult and in this arena, time is money. There’s enough fruitful ground and problems to solve in my area of interest and expertise."

And while most of the ideas for new technologies come from Cragg’s experience and research, George Wallace’s business perspective is an important qualifier in actual company creation. Thus, Intersect generally begins with a clearly identified market need and then looks for the clinical and technological solution rather than the other way around. (Intersect is also open to ideas from outside, and a lot of start-ups approach Wallace because of his connection to SVLS, though such an approach can become expensive for the start-up since Intersect sees its role as that of a development partner in such deals and would take significant equity in any venture brought from the outside.)

Finding the Exit

Starting companies twice as fast on half the capital is, however, only part of the formula: like any incubator, Intersect also needs exits and, generally speaking, exits for device incubators have been frustratingly elusive, even as enthusiasm about the incubator approach remains strong. Cragg and Wallace’s track record is actually better than most: prior to the current portfolio, the pair achieved exits, many if not all of them robust, with each of the five companies they started together—only Sub-Q was a real disappointment. And though they have fared differently post-exit, companies such as TranS1 and Enteryx offered models to which other companies aspire.

Some of that was due to timing: how many spine companies today, no matter how compelling their technology, can hope for the kind of IPO that TranS1 did, now that the IPO market generally seems closed and spine has cooled? ReShape, MindFrame, and Altura will more truly test Intersect’s model—and the test is clearly the ability of each to find a successful exit.

George Wallace notes that the five companies that have found exits took between five and seven years to do so; the problem with most incubators, he goes on, is that the exits take too long. That’s why they run into a cash squeeze. But is that a function of the incubator approach or the economic climate? Wallace notes that, particularly with SVLS as an investor, "we look at what it’s going to take to exit every day," in part because exits have become so difficult, generally speaking, and in part because SVLS is rigorous in its focus on exits. (For more on SVLS’s view of the current climate, see "Device Investing in Tough Times: The VCs’ View," this issue. Also see "Device Investing in Tough Times: The Venture View" - In Vivo, 1 July, 2009..) And while Wallace is optimistic about each of the companies currently in Intersect’s portfolio, he notes that it’s part of the start-up process "that you have to be looking at exits at every stage of the company. Our objective is to get higher-than-average returns and, for the most part, to do that, you have to try to exit early."

Indeed, if there’s a risk, not just to the Intersect model, but to device company development generally, it is that company development is becoming more and more expensive and exits are taking longer to achieve. But incubators, in such a climate, face an additional challenge, one related to the broader difficulties in raising money for start-ups. Andy Cragg notes that, like most incubators, Intersect’s strength lies early in the process. "Our time line runs from idea to first-in-man," he says. "That’s our sweet spot; that’s where we add the most value." Cragg adds that personally, he enjoys the early innovation phase of technology development. Though he did help with training at TranS1, he notes that, "While I enjoy training physicians and helping manage opportunities, my curiosity always draws me back to the design and development process."

As much as bridging the financing gap, Intersect, like all incubators, must increasingly bridge a lengthening development gap—development not just of the technology per se, but of the commercial prospects or fortunes of the companies they launch. And it’s a process that is arguably getting more difficult. Comparing technology development today with 20 years ago when he and Wallace were collaborating at Vaser, Andy Cragg acknowledges the current environment is more difficult. "For one thing, you don’t have the same wide palate [of clinical opportunities] that you had in the 1970s and ’80s," he says. "Back then, there were lots of big problems to solve with devices." Moreover, he goes on, today’s devices face much higher hurdles in terms of clinical evidence, regulatory approval, and reimbursement. "There is a benefit today in that you do tend to avoid the major pitfalls that others have encountered," Cragg says. But even with all of the lessons learned, both from his own missteps and those of others, "the process seemed easier then."

George Wallace says he’s not particularly interested in taking the path that other incubators, such as Synecor and The Innovation Factory, have taken of raising a related venture fund—in part because he’s already affiliated with a VC firm, SVLS, and in part, too, because "I don’t want to compete with venture capitalists on the economics of a deal." That’s why working on multiple projects at once is so important to the Intersect model—having different companies, facing different challenges, offers multiple options in terms of both opportunities and exits. Interestingly, even SVLS’s Gene Hill, as he was backing ReShape, expressed reservations about one key aspect of Intersect’s approach—the value of working on multiple projects at once. "He said, ‘I’ve never seen people do multiple things on a part-time basis and be successful. Everyone says they can do it, but it’s never worked,’" Wallace recalls. But, Hill added, he was willing to take the risk because, he told Wallace, "if you can actually pull this off, the returns will be incredible."

Hill’s remarks resonated with Wallace. As noted, even he concedes that, as he puts it, "our Achilles’ heel is lack of focus." Still, the premise of the model remains: using experienced people, even on a part-time basis, drives better results with less capital. It is, of course, too early to tell if ReShape or MindFrame, let alone Altura, will be successful. But Intersect’s approach offers a fresh perspective on a major issue today for device investors and the companies they back: whether new financing models, particularly incubator-based models, work at a time when there are pressing questions about whether conventional models still do.

Intersect Partners: Does the Incubator Model Still Work?

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