Kliman: Ophthalmology Is A “Leading Franchise” At InterWest
Kliman: Ophthalmology Is A “Leading Franchise” At InterWest Oct 2014
OIS Co-Chair, Gil Kliman, MD, Managing Director at InterWest Partners, delivers insight on his firm’s decision to concentrate on ophthalmology 15 years ago and shares the many lessons he’s learned during that time.
OIS Podcast with Dr. Gilbert H. Kliman (transcript)
Tom Salemi: Hello, everyone. Welcome to the OIS Podcast. I’m Tom Salemi and I’m pleased to be joined by Dr. Gil Kliman, General Partner at InterWest Partners, and an OIS Co-Chair. Thanks for joining us in the OIS Podcast, Gil.
GK: My pleasure, Tom.
TS: Gil, believe it or not, I’m sure this is a highlight of your career, but I used you as a lead in an article I wrote for the old venture capital and healthcare newsletter back in 99 or so, when I first wrote about the growing interest of ophthalmology in VCs, or the growing interest that VCs had in ophthalmology companies. So you and I have been talking about this issue off and on for 15 years or so. So I’m sure you remember that interview as well, right Gil?
TS: And you’ve obviously had some success in the area with IntraLase and LenSx and even Inspire, but how have things played out for you and for the sector over those 15 years? Has the sector delivered on as strong as returns, as you had initially hoped when we talked back in the late 90s?
GK: Tom, it’s really exceeded my expectations and InterWest’s expectations. As you mentioned, a long time ago when I was a younger man, we talked about this and I was a fugitive ophthalmologist coming into venture capital. And in about 2000, InterWest really started focusing on ophthalmology at my suggestion, and it’s turned into really one of our most successful franchises. InterWest had always had a very strong medical device franchise, but over the last 15 years, ophthalmology has turned into our leading franchise in terms of really successful companies.
TS: That’s interesting.
GK: And a few of the companies really had upside surprises. IntraLase was a fantastic technology, but we never imagined that it would become a public company, and be trading at almost a billion dollar value, and then be acquired. And similarly, LenSx was a very early stage company when it got tremendous strategic interest, and was acquired after just two and a half years of investment interest. But the real theme in all these is we were fortunate enough to get behind really talented entrepreneurs in ophthalmology who could create these incredibly innovative and valuable companies in very short amounts of time.
TS: Now you led that article because you were an ophthalmologist, as you mentioned, and I think you were still practicing at the time? Or had you just stopped at that time?
GK: No, the world is a safer place. I’m on the dark side 100%, but I was practicing part-time up until about ten years ago.
TS: How does your MD in your specialty in ophthalmology how has that helped you in investing in companies?
GK: Well, really being an ophthalmologist has helped me in so many different ways. One is in understanding the technology. But also, ophthalmology is one of the most sophisticated business specialties of medicine, where ophthalmologists, many of them really are native born entrepreneurs, and understand how to build practices and get into details of economics. And so coming out of that background, that additionally helped. And it has helped invest in ophthalmology and also helped us take best practices from ophthalmology into other fields that InterWest invests in.
TS: That raises a great question, and one I was going to ask later on, but I’ll bring it up now. What have been sort of the primary sources of innovation? Does it come from the physicians? Or is it more something that has to come out of a research lab, or something where experimentation with lasers and lenses and things can really be done?
GK: Yeah, it’s interesting, innovation seems to come a myriad of different places. There are some themes, depending on what type of technology it is. I think at InterWest, when we’re looking at new investments, often with drug related investments, it’s a university or a pharmaceutical or biotech oriented origin, because there's a lot of basic science that needs to be done first, and often the timelines are quite long. On the device it’s more common that, in addition to those university and industry sources, clinicians themselves may come up with innovations, and it never really passes through academics. Innovation is around us everywhere. Its brilliant people are in all different walks of life. So there's lots of different flavors of it, but if you were going to make a generalization, probably for drugs it’s more often coming from some sort of academic or large company research lab type background that has the infrastructure. But for devices, it’s often clinicians seeing an unmet need and applying their innovative talents to that.
TS: So it’s not unlike other areas in life sciences.
GK: Similar. I think one of the advantages in ophthalmology is a lot of these innovations are very high-tech. At InterWest, when we look across different fields, some things are quite primitive. We invest a lot in orthopedics where the leading edge, innovative devices often still look like they came from Ace Hardware, you know, pedicles and this sort of thing. Whereas ophthalmology, we have lasers, microsurgery, monoclonal antibody drugs, some of the earliest ones there. So it’s really a leading field for the highest tech aspects of innovation.
TS: I was struck by – I was at the OIS meeting in April in Boston. That was actually my first one I’ve attended, and I was struck by the combination of device and biopharma companies at one specialty conference. It seems more often than not, I think, those biotech and device companies are separated at separate events. Is there something – that must be my misperception or is that true? And is there something about ophthalmology that I don’t know, is inviting to both sides, and really allows for a cross-contamination of biotech and device?
GK: I think that’s true. There is more interchange, and the way the technology is evolving, ophthalmology is leading some of the convergence between different fields. Certainly, some of the earliest drug-device convergences have been in ophthalmology with, for instance, long-term steroid delivery and various intraocular implants that are drug related. We’re even seeing some convergence where some of the mobile technologies that are coming out of the consumer space, are coming into ophthalmology and being used for eye testing and so on. So the amount of cross-fertilization between different types of innovation is, as you point out, one of the highest in the field of ophthalmology. It’s also been an active effort from OIS, I should say, that we like to encourage that. So that’s why we haven't split into different meetings, but try to have the synergies of everyone in the same room, listening to a variety of different types of technology platforms.
TS: I think it clearly worked. I don’t think there was a moment where it felt like it was one conference or the other, and people were clearly engaged. What are some of the challenges facing investors doing ophthalmology deals? I’m sure they're not unlike other challenges, but let’s start with syndication. Are ophthalmology companies particularly expensive to back, especially in the early stages? Are their clinical trials perhaps more extensive, that the capital expectations are high? What is it like building a syndicate around an ophthalmology start-up these days?
GK: Well, I think the challenge with any medical device start-up in today’s venture world is just the shrinkage in the venture industry.
GK: I don’t think ophthalmology is that much different than any other medical field; that there just are fewer venture capitalists who are willing to invest in the field in an early stage. There's more interest in investing in drugs on the earlier side, somewhat driven by a recent very booming IPO window here. But for devices, it’s been more challenging, so it is an issue with syndication. And so I think we often look to, if we go into an early stage deal, have pre-picked syndication partners that we know can carry the company forward through many rounds, and potentially the whole way. Or there may be other situations where we actually would look at it only as a later stage opportunity because the risks of syndication at the early stages are just too great.
TS: Sure. Are we seeing the corporates move down in the early stages in ophthalmology like we’ve seen in other areas?
GK: I would say earlier, but they still are biased toward seeing more progress, and as being large organizations, they're looking more at things that are closer to revenue that they could see folding in. Although I’ve been very impressed that a number of strategics have moved to make earlier investments, and have been supportive of a number of InterWest companies across the industry, and have invested earlier. So if that trend could continue, that would help. But I would say it hasn’t completely filled the gap that’s being left by the tide going out of a large number of early-stage venture investors who are no longer investing in life sciences.
TS: Interesting. You mentioned earlier on the complexity of the technology for ophthalmology companies. Is that almost a hurdle? If you’ve got something that looks like you can get it at Ace Hardware or something, you're pretty sure it’s going to work at some point. There's probably more of a question as to something that’s going to – that’s very complex and could fail to meet expectations at some point. Is that a challenge, the fact that you're working with very complex technologies?
GK: Well, it’s interesting. At InterWest, we’ve found that our most successful investments are ones that are very high-tech, and may have a great degree of complexity in them. So we actually embrace that. We tend to shy away from very simple, me-too sorts of technologies, even though the barriers to deliver those may appear to be lower. We’ve found that the greatest value is in creating brand new categories of treatment. And the femtosecond laser evolution is a perfect example of that, where I don’t think I had ever seen anything much more complicated than the IntraLase laser when I first saw it. It was first of its kind. It had never even been pioneered in industry like the excimer laser. It was the first time it was really being used commercially for anything and it was a huge technical project, but due to the very talented founders and management team there, they were able to make it into one of the most successful, breakthrough ophthalmic products, and were rewarded not only with a brand new way of doing Lasik around the world, but also with a very successful public company that ultimately was acquired by AMO. So we like that. It’s actually part of the investment model is to take calculated risks investing in very high technology that will create brand new categories of treatments and really be a disruptive sort of change.
TS: That’s great. We’re going to take just a quick break, and we’ll be right back after this message.
TS: And we’re back with Gil Kliman from InterWest. He’s Co-Chair of the OIS conferences. Gil, let’s just go on down the tick list of challenges out there for investors in ophthalmology deals. How about the FDA? We’re hearing positive things overall, that the agency is getting easier to work with. Is that the case for ophthalmology? Or are there some challenges endemic to this specialty that still make it a challenge for investors?
GK: You know, the FDA always has been sort of a double-edged sword to investors, because on the one hand, some people perceive it as a barrier to get product to the market. But on the other hand, it’s a very effective barrier to entry once a product is approved to be able to really penetrate a market and not have unlimited competition to it. And at InterWest, we really embrace the FDA. It’s an important part of innovation regulation, and it goes in cycles, just like everything in business. And there are times when it’s moving slower and when it’s moving faster, and it also is very division-dependent, and even down to individuals in divisions in terms of how fast they're moving and how much workload they might have. So all that being said, we’re actually pretty optimistic on the environment improving for the FDA in both the drug and the device side. Maybe more so on the device side, because it was moving very slowly two or three years ago, and now it seems, through the good efforts of people, they are making a lot of progress. But it always takes longer than any entrepreneur or investor would want. But it is an important part of the medical system, and so we really try to work with it rather than go around it or invest in things that require very low levels of FDA regulation.
TS: And finally, how about reimbursement? How is that different for ophthalmology investments?
GK: One of the great things about ophthalmology is it’s really pioneered the cash pay model of innovation, getting people to pay out of pocket for innovations that have real value. And that has become a lot of our investment strategy at InterWest, to seek out across all medical fields drugs and devices that might be enabled by a cash pay part. And this really was pioneered, to some extent, by the advent of Lasik, which produced a cash pay market, and then it was expanded with premium cataract surgery, which also pioneered the model of simultaneous Medicare and out-of-pocket pay. And this is one of the biggest advantages of ophthalmology. So for me personally, I’m very excited about the cash pay, particularly in our new Obamacare environment, to develop models where patients can pay part or all of a procedure that’s going to generate huge value to them.
TS: That’s great.
GK: And on reimbursement, I should comment that reimbursement is generally under pressure all the time. Reimbursement has been under pressure since I first went to medical school in the 80s. It always seemed to be a contracting balloon, but there are always opportunities and ways to get reimbursement for very high-value procedures. And the way we look at it at InterWest as investors, is just to make sure the technology that we’re investing in has a very clear value proposition, and either has an existing path to reimbursement, or one where we could see that we could create that and justify it to the payers. And we’ve had very good success with that.
TS: Great. And just a final question, we’re all reading about Google’s deal with Novartis to develop the contact lens that can improve vision and diagnose disease, how do you view this technology? Is it ground-breaking? Is Google and its ilk really capable of bringing something new to the table in ophthalmology? Or is this just a whole lot of buzz because Google is Google and Apple is Apple, etc., etc.?
GK: You know, the Google deal might be one of the most exciting things to happen in ophthalmology, and part of it just for me personally, I have huge respect for the company. We actually hired - one of our newest partners at InterWest came out of Google and is one of the most impressive individuals we’ve had at InterWest. I’m a little biased; my brother in-law works for Google as well, so I see the culture and the products that they're working on there. So I think their interest in coming into healthcare in general, and specifically into ophthalmology, is fantastic. I do think there's going to be some learning there. They're a technology company that's used to taking on very large projects, and they're doing some amazing things. Where I live, here in Silicon Valley, you see these self-driving cars and all the incredibly visionary things that they're doing. But this is something that’s new for them, which is dealing with biology and the healthcare system, and things that may require clinical trials of some sort. So there may be some learning curve there, but I think collaboration with Novartis is a great way for them to partner. And so I hope it’s the beginning of a trend that we could have some of these very large, very successful technology companies coming in to really supercharge things that have been traditionally done by healthcare companies.
TS: Maybe you can leverage some of these connections to get us some Google representatives at our next OIS conference, Gil.
GK: Will do my best.
TS: Great. Well, this has been a great conversation, as I always enjoy talking to you, so thanks very much for joining us.
GK: Likewise. Thanks so much, Tom.
TS: Thanks for listening to this OIS Podcast. Next time, we’ll have the chance to speak with ophthalmologist Steven Slade. Please listen in, and we’ll see you in Chicago.