Today, I am pleased to announce Highland’s recent investment in BÂRRX Medical, a growth stage medical technology company based in the Bay Area. Read more details here.

BÂRRX sells an FDA-cleared endoscopic device for the treatment of Barrett’s Esophagus, a pre-cancerous condition.  The team at BÂRRX has done a truly amazing job generating rigorous clinical data that is unheard of in venture-backed companies.

The crown jewel of this data is BÂRRX’s New England Journal of Medicine publication last summer showing dramatic response rates to their HALO procedure.  For those of you who enjoy reading journal articles, check out this recent review article of Barrett’s Esophagus and the evidence supporting widespread use of the BÂRRX HALO procedure.

Don’t take my word for it – watch my medical school mentor Dr. Oz talking about Barrett’s Esophagus and the BÂRRX procedure. Or the discussions these patients are having about the BÂRRX therapy. Or the dozens of news stories and patient testimonials about BÂRRX’s HALO treatment for Barrett’s Esophagus.

Barrett’s is an irritation of the esophageal lining that is thought to be caused by GERD and impacts millions of people in the US alone. If left untreated, Barrett’s can progress to esophageal cancer – which has an 85% mortality rate at 5 years and a treatment (esophagectomy – removal of a large portion of the esophagus) that is obviously terrible for a patient’s quality of life.

What’s most frightening is that Esophageal Cancer is the fastest growing cancer in the US over the last 30 years – almost a 5x greater increase in incidence versus the next closest cancer.  And it’s starting to impact people in the news: Hosni Mubarak, Christopher Hitchens in the *last week* alone.

It is rare to find a private medtech company with top notch management, FDA-approved products, a large and growing market, A+ clinical data, strong procedure growth, and focused on high unmet medical needs.  It is even more rare to find any medical therapy that actually helps to prevent cancer progression.

Going back to the early days of Highland, we have focused on game-changing medical technologies such as Origin MedSystems (Laparoscopic surgery – acquired by Eli Lilly / Guidant) and Conor MedSystems (Drug eluting stents – IPO, acquired by J&J).

We are so happy to be joining the BÂRRX team and to be working with Greg Barrett, Dr. David Utley and the whole gang as they work tirelessly with doctors, patients, and health insurers to get the good word out about the dramatic proven benefits of the HALO procedure.

Those of you who follow me on twitter know that I started a little data experiment a few months back.

Gary Wolf’s great New York Times piece on Quantified Self and a conversation with a friend this afternoon motivated me to write about this movement from an investor’s perspective.

Three months ago, I bought a few personal sensor-based devices and started to track my sleep, caloric intake, exercise/activity, etc.

And while I have not been religious about it, I have generally used most of these devices at least weekly for a few months. 

A few months into the experiment, I am now convinced more than ever that the future of consumer-driven health is largely dependent on better health data tracking technologies.

The history of wellness and disease management is littered with companies and ideas that have failed to get traction with consumers/patients or have failed to show tangible Return on Investment (ROI).

Yet, the obesity epidemic continues to explode and corporate healthcare costs continue to rise.

The big missing ingredients in many prior efforts at disease management, health coaching, and employee wellness programs has been the inability to “close the loop.” 

Wellness is the buzzword in coporate benefit departments these days.

Wellness programs help employees take health risk assessments and motivate to exercise, eat healthier, stop smoking, and to take their medications. But without an ability to automatically track whether someone is actually undertaking the desired behavior, the wellness program is practically worthless.

I’m convinced that humans will cheat any system that relies on self-reported data. Any wellness program that doesn’t automatically report on compliance by closing the loop will fail either based on low consumer engagement or bad results.

In 2010, we are finally at a tipping point where advancements in low-cost technologies have caught up with this glaring need. Nike+ was a great start.  Now there are dozens (maybe hundreds) of other technologies manifesting themselves in all aspects of gathering data about our bodies and our behaviors. Many approach it from a consumer angle, while others like Proteus Biomedical are far more “medical” in the approach.

The confluence of mobile devices, low-cost senors, and ubiquitous data sharing by average people will make health and wellness ripe for a revolution.

The most interesting companies I am seeing these days sit at the confluence of these sensor-based technologies and consumer wellness.

It may be that the optimal business model in this space has still not yet been found, but let me put forward three thoughts for discussion:

1. Greed is a good motivator.  Large self-insured employers will be the ones who create the business model for this space by subsidizing the costs of these wellness monitors and integrating the data into the design of the employee’s health benefit, reduction of the co-pay, etc. 

2. Fear is a good motivator. Sustained healthy behavior is driven by community.  The first sensor-based company that effectively integrates web community tools into data reporting will emerge as a winner.  Think about “The Biggest Loser” run at your office, but imagine that everyone’s daily caloric intake and activity level was reported to the group. 

3. Silos Suck.  There needs to be an open standard for the data output from all of these sensors and teh industry needs to get serious about data standards. Rather than having to plug each senor into my PC so that the data can be uploaded, I want my iPhone or a small bedside unit to automatically gather all of the sensor technology and upload as often as I tell it to.

Lots of questions remain: data privacy, the GINA laws, sales cycles and adoption time for employers, and getting hardware costs down another 10x from where they are now.

But I’m very hopeful that we are just at the very beginning of a massive movement in healthcare that will become ubiquitous over time. 

I was speaking to an experienced medical device entrepreneur this week and he painted a pretty grim picture of where venture-backed medical device companies are headed.

His macro view:

1. VC Funds Shrinking: Conventional wisdom says that: Half the venture funds will raise about half the money they have previously. The other half will just disappear over the next 5-7 years as fees tail off. There have been rumors that several healthcare/medtech-focused venture funds are having issues raising new money.

Result: smaller syndicates. Less money available for early stage capital intense projects – especially PMA pathway implantable devices.

2. Experience Matters: The herd of entrepreneurs starting medical device companies will thin; only CEOs and founders who have had substantial exits will get funded. The ability to raise money will be a key criteria in picking CEOs and companies to back.

Result: You will see fewer and fewer first time CEOs get venture funding in medical devices.

3. The Device Tax Hurts: The recently passed health reform bill mandated a 2.3% excise tax on the sale of medical devices. This will only serve to hamper R&D spending and innovation at medtech companies.  If given a choice between reducing their cash flows by 2.3%, cutting sales and marketing, or cutting R&D, many  incumbents will choose to cut R&D and preserve cash flows.

4. Innovative Not Incremental: Incremental product innovations just wont cut it any more. Yet the $’s needed for innovative product development are only going up.

5. ROI is Key: Healthcare economics will be a big part of product development from day 1.  If your product doesn’t have a credible cost-effectiveness argument, don’t bother trying to raise big venture money.

6. Revenues Are The Name Of The Game: The biggest venture-backed medical device exits almost always occur at revenue stage (ie, post approval). 

-Acclarent: revenue stage US/EU ($785M acq)
-Corevalve: revenue stage EU ($850M acq)
-Conor: revenue stage EU ($1.4B acq)

The most promising private medical device companies today are at revenue stage and growing fast (Access Closure, Barrx, etc)

7. Acquisition Markets Are Limited: Unlike biotech, where $500+M acquisitions are common, takeouts at that price are rare in medical devices. And the pool of potential acquirers is much smaller than it is in biotech.

8. Regulatory Risk Is Increasing: The FDA is cracking down on medical devices and regulation is going up. Plain 510k’s will become 510k’s with clinicals. 510k’s with clinicals will become PMAs.  Even historically friendly EU device regulators are asking for ~50 patients of clinical data for a CE Mark vs. the 10-15 patients needed just a few years ago.

It’s hard for me to disagree with most of his facts and conclusions. 

Due to poor industry returns in venture over the last 9 years, the extended time to exits, a non-existent pre-revenue device IPO market, and the high cost of medical device product development, the private financing choices are thinning.

The best CEOs and founders have always been in the driver’s seat and will only continue to be more sought after, especially in early stage medical device companies.