Tuesday, June 10, 2008

Acclarent, By a Nose

Maybe Acclarent Inc. knows something we don’t.

Okay, let’s skip the obvious nasal puns. Acclarent—which is selling a device to treat sinusitis—might salvage what has been an absolutely dismal year for medical device VCs. The four-year-old device company ignored all the stop signs and filed to go public last week. No terms of the offering have been set.

Medical device investors would welcome any lucrative exits at this point. One medical device VC says he’s having a hard time looking his biopharma bretheren partners in the eyes these days. The biopharma folks are racking up big exits, primarily by selling their portfolio companies to industry leaders. Acquisitions, of course, have been the device VC's best friend in the past. The problem is, nobody is buying venture capital-backed device companies these days. Big device companies aren’t willing to place big bets and make big-time purchases in this questionable market.

The IPO market has been just as dismal for everyone. As we noted in our earlier post, CardioNet was the last venture-backed health care company to go public. It’s doing fine but so many other recent IPO companies are sagging under single-digit stock prices.

But Acclarent’s confidence isn’t the real story here. Founded in 2004, Acclarent is the spawn of an incubator (accelerator, whatever you’d like to call it) run by serial entrepreneur Josh Makower and backed by mega-venture fund New Enterprise Associates. Acclarent’s origin is a classic inventor’s tale as reported by colleague Steve Levin in this article.

For many serial entrepreneurs, one of the most difficult challenges is finding their next project. For Josh Makower, MD, who had launched device start-ups Endomatrix (incontinence; acquired by CR Bard Inc.) and TransVascular (cardiovascular; acquired by Medtronic Inc. ), the answer was right under his nose. A long-time sinusitis sufferer, Makower was frustrated with the existing standard of care for treating this condition.
Acclarent developed a small balloon that could be inserted deep into the nostril and inflated, opening up sinus passages and relieving the pressure associate with sinusitis. Since the traditional treatment involves highly invasive surgery that calls for cutting and removing bone and tissue to get at the sinuses, the company’s approach would seem like a no-brainer. But the company’s success depends largely on its ability to convince ear, nose and throat surgeons to be open to game-changing innovation.

We wouldn’t bet against Acclarent. In 2005, the company received FDA approval for the device. In 2006, it launched the device in the US and obtained a CE Mark. By 2007, it had an international sales effort in place. As of the end of last month, 3,000 surgeons have been trained on using the device.

However, Acclarent is a story, not a profitable enterprise. Over the first three months of the year, it brought in $10.2 million in cash but had a net loss of $8.6 million. It’s also carrying a deficit of $62.5 million.

Conventional wisdom suggests Wall Street wants proven businesses, not stories. Yet Acclarent obviously holds other opinions, or at least is positioning itself to be acquired by a larger player.

Either way, the company stands to be a huge win for NEA, which owns 44% of the company. Versant Ventures and Meritech Capital own 15% and 8%, respectively.

All together, Acclarent raised more than $70 million from investors. True, that’s a significant sum for a medical device company, but the quick sprint Acclarent made from start-up to IPO candidate not only puts its VCs in a good position for a strong return on investment, it also serves as another example of incubators bearing fruit for their VC sponsors.

For more on the tightening relationships between venture firms and incubator programs go to our START-UP here.

image 'By a Nose' from flickr user Chris Breeze used under a creative commons license.

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