Howard Palefsky is Venture Reporter's Venture Capitalist of the Week
Menlo Park, CA - June 4, 2004
General Partner, Montreux Equity Partners
Montreux Equity Partners has $180 million in capital under management and is currently investing a $75 million second fund and a $95 million third fund, both of which it raised in 2004. As of March 23, 2004, the firm had nine active portfolio companies. General Partner Howard Palefsky recently lead the Montreux investment in Pulmonx and he currently holds a position on the Board of Directors at four companies.
VR: What is Montreux's mission? What has been the strategy over the last several years?
Palefsky: Montreux is product and therapeutics-focused. I would contrast that with firms that are more drug discovery, technology and platform focused. We concentrate on what I call BioPharma and medical devices. The companies
that we've invested in all have product development efforts involving human clinical trials, which means the output of their activities is a product that a physician uses or prescribes to effect a direct therapeutic benefit
to a patient, as opposed to, for example, a methodology of identifying new biological targets.
What drove the investment in Pulmonx?
Pulmonx is a medical device company focused on the endoscopic treatment of chronic obstructive pulmonary disease [COPD], which often results from long-term smoking. It is a giant medical need for which there have been a number of surgical advances developed using lung volume reduction surgery. With COPD, parts of the lung become less responsive to efficient air exchange. If one could direct air only to the healthy areas and shrink the amount of the tissue that the diaphragm has to push, air exchange becomes more efficient and patients could experience great benefit. Pulmonx has taken a non-surgical approach to this. Rather than performing surgery or inserting devices into the chest, a product is inserted through the trachea or windpipe and into the lung, where it closes off the damaged areas of the lung, endoscopically. This product has been used in prototype form in a pilot study. We had been following the COPD field and we approached the lead investor in this round,
MedVentures, and asked if they would be interested in opening up funding for Pulmonx. In addition, the founder, Dr. Rodney Perkins, is a close friend and a well-known medical device entrepreneur.
What is Pulmonx's potential? Do you foresee any exit strategy presently?
It's early, but COPD is a big area. There haven't been many recent medical device IPOs, although Novacept filed and then announced recently a sale to Cytic Corporation. Medical device companies tend to go public when they have revenues, as opposed to drug companies which go public when they have clinical results. Therefore, in all likelihood, the exit will come as an acquisition by a larger device company. However, if the product performs
well, it could be a very interesting IPO.
What do you and Montreux bring to Pulmonx's development strategy?
Montreux's focus on therapeutics helps, we have experience investing in a broad range of therapeutic areas. We bring to Pulmonx the practices that our other companies have used in clinical trials, regulatory strategy, hiring and so forth. I've personally been involved in some very successful medical device start-ups in the past. I have experience being a founder, a CEO and a board member on the venture capital side and can use that experience with Pulmonx.
Was this investment part of a strategy to focus on pulmonary disease?
We've been following the pulmonary and COPD for some time and have looked at other companies in this area. We recently invested in a company in the asthma space. We are intrigued with the lung in that it's very accessible, it has not had a lot of entrepreneurial or large company activity and there are a lot of problems associated with it, principally emphysema and asthma. I think there are some promising medical devices, as well as pharmaceutical
approaches, to treating these problems.
Is there any strategy for Montreux looking ahead in 2004 and beyond?
The BioPharma area is experiencing some success, and the valuations of those companies have had a tendency to increase recently in response to the public markets. The medical device field has not enjoyed such success. However, when looking at the medical device field, we are seeing some very interesting companies recently. The problem with medical device companies, in general, is that when they take themselves to acquisition or IPO, the markets tend to be smaller, although that is not the case with Pulmonx. So we're looking for large market opportunities within medical devices where we can see substantial product development. One has to be careful how much money is invested in these companies because the return may not be as large as with pharma companies.
Has there been any maturation in the medical device industry?
One thing that has matured is that emerging BioPharma and medical device companies are paying more attention to rigorous clinical trial execution. Clinical trials are inherently difficult, but you want to do the best you can so, at least, the operational screw-ups are taken out of the equation. I think companies are doing a better job of bringing rigor to that space earlier on.
Do you get a sense of where the industry is going at all?
There's an inexorable movement towards targeted drug therapies. For example, patients with diabetes are not all the same. Drugs based on the genetic or other patient profiles, or specific elements of a disease, will have smaller clinical trials, fewer failures and, with targeted therapy, fewer side effects and better efficacy. That's where the world is moving. The flipside of that is that big drug companies have a tendency to want to see blockbuster, $3 or $4 billion, drugs. But, if one has a maller target population, the tendency would be to have drugs with perhaps less upside potential, but more of them. This is an opportunity for emerging companies to begin slicing-off parts of the markets for products addressing diabetes, heart disease, cancer and other diseases. Herceptin, the Genentech drug for breast cancer, is a great example as it targets only the Her2-neu positive breast tumor, which is not all breast cancer.
What do you feel is the current relationship between competition and collaboration in venture capital investments?
The larger firms had a tendency in the mid to late 1990s to finance many deals by themselves, and now they will form syndicates. We like to collaborate. I think VC collaboration in medical investments is better in general because, relative to say software, they are "money-eating" activities, and it's more helpful to have deep pockets involved.