Deal Radar 2009: VeraLight

VeraLight is a medical devices company that uses a breakthrough approach to address a critical issue in the diabetes market – detection of diabetes at the onset. Clinical studies have shown that the disease is treatable and, if detected early enough, preventable. Unfortunately, due to performance and procedural shortfalls with existing blood-based screening tests, diabetes isn’t detected until an average of seven years after its onset, thereby making screening to detect the US’s more than 6 million undiagnosed diabetics and 54 million pre-diabetics a serious national priority. 

VeraLight is developing a non-invasive test called SCOUT DS™ to identify people at risk for diabetes or pre-diabetes without overnight fasting, blood being drawn, or waiting for hours for lab results. The technology uses fluorescence spectroscopy to measure changes in the dermis of the forearm through a fiber-optic probe. Part of the fluorescence signal is driven by the formation of certain advanced glycation endproducts (AGEs) in the dermal layer of the skin, which are biomarkers of diabetes. AGEs are produced from glycated proteins, which may form at an accelerated rate when someone develops diabetes. Thus, skin AGEs constitute a sensitive, summary metric for the integrated glycemic exposure that the body has endured. 

The SCOUT unit is a portable tabletop instrument which automatically compensates for subject-specific skin differences caused by melanin, hemoglobin, and light scattering. After an approximate three-minute test time, a quantitative diabetes risk score is reported. 

The Albuquerque, New Mexico-based company was founded in 2003 by David VanAvermaete, who has made diabetes the focus of his career for over 23 years. He was previously president of LifeScan in the early 1990s when it went from a small, $80 million division of Johnson & Johnson with a single-digit share of the market to a billion-dollar enterprise with a dominant market share. In 2000, he transitioned to overseeing a large research investment that J&J had made in Rio Grande Medical Technology (RGMT), a company developing a non-invasive glucose meter in Albuquerque. Several years later VeraLight was spun out of RGMT. The other founder, John Maynard, is the technical brain behind the company.

In October 2004, the company received a seed investment of $500,000 from their parent company, Inlight Solutions. They have raised $42.5 million in subsequent rounds: a $5 million Series A from vSpring, Wasatch, SUGF and Dow Chemical in September 2005; a $17.5 million Series B from Psilos, CMEA and previous investors in July 2006; and a $20 million Series C from previous investors in June 2008. 

When VeraLight was founded, the market opportunity for diabetes screening was largely undeveloped. There was little incentive to finding diabetes early because the effectiveness of the interventions was unproven and all that could be done was to label pre-diabetics without any solution. Several large clinical studies subsequently showed that diabetes was largely preventable. These studies concluded that while patients are still pre-diabetic, they can be helped with a simple diet and exercise regimen or a generic drug. There are two approved and reimbursed methods for diabetes detection: the oral glucose tolerance test (OGTT) and the fasting plasma glucose test (FPG). The OGTT, considered the gold standard for diabetes detection, involves an overnight fast and a two-hour lab procedure with multiple blood draws, but this test is not performed often due to its tedious procedure.

The most widely used detection test is the FPG, which involves a fast and a blood draw, but unfortunately, results are often false negatives, often missing over 50% of patients. The CDC estimates that $175 billion is spent annually on diabetes, which represents 15% of the entire national healthcare expense, and approximately 14 million people in the US. There are 7 million undiagnosed Type 2 diabetics in the country and approximately 55 million undiagnosed pre-diabetics. 

Based on the American Diabetes Association (ADA) guidelines on who should be screened and how often would result in approximately 100 million screens being performed annually. Currently, only 25-30 million screens are done and are largely ineffective, missing 50% of the people who may have diabetes. 

The company has a classic razor-and-blade business model. Customers are charged a capital cost roughly equivalent to the cost of goods coupled with a per test fee (disposable) for each screen performed. The ‘disposable’ would be delivered electronically (via a postage meter) and would be calibrated to provide a competitive advantage to current detection methods.

VeraLight targets four main segments. The first is mobile screening companies like Impact Health, which go into corporations and communities to screen for diseases. The screenings are paid for by employers or individuals and are therefore independent of third-party reimbursement. There are approximately two dozen of these screening companies in the US. The second segment is self-insured corporations. Many large corporations like Cisco are setting up their own health systems. Most diabetes costs are being shouldered by employers. The third segment, retail health clinics like Minute Clinics in CVS and RediClinics in Walgreen’s, are a natural location to perform widespread screening and the pharmacy stands to benefit from subsidizing the cost, since people with diabetes spend 25 times more in a pharmacy than people without diabetes. Finally, physicians’ office labs are another place in which VeraLight plans to make their equipment available. 

The company is currently pre-revenue and is preparing to implement their pivotal trial for FDA submission later this year. They expect to launch in 2010 in the US and possibly earlier in international markets. 

VeraLight plans to grow and achieve profitability on modest revenues and minimal infrastructure. A post-profitability exit to a medical device/pharmaceutical diabetes company is a viable option, but presently VeraLight plans to focus on the distribution of their product.

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This segment is a part in the series : Deal Radar 2009