Blog of Intellectual Capital

SALE OF INTEGRATED SURGICAL LLC

Gerbsman Partners has been retained by Integrated Surgical LLC (“Integrated”) to solicit interest for the acquisition of all, or substantially all of, Integrated’s assets.

Integrated is a privately held medical device development company headquartered in Palo Alto, California, that has developed a family of devices to revolutionize the evacuation of smoke and fluid from the surgical field.

Over the past three years the founding partners of Integrated have contributed over $1,500,000 in equity and loans and approximately $900,000 from investors, many of whom are medical doctors who understand the unmet clinical need addressed by Integrated’s technology.

IMPORTANT LEGAL NOTICE:

The information in this memorandum does not constitute the whole or any part of an offer or a contract.

The information contained in this memorandum relating to Integrated’s Assets (as defined herein) has been supplied by Integrated. It has not been independently investigated or verified by Gerbsman Partners or their respective agents.

Potential purchasers should not rely on any information contained in this memorandum or provided by Gerbsman Partners (or their respective staff, agents, and attorneys) in connection herewith, whether transmitted orally or in writing as a statement, opinion, or representation of fact. Interested parties should satisfy themselves through independent investigations as they or their legal and financial advisors see fit.

Gerbsman Partners, and their respective staff, agents, and attorneys, (i) disclaim any and all implied warranties concerning the truth, accuracy, and completeness of any information provided in connection herewith and (ii) do not accept liability for the information, including that contained in this memorandum, whether that liability arises by reasons of Integrated’s or Gerbsman Partners’ negligence or otherwise.

Any sale of the Integrated Assets will be made on an “as-is,” “where-is,” and “with all faults” basis, without any warranties, representations, or guarantees, either expressed or implied, of any kind, nature, or type whatsoever from, or on behalf of Integrated and Gerbsman Partners. Without limiting the generality of the foregoing, Integrated and Gerbsman Partners and their respective staff, agents, and attorneys, hereby expressly disclaim any and all implied warranties concerning the condition of the Integrated Assets and any portions thereof, including, but not limited to, environmental conditions, compliance with any government regulations or requirements, the implied warranties of habitability, merchantability, or fitness for a particular purpose.

This memorandum contains confidential information and is not to be supplied to any person without Gerbsman Partners’ prior consent. This memorandum and the information contained herein are subject to the Confidential Disclosure Agreement attached hereto as Appendix A.

Company Profile

Integrated is a privately held medical device development company headquartered in Palo Alto, California that is committed to addressing unmet clinical needs in surgery with innovative technologies. Integrated’s core, patented technologies revolutionize the evacuation of smoke and fluid from the surgical field. Integrated has developed a family of novel, one-time use products that have low manufacturing costs while delivering improved performance over existing devices. All of Integrated’s devices integrate seamlessly with current or workflow and industry leading devices as either stand-alone technologies or utilized together to deliver truly effective smoke and fluid evacuation.

Over the past three years the founding partners of Integrated have contributed over $1,500,000 in equity and loans and approximately $900,000 from investors, many of whom are medical doctors who understand the unmet clinical need addressed by Integrated’s technology.

Integrated has developed, prototyped, and broadly patented a family of devices.

• Integrated’s Fully Integrated Retractable Suction Technology (“FIRST”) evacuates both surgical smoke and fluid with a single device that works with industry leading electronic surgical pencils (“ESPs”).

• Integrated’s Pressurized Ultralight Liquid Smoke Evacuator (“PULSE”) technology is a disruptive stand-alone device for smoke filtration and fluid suction. Separation of evacuated substances is handled by Integrated’s Smoke Liquid Separator (“SLS”) technology.

• Integrated has 5 issued US patents, 14 pending US non-provisional patent applications, 2 pending PCT applications, and 2 pending US provisional patent applications.

The current patent portfolio represents an array of different claims including US claims directed to embodiments of Integrated’s suite of surgical products, the FIRST, PULSE, and SLS. Further included are PCT applications directed to each of the FIRST, PULSE, and SLS technologies, as well as provisional patent applications directed to additional embodiments and improvements to the PULSE technology.

Integrated believes its assets are attractive for a number of reasons:

1. Integrated’s intellectual property, which consists of 5 issued US patents, 14 pending US non-provisional patent applications, 2 pending PCT applications, and 2 pending US provisional patent applications. The current patent portfolio represents an array of different claims including US claims directed to embodiments of Integrated’s suite of surgical products, the FIRST, PULSE, and SLS. Further included are PCT applications directed to each of the FIRST, PULSE, and SLS technologies, as well as provisional patent applications directed to additional embodiments and improvements to the PULSE technology. (See Intellectual Property documents).

2. There is a brief timeline to have the products ready for full commercialization with clear 510(k) pathway to FDA approval for the FIRST and PULSE. The SLS is 510(k) exempt. Including a 3 month FDA submission review time, the FIRST is expect to be approved within 12 to 18 months and the PULSE between 5 to 9 months. (See Intellectual Property documents).

3. With a total investment of approximately $525,000 to $740,000, the buyer of the technology should be able obtain FDA approval for the FIRST and the PULSE and the device family should be ready for sale to the end user at a high value. (See FDA Regulatory Outline) (See Draft Valuation)

4. While the FIRST is an evolutionary product, the PULSE is a very disruptive technology as it changes the paradigm for operating room suction devices with superior performance with respect to sound generation and efficiency at a low cost in a large market with considerable demand. (See Integrated Surgical – Preliminary Overview Document)

5. Leading KOLs have stressed the importance of surgical smoke as toxic and carcinogenic. They agree there is a need for safe and effective smoke evacuation for the surgical patient and staff. Several surgeons who have seen and handled the Integrated devices are enthusiastic about the ergonomics and performance, noting that they are better than the predicate devices. They highlighted specific surgical applications where the Integrated devices would be especially advantageous, such as breast, hepatobiliary, colorectal and plastics procedures. Also, the ESP, when used with the FIRST appeared to create less thermal damage to tissue than with the ESP alone. (See KOL Statements)

6. Integrated’s product family uniquely removes smoke and fluid from the surgical field, are used in a very large market, and the devices would fit very well in an end-user’s product group. (See Non-Confidential Slide Deck).

7. In a world with increasing emphasis placed on value for hospital systems, the Integrated product family offers a low-cost and effective way to prevent the harmful effects of surgical smoke and improve outcomes for patients in terms of operating times and less exposure to harmful substances.

Impact of Technology on the Market

Integrated has a 12-18 month timeline to have the products ready for full commercialization with clear FDA approval through a 510(k) pathway.

The global medical device market was $96.4 billion in 2012, with a CAGR estimated at 3.6% between 2014-2019. Surgical instruments alone made up 19% of the market in 2014. The ESP market in the United States exceeded $1 billion in 2014 with an anticipated increase in sales of $370 million by 2016. Hospitals were the highest consumers in this market at 30.2%. There are an estimated 51 million inpatient surgical procedures requiring general anesthesia performed annually in the United States. This statistic does not include procedures performed on an outpatient basis, such as the 1.5 million cosmetic surgeries performed annually by plastic surgeons. Additionally, there are many surgical procedures performed in other fields, such as dentistry, oral surgery, and veterinary surgery. Doctors in these fields commonly rely on the use of electrosurgery in their practices.

In an investor presentation by ConMed in 2011, the electrosurgical market was estimated to be worth $2.6 billion. This industry will likely be worth $4 billion by 2019 with a CAGR of 5.9%, implying a current market size of around $3 billion. Based on the dominance of the two key players in the market (with ConMed and Covidien holding joint market share of around 80%) and anticipated regulation with regards to smoke evacuation in operating rooms, the total anticipated market share of this technology should reach 25% of the total ESP market. Revenues generated by Covidien’s Energy Device Segment were approximately $2.336 billion and $2.476 billion in 2012 and 2013, respectively. It is safe to assume 50% of sales in this segment represented sales of electrosurgical products. Compared with the total market, this represents approximately 43% of the total market. Of this, an estimated 50% of Covidien’s products could utilize the technology developed by Integrated.

There are several key players in the space of smoke evacuation. ConMed has marketed a smoke evacuating accessory for existing ESPs that uses heavyweight corrugated tubing attached to a separate smoke evacuation system. This device has not been widely adopted likely because the device is unwieldy for surgeons. Poor ergonomics are mainly due to the large diameter and weight of the tubing that requires an evacuator system with higher capture velocity and a concomitant increase in noise. Covidien has developed a similar product family for smoke evacuation. Neither the ConMed or Covidien products include fluid suction and resultantly they are not suitable for direct comparisons to Integrated’s products as a competitive product.

Medtronic sells a family of PEAK PlasmaBlade products that do not use electrocautery, but do evacuate surgical smoke and fluid. The Medtronic system is intended to replace existing ESPs but comes with a cost that is approximately 30 times that of and ESP at a time when drastic efforts are being undertaken to reduce the overall cost of healthcare delivery. The adoption of Medtronic’s expensive PEAK PlasmaBlade system has been limited. Low cost options for fluid suction include various types of simple tubing and canister systems, along with different suction tips. The main complaint from surgeons about these products includes the weak suction strength and the impeded visualization that results from an additional device in the surgical field. Fluid suction is also loud which can impair the surgeon’s ability to adequately communicate with other surgical staff. Issues with cost, noise, and suction performance are all addressed with Integrated’s product platform.

In 12 to 18 months Integrated’s lead product can be ready for full commercial production through work with Starfish Product Engineering and Dr. Leeflang to achieve device optimization and regulatory consultants, including WSGR, for FDA regulatory documentation. The cost for this work should not exceed $340k-360k.

Intellectual Property Summary

Integrated has a unique intellectual property portfolio for addressing both smoke and fluid evacuation from the surgical field. At present, Integrated has 5 issued US patents, 14 pending US non-provisional patent applications, 3 pending PCT applications, and 2 pending US provisional patent applications.

The current patent portfolio represents an array of different claims including US claims directed to embodiments of Integrated’s suite of surgical products, the FIRST, the PULSE, and the SLS. Further included are PCT applications direct to each of the FIRST, the PULSE, and the SLS technologies, as well as provisional patent applications directed to additional embodiments and improvements to the PULSE technology.

Integrated’s Assets

Integrated has developed a technology portfolio that delivers a product platform for addressing smoke and fluid evacuation from the surgical field. These assets fall into a variety of categories, including:

1. Integrated has 5 issued US patents, 14 pending US non-provisional patent applications, 3 pending PCT applications, and 2 pending US provisional patent applications. (See Intellectual Property Summaries).

2. Significant intellectual capital in device family design, development, and manufacturing

3. Preliminary analysis of the FIRST design using computational fluid dynamics (“CFD”) showed effective capture and evacuation of surgical smoke. Bench top testing revealed the FIRST and PULSE POC prototypes surpassed current standards and the leading devices in terms of total smoke capture and secondary capture with reduced noise. These devices were preferred by surgeons during animal trials in a mock surgical environment as opposed to leading devices, with improved performance, ergonomics and noise levels. The addition of the SLS further improved efficiency of the FIRST and PULSE.

4. One set of prototypes for the FIRST, PULSE, and SLS.

5. Several team members are also available for ongoing consulting.

6. Clear 510(k) pathway for the FIRST and PULSE technologies while the SLS is 501(k) exempt. (See Intellectual Property documents).

7. Technology addressing unmet clinical need large market. (See Non-Confidential Slide Deck).
The assets of Integrated will be sold in whole or in part (collectively, the “Integrated Assets”). The sale of these assets is being conducted with the cooperation of Integrated. Integrated and its employees will be available to assist purchasers with due diligence and a prompt, efficient transition to new ownership. Several team members are also available for consulting going forward. Notwithstanding the foregoing, Integrated should not be contacted directly without the prior consent of Gerbsman Partners.

Milestones

Integrated Assets should be ready for purchase by an end user within 12-18 months of purchase with an anticipated budget of between $525,000 to $740,000. Under these circumstances, all three technologies, the FIRST and PULSE should have FDA 510(k) approval and all three devices should be ready for commercialization.
Management

Michael Edward Breede – CEO

Elisabeth J. Leeflang, M.D. – CMO

Noah M. Minskoff, M.D. – CSO and COO

Alan A. Moss – CFO

Dr. Hobart Harris, M.D., M.P.H. (UCSF Professor and Chief, Division of General Surgery, Vice-Chair, Department of Surgery, J. Engelbert Dunphy Endowed Chair in Surgery, Director, Infection, Injury & Immunity Lab) – KOL, Medical Science Liaison, and Co-Principal Investigator

Wilson Sonsini Goodrich & Rosati – legal advisor to technology and partner

Starfish Product Engineering – design, development, and manufacturing

Cuddy & Feder – legal advisor on corporate matters

The Bidding Process for Interested Buyers

Interested and qualified parties will be expected to sign a Confidential Disclosure Agreement (attached hereto as Appendix A) to have access to key members of management and intellectual capital teams and the due diligence “war room” documentation (“Due Diligence Access”). Each interested party, as a consequence of the Due Diligence Access granted to it, shall be deemed to acknowledge and represent (i) that it is bound by the bidding procedures described herein; (ii) that it has had an opportunity to inspect and examine the Integrated Assets and to review all pertinent documents and information with respect thereto; (iii) that it is not relying upon any written or oral statements, representations, or warranties of Gerbsman Partners, or their respective staff, agents, or attorneys; and (iv) all such documents and reports have been provided solely for the convenience of the interested party, and Gerbsman Partners (and their respective staff, agents, or attorneys) do not make any representations as to the accuracy or completeness of the same.

Following an initial round of due diligence, interested parties will be invited to participate with a sealed bid, for the acquisition of the Integrated Assets. Each sealed bid must be submitted so that it is received by Gerbsman Partners no later than Tuesday, March 22, 2017 at 5:00pm Central Daylight Time (the “Bid Deadline”) at 211 Laurel Grove Avenue, Kentfield, CA 94904. Please also email steve@gerbsmanpartners.com with any bid.

Bids should identify those assets being tendered for in a specific and identifiable way.

Any person or other entity making a bid must be prepared to provide independent confirmation that they possess the financial resources to complete the purchase. All bids must be accompanied by a refundable deposit in the amount of $250,000 (payable to Integrated Surgical LLC). The deposit should be wired to Integrated’s attorneys, Wilson Sonsini Goodrich & Rosati (“WSGR”) Trust Account. Wire transfer information will be forwarded at a later date. The winning bidder will be notified within the (3) business days of the Bid Deadline, at which point the deposit is non-refundable. The deposit will be held in trust by WSGR. Unsuccessful bidders will have their deposit returned to them within three (3) business days of notification that they are an unsuccessful bidder.

Integrated reserves the right to, in its sole discretion, accept or reject any bid, or withdraw any or all assets from sale. Interested parties should understand that it is expected that the highest and best bid submitted will be chosen as the winning bidder and bidders may not have the opportunity to improve their bids after submission.

Integrated will require the successful bidder to close within a 7-day period. Any or all of the assets of Integrated will be sold on an “as is, where is” basis, with no representation or warranties whatsoever.

All sales, transfer, and recording taxes, stamp taxes, or similar taxes, if any, relating to the sale of the Integrated Assets shall be the sole responsibility of the successful bidder and shall be paid to Integrated at the closing of each transaction.

For additional information, please see below and/or contact:

Steven R. Gerbsman
Gerbsman Partners
(415) 456-0628
steve@gerbsmanpartners.com

Kenneth Hardesty
Gerbsman Partners
(408) 591-7528
ken@gerbsmanpartners.com