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Misplaced Priorities

Requiem for a dream

Perfint Healthcare read the market wrong and then continued misreading it until it was too late


The top floor of a residential building is hardly a place to expect bots. Yet it has been one for a decade, making robotic arms, not humanoids.

For a visitor, a sensor-rigged, hard-wired sort of entrance would be in order you think. Instead, parched potted plants, some twenty of them which were meant to brighten up the passage to Perfint Healthcare’s office in Chennai, greet you. It is peak summer but the leaves have nearly shed. The workspace inside is unusually quiet for an early Friday evening in July. The atmospherics is telling.

So are the facts.

“The last two years have been very tough, barely survival,” says Nandakumar Subburaman, when nudged to talk about the business. “We are three to four years behind what we had planned to be or liked to be. We had a setback; we had to reverse all sales, payback all the money that banks gave. That drained the system.”

As co-founder and chief executive, Nandakumar sounds confident as ever but occasional whiffs of *mea culpas* creep into the conversation. The pivot his experienced team made in 2006, from an engineering research and development services company to a robotics product company, has gone awry.

Started in 2005, Perfint had checked all the right boxes. An ambitious and cutting-edge healthcare product startup staffed by an all ex-GE founding team targeting the growing field of cancer treatment. Its promise was robotic devices that reduce cost, enhance precision and get more radiologists to do minimally invasive treatment of tumors. Interventional radiology was slated to be big.

The all-star founding team was a hit with investors who saw the potential of locally developed robotics products from India where imports make 80 percent of the medical technology (medtech) market. In no time it was seen as the poster child of medtech startups, drawing glowing news coverage and even awards.

But then, reality set in.

Today, after years of iterations and spending nearly $33 million in venture capital (and at least Rs 9.95 crore in soft loans from the Department of Biotechnology), Perfint has neither the topline nor a passionate following for its products among doctors. To the extent that the company is now looking up to India’s creaking public healthcare system as its savior even as nearly half its employees have left or been laid off.

What went wrong?

The premise itself

When Nandakumar, a finance professional by training, assembled a team, he wanted to address a so-called gap in image-guided diagnostics. The ambitious founders chose to build a minimally invasive robotic arm (stereotactic, to be precise) that would, using computed tomography or CT, position a needle at the precise point on the body for drug delivery in cancer or pain management.

Their first device, called PIGA, was ready in 2008 but even before it could be widely adopted, Perfint figured out “it was not the right device”.

Why? Because doctors were not enthused about having large positioning equipment in their CT room.

Since they realized they couldn’t do much about the size, in their next iteration they instead narrowed the focus to oncology, the treatment of tumours. PIGA’s successor was MAXIO, also a robotic arm. But instead of positioning and inserting a needle, this one took a 3-dimensional view before deciding where and how much of energy to deliver.

The space it was targeting now was interventional radiology.

If a radiologist is a consultant’s consultant whose job ends with looking at images and diagnosing, an intervention radiologist is a super specialist who delivers the treatment. Less than five percent of radiologists in India fall in this category. Which meant the potential market for MAXIO was very small, but could be expanded to include other radiologists.

Furthermore, while MAXIO was an advancement over PIGA, it still remained a “planner”. In other words, it simply didn’t have a generator to deliver the energy for the burning of tumours, or ablation. Perfint’s business model did not allow for providing needles and other consumables and that eventually became a tail — a bulky one at that, weighing more than 200kgs — that wanted to wag the dog.

At around Rs.1 crore, MAXIO also came at five times the price of an energy generator.

Doctors began to ignore it, preferring instead to poke their patients a few times rather than adding another expensive and bulky variable in their workflow merely to plan their needle positioning.

“Even those who bought one device would warn us not to come again for a year or two. There was just not enough use,” recalls a former sales executive, who requested not to be identified because he doesn’t want to spoil his relationship with the team.

It was an early brush with oblivion.

Nandakumar gets rhetorical. “Why did we not know this in the beginning? In GE we were only in imaging, not in therapy space. If we had combined our product with consumables – needle, energy generator, etc., maybe it’d have worked.”

Scrambling didn’t help

To make matters worse, the team, in a mad dash to grow, began to design and develop multiple products with many variants. “I was not sure how we would justify the value proposition, we spread too thin; approvals were needed for each one, many of which we were not able to finish and take to market,” says a former senior R&D executive.

In the absence of a domestic regulator, Indian companies are on back foot in any case. They have to seek approval overseas where customers as well as regulators lack confidence in them because if ever there is a product recall, there’s no one in the home country to penalize the company.

Meanwhile, MAXIO’s design itself was confounding. Doctors found it worked well for pinpointing tumours of the liver; somewhat well for those of the lungs; but did not address the chest at all. Which meant doctors would need to move their patients from the CT room to the ultrasound room for even small procedures – a significant disruption.

To be sure, Perfint is trying to solve a difficult problem.

Tumours, which are semi-solid in nature, are supported by fluids and move, sometimes as much as 5 cm, when a patient gets on the couch for radiation. On top of it, ablation, which is often suitable for tumors of a certain size, less than 3 cm, is one among many treatment choices before the patient as is the robotic arm one among many technologies.

A former senior sales executive remembers a customer in South Asia telling him, “Your product is good but it doesn’t work all the time.” He then gave the analogy of a safety device for a high rise jumper. “If the device protects you seven out of 10 times, but leaves you three times unprotected would you jump wearing it?”

Soon after, when MAXIO entered the market, in 2012, some senior executives suggested “let’s fix the product and then launch”. But Nandakumar was not in favour of pulling back even though a few in the senior management challenged his decisions.

“Even when revenues on paper showed Rs. 22 crore, the product was not being used. I said let’s fix it or else they are not going to pay you,” said the executive quoted above.

Turns out he was right, Perfint had to reverse sales in the financial year 2013-14, when it reported Rs 44.87 crores in revenues with a net loss of Rs 17.27 crores. (This is the latest financial data available with the Ministry of Corporate Affairs.)

First mover disadvantage?

When doctors in India did not show interest in testing its technology to generate performance data for regulatory approval, Perfint chose to go overseas. It was a swift decision because right from the beginning the team aspired to build a product for the global market.

The unfortunate reality is that there aren’t many teaching hospitals in India that a medtech company can partner with for product development.

Very quickly, as clinical sites were developed in Europe and Australia, the sales strategy turned outwards as well. Regulatory approvals were sought in far-flung countries like Brazil and sales offices set up without fully ascertaining what the market was all about. Again, as a slap on its strategy, Brazil turned out to be an ultrasound-driven region.

And in true GE fashion, an event was organized in Singapore, much before the MAXIO launch. “To create hype”. (The cautionary joke internally would go as – “we are from GE but we should not be working like GE”.)

In a frenzied flurry, Perfint entered more than 20 countries and ended up having just one or two installations to show for it.

Did its venture capitalists push the team?

Though Nandakumar says all blame lies with the core team, sources close to the company, many of them “disappointed” with the way things are turning out, say “they became slaves of the investors because the latter had pumped so much money”.

Expensive experimentation ensued for a while, primarily because there was much venture capital to go around. Sources also say Norwest Venture’s $11 million infusion in January 2013 came in a single tranche.

In keeping with the spirit of venture-fueled ambition, Perfint’s claims started running ahead of its achievements. Way ahead.

In February 2012, in the freewheeling, quasi public space that Twitter is, the company tweeted “Perfint sees revenue triple to $5 in million in 2012”.

Though Nandakumar says all blame lies with the core team, sources close to the company, many of them “disappointed” with the way things are turning out, say “they became slaves of the investors because the latter had pumped so much money”

In reality, it was nearly half of the claim.

In October 2012, when this writer spoke to Nandakumar for an article in Forbes India magazine, three months after the MAXIO launch in Delhi, he was on a high. “We are preparing to launch MAXIO in the US in November,” he had said. But the fact was, the US Food and Drug Administration (FDA) approval was nowhere in sight. It would come only 18 months later, in May 2014.

When I asked him last month why he’d been playing fast and loose with facts, he snapped: “I have to project! If I don’t show projections who will give me cash?”

Meanwhile, the salary payout for just three co-founders in FY 2013-14 was Rs 9.4 cr, which amounted to 16 percent of the money raised in that year.

“It was basically one-man team. On their part, the Board members, none with any domain expertise, liked to hear good stories,” says the senior sales executive quoted above.

For Nandakumar, it’s all in the spirit of entrepreneurship. “I go and explore, if it doesn’t work, it doesn’t work. I know it is somebody else’s money. We could have saved some, sure, but hindsight is always 20:20. You learn something [in exploration]. After all, it is risk money,” he quips.

Perfint founder and CEO Nandakumar

Perfint founder and CEO Nandakumar

After years of globetrotting, Perfint now concludes that “capex sale in the Western market is nearly impossible”. While ablation as a procedure is under insurance reimbursement, it requires a device maker to work with many insurers over several years to gather local data.

“United States is not a large market for us. Only 20,000 procedures are done across all hospitals and how much of that will qualify for MAXIO? We will have publications and advisors from US, even clinical show sites but no commercial sale,” says Nandakumar.

Unsurprisingly (by now), the marketing pick-up line four years ago was just the opposite.

At the time of the FDA approval announcement in May 2014, Guruswamy K, who was heading sales, said, “Obtaining the 510(K) clearance allows us to start commercial marketing of MAXIO in the USA. It also makes it easier to scale up in several other markets globally. We are hoping to achieve Rs 100 crores in revenue this year.”

In the same press conference Nandakumar had said, “We will reach Rs 500 crores in a few years.”

Their assumptions about Asia market were grossly incorrect, too. The region was not even performing ablation, they would discover. “And those who are performing their adoption curve is very steep. Even today, between open surgical and minimally invasive procedures, it’s the former that wins,” admits Nandakumar.

In how many countries do you have installations today? I ask.

“We don’t keep a count.”

“Maybe 10-12,” he says when I insist.

Overseas markets no longer hold any promise. Not only capital expenditure is tough, pay per use has a painfully long recovery period.

So many things so off the mark. “You’ve got all your estimates wrong. Did you not do any market research to figure what was needed and how much the users would pay for it?” I ask.

“No, that was a mistake. We listened to some physicians’ advice and got on with it,” says Nandakumar.

Return of the prodigal son

After years of missteps, home is finally where Perfint thinks its panacea lies – lower sale prices but compensated by larger volumes. Under the National Cancer Control Programme, 75 hospitals in India will now be upgraded. So Perfint plans to plug its robotic arms in some of those and other government teaching hospitals.

Unfortunately, that’s once again easier planned than done.

“Senior doctors think they are Gods; they don’t need technology, their fingers can do the magic. Junior doctors think real skill development is in learning by hand, (so) why touch a robotic tool?” says a former clinical-marketing executive who struggled to get the doctors to use Perfint’s equipment in a few cancer hospitals, including the Tata Memorial Centre in Mumbai.

Moreover, resource-constrained government hospitals have to be prudent in their expenditure — which means using taxpayers’ money to buy products that are user-friendly and work, instead of being dumped in unsuspecting corners under plastic covers.

Perfint’s experience with the government hasn’t been great in the past either. In December 2013 tenders were floated for six new All India Institutes of Medical Sciences for CTs with accessories. But just after a year, all accessories were scrapped and only CTs were taken.

“Our product was shortlisted and then scrapped. Revenues of Rs 8 crores disappeared in a stroke,” says Nandakumar, fuming.

But the reality is Perfint’s technology flies in the face of bundling, where the thumb rule is that a higher priced product costing, say, Rs.100, is bundled with a much-lower priced one costing only Rs.5-10. This way a seller can pass it on after including some markup, say at Rs 120, and make money.

Instead Perfint is trying to bundle a Rs 1 crore-robotic device with a Rs 1.5 crore-CT. They’re just too darn expensive.

The core team is intact, and making some amends. MAXIO is being integrated with an energy generator so that it becomes a complete therapy system, but that variant is at least another 18 months away. An ultrasound-based new system has been under development, for many years though, albeit in Canada. “In a year’s time it could go into pilot stage assuming we get funded,” reckons Nandakumar.

A cash crunch has hit the company where it hurts most – funding a large sales force to drive adoption.

Perfint earned Rs 18 crore in year ending March 2016 and is “likely to make Rs 55 crore in FY 2016-17” (how remains a mystery), according to Nandakumar who is back in the market to raise more funds, and even thinking of going public. He might hit rough weather.

Slower growth, after spending what is certainly no little pizza money, is an admission of a restricted future and hurts valuations. Emails sent on July 27 to its existing investors, IDG Ventures, Norwest and Accel Partners were not answered till the time this story was published.

One silver lining in this saga is a dozen or so journal publications that Perfint has to its credit, thanks to its multiple overseas clinical associations. At one point, says a Chennai radiologist, Perfint “roped in some of the best ablation experts, from Italy, US and Australia”

Looking back, around 2010-2011 Perfint had a good window of opportunity, if the right steps were taken. It would have been a good fit for consumables companies which could create a biz model around the equipment, maybe even giving it free and making money off accessories.

But Nandakumar chose not to head down that path. Now, he says, Perfint’s indicator of success is not revenue, but adoption, something which he ironically ignored while chasing revenue.

As loopy as this 10-year journey appears, I asked him if he were to redo Perfint, how would he do it.

“I’d not do interventional radiology. And if I were forced into it, I’d not do a CT-based device, I’d go with ultrasound,” he says.

There you go, an admission that is several years too late.

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