Conversation With: Thermi’s Paul Herchman On How He Sold His Irving Company For $80 Million

Paul Herchman, the CEO of Irving's Thermi.
Paul Herchman, the CEO of Irving’s Thermi.

Paul Herchman is a serial entrepreneur who’s been active in the Dallas market since the late 1980s. Earlier this year, he got one of the biggest breaks of his career: the Barcelona, Spain-based Almirall S.A. sunk $80 million into acquiring his aesthetic supplies company, Thermi LLC.

Headquartered in Irving, Thermi provides dermatologists and plastic surgeons with devices that apply specific amounts of heat to their patient’s body. Previously, practitioners typically had access to devices that had generalized levels of heat: Think low, medium, high. Thermi’s products allow them to apply exactly how much heat they need in order to rupture a nerve to relieve pain or to stop the flow of blood through hemostasis. Eventually, about 50 physicians invested a total of more than $2 million in the company to get it off the ground. It’s ascended ever since.

Herchman and his team earned the investors a return of about $80 million when Almirall came to the table. In this interview, Herchman discusses the strategy of his company, why they chose to largely steer away from private equity, and how partnering with physicians gave them a leg-up over the competition. The interview has been edited for length and clarity, and you can also catch Herchman speaking at Health Wildcatters’ The Pulse event on Feb. 25.

D Healthcare Daily: Let’s start by discussing what Thermi is.

Paul Herchman: Sure. Thermi applies very controlled doses of heat to all parts of the body. Different parts of the body require a specific level of heat and time. So that’s where we’re able to stand out from other technologies because we allow physicians to control the level of heat.

Other companies offer general energy devices that have various indiscriminate settings. Look at it this way: When you get in a car, you don’t look at the tachometer; that doesn’t tell you anything besides what that car is putting out. You look at miles per hour, because that’s the most applicable way to measure speed. With Thermi, we’re able to give this measurement of temperature versus a gross guestimate of a setting.

DHCD: So instead of generalized low-medium-high settings, you give the user details about the level of heat it’s actually producing.

Herchman: Right.

DHCD: So how did you come about acquiring Thermi?

Herchman: My partner Kevin O’Brien and I founded the company in 2012. The technology was originally being developed by a company in Boston. They had a medical business working in pain management, so let’s say if you had a particular type of leg pain, the nerves in the back are a highway of communication. The device was used to locate nerves in the back and burn a lesion in the nerve to rupture the communication so the patients could get pain relieved. The company had begun to use the technology in plastic surgery. Leonard Miller and Brian Kinney, who is a very well known plastic surgeon, they began to work with the technology for a couple years.

A private equity firm bought that company and found they had a confused revenue stream. Pain management through hospitals and the reimbursable payment systems, those business models don’t function well together. Aesthetics medicine is all cash pay and behaves differently. So the private equity group decided they wanted to diversify the sales of the asset. My partner was aware of the technology and did a lot of work on it, so when they decided to do that we joined with a couple of Dallas guys and purchased it. We were able to further develop it and implement a commercial strategy.

DHCD: Eventually, you grew the company enough to get noticed by one of the world’s major pharma companies, the Barcelona-based Almirall. How did you go about getting on their radar?

Herchman: Well, the bad news for a lot of things is that we’re older, but the good news is that with age comes a little more understanding and relationships. The technology is extremely effective. We’re in these massive growing new markets that are blue water markets. We are offering new solutions for these conditions. And the market is just enormous. Some of the most successful markets in this space are a focus on these individual procedures. We have a product that could be used across a number of those procedures.

So from the inception, we really felt that we would get the company developed enough up to a point and we would need to seek a strategic partner or resource it to private equity. In the right circumstances, we knew that a partner would be attractive to us rather than receiving equity through those private markets.

We made a decision early on— and that comes from experience raising venture capital and taking companies public and having your own experiences of how things can change when a financial investor comes in. We were very confident in the effectiveness of the technology. We looked for key opinion leaders in plastic surgery, inpatient plastic and dermatology, and some other specialties. Opinion leaders have a tendency to be opinion leaders because they stay in the know and stay on the front end of trends in the market. After 25 years in the market, we know (Almirall) and they know us. So we went to them to have them get involved with us on the protocols and the use of the technology. They bought the technology and they really loved the culture of the company. They invested in our company.

DHCD: You mentioned that the doctors who were using the product were early evangelists. How did that help?

Herchman: When we started the company with Leonard, Kenny and Brian Miller, Leonard advised us. He said, ‘I really like you guys but let’s develop a company where the physicians stay in the development of the company.’ We took a high level approach from a quality perspective of getting physicians involved and showing that the technology works. We got an investment in November of last year from Cypress Growth Capital, they were partnered with a Silicon Valley bank. They put in about $9 million. And up until the time they came in, all the capital that came in was from physicians who were customers. They believed in the technology and they believed in our culture.

When you’re calling on dermatologists or plastic surgeons, you end up with a relationship with those customers. So we’ve got the capital to grow, but strategically we hope to get a head start from those relationships as well.

DHCD: And how much money were the practitioners investing?

Herchman: A minimum of $25,000. We ended up with some people putting in a couple hundred thousand dollars. One investor from Taiwan went in at about $800,000. But there were about 50 docs who provided $2.2 million total.

DHCD: You’ve spent much of your career in Dallas. How would you say the market for healthcare innovation has changed in your time here?

Herchman: Kevin O’Brien and I started a company in 1989 (Editor’s note: Three Seventeen Investments Inc.). By 1992, we were the seventh fastest growing company in Dallas. We took it public in 1996, the mighty Bear Stearns was a lead in our deal. Kevin and I hadn’t worked together since 1997; we’ve actually been competing in the aesthetic marketplace since then. But we got back together in 2011.

One of the reasons I wanted to help in Health Wildcatters is that having the ability to build and incubate businesses is really important. Around that you have different entrepreneurs and investors that have an interest in young businesses in Texas. I’m also on the board of directors of Bio North Texas because we need to cultivate the healthcare environment. That’s all the way from big institutions down to early stage companies. If you have like-minded people who are looking for financing or looking to attract and retain talent, it’s going to make it easier for everyone to not have to hop in a plane and go to Boston or Silicon Valley looking for those resources.

DHCD: So there’s more of a community now.

Herchman: I think that it is. A lot of these people were there, but they just weren’t a community. It’s getting to know each other and understanding who is in the community and how that might work for everybody.

DHCD: Now that you’re a subsidiary of Almirall, what are your future plans?

Herchman: Our plans are to grow. We’ve been extremely fast growing and we’re profitable now. The rate at which we will grow is unmatched in the aesthetic device side and now we have the resources to do it. Our intention is that we view Almirall as a partner and our intention is to have a commercial success and make sure the world knows that Thermi is the preferred technology for treating patients.

God bless my wife and Kevin and his wife too, we were all in, every penny. Everything was banked on Thermi. This one worked out for sure.

The other cool thing about this, we’ve got $80 million and that $80 million goes to 50 physician investors, it goes to employees who have options, some have been with us a long time, some are new. And a little bit goes to Silicon Bank and Cypress Capital, but almost all of it goes to the stakeholders that were out there building this business either as a physician or as a business person. So it’s very rewarding. I’ve got my physician investors who made two times their money to eight times their money.

Our company, we’ve had the circumstances of the environment. You can develop a product, but if the market isn’t ready for that product you miss it. Or you can develop a product and the market’s ready but you can’t get financing so you miss it. We’ve been unbelievably blessed. It’s been hard sometimes but we’ve benefitted from circumstances around us that were beyond our control time and time again.

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