The dire effects on device innovation long threatened by the medtech venture financing crisis are beginning to be felt. Recent years have seen a sharp decline in the number of medtech start-ups being formed, according to US industry group Advamed, placing the sector’s future at risk. And things are going to get worse before they get better.
“The trend in innovation is going to be perceived to be worse for a little while. Even if the investment starts increasing now, there is a lag of five to six years for some of these technologies to start seeing the light,” says Advamed’s chair-elect, Nadim Yared.
An analysis of the US medtech industry conducted by the lobbying group suggests that the formation of new medtechs has declined from a high of more than 2,000 a year in 2006 to around 600 in 2012, the most recent year in Advamed’s analysis. And this has come as a direct result of VCs’ unwillingness to back these groups.
“That sharp decrease correlates very well with the decrease in investments in early-stage companies by the venture community,” says Mr. Yared. This is because the cost for a medtech company to go from incubation to exit has more than doubled over the past decade, and device development timelines have increased dramatically over that same period.
“There used to be an exit in five to six years – now we’re looking at seven to 10 years,” he says. “The timelines for FDA approval [and] for obtaining CMS and private payer reimbursement have increased.”
And this problem is unique to the device space. “When we look at the percentage of the money dedicated to the medtech sector as compared to other sectors, it has decreased,” Mr. Yared says. Other sectors saw a decline in investment following the recession – roughly between 2008 and 2011, but recovered. Not so in medtech. “This is sector-specific,” he says.
The share of venture investment in early-stage medtech companies has dropped from 10% of all US early-stage investing in 1993 to 3% in 2014, Advamed states.
This is partly due to uncertainty regarding regulatory and reimbursement processes, particularly the procedures used by the Centers for Medicare and Medicaid to grant coverage, reducing the eagerness of VCs to invest in early-stage companies. Cuts to Medicare and Medicaid are a strong possibility under the incoming Republican US president and Congress, though whether this will eliminate or exacerbate the uncertainty VCs dislike so much is unclear.
There is one policy that could benefit the medtech sector. The coming administration will almost certainly repeal the Affordable Care Act, along with the 2.3% excise tax on medical device sales within the US that goes towards funding it.
As well as policy changes, there are steps that the industry itself can take to boost entrepreneurship. Mr. Yared says that if a start-up wants to attract investment, it must make an argument based on cost-effectiveness.
“20 or 30 years ago all it took was to develop a cool technology in the medtech space and it would sell,” he says.
During the next phase, 10 or so years ago, a device would only sell if the developer could prove it had a real clinical benefit to the patient.
Over the last five years, the power has shifted even more, and payers are in a position where they can almost dictate what therapies can be adopted, Mr. Yared says. In order to present an appealing prospect for VCs, a start-up must answer basic health economic questions. “Is this therapy cost efficient? Does it reduce costs in the system? Does it eliminate costs? Does it shift costs from one area to another?”
Companies at the top of the pile can help too, for example via corporate VC activity, incubators and partnerships – but the change that would have the greatest effect would be acquiring companies at an earlier stage.
“If we can see the average time to exit reduced and/or a clear positioning of the major consolidators about what type of technologies they would like to see or invest in or acquire, that would give more fuel to the venture community to be able to raise money from mutual funds and institutional investors and have more courage to invest in early-stage medtechs,” Mr. Yared says.
Fortunately, he says the trend is improving, and believes it will continue to improve over the next two to three years.
In the medtech sector more than almost any other the big caps are dependent on acquiring small companies with new devices to flesh out their offerings. It has been obvious for some years that the difficulties in establishing a start-up would bleed through to the larger companies, and this is now taking place, Mr. Yared says.
“We’re seeing our growth rates flattening a little bit in the industry, we’re seeing fewer novel technologies taken to the markets to treat disease. The impact is being felt right now.”
Innovation in the medtech industry is in trouble, and it will take a concerted effort from device makers large and small, as well as funders and policy makers, to get it back on track.