By Michael Quigley, Research Manager, LSN
The Medtech space has had a painfully slow start to 2013. With venture financing remaining scarce, a serious dip in FDA approvals, and the value of M&A activity at pace to be at a 10-year low, slow may be an understatement. Many of the larger companies in the space have been shedding segments of their business in order to specialize and become more efficient. The implementation of this slimming down will undoubtedly have a negative impact in the number of smaller device company acquisitions by Big Pharma. The drivers of this lackluster performance include the 2.3% medical device tax implemented in the beginning of 2013 by the JOBS act, heightened criteria used by the FDA to gain pre-market approval, downward pricing pressures on devices, and the underlying general economic uncertainty around the globe.
While the FDA has long been attempting to increase its efficiency in getting good products on the market, I wouldn’t expect anything more than a slight relaxation of criteria for approval in the 2nd half of 2013. As capital continues to pour overseas and the bottleneck in the FDA gets larger and larger, a more serious change in the approval process may be needed for American device manufacturers to compete. On the bright side, as time goes by, and more investors become accustomed to the impact that the medical device tax has on their potential investments, I see investment interest in all stages having at least a slight rebound in the near future.
What early stage companies need to do to succeed in this kind of capital-dry and regulation-burdened system is twofold. First is to make innovation and comparative advantage ingrained in the company’s brand. Investors aren’t interested in minor tweaks of existing technologies anymore because the FDA has raised the bar. For years, medtech companies have been able to realize large revenue streams from incremental innovation, but over the years, those returns have been diminishing. Whenever dealing with potential sources of funding, having the advantage that your product holds over the current market needs to be paramount.
Secondly, companies need to look to alternative sources of funding (as well as traditional ones) to develop a target list of potential investors. Building a list and establishing relationships and meetings with a myriad of potential partners is crucial in this type of investment environment, regardless of your company’s stage of development and level of innovation. Forming these bonds early and continuing to build on them going forward is seemingly the only way to get though the extremely capital-intensive process of getting a device on the market.
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