The medical technology industry has been on the forefront of innovation for decades, but now return on innovation investment is declining. The very notion of medtech innovation needs redefining in a new health economy that is focused on higher expectations for value and convenience. Medtech companies must be ready to compete in the new environment or risk being displaced by companies that can show evidence that their innovations create value.
The biggest challenge facing the Medtech industry is the Medical Device Tax that took effect on January 1, 2013. The $30 billion medical device tax harms job creation, deters medical innovation and increases the cost of health care.
Medical technology creates more than two million jobs directly and indirectly all over the United States. The industry is one of the few U.S. manufacturing sectors that is a net exporter, and its innovations help reduce the human and economic burden of chronic disease.
What impact has the tax actually had on the industry? According to AdvaMed, the tax has resulted in employment reductions of approximately 14,000 industry workers and forgone hiring of 19,000 workers. The total job impact of the tax on industry employment was approximately 33,000.
Applying this ratio to jobs lost or foregone suggests that the impact of the tax on indirect employment would be approximately 132,000 jobs, for a total job loss due to the tax of as many as 165,000 jobs.
Almost one-third of respondents said they had reduced R&D as the result of the tax, and 10% said they moved manufacturing overseas.
The biggest impact is on our Medtech startup companies who don’t have the cash reserves to absorb the tax. It creates uncertainty in investing in Medtech companies which stagnates the commercialization of innovation.
“ As a small start-up operation that is not yet cash positive, the device tax is particularly onerous because of the decreased amount of funds available to invest in the business. ”
Officials in DC are working on repealing the Device Tax, last month Senator Franken (D-MN) sent a letter urging the new Chairman of the Finance Committee, Senator Wyden (D-OR), to join him in working to repeal the Device Tax.
Until the Device Tax is repealed our Medtech companies will be fighting an uphill battle, not only for funding, but if they are successful, to bring their products to market.
– JC @WCN
Medtech experts say despite “schizophrenia,” the industry’s prognosis is good
The investment climate for the medtech industry has become more cautious, more focused on short-term results, and wary of increased government regulation. At the same time there are still plenty of opportunities for growth and success, a panel of CEOs and entrepreneurs said recently.
The panel discussion was part of the MedTech Investing Conference, which took place last week in Minneapolis. In the discussion, “The Seduction of Medtech: Despite Challenges, Serial Entrepreneurs and CEOs Discuss Medtech’s Allure,” the panelists described an industry that was battered by recession and increased regulation but is, at the same time, regaining its stride.
“I see a degree of schizophrenia in the market,” said Ben Pless, CEO of Autonomic Technologies, a Redwood City, Calif.-based device maker. Pless noted that it has been a struggle for some investors and companies to adjust to the new realities of the medtech industry, where high regulation and low reimbursement have combined to slow growth. However, he added the climate is improving.
“Our product has great value,” he said. “We’re not there yet, but there are some good trends.”
Panelists agreed that investors are more cautious and that deals take longer to put together. Capital is harder to come by, and investors can be gun-shy of products that don’t have a short timeline for producing returns, they said. “We need to be smarter in how we manage our cash,” said Greg Barrett, president and CEO of DFINE, a San Jose, Calif.-based device manufacturer.
“There are going to be opportunities for big ideas, but there is a higher bar for showing results,”he said.
Another panelist was Danny Sachs, MD, aphysician entrepreneur based in the Twin Cities, who in recent years has co-founded four companies that have raised $118 million in venture capital. He agreed that there is more pressure to find quicker payoffs for investments.
“Before, I didn’t care about how much money it takes to get across the finish line,” he said. “Now, I care.”
The panelists said they were dismayed by the amount of regulation created by reforms such as the Affordable Care Act and by the hurdles they face with the Food and Drug Administration. According to Barrett, “The government doesn’t understand the role medtech plays in our economy.”
“We’d like to have a lightly-regulated industry,” he said.
However, he was optimistic about the long view. Despite the climate of caution, he said, a new generation of innovators and investors are waiting in the wings.
“I may not sign on for a 15-year deal, but there is somebody who will, and 15 years from now, they’ll be up here,” Facteau said. “I don’t think anyone in this industry is going to focus on incremental change. The demographics are just too favorable — money will flow.”
Taking questions from the audience, the panelists gave some advice: don’t rush to commercialize (a company can burn through a lot of cash that way), hire the best talent (“Don’t settle,” Facteau said), and Sachs’ recommendation, “Hire a really, really, good patent attorney.”
“This is a long-term relationship — like a marriage,” Sachs said.
But overall, the panelists said that companies and investors must find a Goldilocks-type balance between caution and chasing the next great investment.
“If you worry too much about how long it’s going to take and how much it’s going to cost, you’re going to talk yourself out of some really good ideas,” Pless said.