Chicken or the Egg

In preparing MPO’s annual Top Companies report, the editorial staff gathers, reads, scrutinizes, analyzes and digests an enormous amount of information and data (and caffeine) from a variety of sources. It’s always an illuminating process—not just what we learn about each of the 30 companies, which is always an education, but also about the myriad trends impacting the overall medical device industry from the billion-dollar multinational firm to the five-person startup with an idea and no product.

Overall, financial performance for 2008 outpaced 2007, with companies reporting increased revenues. Fourth-quarter results, which for most companies ended in December, began to reflect the financial upheaval that had been building throughout ’08—and continues this year. Perhaps more than a recession that will have an end (it’s got to, right?), medical technology companies of all sizes will need to learn to cope with and prepare for a longer-term challenge. A new austerity has gripped the nation’s healthcare economy. Payers—public and private—are holding the purse strings much tighter. The White House wants comparative effectiveness for medical technology—in short, long-term data to support the decision to pay for a product, service or technology covered by Medicare (a difficult task considering how quickly medical devices are updated and improved). The rush to “free” the market from what some may see as extravagance, may have longer-term impact as innovation is crippled in the process.

A quote from the CEO of one of the medtech companies we profiled in this issue comes to mind. He said: “2008 was a tough year, and we expect 2009 to be even tougher.” Not the best news we’ve heard, but probably realistic.

So what happens now? A catch-22 is building. To reduce costs long-term, new, more efficient technology would seem to have to be part of the equation—along with quality-based care and control over chronic disease. But to achieve quality care, fewer doctor visits and improved disease management, there is a technology variable that can’t be ignored, constrained or punished. That’s not to say that more expensive technology is always the answer if tried-and-true methods work just as well, but you can’t get to tried and true if you’re not tried first.

Where does new technology come from? This isn’t a chicken-and-the-egg question. Most innovation comes from small firms. Though most of the large companies spend hundreds of millions—some billions—on research and development, it’s usually the startup that has the big idea that’s later absorbed by an industry leader. According to a recent report co-authored by the National Venture Capital Association (NVCA) and the Medical Device Manufacturers Association (MDMA), more than 80 percent of medical device companies employ fewer than 50 people. It’s got to start somewhere. After all, at one time, companies such as Medtronic and Boston Scientific were startups with venture capital roots.

According to a report by Ernst & Young, approximately two-thirds of medical technology revenue in 2008 was from products launched in the previous two years. Part of that pipeline starts with new companies. According to the NVCA/MDMA white paper, titled “Medical Technology and Venture Capital: A Fruitful Yet Fragile Ecosystem,” gun-shy venture capitalists and medtech startups are finding the extra cost and time required to launch a new device hard to reconcile. They wonder if they’ll ever get to market—much less turn a profit.

“A number of market and regulatory challenges currently threaten to darken the industry’s outlook and dampen innovation. Economic pressures may choke off investment in medical technology by venture capitalists and other industry players. Proposed legislative reforms and court decisions threaten to weaken the patent system, which enables small companies to protect the economic value of their innovations,” according to the white paper’s authors.

The paper also noted that more than one out of every three Americans benefited from life sciences innovations developed by companies that can trace their roots to venture capital backing.

That’s a pretty powerful claim.

Keep in mind, there’s also a trickle-down effect. Companies that provide outsourcing services don’t work with large device companies alone. At the risk of being subsector-centric, without the help of contract manufacturers and suppliers, many new technologies from startup firms often wouldn’t see the light of the development day. Third-party manufacturing, research and development, and prototyping (among other services) provide the much-needed infrastructure that nascent companies desperately need, but don’t need (or want) to pay for. Not to mention, there has been a fair amount of venture capital dollars invested in the outsourcing market in the past few years.

The sky isn’t falling. And a slew of positive demographics for continued growth remain on our side. But after a steady ride upward, the medical device industry is going to have to do some course correcting to maintain its ascent. Our industry plays a part in that—

perhaps now more than ever.