por Loren Bonner
, DOTmed News Online Editor | November 20, 2013
It's not just the hotly contested 2.3 percent medical device tax that is presenting a setback to the medical device industry. According to Paul Teitelbaum, managing director with Mesirow Financial's Investment Banking Practice, medical device companies have also been hit hardest by a lack of venture capital funding. DOTmed News spoke with Teitelbaum about why funds are being pulled away from med tech and what it means for the industry.
DMN: Why are venture capital (VC) firms shifting their funding away from medical device start-ups and smaller companies?
VC firms have been making the shift away from investing in start-ups and smaller companies in general because of the 2008 crash and economic fallout, causing limited partnership (LP) investors in funds to pull back their investments into VC firms, which had relatively poor returns and these LPs have cut the amount they have been investing in new VC funds. In order to allocate limited capital and improve their returns, the VCs have been saving their "dry powder" for their latest-stage/highest success probability companies and doing the same for new investments.
Medical device companies specifically have been among the hardest hit by the VC contraction because of lengthened FDA review times, higher clinical requirements and a much higher bar for reimbursement (need for outcomes data and econometric analysis) as the Affordable Care Act increases the scrutiny on the cost-effectiveness of treatments, many of which involve medical devices and focus on improving health management and prevention to reduce the utilization of costly procedures. Also, Washington has taken a tougher approach to medical device companies - for example, taxing 2.3 percent of revenues, while pharmaceutical companies have not had any incremental tax consequences. The general feeling of challenges and difficulties in medical devices has caused life sciences-focused VCs to shift their money more toward biotechnology companies. Also, with the "IPO window" opening up for biotech companies, it's a popular space, another reason for the shift in that direction.
DMN: How is this impacting the medical device start-up space?
It has created significant challenges for medical device start-ups to get funded. We have seen many med tech companies fail to get new VC funding in the past couple of years, even as things have started to ease up for companies in other sectors. Companies have definitely been forced to become more resourceful - they have had to resort to more continued funding from their existing investors, as well as family offices, high net worth individuals/angels, crowd funding, grants and other strategies. To some extent, this is hindering innovation. At the same time, it also may be working to filter out some of the less promising technologies and revenue models that might ultimately fail anyhow. We'll have to see how that plays out.