A Look at the Medical Device Industry Today
BY ARIELLA P. GOLOMB, MD, JUNE 3, 2009
Venture capital companies believe the dynamics and fundamentals and the medical technology industry haven't changed, even though the economic crisis is causing a revaluing of assets. Many VC-backed companies are expecting down rounds, particularly as midstage assets are revalued. These observations were made by David Cassak, a managing partner at Windhover Information, who spoke on the State of the Medical Device Industry at this year's MDMA annual meeting. According to Mr. Cassak, the economic crisis is causing some VCs to "feed their own children first" and not fund other companies.
Mr. Cassak predicted that this revaluation should lead to a lot of bargain hunting by large strategic acquirers, which hasn't been seen to date (with the exception of Medtronic.) He speculated that given revaluation mentioned above the big players don't know what assets are worth anymore.
Certainly in orthopedics we've seen a slowdown in M&A activity. There has only been one M&A deal this year to date (NuVasive's acquisition of Cervitech), while there were 30 deals in 2007 and 50 in 2008. This isn't surprising given that large acquirers presumably feel their companies are undervalued in the public markets and do not want to use their stock as currency. Given the uncertain macroenvironment, they are also likely to be more careful with their cash.
Mr. Cassak highlighted other issues for critical for Medical Device Companies to consider:
- Evidence-based medicine will return and introduce additional costs and clinical trial uncertainty
- The scrutiny being applied to physician-industry relationships will put the important role of physicians in product development at risk
- As the big medtech players get even bigger (J&J, Medtronic, etc.) bureaucratic environments may make it harder to do deals; thus, a new generation of leading strategic acquirers (such as Hologic and Integra) will emerge
- Capital efficiency should be considered important now than ever
- The impact of healthcare reform is unclear
An additional point by Mr. Cassak worth noting was his recommendation that companies "be right, not first to the technology." He made the argument that incremental rather than disruptive technologies are worth the investment. Incremental improvements to existing practice patterns involve a lower risk profile than trying to dramatically shift the way physicians operate. He gave the example of the uphill battle robotics are facing for product adoption and the small first-mover advantage seen in the cardiovascular arena. However, Mr. Cassak did concede that there is still room for successful disruptive technologies, such as tissue and cell therapy and regenerative medicine.
