Venture capital investment in medtech has declined over the past several years, placing medtech innovation at risk. This report examines strategies and solutions—gleaned from interviews and discussions with more than 20 medtech leaders—that could help reverse this trend.
Is medtech innovation at risk? Watch the video.
Is the medtech innovation ecosystem at risk?
We have been tracking a worrying trend: Investment and startup activity in medtech has been declining, putting future innovation at risk. To get ahead of it, AdvaMed and Deloitte partnered to uncover strategies and solutions that could help turn the tide. We examined data, reviewed literature, and interviewed executives across the medtech innovation ecosystem.
The research showed that many startup companies are struggling to make it out of the “valley of death”—or the period between the initial investment and creation of a commercially-viable product. While large medtech companies depend on a thriving external innovation ecosystem for acquisition targets and new sources of growth, many shy away from investing in early-stage, unproven technologies.
In fact, some corporate and venture capital investors are hesitant to make investments in medtech innovation right now. This is potentially the result of financial pressures that stem from health care reform, the transition to value-based care, tougher insurance coverage, and increased regulatory requirements.
Proof is in the research
To fix the capital problem, study participants suggested that:
Similar to the biopharma industry, large medtech companies, entrepreneurs, and the venture funds that back them should consider engaging in strategic partnerships, such as co-development, co-marketing, or contingent merger and acquisition (M&A) deals.
Entrepreneurs should leverage alternative funding sources such as family offices, state programs, and accelerators; and consider investment by non-medtech partners such as providers and technology companies.
The medtech industry should consider supporting aspects of tax reform that might motivate greater investment in innovation; for example, repealing the medical device excise tax or establishing a federal angel investor tax credit.
To reduce coverage and commercialization risk, medtech entrepreneurs should:
Develop a more sophisticated understanding of who their customers are, how they define value, and tailor research and development (R&D) plans and value propositions accordingly.
Engage in partnerships with customers who are focused on population health, such as integrated delivery networks and large employers, to co-develop products.
Consider new contracting approaches that allow for market adoption of products and services while real-world evidence (RWE) is still being gathered.
Stakeholder collaboration is likely to be the key to ensuring that the medtech industry can continue to deliver lifesaving innovations to patients.
Suggested steps forward
To reinvigorate medtech innovation, industry stakeholders should consider taking several action steps:
Set aside capital to invest in early innovation, ideally through corporative venture capital arms that are best-suited to managing a portfolio of investments;
Consider alternative deal structures (build to buy) or partnerships (co-development, co-marketing);
Put the right governance model in place and align incentives across business development and the business units that will support these deals;
Consider partnerships with nontraditional players (e.g., consumer technology companies) to access new capabilities; and,
Mentor early-stage companies on how to develop a compelling value proposition, differentiate products commercially, and tackle key coverage hurdles earlier in the development process.
Take advantage of nontraditional funding options: state programs, SBIR grants, family offices, philanthropic investors, and incubators;
Consider consumer technology companies as potential investors or partners;
Spend additional time understanding potential customers and how they define value early in the product lifecycle; and,
Enter into partnerships with employers and payers to test value propositions, or co-develop products.
Venture capital investors:
Co-invest with large companies in early innovation;
Set a funding hurdle for products or business models that can demonstrate value, generate coverage, and be commercially differentiated; and,
Consider partnering with family offices and other investors to evaluate medtech investment opportunities.
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