Big medical device companies’ R&D budgets are holding strong, but start-ups are feeling the pinch.
Research and development is the lifeblood of the medtech industry. Investing in innovation is what keeps companies churning out the technologies that save and improve the lives of patients year after year. But factors including the global economy, regulatory uncertainty, and the medical device tax that threatening companies’ R&D budgets.
Across all U.S. industries, R&D spending declined for only the second time since the 1950s in 2009—a drop no doubt attributable to the global economic crisis, according to a 2012 report from the National Science Board. R&D spending has rebounded in the following years, but the gains of $2.9 billion in 2010 and $7.3 billion in 2011 are far below the $25-billion-plus jumps seen before the recession.
That’s not surprising, says David Nexon, senior executive vice president at AdvaMed. “I think industry revenue growth has been slowed in the last couple years, and when revenue is growing faster, R&D spending goes up,” he says. “Within big companies where revenue is growing slowly or not growing, they’re looking for savings, and one of the places that has to be considered is R&D.”
Public medtech companies in the United States grew their R&D expense by 2% in 2011, down from 8% in 2010. But the growth was widespread, with two-thirds of pure-play public medical device companies increasing their R&D budgets, according to Ernst & Young’s Pulse of the Industry report.
“There’s still strength in the overall R&D picture in the device industry,” says Marty Grueber, research leader with global R&D firm Battelle (Columbus, OH). “Different companies have different product mixes, different niches, and specific operating environments, so everybody’s a shade different, but R&D still looks fairly strong.”
That was especially true among big companies. Baxter and Thermo Fisher Scientific both posted double-digit growth rates in R&D spending for 2012, and Medtronic’s 2% real growth rate in R&D investment was higher than expected, Grueber says, adding, “Given the state of the global economy, that’s still fairly strong.” Both Baxter’s and Medtronic’s R&D budgets exceeded $1 billion. “That’s pretty significant,” he says.
But for small companies, the R&D picture isn’t so rosy. “Start-ups, which are so much of the engine of innovation in this industry, have had a tough time raising capital,” Nexon says.
Start-ups are research intensive, but because they haven’t yet brought their products to market, they depend heavily on outside funding—often venture capital. But the industry’s lengthy product development process—compounded by regulatory uncertainty—has led venture capitalists to shy away from investing in medtech. The medical device industry saw a 13% drop in VC dollars and a 15% drop in deals last year, according to a report by PricewaterhouseCoopers and the National Venture Capital Association. Early-stage companies suffered the most: First-time financing deals in the industry dipped to their lowest level in 18 years.
Data about 2013 R&D budgets is still scarce, but there’s cause for concern. The 2.3% tax on medical device sales, which went into effect in January, added another problem to the mix. “The device tax has put additional pressure on companies’ budgets, and that affects every part of the expense ledger, including R&D,” Nexon says.
Companies are understandably wary. A majority of medical device companies (61%) said the general economy was the biggest factor causing changes to their R&D budgets this year, according to the 2013 Global R&D Funding Forecast survey conducted by Battelle and R&D magazine. Of those, all said they expected their R&D investment to remain the same or be smaller than expected. About one-third each said general industry changes and regulatory issues would affect their R&D budgets.
But it’s not all doom and gloom. Nexon says he’s hopeful the user fee agreement signed into law last summer will improve FDA performance. “Venture capital funding [for medtech] has dried up because of a perception of how tough it is to get through FDA, so if FDA becomes more efficient and consistent in its reviews, perhaps those investments will become more attractive.”
We’ll have to wait until next year for a full report on the device tax's effect, but Grueber expects it won’t be as pronounced as some have predicted. “R&D is our competitive leg to stand on,” he says. “Cutting R&D because of an overall cost increase due to the tax, that’s something individual companies will have to wrestle with. But ratcheting down the R&D engine just to handle this cost doesn’t seem like the most appropriate path.”
Jamie Hartford is MD+DI's managing editor.