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No Easy Money

No Easy Money
To secure funding, medtech companies think strategically.

With a few exceptions, investors have bet more cautiously on medtech than other healthcare sectors over the past few years. Creative thinking has kept many companies funded while venture capital firms put their money into more lucrative sectors, such as biopharma.

National Venture Capital Association reports that healthcare-focused venture capital funds raised over $12 billion of new capital in 2016. Not much of that went to medtech, which has seen a decline in financing over the past three years. According to data from Silicon Valley Bank, total medical device investment dropped from $5.3 billion in 2015 to $3.9 billion in 2016.

Venture Capital firms look for companies that meet certain profit and loss requirements--requirements many developing medtech companies don't meet. This lack of funding stands to impact the medical device industry as well as the community at large, considering how much health care depends on medical devices for quality care.

Despite the struggle, research firm Kalorama Information reports the medical device market will experience growth this year, albeit minimal. The firm's annual market outlook predicts 2.8% average growth for 2017 and the following five years.

Why Not Me?

The simple reason investors choose other healthcare sectors over medtech? Risk and return. Medical device companies generally have high funding and complex regulatory requirements with lower return than other industries.

"A successful medtech company 10 or even five years ago could generate a 15% rate of return," said Pedro Arboleda, managing director of Strategy at Deloitte. "Now, that same medtech company may generate only a two percent rate of return with a higher investment. As a result, the VCs involved in medtech have whittled down to those that really want to stay in the sector. "

Companies have to meet specific criteria, expectations, and milestones in order to receive VC funding. Market size, strategy, technology, competition, and deal terms, among other factors, all come into play, as well as growth benchmarks.

A technology startup may have product launch and team growth milestones to target to secure or maintain funding. In medtech, reimbursement and regulatory milestones present high hurdles. As these milestones get pushed back, investors lose interest.

"There is no parity between the reimbursement process of biopharma and medtech," said Arboleda. "Medtech takes three to four years. If the industry pushed to get products approved faster, that could lend itself to an improvement in these milestones."

Success Outside the Box

With less money coming from private equity, venture capital, and corporate investors, medtech companies plan differently. Nexeon MedSystems, a medtech manufacturer that develops implantable neurostimulators, has received most of its funding--about $10 million--from government grants and licensing fees. Its at-risk capital has come from the Rosellini family and founders. CEO Will Rosellini said the company plans to do a slow IPO, which enables market pricing of the stock before an IPO pricing, ensuring that early investors are protected from "investment banking pricing arbitrage."

In 2013, Rosellini acquired the assets of Synaptix, which built the neurostimulator device and had gotten European regulatory approval. "They were way ahead on the engineering and behind on the clinical proof," Rosellini said. "So I thought, 'This is the best team of engineers and neurostimulation platform in the world. Given how close we are to revenues and break-even, we should mortgage our house to get this to break-even.' The story should play out as a public company. If we went public faster with raising very little venture capital, the upside for our early investors would be a lot greater."

Hubert Zajicek, CEO and cofounder of Health Wildcatters, a healthcare seed fund and accelerator based in Dallas, Texas, agrees that grants (and accelerators, of course) are good ways to raise early seed capital.

One company that went through Health Wildcatters' accelerator program, Sintact Medical Systems, which develops nonresorbable films that prevent adjacent organs from adhering to each other after surgery, secured nearly $1 million in grants from the Small Business Innovation Research (SBIR) program.

"That's attractive to investors," said Zajicek. "That's more than a million they don't have to put in. It de-risks the technology and increases interest."

Aside from SBIR and university grants, medtech startups can look to the states for a little help. New Jersey's Economic Development Authority offers loans of up to $5 million for eligible technology and life sciences companies. Florida offers attractive economic incentives to businesses willing to relocate to the Sunshine State. And former Massachusetts Governor Deval Patrick signed a $1 billion package into law to support life sciences over 10 years.

Arboleda suggests partnerships with market disruptors. "Large, well-funded companies have made big bets on healthcare and wellness devices," he explained. "Wearables and apps are starting to delve into areas traditionally privy to medical device companies. Why not partner with them instead of creating something from scratch? We're seeing more midsize medtech companies interested in meeting Silicon Valley."

If Kalorama Information's assessment holds true, medtech companies will have to keep hitting milestones before VCs pay attention. Nontraditional routes can help close the gap.

Heather R. Johnson is a freelance writer based in Oakland, California.


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