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Will a Hostile Funding Environment Hurt U.S. Innovation?

As medical device companies struggle to receive funding, innovation is in danger.

Innovation is in danger, according to Ernst & Young’s 2011 “Pulse of the Industry” report. Several factors put the development of new technology at risk—low hospital margins, a lack of funding, reimbursement limitations, and more regulatory scrutiny of devices.

Emerging companies are finding it more difficult than ever to fund innovation. While companies with more than $1 billion in revenue saw a 73% increase in the share of funds raised last year, emerging “precommercial” companies have been up against weak venture capital financing, which fell 13% from 2009, the report states. And venture capital firms are selecting less risky technologies such as nonimaging diagnostics when investing. A recent survey revealed that these firms decreased their investment in life science companies by 39%, and they intend to continue this decline during the next three years, possibly by more than 30%, according to a report by the National Venture Capital Association’s MedIC Coalition. Survey respondents are also anticipating much less investment in medical device companies that are addressing serious diseases such as cardiovascular and neurological conditions, and cancer. According to Jonathan Root, MD, the cost, time, and fickle nature of the FDA approval process is pushing investors away from funding U.S. medical technology. Root is a general partner at U.S. Venture Partners (Menlo Park, CA) and a member of the MedIC steering committee.
 
The MedIC survey also found that venture capitalists are looking overseas for investment opportunities—36% intend to increase their investment in life science companies in Europe, while 44% of these firms want to invest in companies in Asia. A mere 13% of venture capitalists plan to increase investment in North American life science companies.
 
So what is the solution? “The way to sustain innovation is for medtech firms to innovate in new ways — not just develop and improve products, but expand into entirely new kinds of offerings, including services, holistic solutions, and more,” the Ernst & Young report states. “In medtech’s new normal, companies will need to rethink what they sell, how they sell, and even how they develop those offerings in the first place.” In addition, emerging companies will need to work harder to find funding, whether it’s through larger medical device companies, receiving grants from the government, or appealing to various foundations.

Device companies will also need to work closer with providers, according to John Babitt, medtech leader for the Americas at Ernst & Young (New York City). “[Companies] have to be able to work hand-in-hand with the provider to produce the information that can document the cost that they're saving and the improved outcome to the payers,” he says. “We think that harnessing that information and partnering with providers and payers is going to be the new normal. The medtech [industry] is uniquely positioned to take advantage of some of those opportunities.”

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