Pulse of the Industry: Medtech companies challenged by the ‘New Normal’
Before moving forward, check the rearview mirror to see what is behind you.
At EuroMedtech™ 2010 in Leipzig, the international accounting firm Ernst & Young will present the most complete picture to date of the impact of the financial crisis on the medical technology sector, providing a background for a CEO panel discussion, ‘Pulse of the Industry’.
“Overall medical technology companies have weathered the storm of the financial crisis,” said Jason Hillenbach with Ernst & Young’s Global Life Sciences Center.
“Our data shows the financial meltdown was strong enough to pull down the medtech sector, though not as far as other sectors and the broader market,” he told partneringNEWS, adding that the report shows “the crisis was not the train wreck everyone was expecting.”
“In fact, the big multinationals came through the rough weather in relatively good shape,” he said, and overall reporting revenues were actually up 2.4% in 2009, while net income was up strongly with a 15% increase due to heavy cost-cutting measures.
“Smaller companies that are capital sensitive were hurt,” he said, especially those who had recently gone public, or else were venture-backed and finance-dependent.
“Companies marketing ‘me-too products’ that do not stand out among competitors also are struggling from the pressure of tightened markets,” he added.
Venture investing plummeted more than 20% over the past year, yet according to the Ernst & Young report ‘Pulse of the Industry’, 2009 proved to be a solid year for further investments in medical technology from a historical perspective, largely due to several large debt offerings by US-based companies.
However, the irrational exuberance of venture investment in 2006 may have distorted the perspective of executives.
“Venture investment was overheated,” said Hillenbach, explaining that where an average of USD 2 billion of venture capital (VC) was invested annually between 2000 to 2005, in the following two years it doubled to USD 4 billion annually.
Meanwhile, the exits for VCs through initial public offerings (IPO) and mergers and acquisitions (M&A) tightened or closed completely.
“These conditions made for a classic market bubble, so that when the overall economy imploded, the medtech VC investment bubble burst,” he said.
Moving forward, medtech companies are entering a period that Ernst & Young calls the ‘New Normal’, a time that will be defined by the more rational forces of investments and markets but also characterized by new rules.
Currently investment in medtech is being attracted to inside financing rounds at companies where products are ready to commercialize or where the company is believed to be attractive to acquirers.
“There is still money being invested in early round financing, but VCs are being very selective, looking for products that have a reimbursement strategy. Today a company has to prove the value of its products to the payers of healthcare, so clearly this is what the VC investor is looking for as well,” he added.
“Medtech is no longer about throwing a new product into the market and then searching for reimbursement,” Hillenbrach remarked, adding that the work on developing a reimbursement strategy has moved well upstream in the product development process.
Medtech companies with new products will need to deliver value to the healthcare system in order to draw both the investment they need to bring that product to market, as well as to receive reimbursement from payers.
Hillenbach defined value as enhancing patient outcomes, addressing unmet clinical needs, expanding patient access, and improving cost-effectiveness within the overall health ecosystem. In order to demonstrate these values, venture-backed companies will have to increase their investment in R&D, work with payors on a reimbursement strategies, and be prepared to commercialize their products. With the IPO market slow to recover, and acquirers firmly in the driver’s seat on M&A discussions, early stage companies may now have to show revenues, and perhaps even positive cash flow, before they can attain an exit.
“This is a new challenge in the business model for the sector, and it is a new set of headaches for early stage medtech executives,” he concluded.
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