I was speaking to an experienced medical device entrepreneur this week and he painted a pretty grim picture of where venture-backed medical device companies are headed.

His macro view:

1. VC Funds Shrinking: Conventional wisdom says that: Half the venture funds will raise about half the money they have previously. The other half will just disappear over the next 5-7 years as fees tail off. There have been rumors that several healthcare/medtech-focused venture funds are having issues raising new money.

Result: smaller syndicates. Less money available for early stage capital intense projects – especially PMA pathway implantable devices.

2. Experience Matters: The herd of entrepreneurs starting medical device companies will thin; only CEOs and founders who have had substantial exits will get funded. The ability to raise money will be a key criteria in picking CEOs and companies to back.

Result: You will see fewer and fewer first time CEOs get venture funding in medical devices.

3. The Device Tax Hurts: The recently passed health reform bill mandated a 2.3% excise tax on the sale of medical devices. This will only serve to hamper R&D spending and innovation at medtech companies.  If given a choice between reducing their cash flows by 2.3%, cutting sales and marketing, or cutting R&D, many  incumbents will choose to cut R&D and preserve cash flows.

4. Innovative Not Incremental: Incremental product innovations just wont cut it any more. Yet the $’s needed for innovative product development are only going up.

5. ROI is Key: Healthcare economics will be a big part of product development from day 1.  If your product doesn’t have a credible cost-effectiveness argument, don’t bother trying to raise big venture money.

6. Revenues Are The Name Of The Game: The biggest venture-backed medical device exits almost always occur at revenue stage (ie, post approval). 

-Acclarent: revenue stage US/EU ($785M acq)
-Corevalve: revenue stage EU ($850M acq)
-Conor: revenue stage EU ($1.4B acq)

The most promising private medical device companies today are at revenue stage and growing fast (Access Closure, Barrx, etc)

7. Acquisition Markets Are Limited: Unlike biotech, where $500+M acquisitions are common, takeouts at that price are rare in medical devices. And the pool of potential acquirers is much smaller than it is in biotech.

8. Regulatory Risk Is Increasing: The FDA is cracking down on medical devices and regulation is going up. Plain 510k’s will become 510k’s with clinicals. 510k’s with clinicals will become PMAs.  Even historically friendly EU device regulators are asking for ~50 patients of clinical data for a CE Mark vs. the 10-15 patients needed just a few years ago.

It’s hard for me to disagree with most of his facts and conclusions. 

Due to poor industry returns in venture over the last 9 years, the extended time to exits, a non-existent pre-revenue device IPO market, and the high cost of medical device product development, the private financing choices are thinning.

The best CEOs and founders have always been in the driver’s seat and will only continue to be more sought after, especially in early stage medical device companies.