Local VCs more worried about FDA moves than healthcare reform

May 3, 2010 by MassDevice staff

Concerns in the investment community over changes in the 510(k) clearance process and other uncertainty over new regulation at the Food & Drug Administration outweigh worries about the healthcare reform act, according to a MassDevice survey of local med-tech investors.

The survey, conducted with the help of the New England Venture Network, polled a dozen VC professionals in the life science community. The respondents said that, overall, the climate for medical technology investment was "mostly negative." The survey was kept small and anonymous to ensure open and honest responses.

The investors cited regulatory changes at the Food & Drug Administration as their primary concern.

"For now, we have stopped investing in any new med-tech companies with FDA exposure," wrote one investor.

Another pointed directly to the agency's proposed changes as directly affecting the investment climate.

"Fear of further FDA regulation, including 510(k) reform, is making it very difficult to manage risk and leading to fewer investments in devices," that investor wrote.

In fact, most investors said major changes to the 510(k) process would be the most damaging to deal flow, even more so than the 2.3 percent excise tax imposed on American medical device makers as part of healthcare reform. An exclusive new MassDevice report shows that 510(k) decision times increased once again in 2009, to an average of 119 days — up 37 percent from 2005, when times to decision averaged 87 days.

"Early-stage medical device investment has already slowed considerably due to regulatory issues. The incremental effect of the tax will be small compared to the damage already done," wrote one investor.

But that doesn't mean the device tax will have no effect on deal flow. Investors were very negative on the impact of the tax. Here's a sampling of what they wrote:

• "To put it in perspective, 2.3 percent of revenues is approximately equivalent to one-third to one-quarter, or the amount that the big med-tech companies spend on R&D annually. The money has to come from somewhere, and I doubt all will come from profits (at least I doubt that is what their shareholders will want)."
• "Price pressure is already squeezing margins. This means we have to invest more money for less gain. It is bad for returns. Median returns to healthcare venture capital are already poor, and this will only make it worse. In the short term it will raise revenue. In the long run innovation will suffer."
• "Currently, time lags to reimbursement and increased development timelines have increase the time and money [required] to invest in medical device companies to reach profitability. An additional excise tax on the medical device industry enhances this problem, while also impacting the [proft and loss] of potential acquirers for any early-stage med tech company."

The attitude toward healthcare reform generally was negative as well, with the investors saying that the bill doesn't fix inherent problems in the system. One investor wrote that the bill "appears to have been a misguided effort at bringing the uninsured into a highly inefficient and dysfunctional system, instead of developing a better one for all."

Overall, investors felt that the pharmaceutical and biotechnology industries emerged as winners in the healthcare reform act, while medical device companies, health insurers and the American public were its biggest losers.

Download MassDevice.com's "Eye on the FDA" report for a detailed analysis of the increase in 510(k) decision times last year.

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