The following is a copy of a speech given Oct. 22 by MassDevice.com publisher Brian Johnson at the Harvard Club in Boston. Brian was speaking before an assembled panel of medical device industry experts at a luncheon sponsored by Switzerland Trade and Investment Council and Swissnex.
If you want the state of the medical device industry you need not look much further than this anecdote. I just spent most of this week down in our nation’s capital, listening to Donald Berwick and Margaret Hamburg tell the medical device industry to keep its chin up.
When the regulators are the ones telling business to be optimistic, you know there might be some trouble.
Let’s be frank, these are not the best of times for the medical device industry.
The industry is facing daunting challenges to the status quo, which is not good for a business that has had many years of robust growth, healthy profits and relative protection from the whims of the economy.
Those challenges include a motivated and well-funded FDA determined to make substantial changes to the way devices and drugs are manufactured and sold; a public who generally believes that the healthcare industry looks to take care of itself first and patients second; and a massive healthcare reform effort where the stakes are so high that the future of this country’s economic livelihood may be at stake.
That all adds up to uncertainty, which is the worst of all ingredients for business.
Despite the daunting challenges this industry is facing in the short term, we must also look to the bright side. There is no other business in the world that will benefit more from the fact that in 20 years there will be more people over the age of 60 than under the age of five.
But as my wife and investors like to tell me, we live in the present, not the future.
The medtech industry has managed to withstand some of the worst economic conditions in generations. The fiscal discipline of the country’s largest medical device companies has staved off financial ruin and kept the industry in tact.
Those austerity measures have apparently worked: While publicly traded medtech companies in the U.S. and Europe reported essentially flat sales in 2009 of $294.1 billion, net income rose by 10.8 percent last year, according to a just released study by Ernst & Young. Look for those belt-tightening measures to continue in the near future, as medical device companies in the U.S. look to compensate for an excise tax on industry to pay for healthcare reform, changes to the reimbursement structure and other regulatory measures.
Closer to home, publicly traded companies in Massachusetts fared worse, according to Ernst and Young, with net income about $1 billion off of 2008’s pace and only a modest uptick in sales.
Staving off losses is really only a part of a much larger story for this state and the industry as a whole, because it’s not just the companies that have gone out of business that matter. It’s the companies that can’t get off the ground that could derail this industry’s future growth.
The investment community has pulled back on investing in early-stage and seed rounds, choosing to place their money in more mature companies closer to exit.
Further, the venture model is in upheaval thanks to an essentially frozen IPO market. And while M&A has become the primary method of exit for investors, there are only so many companies sitting on the surpluses of cash needed to make big acquisitions.
While those companies are certainly active — Medtronic, for example, has bought 10 companies in the past two years — one has to wonder if there’s enough free cash out there to really keep the pipeline primed.
For Massachusetts, which has a disproportionately high number of start-ups in the pre-revenue stage and a surplus of groundbreaking ideas in labs all over the state, this environment is a serious impediment to our core strength. After all, it doesn’t matter how rosy the picture looks 20 years from now if we can’t get the next Boston Scientifics out of the basement of a Catholic Church rectory in Belmont.
This is one of the questions I would like to pose to our panelists today. What can the large medical technology companies do to help fill the funding gap and drive innovation when the traditional sources have seemingly run dry?
How can the industry work to make sure tomorrow’s great ideas don’t get swallowed up by today’s pressing concerns?
And how will we live up to the promise of creating the groundbreaking technology of tomorrow with the grim realities of today?