By Rod Cain

The 2014 second quarter (Q2) VC Investments MoneyTree™ Report from National Venture Capital Association and PricewaterhouseCoopers was just released and it’s confirmed there is a continuation of the downward trend in medical device and equipment investments. This year medical device investments are at their lowest percentage of total (5.5% of $22.7 billion YTD) VC funding since 2001, when it received 5% ($2.1 billion) of the total $40.9 billion invested.

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The Q2 2014 percent of total was also down -32% from Q2 2013, when it represented 7.4% of the $7.2 billion invested during the quarter. Despite the decrease in industry importance year-over-year, the total value of VC investments increased 23% and the average deal increased 30% to $8.9 million. There is still room for optimism within 2014, as the highest average dollar amount per deal for the medical device industry was $9.3 million in the record breaking year of 2007.

Although the pessimist would counter that the medical device industry recently fell out of the final four largest investment sectors (2014 YTD: #1 Software, #2 Biotechnology, #3 Media & Entertainment, #4 IT Services) and VC investments have been decreasing since the peak in 2007. In that year there were 399 medical technology VC deals inked for a total of $3.7 billion. Another factor for consideration is the venture capital industry’s change in stage of development investments. In 2014 the percentage of seed stage deals is only 4.8%, which is a decrease of -61% from 2007 when they represented 12.5%. In fact, seed and early stage deals are down -20% as a percentage of total deals year-over-year. So with less funding opportunities for seed and early stage technology development, today’s medical device start-ups need to be more efficient and effective with their resources.

Some venture capitalists have cited the regulatory and reimbursement trends have forced the investment community to be much more selective, and thus they have shifted their partnership opportunities towards later stage medical technology investment strategies. This scenario may explain why many medical device innovators indicate they are struggling to find investment sources for pre-FDA 510(k) clearance or PMA approval design and development needs. It may also be the reason why total deals and investment dollars have declined, but the amount of funding per deal has not declined at the same rate.

So what solutions are available to support the new realities of designing, developing, and manufacturing medical devices that can demonstrate they are safe and effective for their intended use?

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A method that has been gaining favor with medical device inventors and entrepreneurs is a fixed fee pricing approach. This kind of agreement is especially attractive for medtech start-ups, versus a traditional time and materials pricing contract, as angel funding and/or venture capital can be tied to development and timeline deliverables. This business funding start-up model can present risks for the medical device research and development process, as margins for error are not typically within the scope of the allocated budget. However an effective fixed fee pricing agreement, could utilize outcome based parameters and timeline triggers as a means of authorizing invoicing and essentially help manage burn rate risks.

Some medical product developers believe a fixed price bid contract is not a recommended best practice for designing a complex diagnostic or therapeutic medical device. Apparently they assume potential outsource partners have a tendency to under-bid as a means of acquiring new projects, which can result in budget overages and additional costly missed deadlines. Others believe a fix fee approach helps filter the potential outsource partners who under-estimate the capabilities, resources, challenges, materials, and time needed to satisfy the regulatory controls necessary to demonstrate your device is safe and effective.

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For this reason, a fix fee pricing proposal may also be a very attractive solution for an established medical device firm as well. As the willingness of the potential outsource partner to provide a fixed fee pricing option for the design and development of your medical device, may serve as an effective preliminary filter to help your company manage quality control outside of the organization.

Pricing is and will remain a very important decision factor when determining how to support the product research and development needs for your medical device company and customers. Time and materials contract proposals often result in the lowest cost bid, as some potential outsource partners will scope only the minimum requirements to support your project and product parameters. However the lowest possible bid cost should not be the only decision factor, as the appropriate capabilities and resources are required in order to produce the potential value the opportunity costs provide. The risks inherited by the outsourcing partner within a fixed fee pricing agreement, could serve the best interests of your shareholders, medical practitioners, reimbursement partners, and customers.

Rod Cain is a practicing strategic marketing professional who has supported profitable new business growth for Samsung, Caterpillar, Rodale Press, and Meredith Corp. He is currently the Director of Marketing & Business Development for RBC Medical Innovations, an ISO 13485|9001 certified and FDA registered medical device contract design and manufacturing provider.