“Flat is the new up these days.”
That was the word from Ernst & Young analyst Richard Ramko to the 320 attendees at this morning’s 13th annual MassMEDIC conference.
During a preliminary review of the consulting firm’s look at the medical device sector, “Pulse of the Industry,” Ramko said companies that manage to keep sales and earnings flat are doing well, given the economic realities.
“Companies are facing a lot of tough decisions,” Ramko told the audience at Boston’s John F. Kennedy Presidential Library & Museum. “It’s just a challenging time.”
Massachusetts Medical Device Industry Council president Tom Sommer said the year since the council’s last summit was “like no other in MassMEDIC’s 13-year run.”
Economic challenges aside, Sommer said the Massachusetts gift ban, the nation’s strongest regulations governing industry compensation to physicians, amounted to a regulatory attack on the Bay State’s medical device sector.
“Our industry experienced what I can only describe as an assault,” he said. “We fought these changes and continue to do so now.”
MassMEDIC is working on legislation he called a “Health Technology Corrections” bill aimed at revising the rules.
The economy was the main focus for Ramko, who said Massachusetts is home to the country’s second-largest medical device sector, in terms of the number of device makers with headquarters or major operations here.
“Massachusetts is once again holding its own with the heavyweights,” he said. “Clearly, Massachusetts is a strong center for med-tech.”
Only California is home to more medical device companies, with about 313 firms calling the Golden State home, according to the Ernst & Young report. Their numbers show Massachusetts as having about 101 medical device makers.
And the Commonwealth’s device makers are tops when it comes to raising cash from venture investors, raising the most venture funding per capita of any state between 2000 and 2008, according the report.
{IMAGELEFT:http://www.massdevice.com/sites/default/wp-content/uploads/headshots/Ramko_Richard_200.jpg}But that was then. Venture capital investment in Massachusetts medical device start-ups plunged 74 percent during the first quarter of 2009, compared with the same period last year. Total public and private financing in the state’s sector plummeted 71 percent.
For venture investment and IPOs to make a comeback, three main milestones need to be passed, Ramko said.
“Debt needs to come back in a meaningful way, we need to see some follow-on offerings and unemployment needs to stabilize,” he told the conference attendees this morning. “When those things happen, I think well see IPOs come back. … But if we hit two to three IPOs for the year, I’ll be shocked.”
It’s a similar outlook for mergers and acquisitions, Ramko said.
“There are a lot of buyers with cash sitting on the sidelines,” he said. “There’s not a lot you have to do if you’re a solid company, just wait. It seems like there’s a lot of bargains out there.”
The devil in the details
The economic tsunami has taken its toll on medical device makers’ biggest customers: hospitals.
As they face lower admissions, fewer elective procedures and reductions in investment income, hospitals are scaling back their capital expenditures and looking for volume discounts on devices such as orthopedic implants and pacemakers, Ramko said.
Eight of ten hospitals have cut their capital expenditures, he said, citing a study by the American Hospital Assn. Nearly 45 percent of hospitals in the study indicated they expect to post first-quarter losses, Ramko said.
That’s bad news for the makers of big-ticket items like MRIs, and even the “middle-ticket” range of $5,000 to $25,000 devices could face headwinds, he said.
Bright spots include devices to treat cancer and cardiovascular disease.
“Let’s face it, if you’re having a heart attack, you’re not going to put off the procedure,” Ramko said.
And better times could be on the horizon.
“First-quarter revenues appear to be flat or up,” Ramko said. “What we see when we have these tough times is that the bounce-back is pretty significant.”