The conventional wisdom that healthcare companies are immune to economic turmoil has gone the way of subprime derivatives and credit default swaps, as reduced consumer spending and tight credit markets have squeezed even the most “recession-proof” industries.
But there are signs of hope for medical device and diagnostics companies, as nervous investors seek quicker returns than pharma or other life science firms can offer.
Experts say the local job market for medical device professionals remains comparatively strong, despite the downturn, and the New England device industry remains an attractive target for government grants and other efforts to stimulate innovative sectors of the economy.
The big picture
Mark Gallagher, SVP at Silicon Valley Bank — a financial services provider focused on emerging technologies — pulls few punches in describing the overall economic outlook at a recent conference sponsored by the Massachusetts Medical Device Industry Council (MassMEDIC).
“It’s ugly out there. It’s very, very ugly,” Gallagher says.
The statistics paint a grim picture indeed: The stock market has lost more than 40 percent of its value over the past six months. Housing prices dropped 12.4 percent in the final quarter of 2008. Credit lines have also become more restricted, as institutional lenders seek to limit their risks. More than a million jobs were lost nationally in January and February alone. A volatility index compiled by the Chicago Board of Trade shows investors are far more fearful of the current economic situation than they were in the immediate aftermath of the 9/11 terrorist attacks.
Healthcare wasn’t left unscathed either. Millions have lost their jobs and either fallen off the health insurance rolls and delayed or forgone surgical procedures. A November 2008 study by the American Hospital Assn. (PDF) found that most hospitals are seeing significant decreases in elective procedures and that almost half were planning cutbacks to spending on clinical technology and equipment.
For medical device companies, the most powerful and immediate effect of this volatility is less of the private equity funding it depends on. Personal investors have been hit hard by the downturn in the stock market and venture capital funding is in sharp decline after five years of steady growth — to wit, a 30 percent drop in healthcare venture capital deals in the final quarter of 2008, according to Gallagher.
The Dow Jones U.S. Medical Equipment Index plunged 43 percent between March 2008 and March 2009. That has also driven private valuations down, meaning companies can no longer easily sell themselves to the public or to a larger institution.
In New England, some medical device companies are clearly feeling the pinch. Covidien announced plans to shutter a manufacturing facility in upstate New York, while NMT Medical Inc. recently announced job cuts and spending reductions after posting losses of $18.1 million last year. And Innovative Spinal Technologies closed its doors in January, citing disappointing sales of its pedicle screw system for stabilizing back injuries.
David Blumberg, advisory sector leader for life sciences at KPMG LLC, says the decrease in available investment dollars marks a tectonic shift in the funding equation for many companies.
“This is not business as usual. In the past, we thought that if we brought a better mousetrap to the market, we would get funding, FDA approval and reimbursement,” he tells the MassMEDIC audience. “We need to re-orient our view about what society will pay for.”
Some good investment news
However, Michael Hanewich, head of life sciences at Silicon Valley Bank, notes that while VC funding is declining overall, medical device makers stand to gain a greater share of the remaining cash, because their products are typically faster to market than other medical products.
“A lot of venture capitalists that do biotech and devices will shift more of their dollars into the device side, because it takes less money to get a device into the market, or [to get] the company to a merger or acquisition,” he says. “Our sense is that more and more funds are going to go to devices because of that phenomenon.”
The companies in the best position to lure those dollars are typically those closer to bringing a product to market, says Hanewich, because fast returns are a top priority for today’s investors. But there is still money to be had for startups, he adds, which tend to proliferate in downturns.
“We’ve never been through anything like this, but we do find that people start more companies in difficult times. They may start a company based on something they’ve been tinkering with for years, or younger PhD’s may start their own companies instead of being hired at a larger company,” Hanewich explains.
Then there’s the comfort of the region’s position as a major hub of medical device research and development. Gallagher estimates that the New England region, plus the state of New York, receives about 20 percent of total national investment in the industry. That’s a “positive sign” indicating the region will remain a stronghold for the industry once the economy improves, he says.
“The great thing about cycles is that they’re cyclical. It’s going to get better. I just don’t know when,” Gallagher says.
The importance of your network
One of the key risks facing medical device companies in a down economy is supply chain disruption. If a drug or parts vendor is forced out of business, the ensuing delay can wreak havoc on a company’s ability to meet the requirements of its own customers, according to PRTM’s Linda Meloro.
At the MassMEDIC conference, Meloro cites a recent study of the association’s members showing increased vulnerability among the local supplier base. 21 percent of respondents said they are already experiencing supply chain difficulties and another 60 percent said they’re worried about it.
The recent popularity of outsourcing and offshoring has only increased the complexity of supplier networks, which has in turn increased risks.
“There were inherent risks already; now you add the financial turmoil and the real possibility that some of those suppliers will go out of business and it’s clear that at some point you may experience a supply reduction,” she says. “Companies typically can survive only 10 days of supply disruption before they start to suffer.”
The key to surviving a supply chain disruption is to identify specific supply chain risks and to prepare solutions for each, Meloro adds.
The employment outlook
While the medical device industry has suffered from staff reductions and hiring freezes, the outlook for job seekers remains strong compared to other industries.
The Web site Indeed.com, which tracks job postings and trends from thousands of sites, reports modest but steady growth for jobs featuring the search term “medical device” from January 2008 to January 2009. The site lists nearly 1,400 job postings for the same search term in just the greater Boston area.
Brendan King, president of human resources placement firm King and Bishop, says the device industry has so far weathered the downturn reasonably well.
“It’s not good, but medical devices and green energy are not as bad as everywhere else. There is still hiring happening,” he says.
One reason for that is the difficulty of finding personnel with specific expertise. While the pool of available talent grows with each layoff or company closing, the necessity of locating specific abilities remains.
“We’re talking about pockets of coveted skill sets that don’t grow on trees,” says King.
King cites recent examples where his firm was hired to find specifically appropriate talent and says there are still jobs for those willing to put in the necessary effort to find and secure them. A job seeker’s network is more important than ever, he says.
“We advise people to develop their message and collateral and get out there and hammer away at the skill sets you have. Sometimes companies that haven’t posted jobs are still going to hire the right person,” he says. “Networking is the epicenter of careers. The reality is if you’re sitting at home and posting your resume at Monster.com, you’re out of luck.”
Uncle Sam to the rescue?
The American Recovery and Reinvestment Act of 2009 — more commonly known as the Obama administration’s “stimulus package,” offers another glimmer of hope to medical device companies. The bill allots $148 billion to the healthcare industry, including $87 billion for Medicaid and another $25 billion to subsidize the COBRA health insurance program for the unemployed.
Most of that money would only indirectly benefit medical device companies, by shoring up consumers’ ability to afford procedures. However, some of those allocations may in the future be apportioned more directly to device companies as research grants or other measures.
New England’s position as a hub of medical device research and development may also pay dividends for the local industry. The stimulus bill includes $9 billion in block grants to states, which in the Northeast could be used to spur economic development in the innovation sector.
“We have significant lobbying in the region, which means there’s always going to be dollars available,” says King.
{IMAGELEFT:http://www.massdevice.com/sites/default/wp-content/uploads/headshots/Barnes-Brown_Peter_100x100.jpg}Perhaps the best summary of the current economic climate comes from Peter Barnes-Brown, a partner at Morse, Barnes-Brown and Pendleton, who told the audience at the MassMEDIC conference that economy was unlikely to tolerate timidity from investors for very long.
“Greed will help us out of this. And I think it will kick in soon,” he said. “The key is to be the last man standing in your niche when the upturn comes.”
