Last year was a tough one for the medical device industry, with acquisition activity down, M&A dollars cut in half and FDA approvals slashed, but at least it wasn’t the worst year that medtech has faced in the last decade – 2009 still holds that title.
Certain regions, such as Minnesota’s life sciences hub, reported increasing activity in 2013, but medtech in general saw fewer investors and a harder environment in general. Large firms faced continued pricing pressure from healthcare providers looking for a cost-savings angle in new purchases and small companies found themselves unable to drum up cash without having already hit significant milestones, such as an FDA win.
Merger & acquisition activity was on track to be the worst in a decide at the start of 2013, but picked up toward the end of the year, signaling potentially promising momentum coming into the new year. The total quantity of deals in 2013, however, was down 16% year-over-year and total deal value was less than half the dollar amount reported in 2012, according to research posted by EP Vantage in its Medtech 2013 in Review report.
"The decline in M&A activity is particularly worrying for an industry built on takeovers," EP Vantage analysts wrote. "Even the largest medtech firms buy in technologies, and, rather than favoring the licensing deals common in pharma and biotech, the usual method is to purchase the company outright."
The lack of deals may be attributed, at least in part, to the growing allure of public listings. A raft of firms launched IPOs in 2013. There are already a handful closed this year and more on the docket.
Analysts hoped that last year’s austerity may mean that larger companies are ready to pick things up this year. Although large firms have been developing new products in-house, bought-in innovations can’t be discounted.
"It is to be hoped that the worst is over. once larger companies come through the cost saving programs they have put in place to deal with the slowdown their focus will turn towards growth, and they will surely seek out new technologies," EP Vantage researchers said. "The question is how long this will take; it cannot come soon enough."
Large companies weren’t the only ones shying away from the M&A playing field last year. The venture capital landscape in 2013 was pretty flat, increasing just $42 million over 2012 and coming in later and later in companies’ cycles. The total number of deals dropped to 235, the lowest since 2008 in terms of quantity.
The reasons for the slow-down are "well-rehearsed," EP Vantage said. Investors cite the increasing regulatory review times and pricing pressures as disincentives to tussle with medtech, turning more often to biotech companies where payoffs seem more likely and more timely.
"The returns in medtech are not good on an absolute basis, and are even less good in a comparative basis to biotech," VC fund Abingworth partner Tim Haines said. "The average time to a medtech exit is 8 or 9 years, and biotech is probably around 6."
Companies that do exit do so later and later, and usually only after they’ve obtained key regulatory approvals. The latter point adds insult to injury, as FDA approvals in 2013 dropped to nearly half the number reported in 2012. The FDA granted just 23 premarket approval decisions in 2013, compared with 41 in 2012. That figure includes humanitarian device exemptions as well as 1st-time PMAs.
"With US approval now almost a prerequisite for a smaller company seeking to sell itself or obtain venture funding, and the FDA raising its bar, it is difficult to see how smaller companies can move forward," researchers said.
To make matters worse, the European medtech review system is scheduled for an overhaul in the next few years as the public and patient advocacy groups clamor for increased oversight of potentially risky technologies and the companies that make them. New pressures overseas coupled with ever-present calls for increased transparency and consistency in the U.S. may create windows of opportunity for device makers to work closer with regulators, the analysts noted.
"If gaining European approval of medical devices becomes a longer, more arduous and more expensive procedure, pressure on the FDA to look with favor on applications will grow," according to the report. "There is of course a balance to be struck between unnecessary standoffishness and simply waving devices through without proper oversight, and the FDA’s caution has served it well in the past. Nonetheless, a more cooperative approach to approvals would help to ease the gridlock that has characterized 2013."