Investment in medtech and biotech: Outlook

Medtech and biotech investment is driven by an expectation of returns, but rapid advances in technology simultaneously drive excitement for their application while increasing the uncertainty in what is needed to bring those applications in the market.

MedMarket Diligence has tracked technology developments and trends in advanced medical technologies, inclusive of medical devices and the range of other technologies — in biotech, pharma, others — that impact, drive, limit, or otherwise affect markets for the management of disease and trauma. This broader perspective on new developments and a deeper understanding of their limitations is important for a couple of reasons:

  1. Healthcare systems and payers are demanding competitive cost and outcomes for specific patient populations, irrespective of technology type — it’s the endpoint that matters. This forces medical devices into de facto competition with biotech, pharma, and others.
  2. Medical devices are becoming increasingly intelligent medical devices, combining “smart” components, human-device interfaces, integration of AI in product development and products.
  3. Medical devices are rarely just “medical devices” anymore, often integrating embedded drugs, bioresorable materials, cell therapy components, etc.
  4. Many new technologies have dramatically pushed the boundaries on what medicine can potentially accomplish, from the personalized medicine enabled by genomics, these advances have served to create bigger gaps between scientific advance and commercial reality, demanding deeper understanding of the science.

The rapid pace of technology development across all these sectors and the increasing complexity of the underlying science are factors complicating the development, regulatory approval, and market introduction of advanced technologies. The unexpected size and number of the hurdles to bring these complex technologies to the market have been responsible for investment failures, such as:

  • Theranos. Investors were too ready to believe the disruptive ideas of its founder, Elizabeth Holmes. When it became clear that data did not support the technology, the value of the company plummeted.
  • Juno Therapeutics. The Seattle-based gene therapy company lost substantial share value after three patients died on a clinical trial for the company’s cell therapy treatments that were just months away from receiving regulatory approval in the US.
  • A ZS Associates study in 2016 showed that 81% of medtech companies struggle to receive an adequate return on investment

As a result, investment in biotech took a correctional hit in 2016 to deflate overblown expectations. Medtech, for its part, has seen declining investment, especially at early stages, reflecting an aversion to uncertainty in commercialization.

Below are clinical and technology areas that we see demonstrating growth and investment opportunity, but still represent challenges for executives to navigate their remaining development and commercialization obstacles:

  • Cell therapies
    • Parkinson’s disease
    • Type I diabetes
    • Arthritis
    • Burn victims
    • Cardiovascular diseases
  • Diabetes
    • Artificial pancreas
    • Non-invasive blood glucose measurement
  • Tissue engineering and regeneration
    • 3D printed organs
  • Brain-computer and other nervous system interfaces
    • Nerve-responsive prosthetics
    • Interfaces for patients with locked-in syndrome to communicate
    • Interfaces to enable (e.g., Stentrode) paralyzed patients to control devices
  • Robotics
    • Robotics in surgery (advancing, despite costs)
    • Robotic nurses
  • Optogenetics: light modulated nerve cells and neural circuits
  • Gene therapy
    • CRISPR
  • Localized drug delivery
  • Immuno-oncology
    • Further accelerated by genomics and computational approaches
    • Immune modulators, vaccines, adoptive cell therapies (e.g., CAR-T)
  • Drug development
    • Computational approaches to accelerate the evaluation of drug candidates
    • Organ-on-a-chip technologies to decrease the cost of drug testing

Impact on investment

  • Seed stage and Series A investment in med tech is down, reflecting an aversion to early stage uncertainty.
  • Acquisitions of early stage companies, by contrast, are up, reflecting acquiring companies to gain more control over the uncertainty
  • Need for critical insight and data to ensure patient outcomes at best costs
  • Costs of development, combined with uncertainty, demand that if the idea’s upside potential is only $10 million, then it’s time to find another idea
  • While better analysis of the hurdles to commercialization of advanced innovations will support investment, many medtech and biotech companies may opt instead for growth of established technologies into emerging markets, where the uncertainty is not science-based

 

Below is illustrated the fundings by category in 2015 and 2016, which showed a consistent drop from 2015 to 2016, driven by a widely acknowledged correction in biotech investment in 2016.

*For the sake of comparing other segments, the wound fundings above exclude the $1.8 billion IPO of Convatec in 2016.

Source: Compiled by MedMarket Diligence, LLC.

 

Ten of the most important trends in medical technology development

Over the course of numerous economic cycles and different eras in medical technology development, I have witnessed many trends, some with obviously more staying power, or greater impact, than others.  

Having a bit of experience in judging the success of prior forecasts (through de novo forecasts that have confirmed prior forecasts), I wanted to look at 2009, in light of the current state of the medtech universe (in all respects), to point up what I see as some of the most important trends in medical technology development:

  1. Outcomes drive more, but not all, development than do episodic success.  Manufacturers are focusing on longer term solutions, competing against the full spectrum of therapeutic alternatives rather than incremental improvements in their widgets.
     
  2. The recessionary economy demands, rightly or not, that homage be paid to cost.  Cost is poorly understood in healthcare (hence the problem!), but it is recognized as important simply by the rate at which premiums increase or the percentage of GDP attributed to healthcare spending.  Cost is difficult to assess in medical technologies, because there are long term, unforeseen implications of nearly every medtech development. Nonetheless, the manufacturer who does not bow down in homage to Cost will be quickly put out of business.
     
  3. The life spans of "gold standards" of treatment are getting shorter and shorter.  Technology solutions are being developed, from different scientific disciplines, at such a pace as to quickly establish themselves, in a broad enough consensus, as new gold standards.  Physicians are increasingly compelled to accept these new new standards or find their caseload shifting to those who do.
     
  4. Many manufacturers strive for being able to claim their products are "disruptive" — overturning existing paradigms. However, few medtech manufacturers really ever achieve anything more than marginal improvements. Note the relative amount of 510Ks versus PMAs in regulatory approvals (not that a PMA denotes a "disruptive" development).
     
  5. Without a broad understanding of materials technologies that encompass traditional device, pharma, biopharma, biotech, cell biology and others, manufacturers will limit their ultimate success.
     
  6. VCs are less interested in medtech than are large-cap medtech companies. The recessionary economy is causing a shift in financing from those with a short(er) term focus on innovation — venture capitalists and angels — to those with a vested stake in medical technology’s success in the long haul — the mid-cap and large-cap medical technology companies.  Established medtech companies intend to stay in the medtech business, regardless of current economic variables, and therefore need strong innovation pipelines.  VCs are in the business of "returns" rather than "healthcare", which may be an entirely different set of incentives.
     
  7. The credit crunch is a good thing for medtech development.  Those companies who could not complete development of clinically proven, regulatory approved products during the days of free-flowing capital simply don’t belong in the business.  (I recall the money-pit days of biotech in the 1980s, when capital flowed endlessly into biotechs that never realized development must have realizable value in the marketplace, not just in basic science.)
     
  8. Healthcare reform will have little negative impact on medical technology development.  I am convinced of the convergence of different scientific disciplines — materials technology, cell biology, biotech, pharma and others — being capable of producing therapeutics matching the cost du jour demands of the healthcare marketplace.
     
  9. Information technology is having, and will have, profound effects on medical technology development and the manufacturers who "get" this, will always gain an advantage.  This happens in ways too numerous to mention in full, but worth noting are: drug and device modeling/testing systems, meta-analysis of clinical research, information technology embedded in implants, and microprocessor-controlled biofeedback systems (e.g., glucose monitoring and insulin delivery).
     
  10. The virtually untapped frontier of medical technology applications in neurology.  The collective scientific understanding of the functional roles of the brain and nervous system has reached a near critical mass at which point the equally advanced capabilities of medical technology are rapidly accelerating in their ability to modulate those functional roles for intervention in neural disease and trauma.

These are in no particular order, nor is this a complete list of important trends. Given a suggestion or further thought, too, I might well add, omit or revise these significantly.


A corollary to this post is the idea of the highest growth medical technologies — in some ways the end result of these trends. For that, see the separate post and white paper.