Medical Technology and Venture Capital: A Fruitful yet Fragile Ecosystem

Medical Technology and Venture Capital: A Fruitful yet Fragile Ecosystem

Prepared by Medical Device Manufactures Association with National Venture Capital Association

June 2009

Executive Summary

The symbiosis between the medical technology industry (also known as “medical devices”) and venture capital industry drives one of the most fruitful yet fragile segments of the U.S. economy. This partnership has produced significant advances in patient care over the past 40 years, including pacemakers, angioplasty, implantable cardiac defibrillators, ultrasound, pulse co-oximetery, and MRI. These advances have vastly improved treatments for medical conditions like heart disease, cancer and stroke – annually among the biggest killers of Americans each year. They also have the potential to help reduce long-term healthcare costs.

The sector’s fragility stems from the fact that it is driven by small businesses and entrepreneurs who must assume large amounts of risk as part of their product development process. More than 80 percent of medical device companies employ fewer than 50 people, yet such small companies drive most of the innovation and product development in the medical technology sector. For these reasons, players in the medical technology field are acutely sensitive to changes in marketplace conditions, the capital markets and regulatory policy.

Despite this fragile balance, the medical devices industry plays a critical role in driving the U.S. economy. It accounted for 2.7 percent of U.S. GDP in 2006 and is responsible for nearly 2 million jobs – equivalent to 1.4 percent of total U.S. employment. Jobs in the sector pay an average of 15 percent more than the average U.S. manufacturing job. As the only net exporter of medical devices in the world, the U.S. medical technology industry generates a $5.4 billion trade surplus. Overall, the industry has experienced approximately 6 percent annual growth in recent years, and continues to provide a valuable flow of breakthroughs that improve patient care while reducing costs.

Today, there is a false perception that medical devices are driving up health care expenditures. In point of fact, medical devices continue to account for less than 5 percent of hospital expenditures; spending on medical technology as a share of total health services and supplies expenditures dropped from 5.8 percent in 1980 to 3 percent in 2006. Furthermore, these devices have significantly improved patient care and have reduced the long-term costs of care.

In spite of this success, a number of market and regulatory challenges currently threaten to darken the industry’s outlook and dampen innovation. Economic pressures may choke off investment in medical technology by venture capitalists and other industry players. Proposed legislative reforms and court decisions threaten to weaken the patent system, which enables small companies to protect the economic value of their innovations. Innovative devices often lack predictable regulatory and reimbursement pathways from the federal government. Comparative effectiveness studies add additional layers of uncertainty for companies without delivering value to patients. Finally, innovative products from small companies do not always enjoy open access to the marketplace.

The benefits of addressing these challenges are significant. Progress toward more effective diagnosis and intervention therapies for serious conditions like heart disease, diabetes and stroke must continue. Innovations such as exact drug delivery to a precise spot on a certain organ to treat cancer, continuous noninvasive glucose monitoring, or a nano-neurostimulator that can be placed in the brain of a paraplegic that would allow her to walk could be available to the public in 10 years or less. All of these measures can help reduce costs – the largest problem facing the U.S. healthcare industry – in the long run.