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Reinvigorating medtech innovation
How can stakeholders address the capital and commercialization risk challenges?
Venture capital investment in medtech has declined over the past several years, placing medtech innovation at risk. This report examines strategies and solutions—gleaned from interviews and discussions with more than 20 medtech leaders—that could help reverse this trend.
- Watch the video
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- Proof is in the research
- Reinvigorating medtech innovation
- Suggested steps forward
Is medtech innovation at risk? Watch the video.
Is the medtech innovation ecosystem at risk?
We have been tracking a worrying trend: Investment and startup activity in medtech has been declining, putting future innovation at risk. To get ahead of it, AdvaMed and Deloitte partnered to uncover strategies and solutions that could help turn the tide. We examined data, reviewed literature, and interviewed executives across the medtech innovation ecosystem.
The research showed that many startup companies are struggling to make it out of the “valley of death”—or the period between the initial investment and creation of a commercially-viable product. While large medtech companies depend on a thriving external innovation ecosystem for acquisition targets and new sources of growth, many shy away from investing in early-stage, unproven technologies.
In fact, some corporate and venture capital investors are hesitant to make investments in medtech innovation right now. This is potentially the result of financial pressures that stem from health care reform, the transition to value-based care, tougher insurance coverage, and increased regulatory requirements.
Proof is in the research
Through interviews and a roundtable with over 20 industry leaders, the Deloitte Center for Health Solutions and AdvaMed sought to define strategies that could reinvigorate early-stage medtech innovation.
Our research made clear that two fundamental issues should be addressed:
- The lack of capital available for early-stage investment
- Increased reimbursement and commercialization risks for new products
These two issues are not mutually exclusive. Early-stage medtech companies could benefit from significantly more capital, but investors may be more willing to invest in technologies that can demonstrate differentiated value, quickly gain coverage, be commercially successful, and generate a sufficient return. (See the Value Framework for assessing value in medical technology that AdvaMed and Deloitte collaboratively developed.)
“There’s no lack of great ideas….I see 20 different companies a week. It’s not an innovation problem.”
—Venture capital investor, roundtable participant
Strategies for reinvigorating medtech innovation
- Similar to the biopharma industry, large medtech companies, entrepreneurs, and the venture funds that back them should consider engaging in strategic partnerships, such as co-development, co-marketing, or contingent merger and acquisition (M&A) deals.
- Entrepreneurs should leverage alternative funding sources such as family offices, state programs, and accelerators; and consider investment by non-medtech partners such as providers and technology companies.
- The medtech industry should consider supporting aspects of tax reform that might motivate greater investment in innovation; for example, repealing the medical device excise tax or establishing a federal angel investor tax credit.
To reduce coverage and commercialization risk, medtech entrepreneurs should:
- Develop a more sophisticated understanding of who their customers are, how they define value, and tailor research and development (R&D) plans and value propositions accordingly.
- Engage in partnerships with customers who are focused on population health, such as integrated delivery networks and large employers, to co-develop products.
- Consider new contracting approaches that allow for market adoption of products and services while real-world evidence (RWE) is still being gathered.
Stakeholder collaboration is likely to be the key to ensuring that the medtech industry can continue to deliver lifesaving innovations to patients.
“No entrepreneur has knocked on the door of a venture capital fund and not heard that they need the health economics of their idea worked out. But there’s no roadmap.”
Suggested steps forward
To reinvigorate medtech innovation, industry stakeholders should consider taking several action steps:
- Large companies:
- Set aside capital to invest in early innovation, ideally through corporative venture capital arms that are best-suited to managing a portfolio of investments;
- Consider alternative deal structures (build to buy) or partnerships (co-development, co-marketing);
- Put the right governance model in place and align incentives across business development and the business units that will support these deals;
- Consider partnerships with nontraditional players (e.g., consumer technology companies) to access new capabilities; and,
- Mentor early-stage companies on how to develop a compelling value proposition, differentiate products commercially, and tackle key coverage hurdles earlier in the development process.
- Small companies/entrepreneurs:
- Take advantage of nontraditional funding options: state programs, SBIR grants, family offices, philanthropic investors, and incubators;
- Consider consumer technology companies as potential investors or partners;
- Spend additional time understanding potential customers and how they define value early in the product lifecycle; and,
- Enter into partnerships with employers and payers to test value propositions, or co-develop products.
- Venture capital investors:
- Co-invest with large companies in early innovation;
- Set a funding hurdle for products or business models that can demonstrate value, generate coverage, and be commercially differentiated; and,
- Consider partnering with family offices and other investors to evaluate medtech investment opportunities.