Following the (Investment) Money in Medical Devices

It will come as no surprise to medical device startups that the funding climate in medical devices is still challenging. We talked recently with two experts who come to this question with two different perspectives.

– Alice McKeon is VP Healthcare Investment Banking at Network 1 Financial, which is based in Red Bank, N.J.

– Dan Clark is a Cofounder and the Chief Marketing Officer at Linear Health Sciences, makers of the Orchid Safety Release Valve.

The power and policies emanating from Washington DC are on the minds of many people these days. How will the Trump Administration affect the investment climate in medical devices?Wall Street Bull image

“The short answer is, no one really knows,” McKeon said. It’s unclear what will happen to the Affordable Care Act (Obamacare). That in turn raises questions in potential investors’ minds.

On the other hand, McKeon said, the loosening of FDA and other regulations, promised by the new president, might make medical device companies more attractive investments, because the approval process could be shorter and returns on investment quicker.

Another factor that might brighten the picture for medical device companies is the continuing effort – by both Republicans and many Democrats – to drop the 2.3% tax on medical devices.

That tax is part of the structure that supports expanded health insurance coverage. While the ACA has benefited some medical device makers by bringing more patients and revenue into the healthcare system, the tax has been understandably unpopular in the medical device world.

Dan Clark sees things from the standpoint of a medical device startup with bright prospects. Linear Health Sciences was the first company to qualify for the new Medtech Accelerator program at the Atlanta-based Global Center for Medical Innovation. GCMI guides the development and commercialization of new medical devices.

“Investors regardless of type want a quicker rate of return, focusing on lower risk startups with an efficient regulatory process,” he said. “Our company’s expedited regulatory pathway can be considered a strength.”

But the investment climate is still soft, he noted. “With a large pool of new medtech in development, the onus is on the young companies to demonstrate immediate and transparent value to healthcare overall.”

Another factor is the relative dearth of initial public offerings. Also, few early-stage companies want to stay independent in the long run.

“This market, more than any other, is positioned as an acquisition-only market,” Clark said. “Being acquired for a high valuation is what identifies startups as successful. Once a company has validated its product acceptance and value, it inherently becomes an acquisition target as a ‘tuck-in’ technology to ancillary market strategics.

“In that sense founders need to prepare to roadmap their fledgling companies in an interesting way: Set your company up in an efficient, long-term-focused manner (i.e. invest your time long term), while including exit portals along the company roadmap in anticipation of a successful exit.”

Among the strengths of Linear Health (a Dowling & Dennis client) have been:

  • A clear, relatively straightforward regulatory pathway to 510(k) FDA clearance;
  • What Clark terms “a relatively easy technology to understand and envision in function” and
  • A substantial need for its technology.

“These factors allowed us achieve early visibility that has helped attract interest from the investment community,” he said.

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