MINNEAPOLIS, Minnesota–People wishing to attend LifeScience Alley’s annual convention Wednesday will first have to brave the season’s first significant snow storm.
It’s a fitting metaphor. The medical device industry, long the backbone of Minnesota’s high tech economy, faces perhaps its most challenging environment in decades. From regulatory headaches and health care reform to a dearth of venture capital, medical device stakeholders face a swirling mix of uncertainty and anxiety.
“The challenges to making a commercially successful medical device company has become geometrically more difficult,” said Ross Meisner, managing partner of Dymedex Consulting in Vadnais Heights.
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Not all is gloom and doom. More than 70 percent of medical device professionals say they are generally optimistic about the industry’s prospects in 2010, according to a survey released this week by Emergo Group. Medtronic Inc. of Fridley, one of the country’s largest medical device makers, recently said second quarter profits jumped 12 percent to $850 million while sales rose 7.5 percent to $3.8 billion.
But the industry nonetheless faces significant headwinds, challenges likely to dominate discussion at the LifeScience Alley conference.
No money
Minnesota has never been a magnet for national venture capital money, especially for early stage companies. But the state could always take comfort in knowing that medical device companies always attracted cash in either good or bad times.
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Not anymore. Nationally, the amount of money invested in medical device and equipment firms in the third quarter fell 6 percent from the previous three months to $617 million, according to the Money Tree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.
Only half of dozen Minnesota companies, including three medical device firms, managed to squeeze a paltry $26.4 million out of investors, the state’s worst venture capital performance in 14 years.
Medical device start-ups, both early and later stage, have had to carefully watch their cash because they have no room for error, Meisner said.
Transoma Medical of Arden Hills, which once filed plans to go public, shut down operations because it could not find more money. The company made a wireless device that could remotely monitor the electric activity of a patient’s heart. EnteroMedics Inc. of Roseville laid off 40 percent of its staff in October after disappointing preliminary results from a clinical study of its device that uses electricity to treat obesity.
“Investors have to get smarter,” Meisner said. “They are looking for ways to reduce risk and establish expectations that are more likely to be met.”
510k madness
Investors and executives have grown increasingly critical of the Food and Drug Administration’s 510k approval system, which okays new devices that are at least safe and effective as existing devices on the market.
Under pressure from Congress and the news media, the FDA has taken a harder line, establishing higher testing requirements that cash-starved start-ups can no longer afford, said Mark DuVal, president of DuVal & Associates law firm in Minneapolis.
Death and taxes
Companies and venture capitalists fiercely oppose a proposed $4 billion annual tax on medical device companies to help finance health care reform. Throw in cuts to Medicare spending and reluctance by payers to cover new technologies and both investors and patients may suffer, some experts say.
America used to lead the world in health care technology, said John Alexander, president of TC Angels, a top angel investor group in Minnesota. But the proposed health care reform bill will kill medical innovation in this country, he warned.
“While the medical technology industry is facing one of the chilliest investment climates in years, it’s hard to gauge how much of that is the result of macroeconomic conditions and how much is a change of industry-specific fundamentals,” according to a recent report by Ernst & Young.
[Minneapolis skyline courtesy of Flickr user philipshannon]
