Can NYC Create an Infrastructure for Medical Device Startups?
[Updated 1/22/13, 9:00 am. See below.] Xconomy New York has been chronicling New York City’s efforts to develop a welcoming environment for life sciences startups since we started, and we always come back to the same problems—the high cost of real estate, a small VC community, and the lack of a vibrant startup infrastructure such as can be found in Boston and San Francisco. But judging by the packed room at a Manhattan meeting Tuesday night focused on creating an ecosystem for medical device startups, there is clearly a lot of interest in changing all that.
The meeting was sponsored by NYC Tech Connect, a public/private partnership started in 2011 with partial funding from the Partnership for New York City Fund. Tech Connect and the Partnership Fund both aim to foster science and technology startups in the city, and the meeting’s panelists agreed that medical device startups definitely need a lot of fostering, since this industry sector barely exists in the NY metro area today.
Tony Natale of Aperture Venture Partners acknowledged that most of Aperture’s devices investments are in San Francisco and Boston even though the firm is based in New York. However, he said he is beginning to see the emergence of medical technology activity in nearby Connecticut and New Jersey. “We’d love to see that grow here in New York, and we’re willing to help.”
What emerged most strongly at the meeting, however, is the critical role that New York’s hospitals can play—and some of them are particularly eager to help foster medical device startups. Memorial Sloan-Kettering Cancer Center is famous for its research in oncology drugs, and eight biotech startups have emerged from work done in the hospital’s labs. But Sloan Kettering wants to be known as a birthing place for devices as well as drugs, and last year started a special division of its technology transfer office devoted to medical devices, many of them new and improved surgical tools.
The division has already led to the creation of one very early stage startup, Cold Steel Laser, to develop a new endoscopic laser scalpel created by head and neck surgeon Snehal Patel. “Our surgeons and radiologists often come up with ideas for better tools,” Yashodhara Dash, licensing manager for devices at Sloan-Kettering’s Office of Technology Development, told me. “We even have an engineering workshop that can make prototypes.”
That engineering workshop is particularly important, since medical device inventors can’t get anyone to invest in their great idea if they can’t actually hand it around. Arikha Moses, the founder of TYRX, a medical device firm in Monmouth Junction, NJ, and now entrepreneur in residence at The Vertical Group, based in Summit, NJ, listed all the hurdles facing anyone who wants to start a medical device company in New York. An entrepreneur needs to find design professionals, fabrication shops, a project manager to oversee the manufacture of the prototype, and of course, some angel investors. “The networks just aren’t in place here for all the initial resources need to get a startup off the ground,” she told the meeting.
It doesn’t help that there has been a distinct lack of interest in medical devices over the last few years on the part of investors, angel or otherwise. PricewaterhouseCoopers reported in October, in its quarterly MoneyTree Report, that not only has there been a steady decline overall in funding for seed/early stage companies, but medical device investing has been particularly weak.
A slowdown in the review times for medical device makers by the Food & Drug Administration, combined with a 2.3 percent excise tax on gross sales that medical device companies must pay, starting this January 1, under the Affordable Care Act, has led investors to shy away from the sector. According to the MoneyTree report, in the 2012 third quarter investment in the medical device sector declined for the third consecutive quarter, dropping 37 percent to $434 million—the lowest level since 2004.
As for the NY metro area, only 1.69 percent of those dollars–$7 million—was invested here. “Certainly the biggest challenge facing medical device startups today is access to capital,” said Jerry Korten, Columbia University’s entrepreneur-in-residence, who has started several medical device companies. He said it can be difficult to figure out how, or even if, insurers or other payers would be willing to pay for a new device. [Editors note: Jerry Korten wrote to provide more context for his remarks and emailed the following quote.] “To find investment, it is important to show how the end user can get reimbursement for using your product in today’s health care environment.”
“It’s tough to figure out who’s going to pay for it,” he told the meeting.
So how to make it better? The speakers at the meeting encouraged university and hospital tech transfer offices to take a much more activist role in nurturing the entrepreneurs in their midst, by providing many of the services Moses listed. Sloan Kettering’s Dash told me that the hospital is definitely stepping up its activities on this front, and sees medical devices as a very important focus for the hospital going forward.
The medical technology community is also expecting that Cornell University’s new technology campus that it is building on Roosevelt Island, between Manhattan and Queens, will provide many of the skills and resources, and the critical mass needed to get a medical device industry off the ground. “I certainly hope so,” said Korten. “Because every time I get a job offer outside of New York my wife says no.”