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Medical Device Startups Getting Squeezed by Recession, Lawmakers, Says E&Y Report

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$135 million through initial public stock offerings, out of $9.2 billion in total financing for the industry. A shocking 16 medical device companies withdrew their IPO statements during 2008, and IPO financing dropped 93 percent from the prior year, according to the report.

It’s little wonder why some of the nation’s pioneering medical device executives and entrepreneurs are fuming about what’s happening to their industry. Boston Scientific CEO Ray Elliott has been quoted as saying Sen. Max Baucus’ proposal for a $40 billion tax on medical device companies is “nonsensical.” David Auth, the prominent Seattle area inventor who once sold a company to Boston Scientific for more than $500 million, told me last month that things have gotten so bad that he has almost stopped investing in the medical device sector. Auth says he can’t imagine how startups can generate returns anymore.

The Ernst & Young report mentions most of these factors, but still tried to paint a somewhat rosier picture. It cited the usual market forces of an aging population, large demand from patients with unmet needs, and economic growth in emerging markets. “As a society, we are certain to need medtech innovation,” the report states.

Since medical devices are an important part of the local innovation clusters Xconomy covers in Boston, Seattle and San Diego, I was especially keen to look for any regional data from Ernst & Young. There wasn’t nearly as much here as E&Y usually gathers on the biopharmaceutical clusters around the country, but there were still some interesting factoids.

—Geography matters. Of the 969 public and venture-backed medical device companies in the U.S., more than half (52 percent) were in California, Massachusetts, and Minnesota. Drilling down a little more specifically, the standout hotspots for medical devices are the San Francisco Bay Area, Orange County, CA, San Diego, Boston, and Minneapolis-St. Paul. (The report’s authors didn’t share the love for Seattle, which some locals like to call the “Silicon Valley of ultrasound.”

—The thriving hubs tended to have a few critical factors in common, according to the report. They all have a population of skilled scientists and managers; strong access to capital in terms of venture backing and banking; and a robust network of support institutions like hospitals, universities, and suppliers.

—In terms of the numbers, Northern California has the biggest concentration of medical device makers by far, with 186 venture-backed companies and 33 public companies. Southern California (a combination of Orange County and San Diego in this report) had 82 venture-backed companies and 41 public firms. Third place went to Massachusetts with 66 venture-backed device makers and 39 public companies. My home state of Washington ranked way down the list in tenth place, with 24 venture-backed companies and five public companies. I guess the problem with ultrasound is that most people can’t hear it.

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  • Luke,

    As usual, your reporting is insightful, and in this case, also sobering. Thank you. What is your thought on substituting, at least temporarily, government “stimulus” and SBIR/STTR funding for some portion of private capital? Is this a viable? Please see our thoughts @ MedTech-IQ on “non-dilutive” government funding for translating medical technology from lab to market – “West Coast Venture vs. East Coast Stimulation … Time to Bridge the Gap?…”, http://medtechiq.ning.com/profiles/blogs/west-coast-venture-vs-east

  • Nick Poulios, PhD

    Reimbursement VP level with 15 years of experience in major pharma/biotech available for full time position with start up biotech and/or medical device company. Direct interaction w/upper management (CEO, SVP). The industry is squeezed on the reimbursement front and now is the time to engage the reimbursement strategies to provide patient access.

  • I think we are also seeing some signs of recovery from the Economic Recession. Of course, we have no idea of how long it will take to completely recover, but some say it’s going to be longer than for the other recessions in decades. I also scanned an article yesterday that said business owners need a new set of tactics to do well during recovery.

  • With most innovation coming from the start ups that feed the gloiaths of our industry, we struggle with raising capital with a decent valuation with so much un certainty that comes from politicians that do not understand the basic principles of this industry. Healthcare is a topic for us all to be concerned with, but start ups that bring innovation cannot overcome the burden of taxes and increased legislative “Red Tape” that they are considering to increase. They will Squeeze the life out of innovation with the plans they are lobbying to enact. May Capitalism Prevail!