Medtech startups hear dour diagnosis

SAN JOSE, Calif. – Medical device startups heard a bleak diagnosis from a panel of executives at the annual BiomedDevice conference here. Funding is tight, regulations are complex and global markets can be difficult to navigate, they said.

"Funding has dried up over the last three years, especially for early stage companies--even later stage companies are getting hammered," said Mir Imran, a serial entrepreneur and chief executive of Modulus Inc. (San Jose), a contract medical design and manufacturing company. "Meanwhile, the regulatory process has become so convoluted it requires more funds to get products through it, so many of us have gone to Europe," he added.

As many as 40 percent of venture capitalists in medtech have been unable to raise new funds since the 2008 recession and are now holding money to keep their existing portfolio companies alive, said Imran who has started or funded dozens of medical electronics companies. Meanwhile deals are available to invest in late-stage companies at early-stage prices, he added.

"Our small fund has done two or three deals in the last year, but some have not done a single early-stage deal in the last year," Imran said. "Things are grim, and probably won't change for another year or two until things flush out," he said.

Long term prospects should improve. Big medtrech corporations such as Medtronic depend on acquiring startups as part of their product development process. A scarcity of early-stage startups now could lead to higher valuations for the few who make it to be acquisition targets in four or five years, said Imran.

"The cycle will fix itself in a few years," he said, noting more than 90 percent of medical electronics startups are eventually acquired.

To survive the lean times, Imran creates multiple companies using the same team and facilities, partnering with others for regulatory and manufacturing services. Others agreed outsourcing has become a requirement for medtech startups.

"In the go-go days VCs would look at and invest in your teams, but now I am seeing investors like it when you partner for capital efficiency," said Roger Stern, president of Stellartech Research Corp. (Sunnyvale, Calif.), another contract development and manufacturing company specializing in medtech.

Meanwhile the regulatory process in the U.S. "has become so convoluted…most of us are going to Europe and Asia, and we are seriously looking at India and China as initial markets to develop with the U.S. last," said Imran.

He mentioned one heart valve startup acquired by Medtronic for more than $700 million without having filed even preliminary regulatory documents with the U.S. Food and Drug Administration. "Going overseas to establish clinical value and maybe even launching a product is more valuable than going to the FDA," Imran said.

But global markets are no slam dunk.

"The global component adds another layer of complexity," said Joseph Heanue, president of Triple Ring Technologies (Newark, Calif.), another contract design and manufacturing company. "There are challenges finding products that work for multiple markets and working at a distance with other groups inside and outside your company," he said.

Medtech startups hear dour diagnosis