CEOs: The medtech investment climate is improving but getting tighter

By Scott Wooldridge

The climate for investment in medical device companies is improving but getting tighter, as biotech and pharma horn in on the recovering economy, according to a pair of medtech CEOs speaking at last night’s DeviceTalks: Minnesota event.

Entellus Medical (NSDQ:ENTL) CEO Bob White and Martha Shadan, president & CEO at Rotation Medical, spoke with LifeScience Alley CEO Shaye Mandle about the state of the medical device marketplace.

Shadan and White agreed that the climate for raising money in the medtech sector has improved. White, whose company makes minimally invasive therapies to treat chronic sinusitis, noted that Entellus went public at the beginning of this year. He described the past months as “a fun ride,” and said companies that can hit the sweet spot of good return on investment and a sustainable business model will do well in today’s market.

“The good news for the medtech industry is that in the past 2 years the doors have finally reopened on the IPO side,” he said. “As we all know, it took a long time to get there.”

Shadan, whose company develops therapies to treat rotator cuff injuries, said that raising capital is never easy, but it can be done.

“If you have a good technology, and if the technology is answering a very clear, unmet need, and if you have good data and a strong management team, there is money—there’s a lot of money out there,” she said.

For Rotation, Shadan said, the problem hasn’t been regulatory hurdles but the reimbursement concerns of investors.

“I spoke to over 65 VC’s and heard a lot of ‘nos.'” she said. “What we learned is that you have to listen to the questions being asked, go back and redo your pitch, and pound the pavement. It’s not an event, it really is a process.”

“Is there really more money out there?” asked Mandle, noting that LifeScience Alley’s research suggests that the market is on the rebound. “Are we back, in terms of dollars?”

Shadan quickly answered: “No. We’re not back. There’s a fraction of the VCs today that there was 5 years ago. Of the VCs that are left, many have pivoted and are investing more in pharma and biotech than they are in medtech.”

Medical technology investors tend to be much more interested in low-risk, high reward companies in the current climate, she added.

“Maybe this is just the natural order of selection – maybe this is the way it always should’ve been,” Shadan said. “You have to have a product that answers an unmet clinical need. It has to be better, cheaper, or make it more convenient to deliver. I think that’s being crystallized, because the money’s so tight. You have to know where the product really fits.”

White noted that the “strategics,” the large companies that partner with smaller startups, are interested in working with firms who reduce overall spending on health care. Like Shadan, he sees investors looking for low-risk propositions – a bottom-line approach that has its downside, he said.

“They’re looking for ways to reduce overall spend,” White said. “There’s less money for the higher-risk models. That’s the unfortunate part, because I think there’s a lot less innovation that might occur in the U.S. because of that.”

Shadan advised medtech startups to have a clear path to profitability, reiterating that reimbursement is a key factor for investors.

Reimbursement is probably on top of the list. Are you going to get paid? We’ve come a long way with the FDA. CMS is now the issue,” she said. “The number 1 reason that I heard ‘no’ was because they didn’t understand or know that we would get paid for our device.”

White said that assembling a good team is something every startup should focus on.

“Make sure you have really good people around you, that’s the key,” he said.

Mandle, noting  noted the growing complexity of the life science field including the explosion of digital technologies, asked how companies can plan for the future in a field where the only constant is change.

White said he looks for patterns in the marketplace.

“Pattern-recognition is the 1st thing I think about,” he said. “You want people who have been there and done that so they can spot patterns and identify resources so they can problem-solve.”

When it comes to marketing, the panelists agreed that provider education is important.

“When we were trying to raise money, we spent a lot on PR trying to create a buzz,” Shadan recalled. “When we turned to commercialization, it was the peer-to-peer, medical education areas where we were spending a lot of time and money.”

The discussion wrapped up with the CEOs talking about the future of medtech investment.

“I’m pretty optimistic about the medical device sector,” White said. “I don’t know if it will look like it did 10 years ago, but I do think we’re in an upswing, as far as venture capital coming back to the market.”

Shadan’s message: “Stay the course.”

“There is a lot of money out there,” she said. “There’s a lot of cash on the strategics’ balance sheets, and they’ve got to put it work.”

The next event in the DeviceTalks series, DeviceTalks: West, is slated for Dec. 9 in Irvine, Calif. Click here for more information.

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