Medtech as investment case a success story

Is MedTech a good investment case for business angels?

I remember vividly a startup, developing a retinal implant to restore a basic sense of sight to people with profound vision loss. Despite its initial success and regulatory approval, the company faced significant challenges and failed in the end. Besides device failures and financial difficulties, the market was not ready for such a “disruptive” technology. 

On the flip side, I recall a startup that developed a cardiovascular drug-coated balloon. After 12 years of navigating countless challenges, setbacks and moments of despair, they finally achieved CE mark approval, had a successful market entry and secured an exit worth over $1+ billion.

Over the last 15 years I have been engaged in several medical device startups as business angel, and regulatory consultant. I observed that on average 9 out of 10 medical startups did not make it in the end and got out of business, even so they had innovative and good products, and all medical devices received CE mark or FDA approval.

The question then becomes: What are success criteria for MedTech investments?

In my observations of why many companies fail, a predominant factor is that the market simply does not want the device, often for a variety of reasons. A common issue is that the product fails to be competitive in solving a clinical problem or does not address an unmet clinical need. Another frequent reason is the inability to secure reimbursement, either because health insurers do not recognize the clinical benefit or the product is deemed too expensive. Hence investors should look for the following prerequisites when evaluating Medtech investments:

1. Clear indication with clinical benefits (market studies)
2. Technological realization (feasibility) is proven and can be patented
3. Positive key opinion leader (KOL) feedback on usability/adaptability to prove the desirability
4. Reimbursement identified and existing or realistic strategy in place to ensure financial feasibility of business model.
5. Last but not least, there must be a strategic interest from big Medtech players to facilitate the distribution and make an exit realistic (rather do not bet on IPO’s). 

Additionally, there are clear market dynamics and opportunities for a business angel to invest in medical startups, which can easily provide a nice multiplication of your investment of 40x and more:

1. Market growth: The MedTech sector is experiencing robust expansion across various segments. For instance:

• The global diagnostics market is projected to surpass $500 billion
• The cardiovascular market is projected to $300 billion
• Dental tech is expected to reach $34 billion
• The surgical devices market is forecast to hit $110 billion by 2030, growing at a 7% CAGR

2. Innovation-driven returns: Successful medtech startups can achieve significant exits.

• One prime example is Covidien, founded in 2002, a leading manufacturer of medical devices and supplies, with products spanning surgical solutions, patient monitoring, and vascular therapies and which was acquired by Medtronic in 2014 for $50 Billion.
• Another example is Auris Health, founded in 2007. Auris Health developed robotic endoscopy systems aimed at early-stage lung cancer diagnosis and treatment. Their Monarch Platform, a robotic bronchoscopy system, was a key innovation. Johnson & Johnson acquired Auris Health in 2019 for $3.4 billion upfront, with additional milestone payments that could bring the total value to $5.75 billion

Challenges remain

Besides those success criteria, MedTech remains a complex and challenging business. The most common challenges are time, funding and regulatory pathway.

1. Extended timelines: MedTech products often require lengthy R&D cycles, clinical trials, and regulatory approvals, leading to longer paths to commercialization.
2. Capital intensity: Substantial funding is typically needed for product development, clinical studies, and regulatory compliance.
3. Regulatory complexity: Navigating diverse regulatory landscapes adds time and expense to the development process.

Strategic Considerations for Angels

1. Leverage expertise: Investors with healthcare or MedTech backgrounds are better positioned to evaluate opportunities and provide strategic guidance.
2. Patient capital: Given the sector’s longer timelines, investors must be prepared for extended holding periods.
3. Thorough due diligence: Careful evaluation of the technology, regulatory pathway, and market potential is crucial.
4. Syndication opportunities: Partnering with other private investors or VC firms can help spread risk and provide necessary follow-on funding.
5. Focus on de-risking: Seek startups that have achieved some level of market validation, such as initial revenue or strong clinical data.

In conclusion, MedTech can be an attractive investment case for business angels, particularly those with relevant expertise and a long-term investment horizon. While the potential rewards can be significant, investors should approach the sector with a clear understanding of its unique challenges and capital requirements.