Downward pricing pressures, restrictions on sales representation within hospitals and a push towards value based healthcare fostered ongoing uncertainty in the Medical Device Industry in 2016. Companies responded by consolidating, leveraging commercial infrastructures and enhancing product portfolios to bolster hospital negotiations and optimize overall financial performance. Signs of positive change are beginning to emerge in the sector. New entrants and non-traditional players are helping to lead the charge in redefining the industry, driving innovation and uncovering new avenues for growth.

Consolidation. Difficult hospital selling environments and pricing pressures created incentives for continued consolidation amongst the largest players in the medical device industry. Abbott was a major participant in 2016, venturing into heart failure, cardiac rhythm management, neurovascular and surgical heart valves with the announced acquisition of St. Jude Medical for $25.0B. Medtronic purchased ventricular assist device maker HeartWare for $1.1B and Teleflex deepened its portfolio in the coronary and peripheral space with the acquisition of Vascular Solutions for $1.0B. Sage Products, a leader in infection control solutions for hospitals was acquired by Stryker for $2.8B, an unconventional move allowing Stryker to capitalize on the shift towards value based healthcare. This high cadence of deals is expected to continue throughout the coming year as companies capture opportunities to drive incremental growth and leverage existing infrastructures.

Early stage acquisitions of note included ValTech Cardio (Edwards Lifesciences), Sequent (Terumo) and DFine (Merit Medical) within cardiovascular, neurovascular and orthopedics, respectively. Development stage companies continue to be a critical source of innovation for the medical device industry and entrepreneurs in search of scarce venture capital have expanded their outreach to angel investors, accelerators, and family offices.

New Entrants. Large pharmaceutical companies demonstrated interest in the medical device sector during the year, mostly to leverage existing franchises, but also contributing to breakthrough research in the field. Specifically, BTG augmented its interventional medicine business with the acquisition of Galil Medical’s oncology portfolio. BTG has been quietly building its medical device division over the past few years and its product portfolio now includes devices treating cancer, emphysema, severe blood clots and varicose veins. Santen Pharmaceuticals acquired glaucoma device maker InnFocus, complementing its broad portfolio of ophthalmology therapeutics. Finally, GSK and Google Verily joined forces to form Galvani Bioelectronics, furthering research and development in the emerging field of bioelectronic medicines. GSK has committed significant resources to the space through Action Potential Venture Capital, focusing on novel miniaturized implantable devices to treat rheumatoid arthritis, heart failure, hypertension, asthma and diabetes.

Google has committed to a variety of programs including glucose detecting smart contact lenses, wearables to detect cancer, AI assisted robotic surgery and bioelectronic medicines. The tech giant will join forces with biopharma and device players to take products to market and has engaged with Novartis, DexCom, Sanofi, Biogen, GSK and Johnson & Johnson.

The convergence of medical devices and digital health will also play a major role in shaping the industry in the coming years. From iRhythm’s continuous cardiac monitoring to Glooko’s connected population health solution for diabetes, the convergence of medical devices and analytics will redefine expectations of patients, payers and providers for device solutions in treating disease.

Strategies for Development Stage Medical Device Companies. The tense environment within the medical device sector and resulting friction over the past few years is beginning to force critical decisions and investments. Development stage companies operating in this new environment should be prepared and ready to:

• Articulate the clinical and economic value of new technologies and solutions to patients, payers and providers from not only an acute care standpoint, but also across the continuum of care
• Collaborate, innovate and partner with pharma, biotech and traditional tech players to drive innovation and connected solutions utilizing in-licensing, out-licensing and joint venture structures
• Fundraise outside traditional venture capital, focusing on strategic investors, angel investors, accelerators and family offices

We at Locust Walk are bullish about the future of the Medical Device industry and would love to assist you in maximizing the value of your technology through transformative transactions. Please contact  samantha@locustwalk.com to learn more about our medical device capabilities.