(P)Reviewing the Year in Medtech

Good riddance to the Dragon. That long-standing symbol of good fortune to Eastern cultures behaved more like its evil Western twin last year, mindlessly menacing the planet in full fire-breathing malevolence, wreaking havoc in its path and turning its victims’ carefully laid life plans upside-down.

Dragons typically don’t conduct themselves in such a destructive fashion. Characteristically beneficent, Eastern Dragons are magical creatures that provide heavenly transportation to the dead, ward off evil, protect the innocent and bequeath safety to all who hold its emblem, according to folklore. They are symbols of the natural world, representations of adaptability and transformation, power and excellence, valiancy and boldness, heroism and perseverance, nobility and divinity. In Eastern societies, Dragons are not the wicked monsters depicted in Western literary fantasies or The Book of Revelation; rather, they are angels that coexist with the gods.

Although they are not considered gods per se, Dragons do possess some almighty powers. They control the world’s waterways and rainfall, and their appearance is a symbol of both good luck and prosperity (according to Chinese legend, the Dragon first appeared in the sky while a future emperor was born, and the country was blessed with peace and prosperity for generations).

Such fortuity has made the Dragon the most revered and sought-after sign of the Chinese zodiac. Birth rates tend to spike when Dragons rear their heads every 12 years, as children born under this sign are considered luckier, smarter, stronger and more likely to succeed than their astrological counterparts.
Years that host Dragons—such as 2012—are considered particularly blessed, though Chinese stargazers and Feng Shui masters warn they also can be turbulent and spawn unpredictable events (not surprisingly, last year’s most devastating curve balls involved water—the Costa Concordia disaster and Superstorm Sandy).

Technically then, last year’s Dragon behaved quite ordinarily.

But labeling (or remembering) 2012 as unpredictable and turbulent is shortsighted and unfair. Frankly, most years are a bit tumultuous and capricious. Still, there is no denying the sucker punches that roiled the planet last year—from the controversial Trayvon Martin shooting and destructive Thailand floods to Syria’s civil war and discovery of the “God particle” (a.k.a., the Higgs boson).

Last year’s Dragon even rattled the normally stable medical device industry. Between layoffs, shrinking venture capital (VC) funding and attempted assassination of the excise tax, 2012 certainly was more tempestuous than past years. To mark the Dragon’s Departure and arrival of the Water Snake (a more reposeful serpent, thankfully), Orthopedic Design & Technology created a roundup of the year’s top financial news/trends and those expected to dominate the industry in 2013.

Out, D***ed Tax!
2012: The industry amassed quite an impressive militia to fight a 2.3 percent excise tax on total company revenue—soldiers included trade groups like the Advanced Medical Technology Association (AdvaMed) and Medical Device Manufacturers Association as well as such OEMs as Baxter Healthcare, Boston Scientific Corp., Covidien plc, Cardinal Health and Hospira Inc. U.S. Rep. Erik Paulsen (R-Minn.) led the battalion to a small but significant late-spring victory on Capitol Hill, convincing the U.S. House of Representatives to repeal the $30 billion levy. But the Democratic-controlled U.S. Senate retaliated by ignoring Paulsen’s Protect Medical Innovation Act of 2011, thereby nullifying it just in time for its Jan. 1 implementation.

2013: The U.S. Senate may have won the battle, but war is far from over. Paulsen and his mercenaries are gearing up for another battle with Congress, hoping its reinforcements are easier to defeat this time around. However, public policy experts doubt the tax repeal revolution will triumph. “The odds are close to zero,” Donald F. Kettl, dean of the University of Maryland’s School of Public Policy, predicted to Minneapolis, Minn.-based Star Tribune reporter Jim Spencer. “Under normal circumstances, it’s harder to stop a tax once it’s enacted. You have to reverse the whole legislative process.” Even if Paulsen can pull off such a feat, his adversaries have an ace up their sleeve—a presidential veto. “The healthcare bill is going to provide medical device companies 30 million new customers,” President Obama told The Weekly Standard of Washington, D.C., in December. “It’s going to be great for business, and they’re really doing well right now.”

Year of the Pink Slip
2012: The medical device industry traditionally has been a source of unconstrained growth, due mostly to innovative technologies that treat an aging world population. But the cost pressures, flat sales, debt crises and pecuniary doldrums of recent years have weakened the sector’s immunity to economic ebbs and flows, endangering its long-term growth. To get back in the black, device manufacturers have cut both spending and jobs, and funneled existing resources into emerging markets. Though device makers have downsized before, the pace at which they sacked employees last year seemed unusually high—a Reuters report found that publicly-traded medtech firms trimmed their payrolls by 7,000 jobs, or 1.6 percent of the industry’s U.S. workforce. Companies blamed the cuts on various factors, including divestitures, increased efficiency and revamped priorities, but the top motivator clearly was the 2.3 percent excise tax. Stryker Corp., Hill-Rom, Welch Allyn, Zimmer Holdings Inc. and St. Jude Medical Inc. are sacrificing workers to the tax, while Cook Medical Inc.—the nation’s largest privately owned device manufacturer—is surrendering five additional production plants.

2013: Chances are high for a fresh batch of layoffs: Accuray Inc. and Hologic Inc. executives began the new year by announcing restructuring plans that will leave hundreds of workers without jobs. The 13 percent reduction in Accuray’s global workforce is part of a “strategic transformation” designed to save the Sunnyvale, Calif.-based radiotherapy device maker about $40 million annually. Hologic, meanwhile, is closing its Breast Biopsy Solutions facility in Indianapolis, Ind., to consolidate its Interventional Breast Solutions businesses. The move will trim 141 positions from the company’s payroll. Further evidence of the year’s future misery is supported by the results of a survey AdvaMed conducted late last year. The poll found that nearly two-thirds (62 percent) of device manufacturers plan to reduce staff in the next 12 months to offset the levy, and more than 80 percent of firms generating between $5 million and $50 million in annual revenue will downsize. Survey respondents estimate the tax to cost the industry between $400 million and $667 million. “This is more proof that the medical device tax will do real damage and it ought to be repealed,” AdvaMed President and CEO Stephen J. Ubl said. “…This tax could push us off an innovation cliff, costing jobs and hurting our industry’s ability to find tomorrow’s treatments and cures.”

Avoiding the Public Spotlight
2012: Medtech firms remained hesitant to relinquish their privacy last year. Only four medical device and diagnostic companies completed initial public offerings (IPOs), one more than the total for 2011 but half the number that went public in 2010, according to data from global professional services firm Ernst & Young. Despite the increase, the foursome—Globus Medical Inc. ($100 million), GenMark Diagnostics Inc. ($45 million), Osprey Medical Inc. ($20.8 million) and MRI Interventions Inc. ($6 million)—pulled in 11.4 percent fewer dollars than the trio in 2011 ($171.8 million compared with $194 million) and 68 percent less than the eight firms that completed $539 million worth of IPOs in 2010. Biotech firms fared just as poorly—the number of U.S. IPOs remained flat at 16, but the total amount raised fell 21.6 percent to $1.4 billion, statistics from international financial services establishment Burrill & Company indicate. Globally, biotech companies raised $2.1 billion through 37 IPOs, a 44.1 percent drop compared with the $3.8 billion raised through 45 offerings in 2011. Industry analysts attribute last year’s scarcity of IPOs to regulatory uncertainties and healthcare reform. “It’s an uncertain time, on a macro level,” Terry McGuire, co-founder and general partner at Polaris Venture Partners, said in published reports. “We’re still seeing how healthcare reform is going to play out and once…we get into a more certain world, I think that’ll help everybody.”

2013: The industry’s past track record doesn’t bode well for a banner year in IPOs. History may repeat itself if investors remain skittish, though device and diagnostics executives are noticing some “cautious optimism” among stakeholders. Burrill & Company CEO G. Steven Burrill shares that sanguinity, having predicted a 56.2 percent surge in life-science IPOs this year due to increased public market activity, improved outlooks about pricing, and the JOBS Act, a measure passed by Congress last spring that encourages small business and startup funding by easing federal regulations and allowing people to become investors. “Though 2013 may get off to a choppy start…we expect a year of strong performance for the [life-sciences] sector,” Burrill said.

The Dawdling Dollar Drought
2012: It wound up being good advice: “Be prepared for a roller coaster ride,” National Venture Capital Association (NVCA) President Mark Heesen told investors early last year at a Southern California roundtable, “because that’s where we’ve been for the past year—and that’s where we’re going.” Indeed, U.S. venture capital firms spent the last 12 months traversing the dizzying peaks and descents of the fundraising “big dipper,” garnering an overall $26.5 billion from 3,698 deals. The data represent a 10 percent increase by dollar commitments compared with 2011 and a 3 percent decline in number of transactions, according to Thomson Reuters and the NVCA. Life-sciences investments seemed stuck in reverse despite solid boosts from the medical device and biotech sectors, falling to a low of 25 percent of all venture capital dollars invested in 2012 (a 1 percent decrease compared with 2011). NVCA analysts blamed much of the decline on poor first-time financings, particularly in the biotechnology and medical device arenas, where deal volume plummeted to its lowest levels in 17 years. The first-time financing fallout likely contributed to a 15 percent reduction in medical device deals and 13 percent drop in dollar value in 2012. A MoneyTree Report by PricewaterhouseCoopers LLP and the NVCA based on data from Thomson Reuters shows the medical device industry finishing the year with $2.4 billion invested in 313 deals. “We continue to see the impact of public policy on venture capital investment levels in very specific ways,” Heesen said. “Life-sciences investment was suppressed for much of the year, particularly with first-time financings, due in part to the impact of the regulatory and reimbursement environments…”

2013: Buckle up. Again. With few changes in store for the U.S. regulatory system and reimbursement environment, VC firms should brace themselves for another dizzying ride along the rails. This year’s trip, however, could have more peaks than nadirs—an impressive 2012 finale by the medical device sector (a 32 percent increase in capital and 9 percent hike in deal volume) is giving hope to investors who have long struggled to raise cash. At the recent J.P. Morgan Healthcare Conference in San Francisco, Calif., venture capitalists noticed an atmosphere of “cautious optimism” not seen in several years. “There is a more somber tone on the device side,” Mike Carusi, a veteran medical device investor with Waltham, Mass.-based Advanced Technology Ventures told The Wall Street Journal. “The industry in general still feels under siege. But I’m optimistic. The big [medical device companies] are clearly concerned that their farm team is going to shrink. I’m seeing much more involvement and collaboration…we’re cautiously optimistic.” Burrill is confident as well, but he’s tempering his hope with pragmatism—he expects life-sciences capital to remain expensive and relatively scarce this year, though the industry could still amass $100 billion in funds, “with financings heavily weighted to large companies and to the use of debt.”