Medtech's outlook

Medtech companies seem to be facing challenges in the market, but is this fact or fiction? The S&P healthcare equipment index is falling behind the broader S&P 500, but overall revenues within the sector are in fact increasing, even in vulnerable areas such as diabetes devices. In addition, medtech companies in the middle market are still maintaining high levels of research and development (R&D), despite capital constraints and long U.S. Food and Drug Administration approval timelines.

Venture capital average investment has increased, but the number of deals is down

Looking ahead, the medtech sector is expected to experience a continued evolution in venture capital (VC) dynamics. The trend of fewer but larger VC deals—a shift from over 1,200 deals in 2021 to under 700 in 2023—is likely to persist. This change is accompanied by a significant increase in median capital investment, which more than doubled in the past four years, according to PitchBook. 

The future may see a further decline in smaller-scale investments ($1 million to $4.9 million), which have traditionally constituted a significant portion of VC activity. Instead, there's an emerging preference for larger investments, particularly those exceeding $25 million. This shift is expected to drive the median capital investment higher. In 2023, the focus within these larger deals was predominantly on surgical devices, a trend that might continue, contrasting with the emphasis on diagnostic equipment in smaller deals. This evolving investment landscape suggests a strategic realignment in the medtech VC sector, favoring more substantial, potentially higher-impact investments.

Premarket approval timelines exceed two years, but R&D levels persist

While the number of new devices submitted for FDA premarket approval (PMA) has remained relatively consistent over the past few years, the growing number of applications for novel, higher-risk devices has led to the average FDA review taking longer than two years during several periods—including the period ending in 2023. After 2010 and 2013—other periods in which the initial PMA process exceeded two years on average—the average review time contracted substantially in subsequent years 2011 and 2014, respectively. However, with the potential for government shutdowns in 2024, the FDA may be unable to decrease the timeline this time around. Companies should ensure that they have sufficient cash runways as well as R&D pipelines to account for the significant delay in FDA approvals for initial PMAs.

Despite these challenges, the outlook for middle market medtech companies in terms of R&D is optimistic. In 2023, R&D spending remained strong despite capital constraints and elongated FDA review times. That trend underscores the sector's commitment to innovation and adaptability in a changing regulatory environment. As the industry moves forward, sustaining investment in R&D will be crucial for companies to stay competitive and successfully navigate the extended approval timelines.

Diabetes management revenue continues to increase despite attention-grabbing GLP-1 headlines

Throughout the past year, the medtech sector has continued to struggle, trailing the S&P 500. As the use of glucagon-like peptide-1 (GLP-1) agonists has continued to increase both in patient counts and in popular culture, medtech companies have faced challenges in the capital markets. However, despite headlines that question the strength of the medtech industry amid reports of the role of GLP-1 drugs in softening demand for CPAP devices and reducing cardiovascular events, global revenue related to diabetes management has continued to grow. 

While the sector will certainly experience a long-term impact associated with the increased and continued use of GLP-1 treatments, many factors will allow for diabetes management revenue to remain high, at least in the near future. Currently, only 25% of private employers cover the use of GLP-1 drugs, though this number is expected to increase within the next few years. However, the high cost of GLP-1 drugs has made some employers reluctant to cover the prescription. Right now, Ozempic is the only Medicare-approved GLP-1 medication for treatment of diabetes, as Medicare Part D coverage specifically excludes weight loss drugs. A recent study of patients who used a continuous glucose monitor along with GLP-1 medications showed higher usage of both, demonstrating the potential for complementary drug-device benefits. 

The takeaway

Although it is facing the capital challenges seen throughout the life sciences industry, the medtech sector is poised to thrive due to significant VC investments, continued R&D spend despite long approval timelines, and strong diabetes management revenue trends. Looking forward, companies should strive to manage their cash runways to facilitate long-term success during this period of capital constraints.