Opportunity still exists despite market conditions.
Medical device makers navigating today’s economic climate have more hurdles to jump than in the post-Covid investment boom of 2021, and the tighter market demands a purposeful approach from those of us looking to bring new technology to market.
Health technology investors have taken a more selective approach1 in the healthcare space in 2023. That marks a continuing trend from the end of 2022 as digital health startups raised only half as much funding in 2022 as they did in 2021, according to a report from Rock Health.2 In addition, slimming operating margins for health systems have reverberated across the market. About half of all hospitals in the U.S. recorded3 a negative operating margin last year and hundreds4 of hospitals face the prospect of closure in 2023.
For the medical device community, we cannot view those circumstances as a challenge, but rather, an opportunity to affect meaningful change through innovation. In a tighter economy, we can still find success through well-executed projects that deliver highly effective solutions for care providers and patients.
Due diligence preparation
For companies attempting to fundraise in this climate, they should expect additional layers of due diligence from potential investors. Startups working toward a U.S. Food and Drug Administration approval, as an example, will field more detailed questions about their FDA submission timeline and how their cash runway will get them there. They will be asked to produce a thoroughly vetted roadmap that accounts for the instability of the market and the supply chain issues5 that have roiled medical device makers.
Inflation and rising interest rates have created an investment market characterized by prudence, but investors still have a substantial appetite for new medical technology. That was evident in the first quarter of 2023, which saw six digital health funding deals6 that exceeded $100 million.
Likewise, hospitals and health systems are showing more conservativism in their approach to technology investments as they continue to weather losses.7 It is incumbent on device makers to produce clinical results that show improved patient outcomes and lower costs for care providers to justify the investment. Pre-market companies also need to give a transparent view of their upcoming clinical milestones and show the steps they are taking to earn regulatory approvals.
With elevated scrutiny from investors and hospitals, device companies must look inward at their own processes. Striving for operational excellence within the company will position them to meet those heightened expectations from third-party partners. In my own experience leading the team at the early-stage device company AVS, I have found success in building a “performance mindset”8 within my teams. We are accountable to our key performance indicators and are always mindful of how our work is impacting the broader goals of the company.
The more mature devices currently have an advantage over pre-clinical solutions, like ours, because investors can take a measure of confidence in devices with established track records. Which leads back to the importance of the roadmap–device makers striving for commercialization must prove they can meet timelines and demonstrate continued progress to keep pace with devices that have a base of clinical evidence.
We also should prepare to meet an increase in demand when the economic climate becomes more favorable. We are already seeing signs of improvement among some health systems’ revenue9 and we expect to see tech investments rebound in the second half of 2023.
With the proper approach, device makers can adapt to the demands of today’s economy and will continue to impact patient care with their innovations. For those of us in the space, we must use the stricter financial climate and heightened expectations to produce higher quality results, rather than a deterrent for innovation.
Sean Gilligan is the chief operating officer at AVS, an early-stage medical device company focused on safely and effectively treating severely calcified arterial disease.