We take a closer look at the fast-growing world of medical technology (medtech), and learn business lessons from leaders who have made it in the sector.
Medtech covers a wide range of applications, from devices enabling new approaches in treatment for specific medical conditions, to software that allows healthcare professionals to work more efficiently.
According to the trade association MedTech Europe, there are over 27,000 companies across the continent working in the sector. Collectively they employ 675,000 people, including100,000 in the UK. Many are exporting products and services to healthcare markets all over the world.
But achieving success in medtech is difficult. Products must be easy to use, whether by clinicians or patients, and may also need to be integrated with existing healthcare technology. Regulatory, commercial and political conditions vary between jurisdictions. This is not a sector for investors looking to make an easy buck.
“Even if a product has clinical benefits, it doesn’t mean it’s going to be successful,” says Peter Jennings, partner in our corporate finance team. Jennings works with medtech and caretech companies, the latter of which develops technology for the social care sector. “You need to develop products that the customer will be willing to pay for, rather than just a product that fulfils a need. This is not a traditional consumer market,” he explains.
The NHS is a particularly difficult place to launch a new medtech product, and some companies opt to eschew the UK market entirely. Endomag, which uses magnetics and electronics to trace and help treat cancer, is one example. It started selling overseas first rather than to the NHS, working through multiple regulatory certification processes in different territories.“The UK has been one of the last countries where we’ve got up and running,” says CEO Dr Eric Mayes.
Endomag is active in 30 countries and its technologies have been used to treat more than 35,000 patients. Mayes says the company’s journey shows how long it can take for medtech companies to progress from concept to successful, approved product on sale in target markets.
He stresses the importance of engaging regulators and getting detailed feedback from healthcare professionals to refine products. “Today, about one third of the organisation is focused on managing all the regulatory requirements for all the markets we work in,” he explains.
Exceeding market expectations
For others, getting things right for the NHS can pay dividends globally. Sky Medical Technology spent years perfecting its product before the NHS adopted it. The company makes the ‘geko’, a device that stimulates the peroneal nerve by contracting the foot and calf muscles to increase blood flow, as if a patient were walking, without them needing to make any physical effort. This can prevent deep vein thrombosis (DVT) or post-operative swelling.
CEO and founder Bernard Ross began raising finance for the company in 2006, but it was three years before full development work began, with the product finally launching in 2015. The eventual adoption of the device by NHS hospitals has attracted interest from healthcare providers elsewhere, and it is now being used across North America, China and the Middle East.
“If you can show that you’ve got a health business case that is transferable globally you will attract interest from other countries,” says Ross. “The NHS is extraordinarily respected around the world: everyone knows the only way it can buy a product is clinical validity and an established business case.”
Development of the geko was made possible by Enterprise Investment Scheme (EIS) financing. Ross chose to use this route rather than responding to early interest from venture capitalists and institutional investors. He explains: “In December 2011 we received an offer to license the technology, but the shareholders and investors decided that the would-be acquirer would only have been working in one area of technology, whereas this is a technology that is applicable in multiple healthcare areas.”
In 2017 one major investor decided to increase its holding, offering to buy 35% of other shareholders’ holdings, enabling investors who had bought shares in 2009 to sell a third for between two and four times the price they had paid for the shares. Best of all, these returns were tax-free under EIS rules.
There are a variety of financing options available to medtech developers, but the feasibility of each may vary depending on the company. Endomag, for example, was initially financed by a £400,000 grant from the UK Technology Strategy Board in 2009. A venture capital firm also invested £350,000 in the company that year, followed by further investments of £1.8 million in 2011 and £3.5 million in 2014.
Ross suggests that the medtech sector could also be strengthened by an increase in the use of corporate venturing: where larger companies support small firms with investment during crucial points in their development. Recognising that many investors succumb to the temptation to sell early, he says: “The cyclical forces that tend to drive M&A activity create an environment where many early-stage technologies fail to progress in large companies”.
Embracing all platforms
Medtech companies are beginning to embrace new platforms and ways of attracting customers. While many products will be sold straight into medical providers and facilities, others can be rolled out directly to the customer.
Taking advantage of the rise in personal devices and digital channels to market its product, Echo offers a service to patients via a free app. Founded in 2016, Echo manages repeat prescriptions, organises delivery of medication to patients and helps them to take it at the right time.
The company started its first trials in January 2017, despatching 800 orders during that month. It now processes around 1,400 orders a day, serving over 35,000 patients. In 2018 the company opened a 12,000 square foot distribution centre to serve clients across the UK. It is now seeking to build partnerships with other digital healthcare services.
Medtech sector challenges
The health and social care sectors are currently facing a number of tough challenges, including lack of funding and significant staff shortages.
One company seeking to address these issues is DoctorLink, which provides an online triage platform to help doctors serve patients more efficiently. The company was founded in 2015 and the platform is now used by more than 700 UK GP surgeries.
Similarly, Cera has built a platform to match up patients with carers, using artificial intelligence (AI) to determine whether individuals require additional medical services. The London-based company launched in November 2016, and has now expanded across the UK
CEO and co-founder Dr Ben Maruthappu acknowledges that he is working in a sector that some investors find unattractive. “Building a fast-growing company from scratch in that environment – a sector in crisis – using technology we’re also building is challenging, but it is rewarding,” he says.
Supply and demand
While the growth of smaller medtech companies may still be challenging, the future of this sector looks bright. With increasing demand on healthcare services, there is a huge growth opportunity for technological innovation.
“There is a well-documented shift towards an ageing population and the need to manage both challenging medical conditions and increased healthcare needs,” explains Jennings. “The only way to solve the impending healthcare crisis is through technology.”
Our healthcare practice helps to manage growth and generate business value at every stage. If you’d like to speak to our healthcare specialists, please contact Peter Jennings.