Medtech 2015 in Review

Medtech 2015 in Review Elizabeth Cairns & Madeleine Armstrong March 2016

EP Vantage MedTech 2015 in Review In 2015 the medtech industry saw the same pattern repeat itself across a number of metrics: fewer, bigger deals. The total expenditure on M&A soared to previously unimagined heights, but the number of deals dropped from a year earlier. The total amount of venture capital raised by medtech groups remained level, but the number of deals crashed. And the explosion in IPOs that characterised last year has burned out but those that did get away were larger, on average, than in any year since EP Vantage started tracking floats. Mergers worth more than $127bn were closed last year as companies consolidated in response to the factors that have become characteristic of this market over that past year or two. Unabating pressure on pricing and a diminishing number of customers as hospitals and insurers conduct consolidation of their own mean medtech groups must build scale to meet their growth targets. This then has knock-on effects. Consolidation of the largest companies means fewer buyers for the smaller groups, which in turn have difficulty raising early-stage investment as VCs see the chances of an exit shrinking. The amount of venture investment raised by medtech groups has remained stable over the past few years, yet the number of deals done has fallen sharply; just 287 medtech companies managed to persuade investors that they were worth a punt, a 30% decrease from 2014. Also contributing to the misery of early-stage companies needing capital to keep afloat is the steady decrease in IPO activity across the sector in 2015. Shareholders, like VCs, are interested only in revenue-stage companies; woe betide a small medtech company seeking capital to fund R&D. Medtech groups listed on stock exchanges have not been hammered in the same way as biotechs, but the public markets have undoubtedly been disappointing across 2015 compared with previous years. Indices of US medtech stocks posted modest rises, whereas in Europe the performance was flat. Dismal as the environment appears, it does not seem to be preventing devices reaching patients: the US FDA approved more products in 2015 than in any year in the previous decade. As if to compensate, however, European regulation is getting tighter. Though the effects of the ongoing changes to European regulatory legislation will be hard to quantify, they are likely to make life harder for start-ups. These companies often rely on a swift, cheap CE mark to allow them to ramp European sales before turning to the US; raising the bar to CE mark will cut off yet another source of early cash. This is a harsh climate in which to grow as a medtech group, and the smaller the company is the harder the task becomes. Unless stated, all data are sourced to EvaluateMedTech and were accessed in January 2016. 2 EP Vantage MedTech 2015 in Review

All-time high for M&A The sums spent on M&A in the medtech sector in 2015 were not only unprecedented but almost unbelievable. Even excluding the record-breaking acquisition of Covidien by Medtronic the total value of mergers closed in 2015 was larger than in any year in the sector s history. And the overall total of $127bn was reached despite 2015 seeing fewer deals closed than any year since 2009. Again excluding the Covidien deal, the average amount paid (calculated using only the 96 deals whose value was made public) was $804m, also the highest on record. Medtech M&A Activity by Quarter Source: EvaluateMedTech January 2016 70 Deal Value ($bn) $68.7bn 90 Deal Count 60 79 80 Deal Value 50 40 30 63 60 58 59 66 72 55 59 60 $28.5bn 52 64 58 47 58 45 58 46 42 51 44 56 45 70 60 50 40 Deal Count 20 10 0 $23.3bn 30 30 $19.8bn $18.8bn $19.7bn $15.3bn 20 $11.4bn $11.1bn $7.9bn $8.6bn $9.1bn $8.4bn $7.4bn $5.9bn 10 $4.3bn $4.7bn $5.0bn $5.3bn $3.5bn $3.5bn $2.5bn $1.8bn $2.6bn 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011 2012 2013 2014 2015 Year *Analysis conducted by deal completion date The biggest deals were prompted by the economic advantages of combining: building scale to offer a wider product range, replacing lacklustre products with more profitable ones, reducing tax bills and, often, cutting staff costs. We have these large entities with these global sales and marketing organisations, and it is always going to make a fair amount of economic sense for them to acquire other businesses that they can recognise some significant synergies from, says Brian Scullion, managing director of healthcare at the investment bank William Blair. 3 All-time high for M&A

The interest of technology and software companies in devices is also hard to miss, with groups such as Google and IBM forming alliances with medtech companies or buying them outright. While the megamergers dominate the headlines, smaller and arguably more interesting deals are still occurring in the background. Medtronic-Covidien, Zimmer-Biomet, St Jude-Thoratec these are all noteworthy deals, but the important point is that there s still a fairly active acquisition market out there for smaller companies, Mr Scullion told EP Vantage. Maybe they re not worthy of the front page of the Wall Street Journal, but the source of innovation and the economic benefit of consolidation continues to be pronounced. Indeed, a company making a large purchase does not have to forswear smaller deals. Medtronic has been extraordinarily active as a buyer, closing eight acquisitions besides its integration of Covidien, and spending over $1bn among them. These nine deals put it way out in front as the most prolific acquirer as well as the biggest spender. Medtronic s 2015 Spending Spree Source: EvaluateMedTech January 2016 Date Closed Target Sector(s) Value ($m) 26 January Covidien Anesthesia & Respiratory; Cardiology; General & Plastic Surgery; General Hospital & Healthcare Supply; Neurology; Patient Monitoring 49,900 2 October Twelve Cardiology 458 11 August RF Surgical Systems General & Plastic Surgery; General Hospital & Healthcare Supply 240 31 August Medina Medical Cardiology; Neurology 150 19 June Aptus Endosystems Cardiology 110 18 November Aircraft Medical Anesthesia & Respiratory; Ear, Nose & Throat; Endoscopy 110 28 September Lazarus Effect Cardiology 100 19 June CardioInsight Technologies Cardiology; Diagnostic Imaging 93 26 March Sophono Ear, Nose & Throat - Medtronic is a good illustration of the two main reasons for M&A. The Covidien deal was about scale, dovetailing the two groups portfolios to provide hospitals and other customers with a single vendor for many of their products, particularly in cardiology and neurology. The other take outs, though, were more to do with the promise of each company s technology. Medtronic swooped on Twelve to get hold of its catheter-mounted artificial mitral valve, gaining a presence in the technology area that arguably saw 2015 s most frenzied activity. These kinds of technology-focused tuck-in deals have historically been the lifeblood of the sector, and they are more important to its long-term health than the megamergers. It is vital that they continue. Daniel Bertholet, a senior investment director at the VC company Endeavour Vision, is optimistic on this point. The large strategic medtech companies need innovation in order to generate revenue growth. They re very selective in their acquisitions, but they keep making acquisitions, he says. It s the business model of the industry. 4 All-time high for M&A

The poor performance of medtech stocks not as bad as biotech, but disappointing compared with prior years might also work to keep merger activity going as targets become more affordable. Top 10 Takeouts Closed in 2015 Source: EvaluateMedTech January 2016 Acquirer Target Value ($bn) Medtronic Covidien 49.9 Zimmer Biomet Biomet 14.0 Danaher Pall 13.8 Becton Dickinson CareFusion 12.2 LivaNova Sorin 3.4 Wright Medical Group Tornier 3.3 St. Jude Medical Thoratec 3.3 EQT Partners Audiology Solutions business of Siemens 2.7 Hill-Rom Welch Allyn 2.1 Cardinal Health Cordis business of Johnson & Johnson 1.9 Another sign that 2015 was no ordinary year is the fact that all of the top 10 deals were worth in excess of $1bn. In fact there were no fewer than 18 billion-dollar deals last year, compared with seven in 2014 and four in 2013. The last year that saw anything like this number was 2007, when 14 billion-dollar transactions were concluded. So 2015 was one for the record books on a number of counts. 2016 will not match it, and might well trail it significantly. 5 All-time high for M&A

Huge venture rounds as start-ups starve The pattern of venture investment that has repeated itself across the years in the device industry is once again present and this time the situation is worse than ever. VCs are clustering together in larger, later rounds and funding for early-stage companies is very scarce indeed. The amount of venture cash available to the industry as a whole has stayed steady for the past few years; in fact the 2015 total is bang on the five-year average of $4.1bn. But with only 287 rounds closed, compared with 407 the year before, it is clear that more VC money is going into large rounds for established companies. Annual VC Investments Source: EvaluateMedTech January 2016 Date Investment ($bn) Financing Count Avg per Financing* ($m) No. of $50m Rounds 2015 4.1 287 12.5 12 2014 4.2 407 10.9 12 2013 4.0 455 9.7 9 2012 3.7 394 9.8 8 2011 4.5 508 9.5 9 2010 4.4 430 11.0 9 2009 3.5 378 10.2 6 2008 3.2 301 11.2 4 *Calculated using only those rounds with disclosed value The key reason is that there has been significant consolidation, so the number of buyers of these young medical technology companies is shrinking, says Andrew Schwab, a managing partner at the US VC group 5AM Ventures. [And] the public markets have never been major buyers of medical device companies, especially not pre-revenue medical device companies. The regulatory hurdle is also higher, both in the US and Europe, says Endeavour Vision s Mr Bertholet. As acquirers become increasingly reluctant to shoulder this burden, the period venture investors must endure before an exit via a sale becomes viable lengthens. And approval of the company s technology is just the start. Increasingly, potential buyers are seeking sales, reimbursement and even profitability before pulling the trigger on an acquisition. With this in mind it is easy to see the appeal for VCs in later, larger rounds. We want to make sure there s enough money around the table to go to the finish line to get to a sustainable company, Mr Bertholet says. 6 Huge venture rounds as start-ups starve

Quarterly Medtech VC Investments Source: EvaluateMedTech January 2016 Investment 2,000 140 135 Investment ($m) 1,800 131 128 Financing Count 123 119 118 118 120 1,600 113 111 110 1,400 100 104 104 102 102 104 102 101 97 98 97 95 100 91 88 1,200 85 81 78 81 80 1,000 70 72 60 800 51 51 600 40 400 20 200 $796m $607m $805m $951m $659m $1,159m $885m $818m $826m $1,396m $1,073m $1,141m $1,126m $1,078m $1,232m $1,081m $1,103m $1,142m $690m $727m $995m $1,248m $931m $876m $816m $1,206m $1,008m $1,193m $922m $1,152m $1,102m $832m Financing Count 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010 2011 2012 2013 2014 2015 Year 0 The decrease in the amount of funding available to early-stage device companies threatens the emergence of innovative products in future. Jason Lettmann, a partner at Morgenthaler Ventures, says that some large medtech groups will have difficulty meeting their growth targets via internal R&D alone. The way they ve been able to fill that gap historically is by buying novel medtech start-ups that can hopefully drive growth, he says. If those early-stage opportunities dry up, there are going to be fewer companies available for the large players to harvest. Conversely, established companies with devices already approved and on sale are able to haul in increasingly large sums in rounds that are progressing through the alphabet: the top 10 rounds of 2015 include no fewer than three series H rounds. The radiology company Mevion Medical Systems H round takes the top spot, but sequencing and diagnostics specialist Adaptive Biotechnologies pulled off the astonishing feat of two fund-raisings of nearly $200m each in a single year. Further evidence of the clustering of money at the top is given not only by the average size of each round in 2015 but also by the number of rounds over a certain threshold. There were 12 rounds worth at least $50m last year, the same number as in 2014, but there were five of $100m or more, compared with just two in 2014. 7 Huge venture rounds as start-ups starve

Top 10 VC Rounds of 2015 Source: EvaluateMedTech January 2016 Company Round Investment ($m) Mevion Medical Systems Series H 200.0 Adaptive Biotechnologies Series F 195.0 Adaptive Biotechnologies Series E 189.5 Oxford Nanopore Technologies Series H 109.0 CeQur Series C 100.0 Silk Road Medical Series D 57.0 Natera Series F 55.5 Calhoun Vision Series G 52.0 Outset Medical Series Undisclosed 51.0 EndoGastric Solutions Series H 50.0 A clustering effect is also seen in terms of therapy areas. Adaptive and Mevion are both cancer focused, and Oxford Nanopore Technologies and Natera are diagnostics groups. Mr Schwab says that investing in a hot area can be a catch-22, with overexcitement leading to overly risky companies being funded. You get a high degree of failures, he says, though he adds that it can be very rewarding, and a company being active in a high-growth area is usually a positive. While excessively risky companies should be avoided, some risk is necessary. Investors must take more chances if the medtech sector is to remain healthy. It is vital to plant the seeds now if there is to be a new crop of takeover targets available in years to come. 8 Huge venture rounds as start-ups starve

The medtech IPO window swings shut Investors in the public markets are thinking along the same lines as venture capitalists: go big or go home. And they are doing so for the same reasons. The average size of a medtech IPO in 2015 was just shy of $84m, larger than in 2013 or 2014. But the second half of 2015 saw just seven device makers going public, and the decline along quarterly lines is clear: from a peak of 12 IPOs in the second quarter of 2014 to just two in the final period of last year. That said, the second half saw the four biggest IPOs of last year, two of which even got away at a premium to their announced range. Public shareholders, like VCs, clearly believe that there is safety in numbers: both kinds of investors want to back companies close to or past the revenue-generating stage, to maximise the chance of a return in short order. Medtech Initial Public Offerings by Quarter on Western Exchanges Source: EvaluateMedTech January 2016 750 12 Amount Raised 12 $677m Count 10 500 8 $480m 8 Amount Raised 250 $382m 5 6 $243m $401m $397m 6 6 6 $259m $268m 5 $257m 6 4 Count 3 2 $58m $80m $122m 1 2 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 2013 2014 2015 Year The quarterly totals raised have remained largely steady for the last 18 months or so. The number of offerings, however, has dwindled in a smooth, uninterrupted decline, suggesting that the good times are over for companies wishing to float. 9 The medtech IPO window swings shut

The poor performance of the Nasdaq and other markets across 2015 most medtech indices rose but nowhere near as much as they have in previous years has effectively shut the window. Only two offerings got away in the last three months of 2015 and as of mid-february there have been no listings on Western exchanges this year either. As valuations fall that tends to make IPOs more problematic, says William Blair s Mr Scullion. Generally for younger, faster-growing companies that money s no longer available for them. Once again it is start-ups that are caught with no way out: most buyers will not look at companies without approvals, sales and reimbursement, and potential shareholders appear to have the same criteria. Unless you ve got a revenue-stage company with strong growth prospects it s almost impossible at this point, says 5AM Ventures Mr Schwab. This is reflected in the largest IPOs of 2015. Nasdaq-listed Novocure s technology is FDA-approved for glioblastoma, and Natera, which closed the largest IPO of the past three years when it scored $180m in July, also has sales in the US. Morgenthaler Ventures Mr Lettmann strikes a more optimistic note. I still think there s going to be an appetite for device companies, he says. Particularly companies that are revenue-stage and growing, I believe those companies will always be able to go out regardless of the market. Top 10 Medtech IPOs of 2015 Source: EvaluateMedTech January 2016 Company Amount Raised ($m) Offering Price Discount/Premium 2015 YE Chg Since Float Natera 180 $18.00 13% (40%) Novocure 165 $22.00 (6%) (34%) ConforMIS 135 $15.00 0% 15% Penumbra 120 $30.00 13% 79% Biocartis 109 11.50 7% 15% Glaukos 108 $18.00 9% 37% Advanced Accelerator Applications 92 $16.00 0% 95% Entellus Medical 78 $17.00 6% (1%) Avinger 65 $13.00 0% 75% Carbylan Therapeutics 65 $5.00 0% (28%) Average across top 10 IPOs 112-4% 21% Average across all 19 IPOs 74 - (3%) (4%) Natera s success was not just due to being on the market it also benefited from a takeout of one of its peers. Its flagship technology is Panorama, which can diagnose foetal abnormalities by testing not the foetus s blood but the pregnant woman s. This arena has been the subject of huge excitement since a group with a similar technology, Ariosa Diagnostics, was taken out by Roche at the end of 2014. With IPOs increasingly regarded as financing events rather than exits in themselves, Natera s venture investors are doubtless keen on a similar outcome. 10 The medtech IPO window swings shut

Medtech IPOs Since 2013 Source: EvaluateMedTech January 2016 IPO count Total raised ($m) Average ($m) Average discount/ premium Q1 2013 2 58.4 29.2 (5%) Q2 2013 3 79.5 26.5 (16%) Q3 2013 1 121.9 121.9 20% Q4 2013 5 381.9 76.4 (2%) Q1 2014 6 242.7 40.5 (18%) Q2 2014 12 677.4 56.5 (12%) Q3 2014 8 401.2 50.1 (19%) Q4 2014 6 259.0 43.2 5% Q1 2015 6 267.8 44.6 (10%) Q2 2015 6 396.9 66.1 (1%) Q3 2015 5 479.9 96.0 2% Q4 2015 2 257.4 128.7 (3%) Over the years many venture investors have come to recognise IPOs as an acceptable step on the route to a trade sale, which has always been the goal in terms of an exit. I m very supportive of companies accessing capital on the public markets, says Mr Schwab. If you can access public capital to build your company, ultimately that will lead to a good outcome, whether as an independent company or as an acquisition target, he says though he does caution that this is dilutive equity capital, so companies and their investors must think hard about the overall timeline and investment return. Many investors would point out that promising companies can still raise big money; in other words, shareholders are becoming more discerning. But there can be no argument that the opportunity for medtech companies to go public is slipping away. 11 The medtech IPO window swings shut

Shares slip, though it could be worse The performance of medtech companies stock was mixed in 2015 with several big-cap companies seeing their shares fall. This was quite a change from 2014, when the worst performer was St. Jude Medical with 5% share price growth. While there was a slowdown in medtech stock indices in 2015, though, the sector was insulated from the big dips experienced by some biotech companies. Of course, medtech had not climbed as high so did not have as far to fall. If you are a revenue-stage growing medical technology company that didn t have a huge run-up, you should be less impacted by the current investment environment, says Mr Schwab of 5AM Ventures. If you haven t gone up as much, you re unlikely to come down as much, by definition. Share Price Indices Source: EvaluateMedTech January 2016 Stock Index % Change in 2015 Thomson Reuters Europe Healthcare (EU) 0% Dow Jones U.S. Medical Equipment Index 7% S&P Composite 1500 HealthCare Equipment & Supplies 6% And with jitters in the biotech market continuing, medtech could benefit as investors look for somewhere relatively safe to stash their cash while they ride out the ongoing storm. I think we ll see medtech doing comparatively well as it may be tougher to show developments in biotech, says Zeshan Muhammedi, co-founder of the US healthcare crowdfunding specialist FundRx. There s just a longer gestation period in biotech than in medtech. Even so, 2015 was the toughest year in a while for some of the larger medtech players. The biggest faller was Zimmer Biomet, and other orthopaedic players also struggled, reflecting the tough pricing environment in this mature sector. The maturing of another sector, radiotherapy, is causing problems for two of its top companies, Elekta and Varian. US hospital consolidation has led to order cancellations, and profits will be squeezed as larger hospital groups are able to negotiate bigger discounts. Ongoing pricing pressures on providers also mean that hospitals could put off making large purchases like radiotherapy systems. St. Jude Medical had another difficult year and its problems could continue for at least a while longer as it tries to resuscitate its troubled cardiac rhythm management unit and secure reimbursement for its CardioMEMS heart failure monitoring system. 12 Shares slip, though it could be worse

Large Cap ($15bn+) Medtech Companies: Top Risers and Fallers in 2015 Source: EvaluateMedTech January 2016 Share Price (Local Currency) Market Capitalisation ($bn) Top 5 Risers YE 2014 YE 2015 Change YE 2015 12M Change Boston Scientific $13.25 $18.44 39% 24.8 7.2 Essilor International 92.68 115.05 24% 27.9 2.6 Edwards Lifesciences* $63.69 $78.98 24% 17.0 3.4 HOYA 4,105.00 4,981.00 21% 17.3 1.1 Becton Dickinson $139.16 $154.09 11% 32.7 5.6 Top 5 Fallers Zimmer Biomet** $113.42 $102.59 (10%) 20.9 1.7 St. Jude Medical $65.03 $61.77 (5%) 17.5 (1.1) Baxter International*** $39.82 $38.15 (4%) 20.9 (18.9) Smith & Nephew $36.74 $35.60 (3%) 16.0 (0.9) Stryker $94.33 $92.94 (1%) 35.0 (0.7) * Corrected for 2:1 stock split ** Name change from Zimmer post Biomet acquisition *** Corrected for spinout of Baxalta While some companies suffered, there were also some impressive risers and unlike in 2014, when stock performance was bolstered by acquisitions, 2015 s biggest gainers largely had innovation to thank, with groups like Boston Scientific, Edwards Lifesciences and Abiomed rising on the back of key product approvals. Others were helped by being active in hot sectors. The blood glucose monitoring specialist DexCom made it into the top five mid-cap risers in both 2014 and 2015, partly owing to its presence in an ever-expanding area, diabetes, and its involvement in the next big thing in that space, the artificial pancreas. The growing popularity of proton therapy propelled IBA Group to the top of the small-cap chart, while Nevro s presence in pain management, with its best-in-class spinal cord stimulator, helped its share price surge. Morgenthaler Ventures Mr Lettmann agrees that neurology is a popular area for public and private investors. There s still a lot of unmet need there, and a lot of places where devices can play a role. He also rates structural heart as a compelling sector, as well as any area where devices can impact drug markets. 13 Shares slip, though it could be worse

Other Significant Risers and Fallers in 2015 (Ranked on Market Cap) Source: EvaluateMedTech January 2016 Share Price (Local Currency) Market Capitalisation ($bn) Five Selected Risers YE 2014 YE 2015 Change YE 2015 12M Change DexCom $55.05 $81.90 49% 6.7 2.4 Lepu Medical Technology Yuan23.8 Yuan38.6 62% 4.9 1.8 Abiomed $38.06 $90.28 137% 3.8 2.3 Nevro $38.67 $67.51 75% 1.9 0.9 LeMaitre Vascular $7.65 $17.25 125% 0.3 0.2 Five Selected Fallers Sonova SFr146.9 SFr127.3 (13%) 8.8 (1.6) Varian Medical Systems $89.00 $80.80 (9%) 7.9 (1.1) Elekta SKr79.7 SKr72.1 (10%) 3.2 (0.9) GenMark Diagnostics $13.61 $7.76 (43%) 0.3 (0.2) OvaScience $44.22 $9.77 (78%) 0.3 (0.8) This focus on innovation bodes well for the industry. If larger companies are being rewarded for the approval of novel devices, they will hopefully be willing to invest in new technology, perhaps by acquiring smaller players with promising approaches. This is vital to the medtech ecosystem. There was a great deal of variation in stock performance in 2015 much more than in 2014. The volatility seen so far in 2016 suggests that even more medtech companies will end the coming year in the red. 14 Shares slip, though it could be worse

More FDA approvals than ever FDA approvals were the one unalloyed positive of the year the agency gave the go-ahead to 51 novel devices in 2015, the most in a decade. This just missed EP Vantage s mid-year prediction of 52 first-time premarket approvals and humanitarian device exemptions but nonetheless marked a 55% increase over 2014. And the time taken to evaluate approvals was not markedly changed: the average review time was 17 months, compared with 16.7 months in 2014. This suggests that measures brought in by the FDA to speed up approval times, such as the expedited access PMA route, are yet to have their full effect, meaning that decisions could become even quicker in the years to come. Number of PMAs and HDEs Granted, 2005-2015 Source: EvaluateMedTech January 2016 60 50 51 Number of Approvals 40 30 20 34 44 32 30 18 22 43 41 23 33 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year That said, removing a couple of outliers shows that things are already getting faster. Integrum s OPRA osseoanchored prostheses for amputees took more than six and a half years to get the go-ahead, while Wright Medical s Augment bone graft took five and a half years. Excluding these, the average approval time for PMAs and HDEs was just 14.6 months. Other measures, including the de novo clearance route, introduced in 2014 for low-risk novel technologies, point to a more accommodating FDA and an easier path to the market. If this is indeed the case it is a plus for smaller players, especially with investors and potential acquirers increasingly looking for companies that have already cleared the regulatory hurdles. 15 More FDA approvals than ever

Arguably getting past the FDA is becoming easier. The dearth of funding for start-ups, however, likely means that many smaller companies cannot secure the cash necessary to reach the filing stage. Roche received more PMAs than any other company in 2015. Six of its tests, including companion diagnostics and immunoassays for hepatitis and HIV, were approved. Medtronic was the second-most represented company, with four PMAs, mainly in the area of cardiology. Average Review Times for PMAs and HDEs by Therapy Area (Months) Source: EvaluateMedTech January 2016 EvaluateMedTech Device Classification First PMAs in 2013 Avg Review Time in 2013 First PMAs in 2014 Avg Review Time in 2014 First PMAs in 2015 Avg Review Time in 2015 Anaesthesia & Respiratory 1 61.3 2 18.5 - - Blood 1 13.2 2 8.7 - - Cardiology 7 17.1 11 12.9 15 13.9 Diabetic Care 1 15.7 1 19.0 2 9.8 Diagnostic Imaging 1 16.8 1 13.0 2 11.5 Ear, Nose & Throat - - 1 9.5 - - Gastroenterology - - - - 3 14.0 General & Plastic Surgery 3 68.2 1 28.7 - - In Vitro Diagnostics 4 8.6 9 13.3 12 11.3 Nephrology - - - - 1 25.1 Neurology 1 40.5 1 8.9 5 19.3 Obstetrics & Gynaecology - - - - 1 12.5 Ophthalmics 1 21.4 1 11.0 1 28.1 Orthopaedics 2 30.0 3 48.0 6 24.5 Physical Medicine - - - - 1 80.9 Urology - - - - 1 29.2 Wound Management 1 31.2 - - 1 14.7 Total 23-33 - 51 - Average - 26.9-16.7-17.0 And while the US agency might be more relaxed than ever, the picture is different in Europe where regulations are set to become more stringent. This could put an end to the current state of affairs in which companies usually seek the European CE mark first then carry out more comprehensive trials to support US approval. [Previously] it was easy to get CE marking and the FDA was very demanding, says Mr Bertholet of Endeavour Vision. I think the regulatory pendulum is now swinging back the other way the FDA has become very pragmatic, and in Europe the new regulations are becoming very demanding. If the stringency of the two regulatory systems is becoming comparable, the US becomes more alluring than Europe. The two markets are roughly the same size but the US is less fragmented, not just when it comes to regulation but also for reimbursement. 16 More FDA approvals than ever

Traditionally companies target CE mark first for their devices, taking the easier path to bring in revenue to keep them going while negotiating the relatively lengthy and expensive US regulatory system. A change to this well-established pattern could deprive young companies of a way of staying afloat. Not all sectors are created equal when it comes to getting the FDA s blessing. As in previous years, the cardiology market saw the most approvals 15 while in vitro diagnostics was in second place with 12. First-time PMAs and HDEs by Therapy Area Source: EvaluateMedTech January 2016 16 14 12 Number of Approvals 10 8 6 4 2 0 Anaesthesia & Respiratory Blood Cardiology Diabetic Care Diagnostic Imaging Ear, Nose & Throat Gastroenterology General & Plastic Surgery In Vitro Diagnostics Nephrology Neurology Obstetrics & Gynaecology Ophthalmics Orthopaedics Physical Medicine Urology Wound Management 2013 2014 2015 Cardiology and IVD approvals were also faster than the overall average, suggesting that the agency was keen to get these products onto the market. Concerns have been raised this year that the increasing pace at the agency could allow unsafe technologies onto the market. But medtech companies will not be complaining. While doom pervades the sector the increase in FDA approvals and the short time it took to get these were rare positives in 2015. 17 More FDA approvals than ever

Where now? The only surprise in the device sector in 2015 is the degree to which the trends already long evident have become even more entrenched. The venture crisis is only becoming more pronounced, and eventually its effects will be felt in a big way: as more start-ups fall by the wayside, unable to find the money to sustain themselves, fewer disruptive technologies will be available for acquisition, and larger groups will be unable to sustain their growth rates. As of mid-february 2016 there had already been five billion-dollar acquisitions, aimed either at building a wider product range to help absorb the kind of discounts demanded by payers and providers, or at shifting a company s focus into areas of higher margins or greater demand. The number of tech-focused acquisitions of young companies continues to drop: perhaps the groups at the top of the sector are already seeing the first consequences of the VC downturn. There appears to be little sign of the markets improving; device indices are down between 4% and 10% year to date. It is hardly a surprise that not a single medtech company has yet braved Western stock exchanges so far this year. The industry can at least hope that the sharp upward trend in FDA approvals seen over the past two years will continue at the same rate. If it does, 2016 could see 70 or more novel devices reach the US. But even then the majority of the approvals would go to established companies those best able to afford them and, in a sense, least in need of them. Report authors: Elizabeth Cairns and Madeleine Armstrong 18 Where now?

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