Medtech faces hurdles ranging from biopharma capital limits to regulation

The medtech industry is poised to encounter significant challenges that could potentially constrain its growth trajectory in the coming months, including capital limitations within the biopharma sector curtailing medical device growth, troublesome surgical indicators and new regulations. By anticipating the potential hurdles and strategizing accordingly, medtech companies can mitigate the effects of these various headwinds and harness opportunities for innovation and growth.

A deeper dive into medtech subsectors

The medtech sector is made up of a variety of subsectors, from complex devices to diagnostic tools and digital technology companies. Life sciences technology products are one major area of the sector, and include instruments, reagents and consumables for laboratories. According to Bloomberg, almost 50% of the revenue within this subsector comes from biopharma, which has faced challenges over the past several years due to ongoing funding constraints.

Likewise, in the medical equipment and devices subsector, physician office visits, a key indicator of surgical interventions, appear to be low compared to prior periods at the end of 2023 into early 2024, according to data from the Centers for Disease Control and Prevention. Based on this trend, we believe that for devices used in the surgical space, demand may decline in the coming months unless trips to the doctor increase. Significant capital was raised in the surgical devices space in 2023, but if investment in that category continues the pattern seen in the first quarter of 2024, we would expect a 40% reduction in capital invested by the end of the year.

Another key subsector under medtech is diagnostics, an area facing regulatory hurdles as a result of new U.S. Food and Drug Administration regulations.

The FDA released a proposed rule in September 2023 relating to the oversight of laboratory-developed tests and released the final regulations on April 29. LDTs, as defined by the FDA, “are in vitro diagnostic products (IVDs) that are intended for clinical use and are designed, manufactured and used within a single clinical laboratory which meets certain laboratory requirements.”

Historically, the FDA has not closely overseen these tests, but as the use and complexity of LDTs have grown significantly over the past few decades, the agency aims to ensure their safety and effectiveness.

The final rule is viewed by many in the industry as less severe than originally anticipated. The FDA noted that it will exercise enforcement discretion with regard to several issues, including currently marketed tests, as well as LDTs manufactured and performed by a laboratory integrated within a health care system where an FDA-authorized test is not available.

While the legality of the LDT policy will certainly face challenges, its potential effectiveness may be impacted by the Supreme Court’s ruling on the Chevron doctrine, which previously held that courts defer to agency interpretations of ambiguous statutes. Meanwhile, the impact for companies in this subsector may be significant, increasing regulatory and compliance costs. Market compression is possible, as smaller laboratories may not have the financial or regulatory resources to comply with the final rule.

Addressing challenges

To address these challenges, medtech companies should evaluate potential cost efficiencies that can help drive margins during periods of lower sales growth. Companies may want to evaluate automation solutions that can help reduce both operational and back-office costs. Prior to deploying automation solutions, companies should collect and utilize data to make decisions relating to inventory management, warehouse operations logistics and distribution, and geographical footprint. Supply chain management, especially in an age of increased tariffs on medical supplies from China, can help companies exploit cost savings opportunities.

Looking ahead

While the remainder of 2024 could be challenging for medtech businesses, there is some promising news. A large number of medical devices continue to be approved and we’re seeing solid levels of research and development spending, along with many clinical trial starts, which, according to Evaluate Medtech, numbered 756 as of the end of May 2024. If annualized, total clinical trial starts would be higher than the average of the past few years. While investment in the sector was off to a slow start in 2024, the second half of the year will potentially bring stability, opportunity and growth.