Can Spine Device Start-Ups Still Survive?

The medical device market has been turned on its head over the last five years as regulations have increased and venture capital funding has dried up. Spinal device manufactures now face myriad obstacles to maintaining profitable and innovative business, including a 2.3 percent medical device tax, instituted in January 2013 to pay for portions of the Patient Protection and Affordable Care Act.

To cope with these challenges and prepare for the future, large device companies have begun acquiring new companies and product lines.

In September, Stryker purchased MAKO Surgical for $1.65 billion. In October, Wright Medical announced its acquisition of French orthopedic device company, Biotech International, and Biomet announced its acquisition of Lanx.

And while the American Association of Neurological Surgeons and other medical groups are continuing to lobby Congress for an appeal of the medical device tax, for the time being it will continue to take its cut directly from the revenue of device companies.

In this increasingly tight environment of market giants, can device start-ups still survive? Maybe, say Scott Spann, MD, and Jason Blain, president of Spinal Elements, but only if the companies can adapt to the changing environment and properly prepare for the uncertain future.

Dr. Spann is the founder of Westlake Orthopaedics Spine & Sports in Austin, Texas. In 2007 he founded Pantheon Spinal to produce lateral access lumbar spine surgery implants and devices.

Carlsbad, Calif.-based Spinal Elements was started in 2003 by Mr. Blain and Todd Andres under the original name Quantum Orthopedics. Spinal Elements' founders got the company off the ground and have maintained and grown its success, even in the face of mounting challenges. Though not running a start-up any longer, Mr. Blain has an up-close perspective of what small-to-midsize companies must overcome to succeed.

Unexpected challenges

Of the many hurdles Dr. Spann faced in the infancy of his company, the bureaucratic burden was even greater than he expected. Medical device laws and regulations are continuously shifting, creating a moving target for companies to keep up with.

"Simply getting an FDA approval on an implant has been far more tedious than I ever anticipated, and I anticipated a great deal of tedium," he says.

The increasing length of time for an FDA approval also forces companies to be more diligent with data provided and resources allocated, Mr. Blain says. Any company with limited resources can only afford to dedicate them to the most significant devices.

"For instance, with our Ti-Bond technology, there wasn't a clear regulatory pathway; we didn't have a market to come into," Mr. Blain says. "We were the first and the only. Putting funds behind that was a tough decision. Do you put funds behind something truly innovative or just something competitive? You have to be good at picking what's the next good thing."

The medical device tax may also force some smaller companies to cut back on research and development spending which could have a negative impact on innovation. And the increasing difficulty to get payers to reimburse medical devices throws an additional wrench in the pathway of device manufacturers.

Though there will always be room for multiple levels of devices and minor improvements to current devices, Mr. Blain says, it may be increasingly difficult to get truly innovative devices cleared to market. Products that require an investigational device exemption or pre-market approval are a substantial investment of time and money that may not pay off in terms of reimbursements.

"Can you get the data to the level that makes sense for insurers to reimburse?" Mr. Blain says is a question for companies to ask themselves before pursing an IDE or PMA. "It's hard to put money into a device if there's not a lot of guarantee you'll get it back."

What Does the Future Hold?

The market is indeed prohibitive for smaller device companies to even get a foot in the door, Dr. Spann says. He compared the market to the airline and auto industries where it's rare for a small company to gain name recognition and a meaningful share of the market. This can be largely attributed to constraints and restrictions brought on by more government control.

Dr. Spann expects growth in the spine device market to stay rather flat. A recent MarketsandMarkets report estimated the spinal device market will grow 5.1 percent by 2017 to a value of $14.8 billion. In 2012, the market held an estimated worth of $11.6 million.

Even in the 10 years Spinal Elements has been in business, the environment for start-ups has changed significantly, Mr. Blain says. Funds are much harder to come by, and in the future companies may have to look outside of venture capital and get creative with fundraising. Neither Dr. Spann nor Spinal Elements raised venture capital; rather, they suggested companies start looking to seed money from individuals, angel funding rounds and whatever other means necessary to keep the company afloat before a profit can be turned.

What will it take?

Spine start-up leaders must have the willingness and commitment to see their company through, knowing the odds of success are currently small, he says. They also must be committed to financially absorbing some of the unexpected costs that arise.

Those committed to starting a spine device manufacturing company should not be deterred by the challenge if they approach the situation with realistic expectations and are fully prepared for the associated risks.

"If it's absolutely a passionate dream of yours, it's a worthwhile goal," Dr. Spann says. "Just be prepared to commit a lot of time, a lot of energy and a lot of money."

The tightening marketplace is a call for spine start-ups to be increasingly innovative and work hard with the resources available. Mr. Blain also believes culture-driven companies can be a recipe for success.

Last October, Spinal Elements launched its Hero Allograft program to donate the device's net proceeds to the Make-A-Wish Foundation and St. Jude Children's Research Hospital. The Hero Allograft was an innovative way for the company to do business while also keeping in line with its culture of caring.

"The Hero Allograft generated interest in our company through keeping to our core values and our core culture," he says. "That's what propels us forward."

The highest quality products and services will continue to survive in the spine device market when they are relevant, as well as companies with positive cultures and a high level of respect for both the employees and the market, Mr. Blain says.

"It all comes down to maintaining a culture of innovation, being respectful of the market conditions and navigating through the market," he says. "If you stay true to those things, there is a means of survival."

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