Science in the Triangle

Strengthening the emerging medical device industry in North Carolina, a state better known as a biotech hub, is a no-brainer no longer.

Sure, North Carolina’s universities are still brimming with ideas, students to test new technologies in a lab and professors to lend their expertise to startup companies, especially in the Research Triangle Park area, home to biomedical engineering departments at Duke University, the University of North Carolina at Chapel Hill and N.C. State University and two teaching hospitals.

But raising cash to pay for development has become more difficult in the past two years, according to two venture capitalists and an investment banker who addressed the challenges facing medical device companies Tuesday at North Carolina’s third Medtech conference, which took place in Durham.

Regulatory scrutiny and cost-saving pressures at hospitals have also increased, according to Ernst & Young’s medical technology report 2010.

Mike Constantino

The medical device business used to be a haven of gadget geekdom, “focused on the newness, the sexiness” of the latest technology, said Mike Constantino, Southeast area life sciences industry leader at Ernst & Young’s office in Raleigh. “Whether patients were getting better was secondary.”

Now, being new is no longer enough. The technology must increase efficiency and improve health outcomes.

Overall, the U.S. medical device industry has fared better than most other industries during the recession, according to Ernst & Young’s report.

Large companies have access to plenty of capital. For example, AGA Medical, a Minneapolis device maker with nearly $200 million in annual sales, raised $94.4 million in an initial public offering a year ago.

But the situation is different for companies with less than $50 million in annual revenue or startups relying on investors to develop a product and bring it to market. That’s the industry segment where many North Carolina device makers fit.

The state’s medical device industry consists of close to 400 companies, according to Ibility, an industry organization that was founded last year with the help of $2.5 million in state funding. A listing of about 250 of them shows that at least 40 percent of them have 20 or fewer employees.

About one-third of North Carolina’s 400 medical device companies have operations in the RTP area, including startups like Physcient, companies with products on the market like Bioptigen and Metabolon and publicly traded companies like New Jersey-based BD.

BD, which generates more than $7 billion in annual sales, this year finished a $12.7 million renovation of its technology and innovation center in RTP, opened a $14 million manufacturing facility west of Durham and announced plans to build a distribution center southeast of Raleigh. (Read about BD’s expansion in North Carolina here.)

With fewer than 20 employees and less than $5 million in annual revenue each, Metabolon and Bioptigen have to rely on venture capital and other private investors to develop new products and get regulatory approval to sell them.

Metabolon‘s latest product is a biomarker test that identifies people at high risk for diabetes. Bioptigen has developed scanners that map the back of the eye in microscopic detail and allow surgeons to identify diseases at early stages.

Physcient, a three-year-old startup, is working on its first product, an surgical tool that opens the rib cage for heart and lung surgeries. The tool, which can be operated electronically with a smart phone, inflicts less damage to tissue and bone than mechanical thoracic retractors that have been used in hospitals for more than 70 years.

Private investors are key to keep the lights on and the development going at Physcient.

All medical device companies, regardless of size, have to deal with more stringent regulatory scrutiny, which add time and costs to the approval process, as well as cost-savings pressures at hospitals and a new 2.3 percent excise tax on medical device sales that takes effect 2013, both results of health care reform. But small companies and startups face an additional challenge: A crunch in venture capital investments, particularly in early-stage rounds.

In 2009, medical device companies raised less than $3 billion in venture capital in the U.S., according to the Ernst & Young report. Only 13 percent of the rounds were early-stage, the least since 2001.

North Carolina was absent from the map of U.S. regions that led in funds raised by medical device companies, even though one company, Durham-based TransEnterix, made the top 10 venture rounds list with a $55 million fundraiser completed in October 2009.