It's not just the hotly contested 2.3 percent medical device tax that is presenting a setback to the medical device industry. According to Paul Teitelbaum, managing director with Mesirow Financial's Investment Banking Practice, medical device companies have also been hit hardest by a lack of venture capital funding. DOTmed News spoke with Teitelbaum about why funds are being pulled away from med tech and what it means for the industry.

DMN: Why are venture capital (VC) firms shifting their funding away from medical device start-ups and smaller companies?
PT: VC firms have been making the shift away from investing in start-ups and smaller companies in general because of the 2008 crash and economic fallout, causing limited partnership (LP) investors in funds to pull back their investments into VC firms, which had relatively poor returns and these LPs have cut the amount they have been investing in new VC funds. In order to allocate limited capital and improve their returns, the VCs have been saving their "dry powder" for their latest-stage/highest success probability companies and doing the same for new investments.

Medical device companies specifically have been among the hardest hit by the VC contraction because of lengthened FDA review times, higher clinical requirements and a much higher bar for reimbursement (need for outcomes data and econometric analysis) as the Affordable Care Act increases the scrutiny on the cost-effectiveness of treatments, many of which involve medical devices and focus on improving health management and prevention to reduce the utilization of costly procedures. Also, Washington has taken a tougher approach to medical device companies - for example, taxing 2.3 percent of revenues, while pharmaceutical companies have not had any incremental tax consequences. The general feeling of challenges and difficulties in medical devices has caused life sciences-focused VCs to shift their money more toward biotechnology companies. Also, with the "IPO window" opening up for biotech companies, it's a popular space, another reason for the shift in that direction.

DMN: How is this impacting the medical device start-up space?
PT: It has created significant challenges for medical device start-ups to get funded. We have seen many med tech companies fail to get new VC funding in the past couple of years, even as things have started to ease up for companies in other sectors. Companies have definitely been forced to become more resourceful - they have had to resort to more continued funding from their existing investors, as well as family offices, high net worth individuals/angels, crowd funding, grants and other strategies. To some extent, this is hindering innovation. At the same time, it also may be working to filter out some of the less promising technologies and revenue models that might ultimately fail anyhow. We'll have to see how that plays out.

DMN: To highlight how important this funding has been for medical device start-ups previously, are there any examples of success stories that come to mind?
PT: Some success stories in the past few years have been in the renal denervation space (minimally-invasive devices to deaden nerves entering the kidney in order to treat high blood pressure). This space has enormous significance for the way high blood pressure, a disease afflicting tens of millions of Americans, will be treated going forward, mainly for severe cases initially but then probably extended to many others over time. If you can treat a disease like this with a single treatment, you can save tens of thousands of dollars on drug therapy and continued office visits over the course of a person's lifetime. Ardian raised about $66 million, largely in VC funding from Morgenthaler Ventures, Advanced Technology Ventures, Split Rock Partners and Emergent Medical Partners (including $47 million in 2009, at the "bottom" of the capital markets) and then was purchased by Medtronic for $800 million. Boston Scientific bought Vessix Vascular for up to $425 million (including milestone payments). Vessix had received at least $30 million in VC funding from NeoMed, OrbiMed Advisors and Edmond, the Rothschild Investment Partners, prior to its sale to BSX. The market potential for renal denervation therapies is expected to exceed a few billion dollars by 2020.

DMN: Why is there still hope for med tech?
PT: I believe that everything is cyclical. Medical device companies have seen their challenges before, but the sector is never going away. Many conditions need to be treated by medical devices, they are a critical part of the health care delivery equation - drugs can't treat everything. There is also a growing and aging population of people living longer who are going to need more clinical care and procedures, so there is going to be increasing demand for medical devices that can save the health care system money - smaller, more innovative, less costly, minimally-invasive devices and consumables that can treat conditions more easily, quickly, with less operating room time and devices such as health monitoring devices that help keep patients out of the hospital (as health care is shifting out of the hospital and increasingly into the home and alternate care settings). This is going to require and drive innovation, and the best technologies will get funded and have attractive exits. As that increasingly happens, there will be a renewed interest in medical device investment and more companies will get funded.

DMN: What advice would you give medical start-ups?
PT: To be successful, companies need to look far ahead and:

- Focus on a single application that cuts costs for the health care system that they can get to market quickly.

- Find a market need and design the product/technology to best meet that need - novel technologies in search of a use are less likely to be successful.

- Interview many physicians, nurses, caregivers and other ultimate customers to make certain your technology is useful - your own physician advisors are biased.

- Put egos aside and do whatever it takes to get a strong, backable CEO who has successfully financed and sold a device company in the past.

- Speak with the FDA early on about what data they will need for approval, and beware of changing CE mark regulations.

- Speak with Medicare and health insurance companies about proposed pricing/revenue models and what they will need to show in studies to get favorable reimbursement.

- Don't be afraid to speak with strategics early on to get their views on what they will need to see before they partner with you.

- Once truly ready for a transaction (sale, merger, partnership or capital-raise), leverage a strong financial advisor to maximize an auction - companies need to be focused on running their business.