Medical device

Is Obamacare killing medical device startups?

December 6, 2012: 4:49 PM ET

healthcare_costsBehind the slowdown in medical device venture capital.

FORTUNE -- Venture capitalists pumped less money into U.S. medical device companies last quarter than in any similar period since 2004. And Elizabeth MacDonald of Fox Business has identified the culprit: President Obama.

The issue, MacDonald argues, is a new 2.3% excise tax to be paid by medical device companies on gross sales. It's part of the Affordable Care Act (a.k.a. Obamacare), and is expected to generate around $29 billion in revenue over its first decade (beginning on January 1).

Without doubt, this new tax is problematic for medical device companies. And that goes double for startups that want to conserve or reinvest every available dollar, as they strive for profitability. But MacDonald's contention that the excise tax is  destroying VC investment in the medical device sector is absurd.

For starters, let's look at the numbers MacDonald cites. Yes, just U.S.-based medical device companies raised just $434 million in Q3 2012, the lowest level since $337 million was disbursed to such companies in Q1 2004. And, yes, it is a major decrease from the $687 million invested in Q2 2012...

Hey, wait a minute: There was $687 million invested in Q2 2012? Were the venture capitalists unaware of the coming excise tax? You know, the one that became law two years earlier? Don't VCs expect to be invested in their companies for up to ten years? Or how about the $705 million invested in Q1 2012, which was significantly higher than the $518 million invested in Q4 2011? In fact, medical device companies raised more VC funding in 2011 than in either 2009 or 2010.

MacDonald provides a link to some of this data, but doesn't bother to mention it in her own column. Instead, she quotes Allison Giles, who is identified as "a top executive at Cook Medical, the world's largest privately owned medical-device company." Giles, conveniently, claims that the excise tax is the "biggest" reason for the Q3 investment drop.

A few things readers might want to know about Ms. Giles. First, she is Cook Medical's VP of federal affairs. Second, she used to work on Capitol Hill as lobbyist and, before that, as a Republican staffer. Third, Cook Group has never actually received venture capital funding, nor does it appear to have invested in any startups.

So I called Giles, to ask why she thinks the excise tax is primarily to blame for the Q3 investment drop. First she said she'd be happy to speak with me. Then she said that she'd have to check with what her PR people told MacDonald, while simultaneously acknowledging that she also spoke to McDonald herself. Finally, she said she was distracted by an email and would get right back to me. Then I got a call back from Cook Group communications rep, who said Giles isn't available until next week.

For what it's worth, I also rang up some actual venture capitalists about the state of medical device investing. They all told me the same thing: The excise tax is clearly an unwelcome burden, but hardly a driving factor in investment decisions. Instead, more salient issues are an increasingly-treacherous FDA approval requirement for medical devices and a relatively lackluster exit environment.

"Devices have become hard to make money in," says Terry McGuire, a co-founder of Polaris Venture Partners and former chairman of the National Venture Capital Association. "Not only because they cost more due to the FDA process, but also because you can't get as much money when you sell them as you can get for a pharma company."

Medical device startups are facing a number of headwinds when it comes to securing venture capital. There's no need to exaggerate the weaker ones to score political points.

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