Heading into 2019, the medtech industry is, in some ways, the strongest it’s ever been—though its players may see new challenges in trying to balance hype and scientific promise against cold reality and economics.

Both sides have a lot going for them: the wider use of artificial intelligence and machine learning appear to offer endless insights into nearly every aspect of the industry and patient care. Though it’s still in its nascent stages, many buyers and sellers alike see the pitch as a way to add value, from product development through to delivery and use.

On the other hand, there have been many warnings for companies to temper their expectations and avoid promising the moon—such as, of course, Theranos, which finally bled dry earlier this year when it announced plans for liquidation. But 2018 also saw less dramatic examples, such as Verily and Novartis’ Alcon unit halting work on their glucose-measuring smart contact lens because it, well, just didn’t.

So how do investors feel, caught between the whispers coming from each shoulder? Some are optimistic.

"Overall, it feels like we're in a much better place, and so the world of medtech investing is pulling in more capital," said Brent Ahrens, a general partner at Canaan, an early-stage venture firm. "I'd say compared to 2018 and 2017, I think people are going to head in a little more with the aperture open, because of the success with IPOs."

But medtech companies haven’t yet seen the same gargantuan Wall Street sums as the mainstream tech industry, tying billions to killer apps—or even those in biopharma, with Moderna recently setting a record with a $604 million listing for a $7.9 billion valuation.

That has largely kept medtech companies disciplined and more focused on producing good science, Ahrens said. In addition, the nature of the field lends itself to more iterative, incremental advancements, compared to headline-grabbing leaps such as gene editing and CRISPR.

But a steadier stream of IPOs is still encouraging, especially when considering the amount of consolidation among the largest medtech companies, which has left fewer buyers around for the startups looking for a place to land.

According to EvaluateMedtech, the top 10 companies in 2017 accounted for nearly 40% of the worldwide market, with the top 30 taking about 75%. And those top 10 names are expected to remain the same for the next few years, but with a little shuffling here and there, as they’re mostly unable to grow any further through mergers among themselves. 

However, their appetite for acquiring smaller companies has still been healthy, and many are following the big pharma companies that hunt there for new ideas. Take Boston Scientific, for example, whose shopping spree this year culminated in November’s $4.2 billion offer to buy out BTG, a move that would greatly pad out its R&D pipeline, alongside several other acquisitions.

But startups and the rest of the industry are also seeing a more manageable way forward on their own, especially with changes happening at the FDA.

At the start of the year, the agency’s medtech center gave itself the goal of making the U.S. market the top destination for developers of new devices by the end of 2020, by streamlining FDA processes and improving industry engagement and collaboration.

More recently, the FDA said it would reform its 510(k) review process and announced new commitments to respond faster to safety signals, using real-world data and active surveillance. Those came in the shadow of an international investigation into device safety reports, which found more than 1.7 million injuries and 83,000 deaths linked to approved and cleared products.

Still, one of the biggest challenges going forward for medtech companies will be securing reimbursement and proving not only clinical benefits but also financial ones.

"When I was at J&J, it was, ‘If you build it they will come,’" said Ahrens, who previously worked at Ethicon. "We'd make some new products, and we would pump them into the marketplace and the market would soak them up. Today, you've got value assessment committees that sit in hospitals and decide what to bring in and why."

Getting coverage, coding and payments is tricky for smaller companies to work through, especially with cutting-edge ideas in AI and new technologies.

"I think there's some great technology that people are looking at, but what's unclear is the business model, to use the overworked term," Ahrens said. "How much are people willing to pay for those things? Over time, it will get worked out, because there are some phenomenal advantages."

"We're pretty enthusiastic with all the things that we see: the backdrop of the industry and the FDA being in a really good place, with it being supportive and helpful, and the cool science that we're seeing in these companies," he said. "So we're open for business. We're not scared of the risk."

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