The pace of innovation in the Medtech sector is high, with 14’292 patent applications filed in Europe in 2020, which is more than in computer technology or communications.

Investors in publicly listed Medtech companies have done well too: Over the past 10 years (September 2011 to September 2021), the index of the 100 largest global Medtech companies has gone up by a whopping 270%.

But the Medtech sector in general faces several challenges: more exacting regulation, competitive pressure from firms outside of the sector, increasing pressure on margins as healthcare costs are spiraling, and the availability of talent. For Medtech startups, in particular, the availability of capital is a pressing issue. Developing a product and bringing it to market takes time and is expensive.

Patents are by no way the only means to protect what a startup is doing, in some cases companies just keep their knowledge as trade secrets to themselves. But patents are important because potential buyers “will look more closely at these and ascertain if they sufficiently protect the technology for which the start-up shall be acquired and if they’re sufficiently broad. For an application, they will consider if it is likely that the patent will be granted and what it may ultimately protect. Also, they will typically want to know if the relevant markets are covered”, as patent lawyer Axel Remde said in our interview.

Regulation is another key element for medical devices. It is obvious that medical devices with an impact on patients’ health are regulated, and startups cannot just sell their products without going through some kind of control mechanism. In the European Union, the set of rules that aims to ensure a high level of safety is called “MDR”. The most important criterion for how high the hurdles are to bring a product to market is the classification of a device. MDR distinguishes between class I, IIa, IIb and class III devices. The exact rules are hellishly complex and run over 6 pages (Annex VIII of the MDR).

Reimbursement means that health insurance companies pay the cost for the service of a healthcare provider regarding the diagnosis and treatment of diseases. Whether a device or service is reimbursable or not, and at what price, will decide if technology will be widely available for patients, and profitable for a manufacturer to provide. In general, technology needs to provide better patient outcomes or cost savings to be reimbursed.

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The European Medtech industry is a hotbed of innovation that rests on a very strong research base. The M&A activity is intense, as Private Equity funds have discovered that Medtech companies are stable and crisis-resistant businesses. Strategic buyers have an unprecedented amount of financial firepower at their disposal, and as a result, valuations are on the rise.

From an investor’s point of view, the patent situation of a Medtech startup and its regulatory pathway merits special attention. This lengthy and costly process has been made even more challenging by the transition from MDD to MDR in Europe. Investors need patience and should ask themselves if startups will be able to raise the money necessary to pass this hurdle. This also means, of course, that investing in a startup that has already passed this stage and received market authorization poses a significantly smaller risk, which, however, comes at a price, as it will no doubt also be reflected in the company’s valuation.