The COVID-19 pandemic has catalyzed and diversified innovation in the biopharmaceutical and medical device sectors. For private equity and venture capital investors alike, several trends present both headwinds and tailwinds that may impact investment flows into 2022.
1) Investments in supply chain innovations will continue to increase.
The pandemic highlighted weaknesses in global supply chains, spurring both companies and governments to prioritize supply chain innovations and shift towards digital transformation. A recent survey of 200 senior-level supply chain executives indicates that U.S. companies plan to focus on initiatives to improve supply chain visibility, efficiency and resiliency. This will include increasing investment in supply chain technologies, such as AI and robotic process automation, and investing in training workers to use new technologies.
Additionally, companies are under pressure from various stakeholders, including shareholders, to focus resources on supply chain sustainability. Companies’ investment in supply chain sustainability significantly increased last year, including in worker welfare and renewable energy, but the most common mechanism used was supplier development.
With policymakers increasingly focused on supply chain and infrastructure improvements, as well as “reshoring” in the United States, investors should consider where sectoral opportunities may arise as a result of new policies. This is also likely to impact competitive dynamics globally, potentially impacting investment opportunities in non-U.S. markets as well.
2) Significant investments in digital health ventures will continue, if regulations remain flexible.
As the remote care innovation platform expands, reimbursement will be an increasingly critical issue, particularly for novel digital health devices, including software- and AI-based devices, that do not fit cleanly in the existing regulatory architecture.
During the pandemic, regulators temporarily relaxed requirements for certain low-risk digital health devices, such as digital therapeutics for mental health care, and telehealth services to meet the public need. While regulators have engaged stakeholders, including through the regulatory development process, on which flexibilities should be made permanent after the pandemic, much uncertainty remains.
These regulatory trends will continue to shape incentives for entrepreneurs into 2022. For PE and VC investors alike, it will be increasingly important to monitor FDA activities relating to digital health and corresponding reimbursement regulations from CMS for Medicare in particular.
3) M&A deals expected to increase as companies continue to look towards consolidation of offerings.
Due to the financial strains caused by the pandemic, combined with the uncertainty of its duration and continued pricing pressures, consolidation in certain medical device segments is likely to continue, though the Administration’s renewed focus on competition may present challenges. While M&A deals lagged early in the pandemic, they began to increase in early 2021. By the end of Q2 2021, medtech M&A recorded a total of 33 deals in the first half of 2021, a significant increase from the 25 deals made in all of 2020.
PE investors should continue to seek opportunities in this space, while VC investors may see headwinds for early stage companies looking to find product market fit in a more competitive ecosystem. Overall, as policymakers increasingly scrutinize competition, new macro-level trends may emerge that impact multiple sectors, such as via the FTC’s recent interest in AI.
4) Drug pricing pressures may impact innovation.
Congress and state legislature’s pressures on drug pricing, including lowering drug prices, reducing what patients pay at the counter, and requiring more transparency on drug pricing, may
lead to less innovation, particularly in innovative therapies.
President Biden has called on Congress to lower prescription drug prices. President Biden’s plan has focused in particular on allowing the Medicare program to directly negotiate drug prices with drug manufacturers. Proposed legislation also would limit price increases for established drugs and cap annual out-of-pocket costs for Medicare recipients.
Additionally, federal regulations are likely to require more transparency from biopharma companies on the drug pricing process, especially given recent price transparency requirements for hospitals and similar rules for health plans taking effect in 2022. These regulations would require that health insurers publish list prices and historical net prices for prescription drugs, available both online and in paper format, in real time. A number of states have also enacted drug pricing transparency laws requiring drug supply chain entities to report information explaining high-price increases and high-priced new drugs.
The majority of state legislatures have also adopted measures to reduce drug pricing. There are currently more than 100 bills introduced to state legislatures aimed to reduce drug pricing. If Congress and state legislatures continue to pass legislation in this area, innovation in drug development could be significantly stifled, especially for smaller, emerging biotech companies. Correspondingly, investors will need to look for targeted opportunities in specific, high value therapeutic areas.
5) FDA action in the medical device and biopharmaceutical sectors could stifle innovation.
FDA regulation in the medical device and biopharmaceutical sectors, including in AI and cybersecurity, could lead to less innovation in the medical device and biopharmaceutical sectors.
FDA has recently been focused on AI and is considering a regulatory framework for these technologies. In January 2021, FDA released its first Action Plan regarding AI and Machine Learning-based software as a medical device. This action plan describes a multi-pronged approach to advance FDA’s oversight of AI/ML-based medical software, including through reporting requirements. FDA has not yet taken any regulatory action or provided any additional guidance since it released its Action Plan.
Additionally, the shift towards digital health technologies during the pandemic necessarily involves information transfer over the internet, which could potentially compromise patient privacy. In response to growing concerns about cybersecurity threats, FDA appointed Kevin Fu as the first acting director of medical device cybersecurity in February 2021.
Fu has indicated that more precise and pervasive cybersecurity threat modeling during manufacturers’ development of medical devices is critical for risk mitigation, and he has explained that FDA is stepping up its assessment of cybersecurity during the medical device premarket and postmarket review processes. Fu has also discussed FDA’s plans to issue revised draft guidance related to premarket medical device cybersecurity.
The FDA’s appointment of the new, and first, acting director of medical device cybersecurity is an indication that the FDA may plan to make cybersecurity a priority in 2021 and beyond.
While the uncertainty around potential FDA regulations and macro-level changes to Medicare may hinder investment and development in the medical device and biopharma sectors in the near future, the current push towards digital health and the proliferation of emerging biotech companies and new products will ensure development in these sectors continues. To what extent development is impacted will likely be determined by the amount and stringency of new rules and regulations promulgated by governmental agencies, and federal and state legislatures.