The regulatory process is one of the biggest barriers to entry in the medical device market. In the USA it will take roughly 10 years to go through the process, and in Europe around seven years. This means a lot of medical device innovation happens in Europe and that devices are often tried and tested in Europe first.
Of course, it’s important to understand the difference between the regulatory environments as there’s a risk of conflicts between regions. I'm working with a European client right now who is developing a way to detect skin cancer. The company already has a CE mark and they want to expand into the US. One of the big issues they have is that in Europe it's okay to have a device that only works on people whose melatonin content in their skin is below a certain threshold. That’s not acceptable in the US, well, theoretically it could be acceptable in the US except that it will never get approved by the centres for Medicare and Medicaid. That means that it will never become covered by insurance because most insurance companies only reimburse for things that Medicare and Medicaid also reimburse for. So this company is going to have to extend its templates.
In the last 10 years or so there's been a move towards harmonisation/synchronisation between North America, Europe and Japan. Medical devices typically have to be registered somewhere, so that if there's some problem they can make the appropriate recalls. It used to be that there were separate databases in Europe, the USA and Asia Pacific but this is what they are working on harmonising. It’s not completed yet and the political situation in these countries could impact the process, for example the outcome of the USA election in November 2020.
A large amount of medical devices are innovated in Europe because of shorter regulatory timelines but also because it's cheaper to do the testing. For example, 70% of all cardiac devices, invented in the world, or innovated in the world, are done in Ireland.
Why Ireland? Well, part of it is that it's a little bit like Silicon Valley. Once you have a group of experts together it becomes a virtuous circle. And now they have a history so now they're leading. But another reason is what's called “first-in-man” testing, which is the testing on the first physical patients. Germany and Italy are among the most predictable to first-in-man testing protocols.
In the USA venture capital companies want a liquidity event roughly every three years. In France and Germany that’s considered a short term investment. The usual holding period for European firms is five years. This means that the European investor timelines and medical device innovation timelines are more closely aligned in Europe. There’s still a two years difference but it’s not near to the seven year discrepancy there is in the USA.
Although there is obviously quite a bit of investment in medical devices from the US, there is also a large pool of money in America, that won't go after them precisely because of the timelines. This opens an opportunity for European private equity markets.