Do you have an idea for a new medical device product?
And are you thinking of licensing it? Well, read on.
There is no question that the medical device industry is changing so fast and this means that manufacturers need to use medical device licensing as a strategy to get their medical devices technology into the commercial market.
The evolving marketplace and the rapid pace of new devices entering the market is shortening the lifespan of med device technology.
This means manufacturers should try to stake their claim in the evolving value chain.
Data indicates that the medical device industry is poised for steady growth, with global annual sales forecast to rise by over 5 percent a year and reach nearly $800 billion by 2030.
These projections reflect increasing demand for innovative new devices (think wearables) and services (think health data), as lifestyle diseases become more prevalent, and economic development unlocks the huge potential in emerging markets.
To put this into perspective in terms of stock market performance, the medical device sector outpaced broader markets over the twelve months ended 4Q17.
In aggregate, total shareholder returns (price appreciation and dividends) for medical device companies were 29.1% compared to 21.3% for the S&P 500 during the period.
The cardiovascular subsector gained the most over the year ended 4Q17, with total returns north of 40%. Orthopedic-focused medical companies returned 16.2% over the twelve months, the only subsector that trailed the S&P 500 index in 2017.
The point here is that you stand to gain a great deal from the medical device industry hence you need to spend some time determining what your strategy for bringing your medical device to market will be.
Is venturing required, or can you license it instead?
Most manufacturers prefer the freedom to keep creating that medical device licensing affords.
Primarily because you can get to market faster, licensing a medical device to a large company is also one of the best ways of protecting yourself.
Here’s a look at more reasons why medical device licensing is one of the best go-to-market strategies for the medical device industry and how to negotiate better licensing deals.
Intense competition and development costs
The competitive landscape for medical devices is getting intense, thanks to new and non-traditional entrants, disruptive technologies, and players with global ambitions emerging from high growth markets (think Apple, Google, IBM, Samsung, Alibaba, etc.).
Medical device manufacturers need to think more broadly and take a step back to understand how the ‘pie’ itself is changing.
They must keep abreast of the competitive landscape, instituting a robust process to monitor disruptive trends and identify strategic partners.
Johnson & Johnson , for instance, has partnered with a leading technology company, adopting their 3D printing capabilities to develop customized orthopaedic products, leading to better healthcare outcomes while reducing costs.
Alibaba, on the other hand, has already entered the market, leveraging their vast logistics capabilities and huge customer base.
Google has collaborated with Ethicon (subsidiary of Johnson & Johnson) to start a new venture company called Verb Surgical – they are developing safer, cost-effective and smarter surgical robots that use artificial intelligence software for image data analysis and machine vision.
These big players are better positioned in the managing and commercializing IP in the consumer marketplace, and will use their capabilities to compete in this fast growing market.
Additionally, the increasing cost of developing medical devices is also proving to be a challenge especially when you consider emerging technologies such as wearables, smart device apps, IoT, cloud-based data and analytics, and blockchain.
Many medical devices are becoming more technically complex, requiring many different technologies often protected by hundreds of patents and consequently many devices must go through the complex approval processes of regulatory bodies.
And not many medical device companies, especially start-ups, are capable of mastering these capabilities in-house.
In fact, many of the largest companies are moving out of the R&D part of the medical device business due to increasing technological innovation.
Instead they are setting up incubators and corporate investment funds to partner with star-ups.
In effect, they are outsourcing their R&D and that is creating a great medical device licensing opportunity for medical device start-ups.
Medical device value and royalty rates
The closer your medical device technology is to market ready, the more value it has in terms of licensing.
This begs the question of what is the proper medical device royalty rate to be paid to the product manufacturer.
Royalty payments are an essential component of most medical device deals. Along with upfront payments and milestones, manufacturers are rewarded for surpassing certain development hurdles.
A properly structured deal will achieve a balance among these financial payment types.
There are defined retail matrixes into which your licensee must factor your royalty rate.
In industries (such as the med tech) where profit margins have historically been high, royalty rates are comparatively high.
For example if the parties anticipate that the licensee will have profit margins of 80%, the royalty paid to the licensor should be in the range of 20-30% of net revenues (before taxes).
But of course, this will be different in fields where profit margins are low (such as the food industry), royalties will be low.
The most effective negotiators do not view obtaining a signature on the agreement as their ultimate goal.
The same goes for trying to get the highest medical device royalty rate.
Instead, they view establishing the potential for a lucrative, long-term relationship with the other party as the primary objective of negotiating.
Research and understand the mechanics of medical device licensing
Make sure you research and understand the key business terms when it comes to licensing your med tech device, such as field of use, exclusivity, and territories.
Make sure you cover all the bases, for instance, is your medical device only for a single market or can it be used in multiple areas of the healthcare industry?
Addressing this question in particular will ensure that you don’t wind up locking up your IP rights with one company and missing revenue opportunities in other markets.
Also make sure you and your licensing partner agree on key milestones, such as development timelines, marketing dates and royalty payment deadlines.
With the medical market evolving even faster, medical device manufacturers need to consider their position in the medical device value chain especially when it comes to medical device licensing.
You must get your device into the market sooner than later by partnering with bigger companies through licensing.
Effective medical device license agreement design and drafting facilitates successful medical technology commercialization.
Although trade-offs exist between upfront payments and downstream royalties, the historical evidence shows that medical device royalty payments are a key value driver of economic success at leading medical device companies.
Additionally, agreements focusing on royalty-related economics best align the incentives of the licensor and licensee, maximize the long-term value of IP and streamline negotiations with licensees, while also preserving options for downstream monetization.