Big mergers: a threat to innovation

The medical device industry is running out of big companies, according to venture capitalist Rob Kuhling. That's definitely bad news for start-ups, and it could bode ill for the medical community and patients as well.

The trend toward big companies gobbling each other has endangered the delicate symbiosis between venture capitalists and large manufacturers of medical devices, said Kuhling, a general partner at Onset Ventures, which has backed more than 100 companies since 1984. The two groups had been in balance for much of the last decade, with start-ups conducting basic R&D into new technologies and big manufacturers buying the small firms with the best ideas.

"For many (companies with) new ideas, there has not been even a thought given to creating a self-sustaining entity," he said. "The proverbial 'back of the envelope' has contained a list of future suitors right alongside the sketch of a new device."

But this strategy of building for acquisition - the "quick flip," as it is called by venture capitalists - requires a sizable pool of suitors. And that pool is shrinking.

Kuhling's concerns came to a head with the recent move to acquire Guidant, a deal that grew out of a bidding war between two goliaths of the medical device industry, Boston Scientific and Johnson & Johnson (Boston Scientific won). Long before this deal took shape, however, the radiology industry was already treading this ground.

The pool of big imaging equipment vendors began shrinking years ago. Philips bought ATL and Agilent (ultrasound), Adac Labs (nuclear medicine), and Marconi Medical (notably MR and CT). GE bought Amersham (contrast media). Siemens picked up Acuson (ultrasound), SMS (IT), and CTI Molecular Imaging (nuclear medicine).

You might argue that, eventually, big companies will run out of other big companies to buy and will again turn their attention to start-ups. But by then the damage may have been done.

Fewer big companies means less competition to acquire small innovators, tilting the playing field in favor of buyers. Investors may be discouraged from taking the risks needed to develop some new ideas.

"This could be bad for the healthcare system," Kuhling said. "It could stifle innovation."

Consolidation among multinationals also threatens to change the character of start-ups. In the past, innovators had focused on developing ideas. In this changed environment, they must invest time and money in an infrastructure that includes manufacturing, marketing, and selling, just to survive long enough to be of interest to an acquirer.

"It puts them in the situation of having to do the wrong things in order to survive," Kuhling said. "It forces a start-up to spend money on things that are not their core competency, when they could be spending it on R&D."

Over time, some small companies may get big enough to acquire other companies. This has already begun in medical imaging, as seen in Hologic's purchase of mammography assets from Trex Medical and Fischer Imaging, and Merge Healthcare's acquisition of eMed and Cedara.

These and other once small companies may grow to the ranks of the very large, and the M&A balance may one day be restored. But this, as Kuhling notes, is a long process. And we are only in the early years.