Med-tech diagnosis: Recessionitis. Prognosis: Uncertain.

Once seen as almost recession-proof, medical technology companies are a bit bruised from the past year's economic downturn but are certainly not down for the count, according to Ernst & Young's annual report on the industry.

The 62-page report released Tuesday indicates med-tech's financial performance in 2008 and the first half of this year held steady. Revenue for publicly traded med-tech companies globally increased 11 percent to $289 billion last year, although it's flat the first six months of 2009. Profit decreased 11 percent in 2008 to $11.4 billion, but that was mostly due to charges associated with big acquisitions and asset impairment charges at large companies.

The pronounced flatness this year "reflects some uncertainty on a global basis for health care reform in the U.S. and similar issues going on in key med-tech countries around the world,'' said Bill Miller, an E&Y partner in Minneapolis.

But the industry faces some vexing challenges, mainly the effect that pending health care legislation will have on the way devices are paid for and the way patients are treated. The leading Senate bill, for example, calls for a $4 billion annual tax on med-tech companies.

"It's a little early to say exactly how it will impact the industry, but, certainly, there will be an impact," Miller said. "On the bright side, reform could mean that companies may have access to an expanded pool of patients'' -- assuming more people will be insured.

Reform could mean that reimbursement will rely more heavily on comparative effectiveness research -- not just on whether a product works but on the benefits it delivers versus its cost, according to the report.

Another question related to health care reform involves the requirement that med-tech firms disclose consulting payments to doctors. Companies often strike agreements with doctors for developing new devices or making existing products better.

Critics say disclosure will make doctors more cautious about working with med-tech companies, and that will slow innovation and growth. While larger companies may have internal programs in place to do public disclosure -- now a requirement in at least one state -- smaller companies may not have the resources to develop such a system, Miller said.

In addition, the industry is closely watching how regulatory approval for new devices will fare under the Obama administration. Many experts say the process will become more rigorous, expensive and time-consuming.

Last month, the Food and Drug Administration (FDA) commissioned the Institute of Medicine to study the way the majority of devices are approved, called 510(k) approval, which does not require detailed clinical studies before approval. If that path is restricted, the time, cost and risk involved in getting FDA clearance for many products will likely increase, the report says.

The report states that capital raised by U.S. and European companies totaled $9.2 billion last year, a decline of 38 percent. Worse, the trend continued this year, with the amount of financing raised dropping 59 percent compared with the same period in 2008.

The amount of venture capital flowing into med-tech -- funds for U.S. companies developing new and innovative devices -- declined 10 percent to $3.6 billion in 2008, while the decrease of 20 percent was more severe in Europe. In the first six months of 2009, venture capital financing decreased 38 percent in both the United States and Europe.

"In med-tech, innovation is the key, and many times that innovation occurs at smaller start-up companies. So getting access to capital is very important," Miller said.

Public offerings -- a traditional, and often lucrative, exit strategy for small med-tech companies and their investors -- have essentially dried up, the report states.

In the United States, there hasn't been an IPO since the first quarter of 2008 -- the longest dry spell since 2003.

Miller said it was a "good sign" last week when Plymouth-based heart device firm AGA Medical Corp. filed to go public, with hopes of raising $275 million.

Fewer deals are being struck on the mergers and acquisition front, too.

Deal-making has also been hurt by the retreat of private equity investors -- "whose buying spree in recent years was fueled by the availability of cheap credit -- and by valuation gaps between the expectations of sellers and the new realities of the market." Put simply, private investors may not have the cash to invest, and many have grown risk-averse.

The report also underlines the concentration of the med-tech industry in certain states, namely California, Massachusetts and Minnesota (in that order). Of the 969 public and venture-backed med-tech firms in the United States, 52 percent were headquartered in these three states.

Despite some gloomy numbers, the report ends on a note of cautious optimism. "The industry has historically gotten through other financial downturns," Miller noted, and there's much innovation yet to be developed through new products and existing ones. Plus, an aging population will likely need more medical devices, and there's certainly room for growth in emerging markets, as well.

Janet Moore • 612-673-7752