As the medical device industry enters 2015, the United States remains the world leader by market size, with total revenue of around $110 billion—around one-third of the $350 billion global pie. But the U.S. medical device industry also faces multifaceted challenges that are hampering growth.

In recent years, the furious pace of growth the U.S. medtech industry had grown accustomed to has slowed. Through 2020, the U.S. medtech market is expected to expand by only 5%, according to Evaluate. That’s down significantly from its 15% growth rate a decade ago, according to Accenture.

To improve its prospects, the industry will need to capitalize on its strengths, overcome its weaknesses, seize opportunities for growth, and address threats that could hamper its progress.

The U.S. medical device industry boasts many strengths, including market position and size, R&D investment, academic institutions, and strong finance markets.

Market Position and Size

The United States continues to command a leadership role in the global medical device space. As of October 2014, U.S. companies held four of the top five rankings for medical device companies with the most revenue and represent 22 of the top 40 spots. Overall, U.S. companies account for almost two-thirds of the total revenue for the top 40 medical device companies, followed by Germany with 14% and Japan with 7%.

An aging population and increased availability of healthcare as a result of the Affordable Care Act (ACA) should continue to keep the United States well positioned in the medtech space. U.S. medical device exports grew at a compound annual growth rate of 4.5% from 2008 to 2013 and are expected to increase at similar rates in the future, according to Bloomberg.

Growing economies in Asia and Africa, where gross domestic product is predicted to rise by more than 5.5%, also bode well for U.S. companies, which enjoy good brand recognition and reputations there.

R&D Investment

While the United States is expected to continue to play a leading role in medical device research and development (R&D) for many years to come, its dominance is eroding. After declining in 2009 for only the second time since the 1950s, according to the National Science Board, R&D spending across all U.S. industries has rebounded—although gains of $2.9 billion in 2010 and $7.3 billion in 2011 were unimpressive.

Larger medical device manufacturers, in particular, have been slow to dedicate more dollars to R&D. From 2013 through 2020, large corporations in the industry with projected spend of $1 billion or more are expected to grow their R&D budgets by approximately 3%, while the rest of the industry is expected to increase R&D spending by more than 5%, according to Evaluate.

Academic Institutions

The United States is home to 141 accredited medical schools and approximately 400 major teaching hospitals and health systems—many of which consistently rank among the best in the world—according to the Association of American Medical Colleges. Many of these academic institutions partner with medical device companies to collaborate on research and development of new technologies.

Strong Finance Metrics

While growth in the industry has slowed over the past decade, revenues still grew at a faster pace than GDP. Renewed confidence in the medtech sector was evidenced by strong improvement in market capitalizations, which surged 37% in 2013, compared with 4% growth in 2012. More than 70% of U.S. medtech companies saw their market cap increase, and nearly a quarter saw their share prices grow 100% or more, according to Ernst & Young.

In addition, there has been a strong market for mergers and acquisitions (M&As) in the medtech sector. The total deal value during the first three quarters of 2014 was considerably higher than in the same period in 2013, while the number of M&A deals rose 20%.

The period from mid-2013 through mid-2014 was also promising for small and midsize companies, with 31 U.S. and European medtech IPOs raising $1.5 billion in funding. This illustrates investors’ faith and confidence in the industry’s future prospects.

To maintain its position as the worldwide leader in medtech innovation, the U.S. medical device industry must overcome weaknesses including an innovation plateau, the medical device tax, a tough regulatory environment, inferior government subsidies for research and development, and a lack of venture capital for startups.

Innovation Plateau

A major reason for slowing growth in the medtech industry has been a gradual shift from risky blue-sky research to more evolutionary research. Large, established corporations, especially, have turned to more predictable research with a more easily measured return on investment. Unfortunately, low-risk or incremental improvements in medical device products do not justify price increases in the eyes of payers.

In contrast, smaller companies outside the United States can accept a larger magnitude of risk due to their more nimble nature and less burdensome regulatory environment, which could lead to greater innovation.

Medical Device Tax

The medical device sector has been negatively impacted by a 2.3% excise tax on sales of medical devices in United States implemented in 2013. According to a February 2014 status report from AdvaMed, as many as 165,000 U.S. jobs have been lost due to the tax, and nearly one-third of respondents to a survey by the trade group said they had reduced R&D investment because of the tax.

The device tax also places U.S. companies at a disadvantage against foreign competitors by raising the U.S. companies’ effective tax rate. Furthermore, it often forces U.S. companies to lower the price of their products in order to remain competitive in the global marketplace. Additionally, the higher tax rate reduces companies’ resources for capital investments, R&D, clinical trials, manufacturing improvements, and investments in startups.

Regulatory Environment

Increased regulatory scrutiny by FDA has lead to increased costs for development of new products. For example, U.S. regulations such as unique device identification, which went into effect in September 2013, add to the growing cost of compliance for companies looking to do business in the United States.

U.S. medical device manufacturers should also be concerned about foreign regulations, particularly in China, which is pursuing policies that favor domestic manufacturers. This may force U.S. medical device manufacturers that want to sell in China to manufacture there. This creates a predicament because companies will need to rely on China’s intellectual property laws and enforcement, which have been major concerns to date. In addition, companies will have to carefully scrutinize and evaluate new Chinese business partners.

Foreign regulations are also an issue in the EU, where new laws will soon replace the EU’s Medical Device Directives. Areas of concern for medtech companies in the proposed legislation include enhanced competence requirements for notified bodies, approaches toward clinical evaluations, and the definition of single-use devices. While there is still ambiguity as to when the final version of the legislation will go into effect and what it will look like, companies will eventually have to comply with the new regulations.

Inferior Government Subsidies for R&D

The R&D tax credit has been vital to sustaining U.S. innovation, but the temporary credit has often been allowed to lapse since its enactment in 1981. Without permanent status, businesses can’t fully rely on the R&D tax credit in financial budgeting and forecasting. A permanent credit would give companies the confidence to invest in R&D, knowing that a certain amount of their expenses would be offset come tax time.

The U.S. R&D tax credit is also inferior to others around the globe. The United States currently ranks 22nd in the world for federal R&D tax subsidies, with countries in Europe, Asia, and South America providing greater incentives for businesses to move there.

Venture Capital

Venture capital firms allocated just 7% of their funding to healthcare in 2013, down from 13% in 2009. Due to long times to market and stringent FDA regulations, early-stage companies have had an especially hard time attracting venture capital. Angel investors have stepped in to provide essential capital to startup medtech companies, but more funding is needed to keep the industry’s innovation pipeline flowing.