Innovation threatened as medtech sees no improvement in venture funding

Analysis

The medtech venture capital landscape remains flat. Device makers managed to raise just over $3.6bn in total VC funding last year, only $42m more than the total the previous year (see table). If this is a recovery it is a pretty pathetic one.

What funding is available is getting later and later as venture capitalists seek to invest in companies that can provide a return in short order. Coupled with the tough environment for M&A the medtech sector is also seeing, this means that early-stage businesses are being squeezed from both sides, potentially endangering the development of future technologies.

Fewest deals for five years

The total raised in 2013 might be slightly – very slightly – up on the previous year, but the number of deals has dropped. Just 325 funding rounds were completed last year, making 2013 the worst year since 2008 in terms of financing count.

Annual VC investments
Year of financing Investment ($bn) Financing count
2013 3.6 325
2012 3.6 330
2011 4.2 434
2010 4.3 372
2009 3.5 346
2008 2.9 249
2007 3.1 203

And the year has ended on a low. The fourth quarter saw just $650m raised through 48 deals, making the third quarter, previously thought of as poor with 75 deals worth a total of $773m, look good by comparison (Medtech venture funding climate remains chilly, October 21, 2013).

One of the fourth-quarter rounds did make it into the year’s top five, but it was not a typical one. Oxford Nanopore Technologies raised $64m to fund development of its molecular analysis systems, but the money came not from a classical VC round but through a private placement of ordinary shares.

New and existing investors participated, but the only new shareholder named by Oxford Nanopore was Odey Asset Management – a London-based hedge fund. Still, Oxford Nanopore’s funding was by far the largest of the fourth quarter, perhaps thanks to its unorthodox nature.

Top 5 medtech VC rounds of 2013
Company Financing round Investment ($m)
ConforMIS Series E 78.7
TearScience Series undisclosed 70.0
Oxford Nanopore Technologies Series F 64.0
Proteus Digital Health Series F 62.5
JenaValve Technology Series C 62.5

The second-largest funding of Q4, a series E round worth $40.1m raised by the molecular diagnostics company Biocartis, illustrates a growing trend in the sector: the participation of corporate VCs. Debiopharm Diagnostics, Johnson & Johnson Development Corporation and Philips have all contributed to Biocartis, suggesting that they are filling in for the shortfall caused by traditional VCs, many of which are struggling to raise new funds themselves.

Diagnostics companies hold the two top spots, showing that this perennially popular segment retains its appeal. The other three companies to have succeeded with funding towards the end of last year are involved in minimally invasive vascular repair, imaging and cancer therapy, and laser surgery.

Top 5 medtech VC rounds of Q4 2013
Company Financing round Investment ($m)
Oxford Nanopore Technologies Series F 64.0
Biocartis Series E 40.1
TriVascular Series E 40.0
ViewRay Series D 30.0
LensAR Series F 27.0

Crucially, all have devices approved not only in Europe but also in the US. VCs are looking for an exit in the shape of either a takeout or an IPO, and companies that have proved their products in the clinic and shepherded them past the FDA are more tempting to buyers and more likely to float successfully.

EP Vantage has already noted that 2013 was a miserable year for M&A in the medtech sector (Medtech M&A picks up in the second half but still disappoints, January 27, 2014). The paucity of VC funding erodes the other main way in which new products can be developed.

It is to be hoped that 2014 brings an improvement in both M&A and venture funding. Without either, too few new medical technologies will reach market.

All data sourced to EvaluateMedTech.

To contact the writer of this story email Elizabeth Cairns in London at elizabethc@epvantage.com or follow @LizEPVantage on Twitter

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