Medtech beats pharma on biggest first-quarter VC deal

Analysis

The medical devices sector may be worth less than half as much as the pharmaceutical industry, but sometimes it punches above its weight. Somewhat surprisingly, medtech's largest venture capital financing in the first quarter of 2013 – a $70m round by ophthalmology specialist TearScience – eclipses the biggest VC funding pharma could muster over the same period. 

The TearScience deal, though, is an outlier, and the total raised in Q1 2013 is a 24% drop from last year’s Q1 haul. This year-on-year fall raises the question of whether the medtech sales tax, which has just seen out its first quarter, might be giving VCs second thoughts about pumping cash into this sector. In order to halt the decline some industry watchers have suggested that favourable tax regimes, among other incentives, could help attract more venture funding into the life-sciences industry.

Quarterly VC investments
Financing Date Investment ($m) Financing Count
Q1 2013 840 57
Q4 2012 574 42
Q3 2012 549 41
Q2 2012 957 69
Q1 2012 1,099 82
Q4 2011 842 79
Q3 2011 1,123 93
Q2 2011 957 90
Q1 2011 947 90
Q4 2010 1,045 75
Q3 2010 1,024 82
Q2 2010 1,311 92
Q1 2010 769 70
Q4 2009 704 73
Q3 2009 836 72
Q2 2009 1,091 76
Q1 2009 640 58
Q4 2008 930 60
Q3 2008 710 49
Q2 2008 503 46
Q1 2008 599 50

Rising or falling?

The first quarter of this year saw $840m in venture capital investments, representing a 46% growth from the previous quarter, and showing the total rising for the second consecutive quarter. Compare it with the same period a year ago, however, and things are not so rosy: VC funding hit $1.1bn in the first quarter of 2012, over a third of all the cash raised last year. If Q1 this year makes up a similar fraction of 2013, it will be a poor show.

The US National Venture Capital Association said last week that venture capitalists could be lured to the life-sciences sector in greater numbers by policies including streamlined regulatory processes, tax incentives and payer support. The US FDA already allows relatively quick approval for medical devices – though the process is certainly not as quick, cheap and easy as gaining European CE marking – but the move to put the medtech industry on a similar tax footing to pharma with the 2.3% levy on US device sales could be pushing investors away.

That said, one source of optimism is the average values of the Q1 deals, which are worth more apiece than any other quarter since the start of 2009. With 57 rounds raising a total of $840m, the average fundraising value this quarter is $14.7m, larger than any since the $15.5m in the fourth quarter of 2008.

Annual VC investments
Financing Date Investment ($bn) Financing Count
Q1 2013 0.8 57
2012 3.2 234
2011 3.9 352
2010 4.1 319
2009 3.3 279
2008 2.7 205
2007 2.8 163

Annual data show that, should VC rounds in the remainder of 2013 raise cash at the same rate as those in the first quarter, the amount of venture funding obtained this year will be exactly the same as last year: $3.2bn. And it will take fewer deals to do it: with 57 already in the bag so far this year, it would take 228 funding rounds to get to the total compared with 234 in 2012.

Biggest rounds to date
Company Financing Round Investment ($m)
TearScience Series Undisclosed 70.0
Nevro Series C 48.0
Avedro Series D 43.0
EndoChoice Series Undisclosed 43.0
T2 Biosystems Series E 40.0

Big deal

Intriguingly though, medtech beats pharma when it comes to the first quarter’s largest medtech venture capital rounds. The $70m netted by Morrisville, North Carolina-based TearScience to fund commercialisation of its evaporative dry eye technology dwarfs the $60m raised by PTC Therapeutics as a means to pursue approval of muscular dystrophy candidate ataluren (No bubble for biotech VC funding as first quarter flops, April 29, 2013).

And that’s only the number one spot. All five of the top medtech deals in the first quarter are larger than their counterparts in pharma. Compared with drug development, shepherding devices through trials to market is generally faster and simpler; investors wishing to turn their investment around quickly may see medtech as a better bet than its larger cousin.

It is too early to say whether the high average deal value and the biggest medtech fundraising beating the biggest pharma round is a sign that VCs are more willing to invest here. Q1 2013 was down compared with Q1 2012, and the same pattern was seen in pharmaceuticals. Either trend could continue into the rest of 2013.

All data sourced to EvaluateMedtech.

To contact the writers of this story email Elizabeth Cairns or Joanne Fagg in London at news@epvantage.com or follow @LizEPVantage or @JoEPVantage on Twitter

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