Medtech venture financing crisis worsens

Analysis

What has long been suspected is now confirmed: VC funds are losing interest in medical devices. The downturn in venture funding of which medtech start-ups have long complained is now so pronounced that the second quarter of 2015 saw the lowest total haul for any second quarter since post-crash 2008.

This is significant as the second quarter is usually the richest three-month period of the calendar year (see graph below). Unless the second half of 2015 sees markedly more venture capital flowing into the industry, 2015 could be the poorest year – in both senses – since 2006. 

And unlike earlier periods, the first half of this year has not been enlivened by any exceptional successes. In the first half of 2014 there were three rounds of $100m-plus, but this time no company has broken the $60m mark (Startling successes puncture the gloom in medtech venture financing, July 24, 2014).

Leader

The leader this time is genetic testing company Natera, which in April drummed up $56m which it said it would use to grow its sales force and invest in R&D, including the development of its prenatal blood test Panorama, used to detect foetal chromosomal abnormalities in a sample of a pregnant woman’s blood (Vantage point – Prenatal blood test market pregnant with possibility, February 13, 2015).

The fact that the round was led by Silicon Valley-based crossover fund Sofinnova Ventures, though, showed that the series F was a pre-IPO round. Sure enough, the company priced its IPO two weeks ago, with ambitious plans to raise $100m at $18 per share. Prenatal testing of this type is growing in popularity with insurers beginning to cover it for women at high risk of carrying foetuses with genetic illnesses.

Recent hints that some of these tests, though not Natera’s, can also pick up signs of cancer in the women themselves may expand the market further.

Top 10 rounds of H1 2015
Company Financing round Investment ($m)
Natera Series F 55.5
Calhoun Vision Undisclosed 52.0
Outset Medical Undisclosed 51.0
Guardant Health Series C 50.0
Shockwave Medical Series B 40.0
Intact Vascular Series B 38.9
Autonomic Technologies Series D 38.0
Scanadu Series B 35.0
Auxogyn Series C 34.3
Neuronetics Series F 34.3

In second place is Calhoun Vision which will put its $52m financing towards FDA premarket approval of its implanted lens, the strength of which can be altered after its implantation during cataract surgery.

Calhoun’s Light Adjustable Lens is made of material that is sensitive to ultraviolet light; when irradiated by light of a particular wavelength the material undergoes photopolymerisation, changing the shape of the lens and hence its power.

Third placed Outset Medical, a dialysis specialist, obtained $91m in funding in June of which $40m was debt and therefore does not count for this analysis. The $51m venture injection will fund a controlled commercial introduction for the Tablo system and allow Outset to pursue expanded FDA clearance so patients can use Tablo at home.

Guardant Health, meanwhile, sourced $50m to ramp up sales of its Guardant360 diagnostic. The company is active in the buzzing area of liquid biopsy – diagnosing cancers using a patient’s blood, rather than a tissue sample. This is intended to be cheaper than traditional biopsy as the surgical and tissue processing steps are eliminated (Interview – Guardant Health takes $50m to make biopsy a thing of the past, February 16, 2015).

These companies have a recognisable technology with a clear market opportunity and without heavy up front costs – and in one case offering an actual saving. But still they are not rewarded with the kind of sums seen in the past.

Steady decline

Medtech start-ups have been bemoaning a paucity of VC funding for the past couple of years, and a look at the annual figures shows that their complaints have merit. The annual data compiled by EvaluateMedTech show the same clear trend in both total cash raised and the number of deals signed: increasing from 2008 to peak in 2011 and, after a lull in 2012, a steady decline since.

Annual VC investments
Date Investment ($bn) Financing count
H1 2015 1.61 154
2014 4.07 379
2013 4.05 440
2012 3.68 393
2011 4.45 497
2010 4.41 423
2009 3.51 379
2008 3.12 295

In large part this is due to venture capital firms fighting shy of risk. Increasingly VCs prefer to invest in later rounds when a company’s technology is a safer prospect to get to market, forcing companies to look elsewhere for the money to fund their businesses.

Realising that without investment, the start-ups on which they depend for future technologies are imperilled, larger healthcare companies are filling at least part of the shortfall via their corporate VC arms (Vantage point – medtech corporate VCs move into the valley of death, April 13, 2015). Novartis Venture Funds, for example, participated in Autonomic Technologies’ $38m round in May – Novartis may be the world’s largest pharma company, but it is also a major investor in early-stage medtech companies.

Autonomic Technologies will use its cash to fund the ongoing US trial of its Pulsante microstimulator to treat severe headaches. However, as this is a series D it is debatable whether it counts as an early-stage round.

Likewise crowdfunding is beginning to play a significant role in medtech (Vantage Point – Risk-averse European VCs drive medtech start-ups to crowdfunding, April 21, 2015). Scanadu, seventh place in the top-10 table by virtue of a $35m round in April, obtained some of its initial funding via an Indiegogo campaign. The company is developing a scanner, the Scanadu Scout, designed to read a patient’s vital signs and send them wirelessly to a smartphone. Showing a canny grasp of the kind of publicity crowdfunding demands, the company compares it with the fictional tricorder device from Star Trek.

But the larger medtech companies and crowdfunding efforts cannot make up for the collapse in financing from dedicated VC funds. If this situation is not reversed the medtech industry could be heading for an “innovation crunch” – a catastrophic lack of new companies with new medical devices. VCs need to start spending and start spending now.

This article was updated on July 23rd 2015 to take account of Outset Medical’s financing

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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