Startling successes puncture the gloom in medtech venture financing

Analysis

Many companies would give a great deal to know what methods of persuasion Proteus Digital Health is using on VC investors. After its $62.5m Series F funding in May 2013 the technology integration company garnered a further $120m in a G round last month, the biggest yield so far this year (see table below).

This is characteristic of the venture climate in medtech: fewer, larger, later rounds. But so far the total raised in the first half of 2014 is less than half that of all of 2013. Proteus has done well, but many other young device companies will surely be struggling.

The good news is that the second quarter of this year is up 33% on the first, according to EvaluateMedTech data, with the total investment raised in Q2 2014 exceeding the billion-dollar mark for the first time since the second quarter of 2013.

Last year, though, the second half was notably worse than the first. If 2014 follows the same pattern it seems likely that at year end 2014 could resemble the lows of 2012.

The pattern in VC funding is similar to that seen in M&A, where the number of buys was also down, but those deals that did get done were high-price affairs (First-half medtech acquisition value surpasses 2013 total, July 22, 2014). This is somewhat worrying for smaller device firms. If start-up companies with new technologies are not getting bought, and are finding it hard to attract funding, it is tricky to see where future innovations will come from.

Risk-averse

This is partly due to VCs’ continuing unwillingness to take risks, even though this would mean lower outlay and getting in on the ground floor. Instead they are happier to participate in later, more expensive rounds when a company is closer to becoming a takeout target or being ready for an IPO.

Annual VC investments
Financing date Investment ($bn) Financing count
H1 2014 1.89 161
2013 3.91 372
2012 3.56 356
2011 4.26 460
2010 4.32 396
2009 3.50 365
2008 3.02 270
2007 3.16 224

Speaking to EP Vantage in May, Raphaël Wisniewski of Edmond de Rothschild Investment Partners (EdRIP) said that when allocating their funds VCs looked for companies that have a clear idea of the niche their products will occupy when they reach market. They must “show that the product is progressing, that development is well done, and that there is a market position in the end”, he said.

It also helps if a company is active in a buzzy area. Proteus is a perfect example; its strategy is to connect medical technologies with ingestible and wearable sensors via mobile and cloud computing. Evoking the fascinating but rather nebulous concept of the “internet of things”, Proteus says it will allow patients to manage their health better and collaborate with caregivers and clinicians more effectively.

Investors including Carlyle Group, Kaiser Permanente, Medtronic and Novartis have been won over by this plan, although Proteus has not disclosed the participants in this year’s $120m financing.

Top 10 rounds of H1 2014
Company Financing round Investment ($m)
Proteus Digital Health Series G 120.0
HeartFlow Series C 104.7
Adaptive Biotechnologies Series D 100.0
Halt Medical Series E 92.8
NeoTract Series C 50.6
InSightec Series D 50.0
AqueSys Series D 43.6
Benvenue Medical Series E 40.0
EarLens Series Undisclosed 39.8
OrthoPediatrics Series C 37.0

The other two companies to top $100m in VC rounds are active in cardiology and advanced sequencing, reliable favourites among investors, and both also have technology enabled by extremely fast and powerful computing.

HeartFlow’s technology uses CT images to create a 3D computer model of a patient’s heart and coronary blood flow. It is hoped that in future the system can be used to help guide stent placement. And Adaptive Biotechnology uses high-throughput sequencing to analyse a patient’s entire T-cell receptor repertoire, allowing both clinical diagnosis and therapeutic monitoring for a variety of disorders.

The lesson seems to be that investors will pay vast sums for eyecatching innovations. But these technologies are not necessarily those that are most needed. The future of the medtech industry would look more assured, with a wider variety of technologies being nurtured, if the number of deals grew.

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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