The difficult environment for venture-funded medical device companies continues. The total venture funding for medtech companies in 2013 may just tick over the total for 2012, EvaluateMedtech data show, but it will be a close-run thing – and still a marked decrease from 2010 and 2011.
“There is a general reduction of capital going into healthcare VC, but particularly in medtech,” Tim Haines, a partner at VC fund Abingworth, tells EP Vantage. “It’s a tough market with much longer timelines than biotech, therefore it’s attracting less money. It is impacting the innovative side in the medtech space.”
Dearth of funding
In the first nine months of this year, $2.9bn of venture cash was funnelled into medtech companies in 245 deals. If the fourth quarter continues at the same pace, the year’s total will be $3.8bn, slightly more than the previous year. Any improvement is to be welcomed, but those hoping for a definite upswing in VC cash flow will probably have a long wait.
|Annual VC investments|
|Financing Date||Investment ($bn)||Financing Count|
The reasons for the dearth of funding are well-rehearsed: increasingly stringent regulation lengthening the time to market coupled with mounting pressure on pricing from cash-strapped payers. Those investors who switched to medtech from biotech in pursuit of a faster return have found that the sector is not as speedy as they had hoped, and are returning to biotech.
“The returns in medtech are not good on an absolute basis, and are even less good in a comparative basis to biotech. The average time to a medtech exit is eight or nine years, and biotech is probably around six,” Mr Haines says.
Most medtech exits are, as they have always been, company acquisitions. “In the medtech space there’s a lot of pressure on top-line revenues, squeezing down earnings per share, therefore medtech corporates will do an acquisition later. The challenge for venture dollars is that, most likely, you’re going to have to get [a product] through to commercialisation to get a sensible exit.”
Allan Marchington of Apposite Capital says that device makers must not only show that their technology is an advance over current products, but map out the route to US approval and beyond. He tells EP Vantage: “Things have got tougher for medtech companies in that, at one time, a medtech company could turn up to a VC and gain funding if the device was easier to use or had a marginal difference over a predicate device. Now, VCs are much more savvy about what is required to get reimbursement, what the market looked like and true differentiation. It has got harder and harder to get funding.”
This is because acquisitions are happening ever later. Often a company must have not just CE mark, but US approval for their product and even reimbursement before purchasers even consider them. “The point of exit in medtech has moved further downstream, to having sales,” Mr Marchington says.
This is exemplified by the top rounds so far this year. ConforMIS’s knee replacement system, iTotal, is already approved in both the US and Europe, but no buyer has yet materialised. Similarly, JenaValve Technology closed a $62.5m round this quarter; the company’s heart valve technology is CE marked but not yet approved in the US (EP Vantage interview – JenaValve aims to triple sales or sell itself, June 25, 2013). JenaValve may have to wait some time before it is bought.
|Biggest rounds to date|
|Company||Financing Round||Investment ($m)|
|Proteus Digital Health||Series F||62.5|
|JenaValve Technology||Series C||62.5|
|Dicerna Pharmaceuticals||Series C||60.0|
The paucity of VC funding, particularly at the early stages, poses a problem not only for start-ups but for the larger corporate medtech companies which need companies to buy in order to gain innovative technologies. The future may bring an increasing role for corporate VCs in medtech.
This again follows a precedent set by biotech. “Probably 20% or more of VC money going into biotech start-ups comes from corporate VCs,” Mr Haines says. “That is a reflection of three things: the dearth of capital for some of these earlier ideas, the [larger companies’] R&D getting squeezed as the P&L is squeezed, and a realisation that if they get in earlier they’re going to get a better deal.”
He estimates that corporate VC makes up around 5% of medtech venture funding. “You will see more corporate VC, though I don’t think it’s happened yet.”
Mr Haines points out that it will be harder for corporate VCs in this sector than in biotech. “On the balance sheets of pharma, the amount of cash they have is at least an order of magnitude greater than medtech. [There is around] $30bn in free cash flow thrown up by medtech – it’s probably ten times that in pharma, so their opportunity for venture investing is much greater.” However, he says that large medtech firms may simply have to move into this area despite the difficulty if they wish to keep the flow of innovations coming.
Tighter regulation and lower prices are the new reality in medtech. Start-ups and multinationals alike are dependent on venture investment. If investors continue to stay away from the sector, the larger device companies are going to have to step in fill the gap themselves.