Second quarter of 2013 sees fewer, richer medtech VC rounds

After the surprise in the first quarter when the largest venture capital financing in the medical device space eclipsed that seen in pharma, the funding situation has settled down a little.

The second quarter of 2013 saw fewer medtech VC rounds than the first, though at 62 the number is still respectable. Importantly, though, at $891m the total amount of cash raised was even greater, suggesting that while fewer companies may be able to persuade investors to part with their money, those that do convince reap significant rewards.

In fact, EvaluateMedTech data show that the mean deal value in the first half of this year is $13.8m, the highest since 2007’s pre-crash average of $16.4m. An optimist might say that this signals that a recovery is well on its way, although it is only an incremental improvement from the $13.4m mean in 2012.

Devices vs drugs

The fact that the largest medtech financing in the first quarter of 2013 beat that in pharma speaks more of the atrocious first quarter the drug developers suffered rather than an unusually good period for device manufacturers (Medtech beats pharma on biggest first-quarter VC deal, April 30, 2013). 

Still, if the medtech sector is picking up, it is not doing so anywhere near as quickly as pharma and biotech. From Q1 to Q2 the total medtech venture investment increased by 1.2%, but pharma and biotech jumped an astonishing 189% (VC funding zooms back with biggest quarter since 2009, July 17, 2013). 

The second quarter is traditionally the best period for VC investment, with the total raised in this period over the past six years averaging $966m. But this has not been borne out when it comes to individual deals: the largest VC funding round in the first half actually came in the first quarter.

Morrisville, North Carolina-based TearScience’s $70m funding to fund commercialisation of its dry eye therapy still leads the pack. Sensor developer Proteus Digital Health, radiotherapy Mevion Medical Systems and Natera, which is working on tests for diagnosing genetic foetal abnormalities using maternal blood, have displaced the previous number two, neurostimulation firm Nevro.

Path to market lengthening

Regulatory changes are taking shape on both sides of the Atlantic, and look likely to make it slightly harder to get certain devices to market.

In the US, it appears that early-stage companies seeking to exploit the CLIA pathway as a source of revenue before obtaining full approval may soon find this route barred (Vantage Point – FDA regulation of lab-developed tests could hurt smaller companies, June 19, 2013).

Meanwhile in Europe, laws designed to harmonise the somewhat fragmented CE mark pathway are taking shape, with a vote on the current proposals scheduled for September (New European medtech laws will improve vigilance, but could delay approvals, October 5, 2012). In both cases the putative changes will make gaining approval for the devices they cover longer, more difficult and more costly, and could even now be off-putting to potential VCs.

After all, a company developing a product soon to be caught in a regulatory net will be less likely to attract a buyer. With the majority of exits in medtech coming in the shape of acquisitions, this is what venture funders can be forgiven for fearing.

To contact the writers of this story email Elizabeth Cairns or Joanne Fagg in London at [email protected] or follow @LizEPVantage or @JoEPVantage on Twitter