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Medtech VC Spending Grew in Third Quarter

Deal volume declines, according to latest PwC report.

Medtech venture capital investment may finally be rebounding.

Funding rose slightly during the third quarter, ending a troubling slide that began well before the official start of the Great Recession. Deal volume fell, but the improvement in value nevertheless is encouraging, if only for the hope it represents to the industry. Investors funneled $566 million into 65 medical device industry venture deals, a 12 percent hike in dollars but an 8 percent drop in deals compared with the previous quarter, when $543 million was infused into 71 deals, according to the latest MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.       

While the third-quarter decline in deal volume is sobering, the improved investment level is encouraging, considering medtech venture investment during the first quarter of 2013 fell 20 percent in value and 10 percent in dollars compared with Q4 2012. Funding fell 1 percent in the second quarter.

Despite the third-quarter improvement, however, the device industry remains a risky investment for capitalists. Financiers prefer to back companies like ConforMIS, which expanded and nearly doubled a Series E financing round in Q3 that raised nearly $168 million from sovereign weath funds, government investments and private equity in the United States, Europe, Asia and the Middle East. The Massachusetts orthopedic implant maker is using the money to boost marketing and manufacturing efforts for its iTotal knee replacement system, which already has U.S. and European regulatory approval. 

One of the major roadblocks to a medtech investment recovery is healthcare reform. A greater emphasis is now being placed on products that can help reduce skyrocketing healthcare costs; companies, of course, cannot make such promises or guarantee their new devices and diagnostics will win insurance coverage and produce revenue. As a result, investors are still gun-shy about returning to the industry. “Products can get approved, but now you can’t get paid for it,” observed one industry analyst. “This is what is really discouraging the investment in that space. It is pushing people away. Everything goes in cycles. But until we have more predictability about the path we get paid, it is going to be more challenging.”

Biotech, on the other hand, gives investors an exit. Analysts claim that pharmaceutical companies increasingly want to purchase promising new drugs in development. – See more at: http://www.mpo-mag.com/contents/view_breaking-news/2013-08-28/venture-capitalists-flock-to-biotechnology-sector-/#sthash.ciqjYlpx.dpuf

 

Medtech companies such as ConforMIS — with products near approval or already approved — are safer venture investments, particularly in the United States, where the Affordable Care Act’s focus on value, plus a tougher reimbursement climate, make it harder for companies to gain ground in the marketplace, industry analysts note.

Not surprisingly, the medical device industry garnered the third highest amount of investment dollars in the third quarter (ended Sept. 30), the MoneyTree report indicates. Software companies attracted the most venture capital, followed by biotechnology firms; investors funneled $852 million into 123 biotech deals, a 39 percent decrease in value but a 10 percent jump in volume compared with Q2.

Investments in the life sciences sector overall (biotechnology and medical devices) fell 26 percent in dollars but rose 3 percent in deals.  Looking at the first three quarters of the year, overall life sciences investing remains depressed with 541 deals reported in 2013, marking the lowest nine month total since 2005.
 
The life sciences sector, however, dropped 56 percent in dollars from the prior quarter to $150 million while the number of companies receiving funding for the first time rose 31 percent to 47.  Through the first three quarters of 2013, only 104 life sciences companies received venture capital for the first time, the lowest number for the first three quarters of any year since 1996.



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