Interesting Times

There’s an oft-quoted ancient Chinese curse that threatens: “May you live in interesting times.” The implication is that “uninteresting” times of peace and tranquility are more life enhancing. Some historians claim the saying is more modern in origin and, perhaps, may not even be Chinese. Old and authentic or not, the warning is an interesting one.

Given the current state of the economy (dare we use the dreaded “R” word), some medical device makers—particularly startups and venture capital-backed firms—certainly may feel as if they have begun living in “interesting times.”

In 2007, venture capitalists pumped a record $9.1 billion into privately held US biotechnology and medical device companies in hopes of making discoveries they could sell to larger companies or perhaps on Wall Street with an initial public offering (IPO). Bio-technology and medical device companies raised 20% more cash in the United States last year than in 2006, according to a report by accounting firm PricewaterhouseCoopers and the National Venture Capital Association (NVCA).

According to yet another more recent study from PricewaterhouseCoopers and the NVCA, however, the life-sciences sector (biotechnology and medical devices combined) saw a 14% drop in venture capital investing in the second quarter of 2008, with $1.9 billion going into 209 deals (a 9% drop in the number of deals from the first quarter of 2008). This decrease is attributed to declining investment levels in both biotechnology and medical devices.

Some device industry insiders who have spoken with Medical Product Outsourcing editors have expressed their concern that the well for new funding may be drying up. That’s not quite the case, said Mark Heesen, president of the NVCA, based just outside Washington, DC in Arlington, VA.

“One quarter does not make a trend,” Heesen told MPO. “The medical device sector has been so strong for so many quarters that it was inevitable that we’d see a bit of a slowdown from the breakneck pace of 2007. Last year, you saw more money going into medical devices and more companies funded than ever.”

Heesen said the venture capital community continues to be “optimistic” about life sciences and the medical device industry in particular. There may be a bit of caution at work, however, as we approach the end of an election year, he said. Investors may want to wait and see how the market would be affected by a new FDA commissioner and a new administration. But Heesen emphasized that compared with the biotechnology industry, medical device companies still have a comparably easier time getting products approved by the FDA and the Centers for Medicare and Medicaid Services.

“When you’re looking at it from a venture capitalist’s perspective, many of them continue to look at medical devices as a safer area in which to invest, and one that has paid very nice dividends for [venture capitalists], patients and our investors—pension funds, colleges and endowments,” Heesen explained. “The prognosis is still very good overall for medical devices, regardless of who becomes president and regardless of what comes through healthcare policy from a new Congress. The industry no longer is driven by just the US population. There’s a global population willing to pay for effective medical technology.”

When asked about the direct impact the current state of the economy has on the flow of capital-funded dollars, Heesen said  that while venture capitalists are long-term investors and are able to ride out some of the economy’s peaks and valleys, there aren’t as many exit strategies open to them currently as a result of a slowing economic performance—meaning there’s a soft market for acquisitions, and IPOs virtually have dried up.

“The economy of today is not going to be the economy of five, seven or 10 years from now. So, ultimately, I don’t see dramatic changes. Where you do see a change is that we’re not able to exit our deals right now,” he explained. “From an entrepreneur’s perspective, it means that a venture capitalist has to spend a lot more time and money than expected on existing deals. The most important commodity to a venture capitalist is time, so you could see, in general, fewer emerging-growth companies being funded over the next year or two because of today’s economy. That will impact medical devices just as it has impacted others areas such as communications, information technology and biotechnology.”

So there’s no cause for doom and gloom just yet?

“We continue to see very exciting discoveries in the medical device industry—areas where [venture capitalists] and others continue to think there is significant financial opportunity and, at the end of the day, an opportunity to do something good,” Heesen emphasized.

Interesting times, indeed.