Christopher Delporte , Group Editor02.27.07
The pharmaceutical industry, once the darling of Wall Street, is experiencing a run for its money—literally—from the medical device sector. Venture capital for device startups often took a back seat to biotech, but numbers from 2006 show an evolving financial landscape. Venture capitalists are enthusiastic about medical device technology.
According to a recent study conducted by Ernst & Young and Dow Jones VentureOne, US venture capital investment rose to its highest level in five years, due in large part to the strength of the device sector. Analysts who compiled the report wrote that there was “significant interest in key growing industries” such as medical devices, which “contributed greatly” to boost investment in 2006.
The healthcare sector in 2006 recorded 628 deals totaling $8.25 billion in investment, the report said. Of those, 239 were for medical device companies, representing $2.63 billion in funding, a 20% jump and a record year both in the number of deals and money raised. While biotech and pharmaceuticals still raised significantly more with $4.72 billion, the sector’s growth lagged behind at 12.5%.
“Healthcare and medical devices are fueling most of the growth we’ve seen,” Josh Grove, senior research analyst with venture capital market research firm Dow Jones VentureOne, told me in a recent conversation, adding that he expects the good fortune to extend into this year. “I think that healthcare in general—and devices specifically—will continue to have strong investment in 2007.”
Grove said therapeutic devices—both invasive and non-invasive—have led the pack of medical technology garnering the lion’s share of venture capital. There were 101 deals in 2006 valued at $1.36 billion. Surgical devices also attracted a lot of interest, he added.
In the recent past, venture-backed companies had taken the next step in growth through initial public offerings (IPOs) of stock. Now, however, companies are making themselves more attractive as merger-and-acquisition (M&A) targets, Grove explained. There were 22 medical device mergers and acquisitions in 2006 valued at a little more than $2 billion, up from 14 deals worth $1 billion in 2005. By comparison, there were only six IPOs in 2006.
Robert Gold, a medical device analyst for Standard & Poor’s Equity Research Services, agrees with the M&A outlook for the sector. According to a recent report, Gold believes M&A activity will continue to rise in 2007, “creating more powerful global competitors in categories such as orthopedics, vision care, interventional cardiology and oncology.”
Standard & Poor estimates that 2007 revenue for the industry will rise by about 11% to 12%, thanks to improved pricing in orthopedics. Gold also anticipates a rebound in the implantable defibrillator market this year and predicts continued growth in spinal surgery, pain management, robotic surgery, diagnostic imaging and diabetes management.
What does all this mean for outsourcing? A greater number of well-funded start-up firms will turn to contract manufacturing partners to provide ready-to-go manufacturing services—for everything from R&D to packaging—to get products developed and marketed quickly, with little overhead. Gold also pointed to the significant possibility of several important product launches in 2008 and 2009. These positive indicators bode well for the outsourcing industry that supplies the framework to bring technology and cutting-edge care to patients and healthcare providers.