In this list of the top 10 med tech VC deals for Q3, one thing is painfully clear: Early-stage innovators are out of the picture.
The winning companies are relatively far along, looking to expand commercialization efforts, on the verge of regulatory approval or in late-stage clinical trials. Carl Goldfischer, a managing director and investment partner at Bay City Capital, told FierceMedicalDevices that the results, as compiled by PricewaterhouseCoopers and the National Venture Capital Association (based on Thomson Reuters data), reflect the reality that med tech companies continue to face the most challenges with long-term venture investment trends.
"In all of life sciences venture investing, the device side of it is the most problematic and complicated to understand," Goldfischer said.
According to the latest MoneyTree Report, medical device companies attracted 12% more VC money than in the previous quarter, but the number of deals dropped 8%. Goldfischer said that the med tech industry, even with a few recent IPOs, is still dealing with some profound structural changes that make early-stage VC investments much less common these days. Among them: a tougher reimbursement climate and more rigorous U.S. regulatory demands that add costs to med tech development. Smaller med tech companies often count on being sold at some point to larger industry giants, but current trends, he said, make those typical M&A exits much harder to reach.
"For most of the history of these markets, the funds that specialized in medical device work were able to commit relatively small amounts of capital to a novel gadget widget and go through a relatively simple 510(k) process and often sell that to Medtronic ($MDT) or whomever in order to generate appropriate returns and supply innovative products to those companies," Goldfischer said. "That whole dynamic has materially shifted in the past few years where you now, more often than not, don't just need to get that device approved."
Today, medical device giants seeking to buy smaller companies developing something novel for the market also want to reduce risk in their acquisitions. That means they increasingly wait to make a deal until the company can start generating revenue, Goldfischer said. That, plus those tougher regulatory requirements that shunt more device companies to the tougher PMA process, puts more financial demands on startups that must raise extra capital to reach the finish line, he explained.
"The capital requirements of these companies have become far more significant," Goldfischer said. "To do all of these things, to develop a novel device, bring it through a complicated approval process and to go through to revenue--the reimbursement process is longer, far more complicated and expensive than the industry has experienced previously. Many funds unfortunately did not have adequate reserves to be able to see those investment through, and fewer medical device-focused VC firms have been able to raise capital for new funds."
Today's med tech company almost needs as much time and capital as a pharmaceutical company to reach the market with a new product, Goldfischer said, noting that med tech companies historically generate smaller returns. With that in mind, he added that his firm hasn't "done a new medical device transaction in years."
IDEV Technologies, a Texas-based maker of a CE-marked self-expanding nitinol stent to treat peripheral artery disease, was one long-term Bay City Capital portfolio company that finally got snatched up this year. Abbott Laboratories ($ABT) agreed in July to buy it for $310 million. Goldfischer said that his firm "did very well" with the investment, but IDEV required "well over $100 million" in venture investment over several years to reach that point. That's much higher than a similar company would have required several years ago, he said.
Looking ahead, Goldfischer said that companies will increasingly have to advance toward commercialization overseas, where they can gain quicker approval, prestige and data that allows for U.S. investment and marketing to follow.
"I don't personally see a return to some better place, especially on the early, innovative side," he said.
With that in mind, the top 10 med tech investments of the 2013 third quarter are listed below. Keep in mind that the numbers reflect money in the bank as of the third quarter, which can be less than the total VC amount committed to a given company. Let us know what you think, and thanks for reading.
-- Mark Hollmer (email | Twitter)
Source: The MoneyTree Report, from PricewaterhouseCoopers and the National Venture Capital Association, based on Thomson Reuters Data.