By now, you've been hearing this for months: Venture investing in the medical device world is on a downward slide with no sign of stopping. And the problem is most acute for early-stage companies.
The trend continued last week with news that the decline deepened dramatically in the first quarter of 2013, according to the latest MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association (based on Thomson Reuters data).
To be sure, there were hopeful signs this year, such as Third Rock Ventures' launch of its third fund--a $516 million pot of cash devoted, in part, to medical device and diagnostics developers, with early-stage startups very much part of the equation. But on a wider scale, the trend is leading to some major changes in how companies obtain investments, such as how the remaining venture capitalists in the medical device space pick their portfolio companies, explains David Douglass, an NVCA board member and partner at Delphi Ventures in Menlo Park, CA.
Delphi invests in a large number of medical device companies. And while Douglass said Delphi would consider the right early-stage deal, it hasn't pursued a single Series A medical device investment in the last four years. He blames a lack of predictability with the FDA, with an approval process that has slowed because of the increased demands device companies face, drastically adding to the cost of bringing a device through the approval process.
Consider that Delphi portfolio company Cameron Health needed about $180 million to reach FDA approval with its subcutaneous ICD, at which point Boston Scientific ($BSX) snatched it up for $1.35 billion, giving investors their return. When Douglass first became an investor a number of years ago, the typical cost to bring a device company to regulatory approval was closer to $30 million. As a result, medical device companies close to or already past the approval process are far more attractive prospects for investors. But even beyond the FDA, Douglass points out that there is simply less money to go around.
"A number of venture capital firms in healthcare have not been able to refinance themselves, (and so) the amount of money going into healthcare VC has dropped dramatically," he said. "Entrepreneurs are finding it very difficult to finance innovative new technologies, but on top of that, all of us are losers, as consumers of healthcare, because the amount of innovation coming into healthcare is decreasing dramatically."
In the absence of an abundance of early stage investment opportunities, Douglass said that the remaining VC investors focused on medical devices are filling the void in the later stage of the process.
"We have a phenomenon as an investor," he said, "where we can find later-stage companies either commercial, or near commercial, have FDA approval, and are financed by syndicates that don't have any more money. But we can go in and refinance with lower valuations than (were historically the norm)." New investors in late-stage companies can achieve liquidity faster, and even sell the companies at lower prices, "and still get a return," Douglass said.
The remaining firms in the med tech space are also raising smaller funds than they used to. Delphi, for example, is working through its current, $300 million fund. But Douglass expects the next one will be closer to the $150 million to $200 million range.
"All of us are raising smaller funds," Douglass said. "There is less money." And longer term, the next big medical device advance might be that much harder to come by.
"The industry is not sowing corn," Douglass said. "The number of startups is down dramatically and will continue to drop as fewer VC funds can refinance themselves."
With that sobering backdrop, we present the top 10 medical device venture investments in the 2013 first quarter, based on NVCA, PWC/Thomson Reuters data. Thanks for reading, and let us know your thoughts.
-- Mark Hollmer (email | Twitter)
Who: Intersect ENT
What: Makes implant to treat chronic sinusitis
Investors: Kleiner Perkins Caufield & Byers, Medtronic ($MDT), Norwest Venture Partners, PTV Sciences and US Venture Partners
How much: $20.86 million
*Editor's note: The company announced a $30 million funding round, with the rest expected during the 2013 second quarter.
Who: 480 Biomedical
What: Developer of a resorbable stent to treat peripheral vascular disease
Investors: Intersouth Partners, Polaris Venture Partners and an undisclosed investor
How much: $21.2 million
What: Maker of ablation device to treat uterine fibroids
Investors: Abingworth Management, Advanced Technology Ventures, Correlation Ventures, HBM Healthcare Investments AG and InterWest Partners LLC
How much: $22.16 million
What: Maker of vapor devices to treat COPD and other breathing ailments
Investors: RiverVest Venture Partners and an undisclosed investor
How much: $26.4 million
What: Developer of eye stent for glaucoma treatment
Investors: Ascension Health Ventures, Delphi Ventures, MemorialCare Innovation Fund, New Enterprise Associates
How much: $27 million
What: Developer of weight-loss device
Investors: Arboretum Ventures, Boston Scientific, Highland Capital Partners, Lumira Capital, ONSET Ventures, Santè Ventures
How much: $27.3 million
What: Maker of a tiny eye implant to relieve cataract surgery fluid buildup
Investors: Domain Associates, Frazier Healthcare, InterWest Partners, Meritech Capital Partners, Montreux Equity Partners, OrbiMed Advisors, Versant Ventures, and an undisclosed investor
How much: $30 million
Who: OptiScan Biomedical
What: Maker of noninvasive glucose monitoring devices for hospital ICUs
Investors: Johnson & Johnson Development, MedVenture Associates, Morgenthaler Ventures and Wexford Capital
How much: $30.7 million
What: Maker of thermal energy-powered vision correction devices
Investors: Abingworth Management, Aperture Venture Partners, Borealis Ventures, De Novo Ventures, Echelon Ventures, Flagship Ventures, Prism VentureWorks, SCP Private Equity Partners and Third Point Ventures
How much: $41.88 million ($43M committed)
What: Maker of a spinal cord stimulation pain-management implant
Investors: Accuitive Medical Ventures, Bay City Capital, Covidien Ventures, Johnson & Johnson Development, MPM Capital, New Enterprise Associates, Novo A/S, Three Arch Partners and an undisclosed investor
How much: $48 million