Medical device, diagnostic venture investment at $2.7B, highest since 2008

Med tech venture investing may lag biotech by more than half, but it's coming on strong. As venture-backed exits pick up, a real devotion to breakthrough innovation seems to be whetting investor appetites. A total of $2.7 billion was invested by VCs last year in medical devices and diagnostics, with $748 million of that total coming during the fourth quarter.

That's the highest annual sum for med tech venture investment since 2008, when it brought in $3.6 billion. This is according to the latest MoneyTree Report by PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) based on data from Thomson Reuters. The venture investment for medical devices and diagnostics in 2014 represented 45% of the $6 billion that went into biotech startups for the year.

"It was a great year for medical devices. Last year, we saw biotech take off, so it wasn't surprising to see medical devices take off this year. There's usually about a 12-month lag," PwC Partner Greg Vlahos told FierceMedicalDevices. "We are seeing innovation in the cardiovascular and neurological therapy areas that are shaping the segment because they are providing a high return."

First-time medical device and diagnostic startup financing also more than doubled to $446 million from $187 million in 2013. In fact, the largest two rounds in this segment for the year went to first rounds. Butterfly Network raised a $100 million round to bring deep learning to medical imaging. It came out of accelerator 4Combinator and was backed in the financing by investors including Aeris Capital. In addition, MID Labs raised $51 million in its first institutional round for its ophthalmic surgical devices from investors including OrbiMed Advisors and SoftBank China Venture Capital.

Vlahos is optimistic that an improving returns environment will continue to prevail for medical device and diagnostic venture-backed startups, despite the ongoing big-cap consolidation in the sector that some fear could dampen an already limited acquisition appetite.

"We're seeing more traditional biotech investors looking at companies in the medical device and diagnostics space. For diagnostic companies that have a drug component or a drug partnership, that helps validate the space and we continue to see strong investment in 2015," he added, noting that there were four medical device IPOs and one diagnostic IPO during the fourth quarter after little to no activity for years.

Currently, 52 companies have publicly filed for an IPO, most of which are life sciences companies. There were more than 120 venture-backed exits during 2014. Biotech led the way, but there were also a "strong number" of medical device exits, particularly looking at the last half of the year, Vlahos added. PwC and NVCA will put out a detailed report on venture exits in 2014 in about a month.

He is optimistic that all this venture activity is going to translate into more of what the medical device industry, in particular, is sometimes sorely lacking: innovation.

Vlahos concluded, "If you look at some of the companies that have gone public, they are in novel areas that haven't been traditionally backed by the medical device space. Novel technology is the next step in the evolution of devices."

- access the report through the NVCA

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