If you ask Carl Goldfischer, companion diagnostic tests are a bright spot in the overall diagnostics industry right now.
"The areas most interesting are companion diagnostics with specific forms of therapy," said Goldfischer, a managing director and investment partner with Bay City Capital. "You have seen a lot of novel cancer agents being developed against specific targets, with the thought of companion diagnostics to be able to identify specific targets and responsiveness of patients--those areas are really interesting to do and [include] quite novel, innovative companies."
The thing is, overall venture funding for med tech remains sluggish, and diagnostics investment has not been immune to the trend. The latest MoneyTree Report--compiled by PricewaterhouseCoopers and the National Venture Capital Association, based on Thomson Reuters data--revealed that medical device/med tech companies drew in 12% more VC money than in the previous quarter but that the number of deals declined 8%. Also, none of the top med tech investments involved early-stage deals.
Similarly, not a single one of the top 5 diagnostics VC investments involved early-stage deals. Also, most of the top VC deals in the sector during the quarter came from diagnostic imaging. Companion diagnostics may be promising, but startups in the space didn't come close to landing the largest funding levels, at least during Q3.
Also, the top VC rounds for diagnostics companies during Q3 are relatively small in size. Goldfischer said the investment climate is as bad for diagnostics companies as it is for medical devices, and may even be worse, considering how companies and their backers are "trying to make guesses about reimbursement" in a tough climate. Insurance coverage for diagnostic tests and equipment is becoming increasingly hard to obtain, with companies now having to prove their products can also help control health costs as well as improve the standard of care. That wait for reimbursement can take some time, Goldfischer noted, which means startups need a lot more capital than they used to in order to reach that pivotal point.
"The capital, effort and time required to do that tends not to particularly coincide with getting favorable venture returns," he noted.
That said, some bright spots have crept into the industry. Promising diagnostics companies including 2013 FierceMedicalDevices Fierce 15 winner Veracyte, Oxford Immunotec, CardioDx, Biocept Laboratories and Foundation Medicine ($FMI) are among those who have filed IPO plans or hit the public markets outright in recent months, bringing their longtime venture backers on the cusp of finally getting returns on their investments.
Goldfischer said he sees more investment optimism about healthcare in general, and added that could trickle down to diagnostics and devices in the longer term.
"Having more regulatory certainty and insights into reimbursement would help us to make more investments in those areas," he said. "In general, we are coming out of an exceptionally dark period. Assuming capital markets stay healthy it is a pretty good time to invest in healthcare."
Below are the top diagnostic VC investments for the 2013 third quarter. As with our Q3 list for medical device companies, the numbers listed account for money in the bank as of the third quarter, which isn't always the same figure as the total VC amount committed to a given company. We appreciate your interest. Let us know what you think.
-- Mark Hollmer (email | Twitter)
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Source: The MoneyTree Report, from PricewaterhouseCoopers and the National Venture Capital Association, based on Thomson Reuters Data.