U.S. med tech venture investment wanes--even as venture-backed M&A holds strong

Venture capital investment in the U.S. jumped to $59 billion last year--almost twice what it was a scant 5 years ago, according to the latest annual healthcare report from Silicon Valley Bank. But medical devices are capturing an ever-shrinking portion of all that largesse for innovation--down to a mere 4% of that VC total for last year or $2.4 billion, which is roughly right where it was in 2014.

Medical devices and diagnostics are in a precarious but potentially promising spot; because while strategic interest in these segments is growing as activity holds strong, venture investment--particularly in early stage companies--is suffering.

In addition, earlier stage acquisitions for companies with just a CE mark or no regulatory approval in hand at all heated up last year. That's notable since device acquisitions typically happen at a much later stage than in the biopharma industry. This shift suggests that strategic acquirers are becoming more interested in and confident of early stage device innovation. If that trend continues, it could ultimately spark a deeper commitment to med tech by VCs.

Jonathan Norris, managing partner, Silicon Valley Bank

"The not-approved and CE mark deals outnumbered any commercial deals. That hasn't happened since 2009. That's good news--and they got snapped up for good dollar amounts," noted Silicon Valley Bank's Healthcare Practice Managing Director Jonathan Norris in an interview with FierceMedicalDevices.

"The Series A investment was off substantially, but look at the M&A happening in the sector. The number of Series A rounds equals the number of M&A deals. That seems like a great time for venture investors--they can get pick of the litter and don't have to have a lot of me-too companies. It seems like that would be a great time for Series A activity, so we're hoping that it will pick up," he added.

SVB found that there were only 22 Series A medical device financings worth a total of just $96 million in 2015; that's down from 39 in 2014 worth a whopping sum of $327 million. And the majority of medical device Series A rounds were for less than $5 million, keeping those startups on a very tight leash. New diagnostics and tools startups were similarly starved, down to 17 financings last year worth only $165 million--that's down sharply from 45 Series A financings worth $354 million in 2014.

The nitty gritty on VC

NEA again was the most active medical device investor in 2015 with 8 deals for a total of $136 million, followed closely by Life Sciences Partners and Windham Venture Partners that each made 7 investments. OrbiMed Advisors, Lightstone Ventures and Novo each also did 5 or 6 med tech venture financings last year.

Boston Scientific ($BSX) was the most active corporate investor in medical devices last year with 7 investments totaling $75 million. Johnson & Johnson's ($JNJ) JJDC also weighed in with 4 deals worth $60 million in total. Cleveland Clinic Innovations was also busy with four very early deals totaling only $4 million.

Like the oncology-oriented biotech sector, medical device investors largely stick to familiar specialties with a history of being more lucrative. Over the last two years, first-time venture investments have clustered largely in cardiovascular (20 deals worth $368 million); orthopedics (12 deals worth $159 million); vascular (10 deals worth $225 million) and surgical (9 deals worth $225 million). Cardio was obviously boosted by the bandwagon that is mitral valve replacement, which attracted a number of major acquirers and partners throughout the year.

Orthopedics and vascular pushed neurology and ophthalmology out of the second and third spots on that list that they previously held. Drug delivery made its appearance on this top 10 list for the first time--surging on with 6 deals worth $60 million. 5AM Ventures has been particularly active in drug delivery venture investment.

"Drug delivery is on the list for the first time," noted SVB's Norris. "I think that trend will continue--finding ways of delivering noninvasive or minimally therapies. We're seeing a lot of investment in minimally invasive devices to take market share from drugs or unique tech for drug delivery."

Life science crossovers have gained some traction in medical devices over the last few years, with 6 investments from Deerfield Management, four from RA Capital and three from Foresite Capital. Crossovers are public company investors that sometimes invest in private companies that typically have a relatively short path to the public markets.

Diagnostics and tools companies also attracted their share of crossover attention in that timeframe with 6 investments by Casdin Capital as well as two each from RA Capital, Rock Springs Capital and Woodford Investment. Norris expects Dx companies will continue to gain traction with rising interest in next generation sequencing tech and synthetic biology. OrbiMed and Khosla Ventures were the most active investors in new diagnostics companies in the last few years with five each.

Making more from M&A

There were 11 medical device IPOs last year; that's comparable to 2014 when there were 10. On the diagnostics side, there were 5 IPOs in 2015 with 7 of them in the year prior. There were 5 venture-backed M&A deals in diagnostics last year, down from 10 in 2014.

But with recent weakness in biotech IPOs, overall market choppiness and a dearth of filings it could be tough to see many med tech IPOs this year. Part of the caution in the sector by VCs is because, many still retain device and diagnostic portfolio companies for which they need an exit.

On the venture-backed M&A front, there were 17 in medical devices last year--largely on par with the 18 in 2014 but with a median valuation that's 20% higher than. Time-to-exit for these fell to a four-year low last year of 5.5 years.

Six of the medical device acquisitions were by sector giant Medtronic ($MDT), which didn't slow its appetite at all as it digested the Covidien deal. Covidien was the second-most prolific medical device acquirer prior to the acquisition, but its absence was scarcely felt as other entrants took up the slack.

The wild card last year was Google, which was far more aggressive than anyone expected last year forming med tech Verily as its first company under new parent company Alphabet ($GOOG) and starting robotics and medical device focused Verb Surgical as a joint venture with Johnson & Johnson ($JNJ).

SVB's Norris expects to see more tech players pile into med tech in 2016, but cautions that technology companies have had a tough time breaking into the life sciences given some lack of understanding around market uptake and reimbursement. He would like to see other tech entrants follow Google's example of hiring industry vets and structuring its med tech efforts with some autonomy and accountability.

"There's going to be at least one or two big tech players that will create a group within their company or a new company to focus on the life sciences," predicted Norris for 2016. "It wouldn't surprise me to see someone like Apple become more focused themselves."

- here is the report

For more:
Medical device, diagnostic venture investment at $2.7B, highest since 2008
Med tech exits pick up in 2014, momentum to continue into 2015
Medtronic to buy Twelve for $408M+, joining Abbott and Edwards on the transcatheter mitral valve bandwagon
Abbott moves more into mitral valve med tech, to buy startup for $250M and options another
Abbott creates electrophysiology biz by moving in on a trio of NEA startups