Top Dx VC investments of 2012

In 2012, investors took a big step back from their previous embrace of molecular diagnostics. Instead, they shifted their interest to safer, related areas such as diagnostic imaging and surgical tools.

Those two factors stand out in the recently released 2012 MoneyTree report from PricewaterhouseCoopers and the National Venture Capital Association (using Thomson Reuters data). Another trend: Venture investment levels in the broader diagnostics field are down. VCs committed a little over $171 million in 2012 to 60 medical diagnostics-related deals. That's down from more than $250 million invested in 57 deals in 2011, and $206 million targeted to 49 deals in 2010, according to the MoneyTree report data.

Deal volumes for 2012 ranged from $6 million to $30 million, relatively small funding amounts. And the lead company is a national radiology group that offers diagnostic patient care; it does not make diagnostic tests. But besides the smallish investment rounds, it is painfully clear that molecular diagnostics startups aren't the darlings of the venture capital industry right now, at least not in their early stage. The MoneyTree report suggests that investors generally focused some of their attention on molecular diagnostics tests, but also devoted much of their capital in 2012 on imaging equipment and diagnostic tools--areas in the diagnostic sector that have much less financial risk and far fewer obstacles for both regulatory approval and reimbursement.

Sherill Neff, an NVCA board member and founder of the Philadelphia-based venture capital firm Quaker Partners, blames expense, plus regulatory and insurance reimbursement risk, for pushing investors away from early-stage molecular diagnostics investments. (His firm invests, in part, in device and diagnostics startups.)

"There was huge excitement 5 to 7 years ago in what was enabled in breakthroughs in genetic sequencing," Neff told FierceMedicalDevices. "And a lot of people rushed down the path [with] very interesting concepts in molecular diagnostics. But most of those companies, in our experience, forgot two very important things. One is they needed ultimately to develop a huge body of clinical data to drive market adoption and reimbursement. And they really got carried away with themselves in terms of how exciting the technology and gene panels were going to be."

So what about the other thing?

"The second thing they forgot is ultimately they have to convince somebody to pay for their tests, either private payers or government payers or consumers themselves," Neff notes. "Those great innovative technologies have run smack into market reality, and a lot of these companies are struggling today," he said, as they face the enormous expense of building a commercial infrastructure and also persuading government and private payers to pay for new diagnostics without "robust clinical data to support them."

With this in mind, Neff said, venture capitalists currently view diagnostic imaging equipment and surgical tools as a much more viable investment than early-stage molecular diagnostics.

"You're not taking the regulatory risk at all," Neff added. "You're taking a pure commercial risk--[asking], 'Is this technology in this commercial form appealing to the marketplace?' That is a very different set of concerns than, 'What does the FDA think about what I am doing or what does CMS think about what I am doing'" for molecular diagnostic tests.

Molecular testing companies are still drawing investor attention. Genomic cancer test maker Foundation Medicine, for example, successfully drew in Bill Gates and other investors earlier in January to contribute $13.5 million to a Series B financing that has now hit the $56 million mark. Neff said he sees this as an example of a company in the molecular diagnostics space drawing investor attention on the strength of its "excellent concepts," and Foundation isn't alone. But Neff said he sees that as an exception. Diagnostics companies are likely poised for consolidation down the road, he said, with VCs prepared for "more cautious investing for a while until the marketplace sorts itself out on the regulatory and reimbursement side."

Have a look at our top 10 2012 VC investment list for the diagnostics industry, based on the MoneyTree report and the Thomson Reuters data that helped inform it. It follows our look at the top 10 medical device venture investments from 2012. And we'll keep a close watch on 2013 venture investment trends in the months ahead. -- Mark Hollmer (email | Twitter)

Who: NinePoint Medical

What: This Fierce 15 company is developing a pill-sized infrared diagnostic imaging tool for Barrett's esophagus

Investors: Third Rock Ventures

How much: $6 million

Who: TriboGenics

What: Developer of a low-cost miniature portable diagnostic X-ray

Investors: Flywheel Ventures, Founders Fund and an undisclosed investor

How much: $6.2 million

Who: CardioInsight Technologies

What: Developer of 3-D diagnostic imaging tool

Investors: Draper Triangle Ventures

How much: $7.1 million

Who: Seno Medical Instruments

What: Developer of optoacoustic diagnostic imaging for cancer

Investors: Essex Investment Management Company, MedCare Investment Funds

How much: $7.36 million


Who: Biobehaviorial Diagnostics (BioBDx)

What: Developer of computer diagnostic tool for ADHD

Investors: Sevin Rosen Funds

How much: $7.61 million

Who: 3DR

What: Maker of 3-D diagnostic imaging technology

Investors: Advantage Capital Partners

How much: $9.8 million

Who: CellScape

What: Developer of a prenatal genetic blood diagnostic test

Investors: RA Capital Management, X/Seed Capital Management

How much: $10.45 million

Who: NeuroLogica

What: Developer of CT diagnostic imaging equipment

Investors: Stata Venture Partners and an undisclosed Investor

How much: $12 million

Who: AssureRX Health

What: Developer of diagnostic tools that analyze gene variants affecting metabolic responses to various medications

Investors: Alafi Capital, Allos Ventures, CincyTech, Claremont Creek Ventures, Four Rivers Group, jVen Capital, Sequoia Capital and an undisclosed Investor

How much: $12.5 million


Who: Radisphere

What: National radiology group

Investors: Maverick Capital, Oak Investment Partners and an undisclosed investor

How much: $30 million


Top Dx VC investments of 2012

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