BioCrossroads and Venture Capital and Medical Devices and Health Care & Life Sciences and Health Care & Insurance and Life Science & Biotech

Outlook gloomy for device investments

October 29, 2012

The mood was gloomy Oct. 23 as venture capitalists gathered at the Indiana Life Sciences Summit to discuss the environment for medical technology companies wanting to raise private institutional money.

And for good reason. The amount of venture capital invested in medical-device and -equipment companies nationally has declined each quarter this year, according to data released Oct. 19 by the National Venture Capital Association and PricewaterhouseCoopers.

Dollars invested in medical-device companies fell 37 percent in the third quarter, to $434 million across the country. That was the lowest dollar volume in a quarter since 2004. The number of deals dropped 27 percent, to 65, according to the National Venture Capital Association and PricewaterhouseCoopers.

Data for Indiana medical-device companies has yet to be released. Through the first half of the year, such Indiana firms had received pledges of more than $32 million in three deals, according to a tally kept by Cleveland-based BioEnterprises.

But those results were skewed by Indianapolis-based Strand Diagnostics LLC, which secured a five-year, $30 million commitment from a California financier for its blood-sample tracking system called Know Error.

The only other medical-device companies to raise money were Indianapolis-based IV Diagnostics, which secured $1.31 million in angel capital, and Fort Wayne-based Quantum OPS, which raised $1.05 million from a Pittsburgh life sciences fund.

The drop-off in appetite for medical-device companies flows from several factors. First, the U.S. Food and Drug Administration’s process for approving new devices has become much more uncertain. Also, the FDA is requiring more clinical trials before approving a medical device, extending the time-to-market for many firms.

Also, the potential for reimbursement payments for new devices is murkier than ever. And on top of that, a new 2.3-percent excise tax on medical devices kicked in this year to help pay for the expansion of health insurance coverage under President Obama’s health reform law.

That combination of headwinds has led many companies to launch products first in Europe and then later—if ever—bring them to the United States.

And the uncertainty is chasing off some investors who previously liked medical-device firms because they could get products to market faster than drug companies and yet still enjoyed markets with significant barriers to entry.

“Does it make sense anymore to have a med-tech-only fund?” asked Jonathan Silverstein, a partner at OrbiMed Advisors LLC in New York, who moderated the Oct. 23 panel discussion. The summit, organized by Indianapolis-based life sciences group BioCrossroads, was at the downtown Westin hotel.

No, was the clear answer he got from two of the panelists: Ron Hunt, a managing director of New York-based New Leaf Venture Partners, and Adele Oliva, a partner at Philadelphia-based venture fund Quaker Partners. The panelists also noted that many venture capital firms having been cutting back their med tech staff members.

"There are still med tech opportunities, but venture capitalists want to come in later," Oliva said.

That desire has stretched the so-called “valley of death” between an initial phase of startup capital and the point at which venture capitalists come in to about five or six years.

"It's because of the regulatory and reimbursement concerns," Hunt said, adding, "I don't know where the money is going to come from."

However, Bernard Yancovich, a managing partner at Credit Suisse who oversees the bank’s investments in Indiana-focused life sciences venture funds, said there’s still a place for medical-device investments as part of a broad-based portfolio approach.

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