Medical Devices

Mind the innovation gap and 7 other interesting venture-backed healthcare company trends

ExitAlthough there’s been a trend over the past couple of years of venture investment in biotech going into companies in the later stages of their development, a new report illustrates the result of that trend. Of the 18 venture-backed “big exit” merger and acquisition deals in biotech in 2012 (an eight year high), half were at the commercial stage.

That was one of the interesting investment trend highlighted in a new report by Silicon Valley Bank. It defines big exits as private venture-backed M&A with at least $75 million upfront in biotech and $50 million upfront for devices and services.

Here are seven more:

In the near future, reduced venture investment in healthcare  There’s a widening “innovation gap,” as the report puts it, between funds raised and capital deployed from funds dating from 2010 and later and equity invested in the form of follow-on investments from older funds. The reserves of the older funds will soon be depleted. There are fewer newer funds and the ones that do exist are smaller.


Shift in early stage biotech investment priorities It tends to be oncology companies that get the lion’s share of Series A investment because they account for the biggest chunk of biotech. But for the first time in six years, that didn’t happen. In 2012, the most companies generating Series A investment fell into the Central Nervous System and pain category with nine. Given the attention on the number of Baby Boomers entering retirement and the neurodegenerative conditions that affect seniors, such as Alzheimer’s disease and Parkinson’s disease, it may not be so surprising. But it is a significant shift. Eight of the companies focuses on platform delivery — early-stage technology platforms without an identified lead asset or specific indication focus. Ophthalmology, anti–infectives and metabolic segments each had four companies completing series A rounds.

Corporate venture capital’s role in healthcare Corporate venture capital accounted for 30 percent of all biotech Series A deals in 2012 and represents 15 percent to 20 percent of all capital invested into healthcare venture-backed companies, according to the report. It’s a substantial increase over 2010 when corporate venture figured into 14 percent of deals and accounted for 12 percent of deals in 2011. But the report emphasizes two things. First, corporate venture investment numbers aren’t adequately tracked. Second, it won’t be enough to make a difference to keep up the current pace of capital investment.

Biotech Series A steadying eludes medical devices There’s been a shift in healthcare venture investment with the number of biotechnology Series A deals remaining steady since 2011. The fortunes of early stage medical device companies have not been as robust, though. Series A deals in this category fell to a seven-year low last year. The reason? The report notes that one of the biggest factors has been overfunding in the last deacade. It created a big backlog of older companies in need of venture funding, which drew investors with capital to deploy. As a result, early stage medical device companies seeking institutional investment suffered.

More diversity among biotech acquirers Outsourcing trends among big pharma companies means there is a more diversified set of acquirers in biotechnology than, say, medical device where fewer companies are making acquisitions. According to the report, 13 different pharmaceutical companies acquired at least three of the 104 biotech private venture-backed companies since 2005. About five medical device acquirers did most of the buying for the same period.

Rising interest in healthcare services Companies in areas like data analytics/big data are a growing target for investment, particularly since these companies can generate revenue earlier than medical device and biotechnology companies can. At $359 million, healthcare services had a higher upfront average deal value than biotech ($269 million) and medical device companies ($182 million), although the average of 10 years before an exit is much longer than the path to exit for biotech and medical device companies. It may also reflect what’s still very much a new sector of healthcare as hospitals look for ways to improve patient outcomes by using population health IT tools. As Bijan Salehizadeh, managing director at Washington, DC-based NaviMed Capital put it: “With the massive pending regulatory changes of the Affordable Care Act and the proliferation of data and analytics in hospitals and insurers, we see a continued large investment opportunity in health services, which remains a specialized and lucrative corner of healthcare investing.”

Investors are getting less money upfront when biotech deals close. The majority of big exit biotech deals, 14 out of 18, were structured deals. In 2012, the upfront portion of the deal (paid at deal close) fell to 39 percent of the overall deal value, compared with 52 percent in 2011, according to report. Investors have to wait for companies to meet milestones before they can generate bigger returns.

 [Featured photo credit: People connect across gap from BigStock Photo]

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