By JIM STOMMEN
Medical Device Daily Contributing Writer
MINNEAPOLIS The numbers were, as they say, staggering. When asked by conference co-chairman Kevin Wasserstein how many in the audience of nearly 400 attendees at the 11th annual MedTech Investing Conference here last week felt business conditions for the med-tech sector were better now than a year earlier, the number of hands raised could have made up the starting teams in an NBA game at the Target Center across the street.
That's right, only about 10 persons raised their hands, a dozen at the most. It was a sobering reminder of how economic travails, regulatory uncertainties and significantly less plentiful venture financing have combined into a triple whammy for those interested in or working in the medical-device space.
But the crowd, standing-room-only for some of the day's sessions, was not really there to hear about the negatives afflicting the industry, factors with which most are all too familiar. Rather, they wanted to point to the future.
They were there for a gathering that Wasserstein, managing director of Versant Ventures (Menlo Park, California), dubbed an "investing/companies/technologies conference," a one-day meeting that drew a huge turnout to follow an agenda that covered the landscape of med-tech.
And unfortunately that landscape today includes acknowledging a venture investing climate that is, well, unfriendly. Just how unfriendly was made clear by the opening two sessions in the ballroom of the glistening Graves 601 Hotel in downtown Minneapolis.
During one, Mark Scholtes, partner in PricewaterhouseCoopers' (PwC) Minneapolis office, presented some of the findings of the most recent MoneyTree Report prepared by PwC and the National Venture Capital Association (Washington), based on data provided by Thomson Reuters (New York).
Scholtes said that while the difficulties and challenges that med-tech has been facing over the past several years continue to impact the industry, "there are signs of optimistic activity in the data, particularly in the volume of dollars invested by VCs."
Those totaled $29 billion nationally across all industries, up substantially from $23 billion in 2010. For the fourth quarter, the life sciences share of those dollars stood at 27%, a jump of almost 3% over the same quarter of 2010.
The device segment received $2.8 billion in 339 deals during 2011, an increase of 20% in dollars and a decrease of 2% in deal volume from the prior year.
In Minnesota, "we had a nice rebound year," Scholtes said, with 34 deals bringing in $274 million across all industries, roughly $125 million of which went to med-tech, down a little from the historic 50-50 split usually seen in the region. Minnesota accounted for just about 4% of the national total.
Also enjoying a rebound was the biotechnology industry, which captured 72% of all life sciences venture funding, up from 60% in the final quarter of 2010. Conversely, the medical device industry's share fell to 28% in the quarter after a $265 million falloff in funding. For the year as a whole, biotech's share of 63% was only a half-percent higher than in 2010, while medical devices captured 39% of the funding.
In terms of dollars, that fourth-quarter funding for med-tech totaled $498 million, up 10% over the same quarter of 2010, but the number of deals slipped by 11%.
Among the top 10 states for receipt of VC dollars in med-tech, Scholtes noted that Minnesota ranks fourth behind the runaway leader, California, with Massachusetts and New Jersey running second and third. "California accounts for more than half of the total," he said. "Massachusetts got 10% and the rest of the states are in a battle for the leftovers."
In the second session, a panel moderated by Bill Harrington, a well-known venture capitalist who has recently joined Osage University Partners (Bala Cynwyd, Pennsylvania) as managing partner, a diverse group of investors discussed where med-tech VCs are putting their money these days.
Short answer: Mostly in later-stage deals, and in somewhat larger amounts than the recent past, although the activity still is nothing to write home about unless it's a home where a tight-fisted Mom guards the family cookie jar with a rolling pin and a mean disposition.
John Ryan, partner in the medical technology practice of Onset Ventures (Menlo Park, California), said his firm, which focuses on information technology and medical companies, operates somewhat in opposition to the prevailing trends favoring late-stage financings. "We're keen on early-stage investing," he said, "with about 70% of our financings in early-stage companies."
In the medical side of Onset's business, which amounts to between 40% and 50% of the total, he said, "We're primarily in devices, and we're very optimistic about the future" of that space.
Asked by Harrington about investing in healthcare IT, Ryan said, "we usually invest in proprietary devices, but entry barriers to healthcare IT are very low, so that impacts investors' desires."
Fellow panelist Lisa Suennen, co-founder of Psilos Group Managers (Corte Madera, California), is in the later-stage camp. "Our focus is on companies aimed at improving quality and reducing costs," she said, "and we tend to invest in the later stage" with what she termed "a very focused approach." Roughly 45% of the firm's funding is in med-tech.
Julie Bakker, founder and managing director of Longitude Capital (also Menlo Park), said her firm "is very focused on healthcare." She said that the return on early-stage investments is in the range of 0.9%, so you have to have other places where people can put their money."
Meanwhile, Mike Carusi, general partner at Advanced Technology Ventures (Palo Alto, California), said healthcare "is about 50% of what we do, and 50% of that is in devices." In that segment, "75% is in late-stage companies, but we're looking for them to exit earlier."
While his firm is favorably inclined toward med-tech, "the question is, will our investors allow us to invest in devices? That's the big challenge. We need to show that we can make money doing so."
Carusi said that "critical medical needs remain unmet," which means opportunity. However, he cautioned that commercial payers and Medicare "won't pay for incremental change." For a young company to make it through to commercialization and exit, "it all comes down to the data; if you don't have good data, you're sunk."
He said too much is being said about the difficulties of working with the FDA, "You need to generate good data. Don't worry about the FDA, just get the data."
Suennen weighed in on the payers as well. "It's the commercial payers who call the shots. That's an important point to think about when we're investing."
Ryan also touched on dealing with the FDA, adding an historical perspective. "In the early 1990s, the FDA was awful and many VCs avoided med-tech investing because of that. There are positive signs of change now; I think the FDA is going to get better and investors will see that."
He said the next big challenge is reimbursement. "You need to start thinking more about reimbursement because it can take years and years to get your technology paid for."
Suennen added: "Talk about data-oriented, these guys [payers] are all about the data, which they use to decide which technologies are going to get reimbursed."
Asked about the coming impact of the medical device excise tax which is scheduled to take effect next Jan. 1, Carusi said, "It's just another challenge for investors."
He had his own forecast for the sector: "I think the next 10 years are going to be better than the last 10."
The annual conference is co-presented by International Business Forum (Massapequa, New York) and LifeScience Alley (St. Louis Park, Minnesota), the regional advocacy group for Upper Midwest organizations involved with various aspects of the healthcare business.
Published May 14, 2012