Med tech exits pick up in 2014, momentum to continue into 2015

Print 07 January 2015
Stacy Lawrence, FierceMedicalDevices

Venture-backed medical device and diagnostics companies are benefiting from a groundswell of investor interest in life sciences that has been spearheaded by great biotech returns for the last several years.

In 2014, medical device and diagnostics companies have had a strong M&A and IPO environment, which may be dampened a bit by ongoing big medical device mergers, but is still expected to maintain momentum into 2015. Diagnostics, in particular, is becoming more attractive as technologies come of age, revenue models become clearer and biopharma companies are more active backers and acquirers.

Last year was a solid one for both IPOs and M&A activity among medical device and diagnostic companies. There were 9 device IPOs on U.S. markets in 2014; up dramatically from three in both 2012 and 2013, according to a report from Silicon Valley Bank. And there's been a continuing onslaught of IPO filings in the sector. Similarly, there were 7 IPOs for diagnostics or tools companies in 2014; that's a big increase from only three in 2013 and none in 2012.

The IPO market has picked up for devices and diagnostics," SVB's Jonathan Norris, who is a managing director of the bank's healthcare practice, said in an interview. "A rising tide floats all boats. Investors that are not necessarily specifically focused on the life sciences are looking outside of biotech."

Continued Norris, "But then the issue becomes what's the revenue model for diagnostics. On the device side, you get through your regulatory hurdles and into commercialization, that's when investors want to hear from you."

Almost all the IPO companies on both the medical device and diagnostics side had already achieved commercialization--and that's still what investors expect.

Strategic acquisitions of venture-backed medical device and diagnostic companies were also high last year. For medical devices, there were 16 acquisitions worth more than $50 million upfront. That's more than the highest number of big exits since 2011. But Norris thinks that big medical device M&A, the Medtronic ($MDT) and Covidien ($COV) merger in particular, could slow that pace.

Newly combined companies are typically focused internally, rather than continuing to be acquisitive. And between them, Medtronic and Covidien alone accounted for 5 of these 16 big medical device exits.

For diagnostics, though, Norris just sees the M&A potential skyrocketing as pharma's interest in companion diagnostics and public investor revenue expectations are rapidly improving. There were 10 acquisitions of venture-backed diagnostic companies that were worth more than $50 million upfront in 2014--that's the most since SVB started tracking these figures in 2005.

But early investment in medical device companies isn't reflecting some of these solid, recent returns. Innovative companies, with a product that would require a PMA approval rather than the more straight-forward 510(k) clearance, are hard pressed to attract early backers.

"For a company looking to raise a Series A for a PMA candidate, it's a very tough road. Rounds for a 510(k) are easier, because they require a fairly small round. But for a PMA, it's very early with a long road to how--but they do get the bigger dollar amounts," said Norris. He did say that there are several information technology focused VCs who are interested in deploying capital in the life sciences and are looking for ways to do so. Google's ($GOOG) venture arm and its R&D arm, Google X, made a big splash with investment in ambitious, even futuristic, medical device and diagnostics projects last year.

One area that investors are very interested in now is next-generation sequencing technology, Norris said. "There's cool technology that's getting high buzz. That's one sector that we think holds a lot of promise."

The broader and more IT-focused category of digital health raised $4.1 billion in 2014. That's more than the prior three years combined, noted another recent report from Rock Health. Some of the largest venture rounds in digital health went to companies including biomolecular medicine, bioinformatics and technology services company NantHealth ($375 million), ingestible digital medication tracker Proteus Digital Health ($172 million) and physician-oriented genetic information provider Invitae ($120 million).

Kleiner, Perkins, Caufield & Byers and Khosla Ventures are the two most active digital health investors, with 17 and 15 deals, respectively, over the last four years. And their pace may be accelerating--7 of these for each were in 2014 alone.

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