Q1: Medical Device Funding Up, Biotech Funding Down

Although venture investment across industries remained relatively steady in the first quarter of 2006, investments in the overall life sciences sector—including biotechnology and medical devices—declined 13% to $1.5 billion compared to the previous quarter, according to the PricewaterhouseCoopers–National Venture Capital Association (NVCA) MoneyTree Report. However, first-quarter funding for medical device companies alone rose about 8% over the fourth quarter of 2005, an increase that partly offset a 24% decline in biotechnology funding.

Medical device venture investment also outpaced biotechnology funding in terms of year-over-year comparisons. The $690 million in funding across 70 deals for medical device companies in the first quarter of 2006 represented an increase of 62% over the first quarter of 2005. The report, based on data provided by Thomson Financial, stated that biotechnology funding grew 18% in the same period, from $682 million to $808 million.

The decline in overall life sciences funding in the first quarter is in line with historical patterns, and the levels were still within the quarterly range of the past several years.

“We are experiencing the regular ebb and flow of venture investing, and we are truly at our healthiest and most sound investment point since the mid 1990s,” said Mark Heesen, president of the NVCA. “That said, we will need to see improvements in the initial public offering (IPO) markets and better evidence of early-stage investing momentum in future quarters if we expect to sustain this reasonable pace.”

Across all industries, first-quarter funding for start-up and early-stage companies fell 14% to $931 million compared with the fourth quarter of 2005. The average deal size for start-up and early-stage companies also declined.

“It takes a more-mature company to reach a successful exit, especially if that exit is through the narrow IPO window,” said Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers. “And it takes considerable time and money to reach that level of maturity. The opportunity still exists for first-time entrepreneurs, but they're having to find new ways to ensure their company stands out among the sea of start-ups.”

Across all industries, fewer companies received funding for the first time in the first quarter of 2006 than in the previous quarter. However, industry patterns in such financings remained consistent, with software companies attracting the most first-time deals at 53, followed by medical device companies at 23.

In the Midwest, healthcare start-ups reported $128 million in investment during the first quarter, according to data from BioEnterprise (Cleveland), an organization that supports the growth of the region's bioscience companies. “More companies in the Midwest attracted funding in the first quarter of 2006 than 2005, though the total dollar volume of deals is similar,” said Baiju R. Shah, president of BioEnterprise. “The Midwest performance mirrored the nation for overall dollars being insignificantly different from previous levels of Q1 activity.

“The sector-to-sector comparisons are tilted by the large deals,” Shah adds. “Q1 2006 saw three large biopharmaceutical financings in the Midwest compared with Q1 2005, which saw three large medical device financings in the Midwest.”

In the first quarter of 2006, Midwest biopharmaceutical companies reported funding of $66 million across six companies. Medical device companies reported $38 million in funding across eight opportunities, with healthcare software and service companies reporting $24 million across nine companies.

“My observation is that 2005 was a very strong year for Midwest healthcare venture investments, and that 2006 is off to a similarly strong start both in terms of number of deals as well as total dollars,” Shah says. “Nationally, beyond the usual hot areas of cardiovascular and orthopedic opportunities, BioEnterprise is observing significantly greater interest among venture investors in pulmonology, neurostimulation, and cosmetic and quality-of-life oriented devices. Restore Medical, a Minnesota-based developer of sleep-disorder devices, is a medical device IPO that will be closely watched.”

© 2006 Canon Communications LLC

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