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Funding Medtech Ventures

Medical technology hubs are leading the way in venture capital investment.

FINANCE

Although biotechnology often grabs the headlines within the life sciences field, the medical technology sector has quietly positioned itself over the last several years as a stable engine of innovation and economic growth. The promise of emerging breakthroughs and the healthy returns that accompany the successful commercialization of new medical devices have fostered a strong investment following by the venture capital community—a trend expected to continue for the foreseeable future.

According to the PricewaterhouseCoopers–National Venture Capital Association MoneyTree Report, in 2005 venture capitalists invested more than $2.1 billion in emerging medical technology companies, a 25% increase over 2004.1 Investment in the first half of 2006 suggests similar growth this year.

To a large extent, the interest in medical technology investing is being fueled by the successful exits of venture-backed companies in recent years. From 2004 through the first half of 2006, 44 medical technology companies completed initial public offerings (IPOs) in the United States, accounting for a high percentage of all recent IPOs. Additionally and as importantly, these IPOs have delivered strong aftermarket performance. The medical device industry continues to discover new and better ways to improve patient treatment. However, these companies must still convert innovations into commercially viable products in order to succeed.

In addition to the relative strength of the medical technology IPO market, medtech mergers and acquisitions activity has also proven to be robust, with 92 acquisitions of venture-backed companies taking place since 2004. Small, nimble companies have proven to be excellent strategic targets for larger medical technology companies such as Boston Scientific Corp. (Natick, MA), Johnson & Johnson Inc. (New Brunswick, NJ), and Medtronic Inc. (Minneapolis), which are seeking to acquire innovation and augment their research and development pipelines.

Buoyed by these successful transactions, venture capitalists are committing further resources to the sector, and more venture firms are raising funds designated specifically for medical technology investment. With the average life span of a venture capital fund being 10 years, the medical technology sector can expect the flow of risk capital to continue well into the next decade.

The investment outlook bodes well for regions that can create and sustain a healthy venture-investing environment. The strongest U.S. regions in medical technology venture investment include Northern California, Boston, and Southern California, and generally possess the following key elements.

  • Strong infrastructures girded by capital and professional services, such as corporate and
        intellectual property attorneys, and certified public accountants familiar with the innovation
        process.
  • Large, established companies from which to recruit talent and expertise.
  • Entrepreneurial cultures supported and encouraged by local government.
  • University communities that support research and provide a pool of innovators with deep and
        relevant knowledge.

    Such regions use these elements to achieve critical mass and sustain momentum (see Tables I-VIII). Lesser-performing regions usually lack one or more of these elements, but can certainly raise their stature by acquiring or developing them. In recent years, areas such as Seattle, Minneapolis, North Carolina's Research Triangle Park, and parts of the Midwest have shown considerable promise in their quests to become venture investment hubs for medical technology companies.

    Metropolitan
    Statistical
    Area
    Number
    of
    Deals
    Medtech
    Companies
    (no.)
    Financing
    Firms
    (no.)
    Avg. per
    Deal
    ($ millions)
    Avg. per
    Company
    ($ millions)
    Avg. per
    Firm
    ($ millions)
    Sum
    Invested
    ($ millions)
    % of
    Total Medtech
    Investment
    San Jose, CA
    27
    23
    63
    11.20
    13.15
    4.80
    302.52
    15.07
    Boston, MA—NH
    23
    20
    59
    9.07
    10.43
    3.54
    208.66
    10.39
    San Diego, CA
    25
    21
    61
    7.27
    8.65
    2.98
    181.68
    9.05
    Orange County, CA
    26
    18
    46
    6.94
    10.03
    3.93
    180.56
    8.99
    Oakland, CA
    11
    11
    35
    15.47
    15.47
    4.86
    170.20
    8.48
    San Francisco, CA
    16
    15
    41
    10.11
    10.78
    3.94
    161.73
    8.06
    Minneapolis–St.
         Paul, MN–WI
    19
    18
    21
    4.77
    5.03
    4.31
    90.55
    4.51
    Atlanta, GA
    7
    6
    27
    12.04
    14.05
    3.12
    84.30
    4.20
    Seattle-Bellevue-
         Everett, WA
    6
    5
    15
    11.55
    13.86
    4.62
    69.30
    3.45
    Austin–San Marcos,
         TX
    3
    2
    11
    16.17
    24.25
    4.41
    48.50
    2.42
    Philadelphia, PA–NJ
    4
    3
    11
    11.52
    15.36
    4.19
    46.09
    2.30
    Lawrence, MA–NH
    3
    3
    13
    14.40
    14.40
    3.32
    43.20
    2.15
    Raleigh–Durham–
         Chapel Hill, NC
    5
    5
    12
    8.45
    8.45
    3.52
    42.25
    2.10
    Madison, WI
    4
    3
    14
    10.48
    13.97
    2.99
    41.90
    2.09
    St. Louis, MO–IL
    1
    1
    11
    34.53
    34.53
    3.14
    34.53
    1.72
    Pittsburgh, PA
    3
    3
    7
    10.25
    10.25
    4.39
    30.75
    1.53
    New York, NY
    3
    3
    5
    8.30
    8.30
    4.98
    24.90
    1.24
    Lowell, MA–NH
    3
    3
    10
    7.20
    7.20
    2.16
    21.60
    1.08
    Fort Lauderdale, FL
    3
    1
    5
    7.00
    21.00
    4.20
    21.00
    1.05
    Chicago, IL
    1
    1
    4
    20.00
    20.00
    5.00
    20.00
    1.00
    Table I. Top 20 regions for venture capital investment in medical device and diagnostics companies in 2001. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.
    Metropolitan
    Statistical
    Area
    Number
    of
    Deals
    Medtech
    Companies
    (no.)
    Financing
    Firms
    (no.)
    Avg. per
    Deal
    ($ millions)
    Avg. per
    Company
    ($ millions)
    Avg. per
    Firm
    ($ millions)
    Sum
    Invested
    ($ millions)
    % of
    Total Medtech
    Investment
    San Francisco, CA
    25
    20
    65
    10.51
    13.14
    4.04
    262.72
    14.18
    San Jose, CA
    32
    27
    68
    6.97
    8.27
    3.28
    223.16
    12.05
    Boston, MA—NH
    32
    29
    76
    6.09
    6.72
    2.56
    194.81
    10.52
    San Diego, CA
    16
    12
    37
    11.30
    15.06
    4.88
    180.74
    9.76
    Orange County, CA
    12
    11
    32
    13.36
    14.57
    5.01
    160.32
    8.66
    Seattle-Bellevue-
         Everett, WA
    12
    10
    39
    11.29
    13.55
    3.47
    135.49
    7.31
    Minneapolis–St.
         Paul, MN–WI
    10
    9
    31
    8.87
    9.86
    2.86
    88.73
    4.79
    Raleigh–-Durham–
         Chapel Hill, NC
    4
    3
    12
    16.20
    21.60
    5.40
    64.80
    3.50
    Phoenix, AZ
    4
    3
    15
    10.40
    13.87
    2.77
    41.60
    2.25
    Boulder-Longmont,
         CO
    6
    4
    9
    6.49
    9.73
    4.32
    38.91
    2.10
    Atlanta, GA
    5
    5
    22
    7.60
    7.60
    1.73
    38.00
    2.05
    Oakland, CA
    7
    5
    13
    5.07
    7.10
    2.73
    35.49
    1.92
    St. Louis, MO–IL
    4
    3
    17
    7.35
    9.80
    1.73
    29.41
    1.59
    Middlesex-Somerset-
         Hunterdon, NC
    1
    1
    6
    25.00
    25.00
    4.17
    25.00
    1.35
    Sacramento, CA
    1
    1
    5
    24.00
    24.00
    4.80
    24.00
    1.30
    Pittsburgh, PA
    2
    2
    7
    11.41
    11.41
    3.26
    22.82
    1.23
    Hamilton-Middletown,
         OH
    1
    1
    6
    21.00
    21.00
    3.50
    21.00
    1.13
    Bergen-Passaic, NJ
    1
    1
    2
    20.00
    20.00
    10.00
    20.00
    1.08
    Daytona Beach, FL
    1
    1
    4
    17.50
    17.50
    4.38
    17.50
    0.94
    Oklahoma City, OK
    2
    1
    9
    8.75
    17.50
    1.94
    17.50
    0.94
    Table II. Top 20 regions for venture capital investment in medical device and diagnostics companies in 2002. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.
    Metropolitan
    Statistical
    Area
    Number
    of
    Deals
    Medtech
    Companies
    (no.)
    Financing
    Firms
    (no.)
    Avg. per
    Deal
    ($ millions)
    Avg. per
    Company
    ($ millions)
    Avg. per
    Firm
    ($ millions)
    Sum
    Invested
    ($ millions)
    % of
    Total Medtech
    Investment
    San Jose, CA
    36
    31
    84
    7.90
    9.17
    3.38
    284.23
    7.81
    Boston, MA–NH
    24
    22
    55
    7.12
    7.76
    3.11
    170.81
    10.70
    San Francisco, CA
    20
    18
    39
    7.90
    8.78
    4.05
    157.96
    9.90
    Orange County, CA
    15
    14
    39
    9.48
    10.16
    3.65
    142.20
    8.91
    Oakland, CA
    16
    12
    37
    7.98
    10.64
    3.45
    127.70
    8.00
    Minneapolis–St.
         Paul, MN–WI
    11
    10
    32
    8.37
    9.21
    2.88
    92.09
    5.77
    San Diego, CA
    9
    9
    15
    6.36
    6.36
    3.81
    57.22
    3.59
    Seattle-Bellevue-
         Everett, WA
    6
    6
    12
    8.86
    8.86
    4.43
    53.13
    3.33
    Lawrence, MA–NH
    2
    2
    14
    21.75
    21.75
    3.11
    43.50
    2.73
    Philadelphia, PA–NJ
    10
    10
    16
    4.25
    4.25
    2.66
    42.54
    2.67
    Raleigh–-Durham–
         Chapel Hill, NC
    4
    3
    15
    10.26
    13.68
    2.74
    41.05
    2.57
    Atlanta, GA
    5
    4
    14
    6.21
    7.76
    2.22
    31.06
    1.95
    Portsmouth-Rochestert,      NH–ME
    1
    1
    8
    27.00
    27.00
    3.37
    27.00
    1.69
    Newwark, NJ
    2
    2
    6
    12.50
    12.50
    4.17
    25.00
    1.57
    Nashua, NH
    2
    1
    7
    11.95
    23.90
    3.41
    23.90
    1.50
    Boulder-Longmont,
         CO
    3
    2
    3
    7.75
    11.62
    7.75
    23.25
    1.46
    New York, NY
    4
    3
    5
    5.25
    7.00
    4.20
    21.00
    1.32
    Sacramento, CA
    1
    1
    6
    20.60
    20.60
    3.43
    20.60
    1.29
    Buffalo–Niagara
         Falls, NY
    2
    2
    4
    9.25
    9.25
    4.62
    18.50
    1.16
    Chicago, IL
    2
    2
    7
    7.75
    7.75
    2.21
    15.50
    0.97
    Table III. Top 20 regions for venture capital investment in medical device and diagnostics companies in 2003. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.
    Metropolitan
    Statistical
    Area
    Number
    of
    Deals
    Medtech
    Companies
    (no.)
    Financing
    Firms
    (no.)
    Avg. per
    Deal
    ($ millions)
    Avg. per
    Company
    ($ millions)
    Avg. per
    Firm
    ($ millions)
    Sum
    Invested
    ($ millions)
    % of
    Total Medtech
    Investment
    San Jose, CA
    34
    27
    70
    8.94
    11.26
    4.34
    304.12
    17.87
    San Francisco, CA
    30
    26
    73
    9.59
    11.07
    3.94
    287.70
    16.90
    Boston, MA–NH
    24
    23
    76
    8.40
    8.76
    2.65
    201.59
    11.84
    San Diego, CA
    16
    14
    43
    9.36
    10.70
    3.48
    149.77
    8.80
    Minneapolis–St.
         Paul, MN–WI
    13
    11
    39
    10.90
    12.88
    3.63
    141.68
    8.32
    Seattle-Bellevue-
         Everett, WA
    12
    10
    31
    9.99
    11.98
    3.87
    119.84
    7.04
    Oakland, CA
    16
    14
    46
    6.26
    7.15
    2.18
    100.09
    5.88
    Orange County, CA
    7
    7
    17
    5.64
    5.64
    2.32
    39.50
    2.32
    New York, NY
    6
    5
    7
    6.25
    7.50
    5.36
    37.49
    2.20
    Salt Lake City–Ogden,      UT
    2
    2
    7
    15.35
    15.35
    4.39
    30.70
    1.80
    Boulder-Longmont, CO
    7
    4
    12
    3.84
    6.72
    2.24
    26.86
    1.58
    Atlanta, GA
    9
    8
    22
    2.90
    3.27
    1.19
    26.13
    1.54
    Austin–San Marcos, TX
    5
    5
    11
    4.86
    4.86
    2.21
    24.30
    1.43
    Madison, WI
    2
    2
    12
    10.28
    10.28
    1.71
    20.55
    1.21
    Lawrence, MA–NH
    1
    1
    7
    20.00
    20.00
    2.86
    20.00
    1.18
    St. Louis. MO–IL
    2
    2
    7
    8.77
    8.77
    2.51
    17.54
    1.03
    Indianapolis, IN
    1
    1
    5
    11.75
    11.75
    2.35
    11.75
    0.69
    Charlotte–Gastonia–
         Rock Hill, NC–SC
    1
    1
    6
    10.00
    10.00
    1.67
    10.00
    0.59
    Middleses-Somerset-
         Hunterdon, NJ
    2
    2
    3
    4.38
    43.8
    2.92
    8.75
    0.51
    Raleigh–-Durham–
         Chapel Hill, NC
    3
    1
    4
    2.77
    8.31
    2.08
    8.31
    0.49
    Table IV. Top 20 regions for venture capital investment in medical device and diagnostics companies in 2004. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.
    Metropolitan
    Statistical
    Area
    Number
    of
    Deals
    Medtech
    Companies
    (no.)
    Financing
    Firms
    (no.)
    Avg. per
    Deal
    ($ millions)
    Avg. per
    Company
    ($ millions)
    Avg. per
    Firm
    ($ millions)
    Sum
    Invested
    ($ millions)
    % of
    Total Medtech
    Investment
    San Jose, CA
    37
    33
    72
    8.50
    9.53
    4.37
    314.35
    14.65
    San Francisco, CA
    22
    22
    55
    11.14
    11.14
    4.45
    245.00
    11.42
    Orange County, CA
    18
    16
    52
    11.60
    13.05
    4.02
    208.88
    9.74
    Boston, MA–NH
    25
    21
    60
    7.24
    8.62
    3.02
    181.12
    8.44
    San Diego, CA
    20
    17
    53
    8.06
    9.48
    3.04
    161.18
    7.51
    Oakland, CA
    13
    10
    46
    9.44
    12.28
    2.67
    122.77
    5.72
    Minneapolis–St.
         Paul, MN–WI
    10
    8
    33
    8.78
    10.98
    2.66
    87.82
    4.09
    Seattle-Bellevue-
         Everett, WA
    9
    9
    36
    7.96
    7.96
    1.99
    71.62
    3.34
    Atlanta, GA
    7
    6
    19
    9.11
    10.63
    3.36
    63.77
    2.97
    New York, NY
    4
    4
    13
    15.78
    15.78
    4.85
    63.10
    2.94
    Philadelphia, PA–NJ
    14
    7
    17
    4.48
    8.96
    3.69
    62.75
    2.92
    Fort Lauderdale, FL
    3
    3
    12
    13.77
    13.77
    3.44
    41.31
    1.93
    Boulder-Longmont, CO
    6
    5
    15
    6.13
    7.36
    2.45
    36.79
    1.72
    Raleigh–-Durham–
         Chapel Hill, NC
    4
    3
    10
    7.90
    10.53
    3.16
    31.58
    1.47
    Baltimore, MD
    4
    2
    8
    7.41
    14.82
    3.70
    29.64
    1.38
    Providence–Fall River–
         Warwick, RI–MA
    2
    1
    9
    13.20
    26.41
    2.93
    26.41
    1.23
    Wilmington, NC
    1
    1
    4
    25.60
    25.60
    6.40
    25.60
    1.19
    Madison, WI
    4
    3
    14
    5.87
    7.83
    1.68
    23.50
    1.10
    Pittsburgh, PA
    3
    3
    12
    7.52
    7.52
    1.88
    22.55
    1.05
    Cleveland-Lorian-Elyria,      OH
    3
    3
    14
    6.44
    6.44
    1.38
    19.33
    0.90
    Table V. Top 20 regions for venture capital investment in medical device and diagnostics companies in 2005. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.
    Metropolitan
    Statistical
    Area
    Number
    of
    Deals
    Medtech
    Companies
    (no.)
    Financing
    Firms
    (no.)
    Avg. per
    Deal
    ($ millions)
    Avg. per
    Company
    ($ millions)
    Avg. per
    Firm
    ($ millions)
    Sum
    Invested
    ($ millions)
    % of
    Total Medtech
    Investment
    San Francisco, CA
    18
    16
    54
    12.00
    13.50
    4.00
    216.02
    17.12
    San Jose, CA
    18
    16
    46
    9.23
    10.38
    3.61
    166.16
    13.17
    Seattle-Bellevue-
         Everett, WA
    10
    10
    45
    13.23
    13.23
    2.94
    132.33
    10.49
    San Diego, CA
    8
    8
    26
    15.23
    15.23
    4.69
    121.82
    9.66
    Boston, MA–NH
    12
    11
    32
    9.38
    10.23
    3.52
    112.57
    8.92
    Oakland, CA
    8
    8
    35
    12.10
    12.10
    2.77
    96.84
    7.68
    Orange County, CA
    5
    5
    16
    15.51
    15.51
    4.85
    77.55
    6.15
    Minneapolis–St.
         Paul, MN–WI
    6
    6
    16
    9.46
    9.46
    3.55
    56.75
    4.50
    Lawrence, MA–NH
    2
    2
    11
    20.15
    20.15
    3.66
    40.30
    3.19
    Atlanta, GA
    3
    3
    5
    5.07
    5.07
    3.04
    15.20
    1.20
    Charlotte–Gastonia–
         Rock Hill, NC–SC
    1
    1
    4
    15.00
    15.00
    3.75
    15.00
    1.19
    Philadelphia, PA –NJ
    3
    3
    6
    4.89
    4.89
    2.44
    14.66
    1.16
    Boulder-Longmont,      CO
    3
    3
    12
    4.47
    4.47
    1.12
    13.42
    1.06
    Lowell, MA–NH
    1
    1
    6
    13.00
    13.00
    2.17
    13.00
    1.03
    New York, NY
    4
    4
    7
    3.14
    3.14
    1.80
    12.57
    1.00
    Baltimore, MD
    2
    2
    5
    6.25
    6.25
    2.50
    12.50
    0.99
    Austin–San Marcos,      TX
    1
    1
    4
    11.00
    11.00
    2.75
    11.00
    0.87
    Santa Rosa, CA
    2
    2
    4
    5.45
    5.45
    2.72
    10.90
    0.86
    New Haven–Meriden,      CT
    1
    1
    4
    10.00
    10.00
    2.50
    10.00
    0.79
    Houston, TX
    1
    1
    2
    9.90
    9.90
    4.95
    9.90
    0.78
    Table VI. Top 20 regions for venture capital investment in medical device and diagnostics companies in the first half of 2006. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.
    Metropolitan
    Statistical
    Area
    Number
    of
    Deals
    Medtech
    Companies
    (no.)
    Financing
    Firms
    (no.)
    Avg. per
    Deal
    ($ millions)
    Avg. per
    Company
    ($ millions)
    Avg. per
    Firm
    ($ millions)
    Sum
    Invested
    ($ millions)
    % of Total
    Medtech
    Investment
    San Jose, CA
    184
    74
    173
    8.67
    21.55
    9.22
    1,594.54
    15.09
    San Francisco, CA
    131
    57
    141
    10.16
    23.35
    9.44
    1,331.14
    12.60
    Boston, MA—NH
    140
    65
    180
    7.64
    16.45
    5.94
    1,069.55
    10.12
    San Diego, CA
    94
    48
    132
    9.07
    17.76
    6.46
    852.40
    8.07
    Orange County, CA
    83
    30
    87
    9.75
    26.97
    9.30
    809.00
    7.66
    Oakland, CA
    71
    34
    113
    9.20
    19.21
    5.78
    653.09
    6.18
    Seattle-Bellevue-
         Everett, WA
    55
    22
    79
    10.58
    26.44
    7.36
    581.71
    5.51
    Minneapolis–St. Paul,
         MN–WI
    69
    35
    85
    8.08
    15.93
    6.56
    557.63
    5.28
    Atlanta, GA
    36
    19
    55
    7.18
    13.60
    4.70
    258.45
    2.45
    Raleigh–Durham–
         Chapel Hill, NC
    23
    11
    35
    8.43
    17.64
    5.54
    193.99
    1.84
    Philadelphia, PA–NJ
    41
    18
    36
    4.21
    9.60
    4.80
    172.74
    1.64
    New York, NY
    22
    12
    23
    7.58
    13.89
    7.25
    166.68
    1.58
    Lawrence, MA–NH
    9
    5
    27
    18.11
    32.60
    6.04
    163.00
    1.54
    Boulder-Longmont, CO
    27
    9
    33
    5.74
    17.23
    4.70
    155.09
    1.47
    Madison, WI
    13
    4
    21
    8.71
    28.31
    5.39
    113.25
    1.07
    Austin–San Marcos, TX
    17
    9
    22
    6.35
    11.99
    4.90
    107.88
    1.02
    St. Louis, MO–IL
    14
    4
    26
    7.49
    26.21
    4.03
    104.84
    0.99
    Pittsburgh, PA
    17
    6
    30
    5.63
    15.95
    3.19
    95.70
    0.91
    Phoenix, AZ
    13
    5
    20
    5.61
    14.58
    3.64
    72.90
    0.69
    Fort Lauderdale, FL
    7
    3
    15
    9.59
    22.37
    4.47
    67.11
    0.64
    Lowell, MA–NH
    11
    4
    18
    6.06
    16.66
    3.70
    66.65
    0.63
    Salt Lake City–Ogden,
         UT
    6
    5
    14
    10.45
    12.54
    4.48
    62.70
    0.59
    Sacramento, CA
    4
    1
    8
    15.57
    62.27
    7.78
    62.27
    0.59
    Baltimore, MD
    12
    7
    19
    5.11
    8.76
    3.23
    61.34
    0.58
    Washington, DC–MD–
         VA–WV
    27
    11
    22
    2.19
    5.37
    2.68
    59.02
    0.56
    Charlotte–Gastonia–
         Rock Hill, NC–SC
    5
    3
    14
    10.91
    18.18
    3.90
    54.55
    0.52
    Chicago, IL
    12
    5
    12
    4.39
    10.54
    4.39
    52.70
    0.50
    Middlesex-Somerset-
         Hunterdon, NJ
    4
    2
    9
    12.19
    24.38
    5.42
    48.75
    0.46
    Providence–Fall River–
         Warwick, RI–MA
    5
    2
    15
    8.68
    21.70
    2.89
    43.41
    0.41
    Santa Rosa, CA
    6
    4
    11
    7.22
    10.83
    3.94
    43.32
    0.41
    Portsmouth-Rochester,
         NH–ME
    4
    3
    15
    10.39
    13.86
    2.77
    41.57
    0.39
    Cleveland-Lorain-Elyria,      OH
    7
    4
    22
    5.84
    10.22
    1.86
    40.88
    0.39
    Wilmington, NC
    3
    1
    5
    13.12
    39.35
    7.87
    39.35
    0.37
    Bergen-Passaic, NJ
    9
    4
    9
    4.15
    9.33
    4.15
    37.31
    0.35
    Newark, NJ
    4
    3
    8
    8.20
    10.93
    4.10
    32.80
    0.31
    Daytona Beach, FL
    3
    1
    6
    10.67
    32.00
    5.33
    32.00
    0.30
    New Haven–Meriden,      CT
    5
    4
    13
    6.10
    7.62
    2.35
    30.50
    0.29
    Oklahoma City, OK
    5
    1
    10
    5.34
    26.69
    2.67
    26.69
    0.25
    Hamilton-Middletown,      OH
    2
    1
    6
    13.10
    26.20
    4.37
    26.20
    0.25
    Ann Arbor, MI
    6
    2
    12
    4.14
    12.43
    2.07
    24.87
    0.24
    Table VII. Top 40 regions for venture capital investment in medical device and diagnostics companies, from January 2001 through June 2006. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.
    Metropolitan Statistical
         Area
    2001 Venture
    Capital Investment
    ($ millions)
    2005 Venture
    Capital Investment
    ($ millions)
    % Change
    Five-Year-Total
    ($ millions)
    Five-Year-Annual Avg.
    ($ millions)
    San Jose, CA
    302.52
    314.35
    3.91
    1,594.54
    318.91
    San Francisco, CA
    161.73
    245.00
    51.49
    1,331.14
    266.23
    Boston, MA–NH
    208.66
    181.12
    –13.20
    1,069.55
    213.91
    San Diego, CA
    181.68
    161.18
    –11.28
    852.10
    170.48
    Orange County, CA
    180.56
    208.88
    15.68
    809.00
    161.80
    Oakland, CA
    170.20
    122.77
    –27.87
    653.09
    130.62
    Seattle-Bellevue-Everett, WA
    69.30
    71.62
    3.35
    581.71
    116.34
    Minneapolis–St. Paul, MN–WI
    90.55
    87.82
    –3.01
    557.63
    111.53
    Atlanta, GA
    84.30
    63.77
    –24.35
    258.45
    51.69
    Raleigh–Durham–Chapel Hill,      NC
    42.25
    31.58
    –25.25
    193.99
    38.80
    Philadelphia, PA–NJ
    46.09
    62.75
    36.15
    172.74
    34.55
    New Yor, NY
    24.90
    63.10
    153.41
    166.68
    33.34
    Lawrence, MA–NH
    43.20
    16.00
    –62.96
    163.00
    32.60
    Boulder-Longmont, CO
    15.85
    36.79
    132.11
    155.09
    31.02
    Madison, WI
    41.90
    23.50
    –43.91
    113.25
    22.65
    Austin–San Marcos, TX
    48.50
    12.32
    –74.60
    107.88
    21.58
    St. Louis, MO–IL
    34.53
    2.03
    –94.12
    104.84
    20.97
    Pittsburgh, PA
    30.75
    22.55
    –26.67
    95.70
    19.14
    Phoenix, AZ
    14.80
    14.70
    –0.68
    72.90
    14.58
    Fort Lauderdale, FL
    21.00
    41.31
    96.71
    67.11
    13.42
    Table VIII. Venture capital investment in medical device and diagnostics companies in the top 20 U.S. regions from 2001 through 2005. Source: Thomson Financial for PriceWaterhouseCoopers–National Venture Capital Association MoneyTree Report.

    Challenges to Investment

    Despite the promising national outlook, the medical technology industry still faces a number of challenges.

    Regulation. Regulation by FDA remains a fact of life. Although few would dispute the importance of FDA's role in ensuring patient safety, the medical technology community continues to seek a more efficient and effective path to regulatory approval. The recent implementation of user fees for medical device market clearance is a step in the right direction, as many industry stakeholders hope that the additional funding will enable FDA to rationalize its process further. Regulatory consistency is vital to a small company's development and go-to-market strategies.

    Reimbursement. As one of the largest and most influential payers in the marketplace, the Centers for Medicare and Medicaid Services (Baltimore) can affect the success of a company dramatically through its decisions regarding which technological innovations it will pay for and which it may not.

    For smaller companies, group purchasing organizations have exacerbated the channel challenges encountered as they launch new products. These large buyers have significant influence over which products reach higher sales levels.

    Consolidation. Continued consolidation at the top of the medical technology industry will inevitably slow the rapid pace of acquisitions to which the industry has grown accustomed. This may force small companies to remain independent longer, which might increase the need for further financings and drive down overall returns.

    Venture capitalists are risk takers—but they are calculated risk takers, and inputs such as reimbursement probability, regulatory clarity, channel access, and the interest of potential acquirers will always drive investment decisions.

    Attractive Prospects

    Despite numerous challenges, the medical technology industry seems to be hitting its stride at just the right time, as a new wave of innovations is creating a level of excitement in the medical community reminiscent of that generated first by the advent of open-heart surgery and later by the introduction of stents.

    Over the past two decades, enormous strides have been made in minimally invasive surgical techniques. This has led to both faster recoveries for patients and lower costs throughout the care chain, as hospital stays have shortened. Additionally, the combination of drugs and devices for treatment, most notably embodied in drug-eluting stents, has become increasingly common, opening the door to a tremendous range of opportunities for patients, doctors, and medical technology companies alike. Finally, emerging areas such as neurostimulation are beginning to revolutionize treatment options for complex neurological conditions such as epilepsy and simple pain management. The effectiveness of such treatments—in which doctors tap into patients' nervous systems, isolate specific nerves, and regulate their impulses—figure to generate significant demand for devices that can handle increasingly complex tasks while at the same time minimizing invasiveness.

    In all, the medical technology sector's current health and promising outlook are on track to create value for industry stakeholders and investors for the long term. More importantly, a continued healthy environment for venture investing in these promising medical technology companies will bring innovations to market faster, improving and expanding the treatments available to patients around the globe and vastly enhancing the quality of their lives.


    Reference

    1. "The PricewaterhouseCoopers—National Venture Capital Association MoneyTree Report" (New York:
        PricewaterhouseCoopers, 2006); available from Internet:
        www.pwcmoneytree.com/exhibits/05Q4MoneyTreeReport_FINAL.pdf.

    Guy Paul Nohra is a founder and managing director at life sciences venture capital firm Alta Partners (San Francisco).
    Copyright ©2006 MX
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