FINANCE

Venture capital funding for life sciences companies hit record levels during the first half of this year, and the pace of investment shows no signs of slowing. In the second quarter, $2.2 billion went into 223 life sciences deals, representing investments in both biotechnology and medical devices.¹ Although down slightly in dollars from the first quarter—which was the highest quarterly dollar amount ever recorded for life sciences deals at $2.6 billion—the life sciences sector's second quarter was its most active to date, with deal volume reaching an all-time high. Both biotechnology and medical devices saw a decrease in dollars but an increase in deals for the second quarter.

Medical devices and equipment alone saw a total of $2.1 billion in venture capital investment during the first half of 2007, an increase of more than 60% over the $1.3 billion invested during the year-ago period. Combined, biotechnology and medical device ventures accounted for 33% of all venture capital dollars invested during the first half of the year (see Tables I–II).

“The key driver behind medical device investments is the perceived reduction in time-to-market, while the driver behind biotech investments is the potential for a platform or cross-market technology,” says John Hoopingarner, executive vice president of Emergent Technologies (Austin, TX).

Beyond the robust numbers in life sciences, today's overall venture capital industry is quite healthy, says James A. Datin, executive vice president and managing director for the life sciences group of Safeguard Scientifics Inc. (Wayne, PA), a holding company for technology and life sciences companies. “The venture capital industry has $67 billion of capital ready for deployment, and new capital is generally available,” he says. “Yet the investment landscape is quite different than it was during the bubble years.”

Datin notes that healthcare is now one of the hottest investment sectors, and venture capitalists are seeking to branch out, balance their portfolios, and mitigate investment risks. In particular, Datin says there are three main areas that are attracting significant attention from venture capital investors: medical devices, molecular diagnostics, and drug delivery and specialty pharmaceuticals. He says his firm has made strategic investments in each of these sectors based on companies' performance and status in relation to five major themes: maturity, migration, convergence, compliance, and cost containment.

Devices and Beyond

The recent venture capital investment statistics reflect continued support for medical devices, as well as support for technologies that blur the lines between sectors of the life sciences industry. On the device side, investment levels are particularly robust in cases where technologies promise to ease the economic burden of healthcare costs.

For example, in 2006 Safeguard Scientifics provided $20 million of growth capital in a $30 million series C financing for Rubicor Medical (Redwood City, CA), a breast-care device company in its early commercialization stages. “Rubicor has a technologically disruptive series of medical devices that will move the removal of tumors and the biopsies of tumors out of the operating room and actually put them into the doctor's office,” Datin says. “These devices will, at the same time, greatly improve the accuracy of these procedures—a giant step forward.”

In addition, the aging baby boomer population continues to wield great power over the development of medical devices. Correspondingly, technologies designed to meet the demands of this demographic have the attention of investors. “Devices that are aesthetic in nature and focused on lifestyle are doing very well,” says Mike Carusi, a general partner at Advanced Technology Ventures (Palo Alto, CA). “This includes technologies for noninvasive face-lifts and fat removal. In addition, there's been a fair amount of investment activity in the ophthalmology space due to the interest in treating presbyopia—eliminating the need for reading glasses.”

Datin says another area seeing a great deal of investment is molecular diagnostics. “In the past, many investors believed that there was no money to be made in this sector,” he says. “However, opinions have changed as this space is expected to quickly develop over the next few years. Diagnostics will be critical to identifying ideal appropriate patient populations to maximize efficacy and minimize side effects.”

In 2007, Safeguard Scientifics co-led a $26 million series C financing round for Avid Radiopharmaceuticals Inc. (Philadelphia). Avid's mission is to develop new molecular imaging agents capable of changing the medical management of significant chronic human diseases. “Avid's pipeline of imaging compounds has the potential to dramatically alter the clinical course of Alzheimer's disease, dementia with Lewy bodies, Parkinson's disease, and diabetes mellitus,” Datin says. “This is possible because Avid's molecular imaging compounds may be able to detect the first stages of pathological change—enabling early treatment and management of people at risk before symptoms of disease can develop.”

In addition to devices and diagnostics, drug delivery and specialty pharmaceutical companies are also successfully competing for venture funding in the life sciences arena. For example, in 2006, Safeguard Scientifics provided $6 million of a $15 million series A financing for NuPathe Inc. (Conshohocken, PA). NuPathe develops therapeutics in conjunction with novel transdermal delivery technologies. The company's lead product, NP101, would be the first-ever patch to treat migraines, and NuPathe is also developing products to treat Parkinson's disease and schizophrenia.

“In the pharma and biotech sectors, two general types of companies are getting funded right now,” Carusi says. “The first are those with drugs in the pipeline. For these small operations that get funded, there's often a reason to believe that they can make the product successful when it otherwise may have stalled in Big Pharma.

“The other companies getting funded in this sector are more or less platform plays where the company has an eye toward products,” Carusi adds. “This could be a company with underlying chemistry expertise, a new assay technology, or a unique understanding of a novel biological pathway.”

Market Challenges

The regulatory and reimbursement challenges facing new medical technologies continue to grow. Venture capitalists focused on life sciences investment are well aware of such challenges and evaluate prospective investments with those obstacles in mind.

“The challenge isn't that the path is longer,” Carusi says. “The challenge is that the path is unknown. That's where it gets uncomfortable for investors.”

To position themselves favorably in the eyes of venture capitalists, companies must plan early and have a good understanding of the regulatory and reimbursement landscape they must cross. “If there's a silver lining to the regulatory and reimbursement challenges, it's that they enable companies to build barriers to market entry,” Carusi says. “If a company can navigate those tricky waters, they can bring quite a bit of value to an acquirer or the public market.”

Carusi says that the majority of the life sciences deals are mid- to later-stage transactions—series B and series C. “However, early-stage investment is picking up as well,” he says.

Of the $2.1 billion invested in medical devices and equipment companies in the first half of this year, $420 million went into first-sequence investments. That figure is nearly double the $225 million invested in first-sequence medtech companies in the comparable year-ago period. Of the $2.7 billion invested in biotechnology during the same period, $450 million went into first-sequence fundings—similar to the $454 million in the year-ago period.¹

Conclusion

The current robust levels of life sciences investment show no signs of waning, marking a significant opportunity for medtech entrepreneurs. “In the first quarter of 2007, the industry hit an all-time high in terms of venture capital investment in medical devices,” Carusi says. “I expect to see those levels of investment continue, at least in the near term. Venture capitalists have seen some success through medical device initial public offerings and acquisitions, so there will continue to be robust levels of funding in that sector.”

Datin says that, going forward, the baby boomer market will continue to receive more attention—from both technology developers and investors. “With this new demographic, there will be new opportunities to invest in aesthetic and dermatology sectors, cosmeceuticals, and devices and therapeutic agents,” he says.

In these and other areas, emerging technologies that capture the attention of venture investors will continue to be those that can demonstrate economic and clinical benefits to a wide array of stakeholders, as well as a clear path toward regulatory approval and reimbursement.

Reference

1. “The PricewaterhouseCoopers–National Venture Capital Association MoneyTree Report” (New York: PricewaterhouseCoopers, 2007); available from Internet: www.pwcmoneytree.com.

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