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Originally Published MX November/December 2006

FINANCE

Funding Medtech Ventures

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

Guy Paul Nohra

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