Is funding for medtech stagnating, or is there hope on the horizon? Freelance business and technology journalist Trevor Clawson takes a look at the current scene and talks to key medical device investors
First the good news. According to projections published towards the end of 2015 by analysis company Evaluate, the global medtech sector is set to grow at an annual rate of 4.1 per cent to a value of $447.5 billion between now and 2020. Not a stellar rate of expansion perhaps, but as health and social care systems around the world wrestle with the challenges of improving services and meeting increased demand while also keeping budgets in check, the growth potential of the industry is underpinned by a need for new, innovative and cost-effective technologies.
But as Michael Jewell, a partner specialising in healthcare and medtech at mergers and acquisitions (M&A) advisers Cavendish Corporate Finance, observes, early-stage businesses often struggle to secure the investment required to bring those new technologies to the market. ‘There’s a general recognition that small businesses are responsible for much of the innovation but there is a reluctance among medical device investors to fund them,’ he explains.
It’s a view confirmed by industry figures. In its 2015 Medtech Half-Year Review, EP Vantage noted that only 287 early-stage medtech companies managed to secure equity investment across the year as a whole, 30 per cent down on 2014. That’s not to say money wasn’t changing hands. In the same year, a wave of consolidation in the industry raised the total value of M&A deals to an unprecedented £127 billion. Against that backdrop of bigger deals, small companies were finding it difficult to attract medical device investors.
‘Funding for early-stage biopharma and medtech research appears to have dwindled in 2015,’ agrees Tej Kohli, medtech investor and chairman of Kohli Ventures and The Tej Kohli Foundation. ‘Investors shifted their support to more mature companies.’
And this matters because about 95 per cent of Europe’s medtech players are small- and medium-sized companies, according to industry body Medtech Europe. Unless they can raise the capital they need, the flow of innovative products coming to the market must surely be slower. So here’s the conundrum. If the demand is there, why is there a shortage of funding for startups and early-stage companies?
Medtech companies are not alone, however, in facing a finance drought, particularly at the point where initial seed-funding runs out, and further cash is required to develop the product. This is the infamous ‘Valley of Death’. With early funds exhausted, medical device investors are reluctant to step in with additional larger amounts unless there is a proven product. Tej Kohli says his preference is to invest at a later stage. ‘A lot of companies coming into the medtech space burn their money early on when developing the product,’ asserts Kohli. ‘We tend to invest in companies that have already developed the product but lack the business experience and further finances to take it to the next phase of development.’
Michael Jewell sees similar preferences on the part of trade buyers. ‘Corporate buyers are looking for companies that are generating revenues and making profits,’ he explains. ‘In cases where we’ve liked the technology and we’ve advised earlier-stage companies on selling their businesses, we have often found it hard to get traction.’
The wave of consolidation among better-established medtech companies may also be having an impact on early-stage funding. According to EP Vantage, the wave of M&A has resulted in larger but fewer companies with an appetite for acquisition. And with fewer corporates, there aren’t so many opportunities for smaller company management teams to exit via trade sales. Reduced exit opportunities have, in turn, dampened the enthusiasm of venture capitalists (VCs), according to the EP Vantage value analysis.
However, Jewell says the impact of consolidation in the sector isn’t quite so clear cut. ‘In theory, when a Johnson & Johnson merges with a Novira, that means one less corporate buyer. In practice, I’m not sure if there has been a real impact on the market,’ he adds.
Perhaps more fundamentally, not that many VCs have an appetite for medtech. ‘The number of medical device investors is relatively small because not many people have made money from this sector,’ says Dr Robert Tansley, Investment Director at Cambridge Innovation Capital, a company established to invest in technology businesses in and around the Cambridge cluster.
And, as he sees it, there are some very real barriers, not least that medtech products can take a long time to develop and take to market. ‘Medical device investors have to take a long view,’ adds Tansley. This is certainly not something that all investors are comfortable with.
But if the overall view of the investment environment suggests that early- stage medtech firms are facing a tough time raising finance, it’s important to remember that this is a hugely diverse sector. And as Dr Tansley stresses, some sectors of the industry are more attractive to investors than others. ‘There is no funding gap in genome therapeutics,’ he says. ‘You can raise money in that segment at just about every stage. And some sectors are very fashionable. For instance, if you look at genomics, Google Ventures has named that as a priority.’
More broadly, medical device investors are aware that some technologies have the potential to revolutionise the healthcare market. ‘Companies operating in the medtech space are attracting increasing attention from investors, particularly here in the UK,’ says Kohli. ‘Just as the digital revolution transformed the traditional retail and banking sectors, so too can we expect technology to transform how we view, experience and invest in healthcare.’
As Kohli sees it, the interest in medtech is particularly acute when businesses have the potential to apply cutting-edge science and technology to big, big problems. He cites one of his own investments as an example. ‘When I invested in the Tej Kohli Cornea Institute, I did so based on two core facets: firstly, that there was an unbelievable problem affecting more than 285 million people in the world – blindness; and secondly, that there were technological breakthroughs taking place in the field of curing certain types of blindness,’ he explains.
Added to that was the fact that ‘no-one else’ was investing in the technologies in question. ‘For me, this is the holy trinity,’ Kohli adds. ‘An investment grounded in innovative technology, with vast social impact implications and exponential growth opportunities.’
‘For me, this is the holy trinity. An investment grounded in innovative technology, with vast social impact implications and exponential growth opportunities.’
Dr Tansley has similar criteria. ‘What we’re looking for is something that is disruptive, IP-rich and with growth potential,’ he states. A case in point is Inivata, which recently raised £31 million from a syndicate of investors led by Cambridge Innovation Capital. A spinout from Cancer Research’s Rosenfeld Lab, the company uses circulating tumour DNA technology to improve the diagnosis of cancers. On the trade-sale side, Jewell says buyers are often agnostic in terms of technologies. ‘What they are looking for is growth potential,’ he explains.
As with any equity investor, Dr Tansley sees the management team as all important, but in addition to the sales, marketing, operations management and financial skills that equity investors tend to look for in just about every sector, he points out an area of expertise specific to medtech – namely the ability to navigate a way through the regulatory issues erected by individual jurisdictions. ‘Regulation in itself is not necessarily a barrier to investment,’ he says. ‘But we are looking for management teams who understand how to address regulatory issues – not just in their home countries but globally.’
Jewell agrees that the ability to bring products to market is key, both in terms of dealing with regulations and the procurement processes of healthcare bodies like the NHS. He adds that this is often a driver when small medtech businesses decide to pursue a trade sale, simply because corporates have the resources to market products internationally.
Medtech is attractive to investors, but with timelines to market longer than some VCs are comfortable with, the likelihood is that businesses with strong, defensible IP addressing a major problem are going to be best placed to raise investment in the current climate.
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