For Device VCs, the Eyes, Heart and Stomach Have It

Full article reprinted from Start Up - January/February 2010

Anyone with access to the right data can tell you which technologies and medical specialties are commanding the highest valuations from device VCs. But what would it be worth to know which companies will be commanding the top prices in the next year? A survey of more than a dozen VCs--who participated with a promise of anonymity--with money to invest draws a very clear picture about what investment opportunities they might find worth fighting over and the areas they'll ignore. Read more...

For Device VCs, the Eyes, Heart and Stomach Have It

Full article reprinted from Start Up - January/February 2010

Anyone with access to the right data can tell you which technologies and medical specialties are commanding the highest valuations from venture capital investors. But what would it be worth to know which companies will be commanding the top prices in the next year? A survey of more than a dozen VCs—who participated with a promise of anonymity—with money to invest draws a very clear picture about what investment opportunities they might find worth fighting over and the areas they'll ignore.

Among areas they favor are ophthalmology, atrial fibrillation, endogastric devices, neurostimulation, heart valves, and molecular diagnostics. In some cases, like atrial fibrillation and heart valves, venture investors were impressed both by the potential market and the actual returns realized from high-profile acquisitions in each space. Last year, Medtronic Inc. acquired atrial fibrillation company Ablation Frontiers Inc. (now Medtronic Ablation Frontiers LLC) for $225 million plus earn-outs. That came just a few weeks before Medtronic announced its $700 million acquisition of aortic valve maker CoreValve Inc. (now Medtronic CoreValve LLC). Neither company had received PMAs from the FDA, though both had begun selling their devices in Europe. Market size, usually cited as $6 billion currently for all therapy areas taken together, was the main lure for molecular diagnostics, as well.

The ophthalmic industry drew the most interest by far, with every investor expressing interest. They were drawn by the large market and small customer base—ophthalmologists—to target with a sales force. Likewise, the acquisition of Visiogen Inc. boosted interest. Now a division of Abbott Medical Optics Inc., Visiogen hadn't acquired its PMA when Abbott Laboratories Inc. swooped in last September with a $400 million bid to buy the company.

Investors also still see great potential in neurostimulation, despite the field's generally slow pace of development and the high-profile failure of Northstar Neuroscience Inc. But companies like Neuronetics Inc. and NeuroPace Inc. are progressing either commercially or clinically. ( See "Neuronetics' FDA Nod Opens Doors to New CNS Market," START-UP , November 2008.)

There were strong signs of interest in orthopedics and ear, nose and throat (ENT) ventures as well. Part of the allure might be the potential to create a market-moving device that only requires a 510(k). Clearly the acquisitions of Acclarent Inc. and St. Francis Medical Technologies Inc. show that 510(k) products can occasionally garner huge payments. ( See "Ethicon Buys Acclarent: Can This Exit Open Up ENT?" IN VIVO, February 2009. The companies were acquired for $785 million and $725 million by Johnson & Johnson/Ethicon Inc. and Kyphon Inc., respectively—and St. Francis generated a particularly robust return, off of only $27 million invested. Investors have serious reservations about both areas, but the VCs in these two companies did so well that they're willing to overlook their concerns if the deal is right.

--Tom Salemi

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Companies mentioned in this article:

Abbott Laboratories Inc.

Abbott Medical Optics Inc.

Visiogen Inc.

Johnson & Johnson

Ethicon Inc.

Acclarent Inc.

Medtronic Inc.

Kyphon Inc.

Medtronic Ablation Frontiers LLC

Medtronic CoreValve LLC

NeuroPace Inc.

Neuronetics Inc.

About Start Up

No publication reviews leading edge companies and technology better than START-UP. Each issue of START-UP profiles the most important new product companies, identifies the hottest technology areas, reviews funds flowing into private companies and investment trends, and reports on university tech transfer licensing. Industries covered: pharmaceuticals, biotechnology, medical equipment & devices, and in vitro diagnostics.