Medical Device Investing 2010 and Beyond: Time To Challenge the Conventional Wisdom

Article preview from Start Up- December 1, 2010

A new analysis by Aisling Capital and Silicon Valley Bank questions the assumption that bets in medtech companies pay off more quickly and surely than biopharma investments. However, when medical device companies win, they win big.

Medical Device Investing 2010 and Beyond: Time To Challenge the Conventional Wisdom

Article preview from Start Up- December 1, 2010

A new analysis questions the assumption that bets in medtech companies pay off more quickly and surely than biopharma investments. However, when medical device companies win, they win big.

Historically, investing in medical device companies offered the benefits of lower capital intensity and the potential for a simplified path to market through a 510(k) market clearance.

These benefits, as well as challenges in the biopharmaceutical sector, led some VC investors to increase their interest level in medical device investing in the mid-2000s.

Now that the dust is settling, an analysis finds that relative to biopharmaceutical investments, medical device companies are more likely to have a binary outcome, require more time to exit, and are consuming an increasing proportion of capital in later rounds of financing.

These trends are evident even before accounting for the impact of impending changes to the 510(k) regulatory pathway, and they should be considered when determining medical device allocations for venture capital portfolios.

For at least three years, venture capitalists have been frustrated by the external challenges facing investors in private biopharmaceutical companies. A more stringent and unpredictable regulatory environment has increased the cost of achieving product approvals. Late-stage drug development in certain therapeutic areas, such as diabetes, has become so expensive that some investors are avoiding them entirely. Generic pharmaceuticals are posing a threat not just to the specific drugs they are replacing, but also to new drugs that may offer only incremental improvements. At the same time, and well before the collapse of Bear Stearns and Lehman Brothers, the nature of the biotech IPO has changed entirely. Gone are the days of investing $50 million to bring a compound to the clinic, followed by an IPO with a $200 million pre-money valuation. In this environment, what biotech venture capitalist wouldn't lift up his or her head and look for greener grass?

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