Medtech Venture Capital: The View From Europe

Article preview from Start-Up - May 1, 2011

Medical device companies have always faced technological, regulatory, reimbursement and market risk, and a new risk has been recently added to this existing set of challenges: financing risk. Longer product development cycles mean sustained funding requirements, at a time when venture funds are less numerous and smaller, and syndicates have become difficult to assemble.

Medtech Venture Capital: The View From Europe

Article preview from Start-Up - May 1, 2011

Where device investments once hedged biotech portfolios, because of the relatively short product development cycles relative to drugs, now regulatory and reimbursement risk mean that it can take eight to 10 years for devices to get to the market. Indeed, the FDA process is a major risk factor for medical device investors, not only in terms of uncertainties surrounding 510(k) reform (the regulatory pathway to approval for 90% of devices), but also because of increasing demands around clinical trials that are difficult for small companies to meet.

Regulatory risk is often mentioned as one of the biggest challenges facing companies and their investors today. Many companies in the middle of development have been asked by the FDA to conduct new or longer trials for which they can't gain funding support, stopping them dead in their tracks. This was the case for drug-eluting stent company Xtent Inc., obesity device developer Satiety Inc., and interventional pulmonology company Emphasys Medical Inc. All have gone out of business within the past two years.

Medical device companies have always faced technological, regulatory, reimbursement and market risk, so these risks are not new, they're simply exaggerated in this financing environment. What's more, a new risk has been recently added to this existing set of challenges: financing risk. Longer product development cycles mean sustained funding requirements, at a time when venture funds are less numerous and smaller, and syndicates have become difficult to assemble. VCs thus have become very selective about which early-stage companies they think can reliably get to a meaningful value inflection point: a clinical proof-of-concept, a product approval, an exit, or a certain level of sales in the target market. Fewer early stage companies will get funded, and for those companies in the doldrums of a trial that is taking longer than anticipated, or with an edict from the FDA to conduct a new trial, there are very few funding options.

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