Venture capitalists are finding the medical device industry less and less lucrative, according to a recent MoneyTree Report, published by PricewaterhouseCoopers LLP (PwC) in conjunction with the National Venture Capital Association (NVCA).
Report findings show venture capital (VC) for the Life Sciences sector, which includes biotechnolgy and the medical device industry, dipped 30 percent in VC funding dollars and 22 percent in deals for Q2 compared to the same quarter last year.
According to the report, venture capitalists invested a total of $1.4 billion during the second quarter, the lowest level since Q4 of 2010. Deal volume also saw a decline, dropping 6 percent from Q1 to 174 deals. When compared to a year ago, funds invested into life sciences companies during Q2 of 2012 decreased 39 percent while the number of deals declined 22 percent from the $2.3 billion invested in 223 deals during the second quarter of 2011.
Officials say reasons behind the steady decline in VC funding proves complex and is multifaceted.
For one, the recent Supreme Court decision to uphold the Affordable Care Act will require medical device manufacturers to pay a 2.3 percent excise tax on “taxable medical device” sales – a tax that may make the medical device industry considerably less appealing to venture capitalists.
According to an article by the Wall Street Journal, the tax is expected to raise $20 billion by 2019.
“Given the regulatory challenges currently impacting the life sciences industry and the amount of capital required to fund these companies, it’s no surprise that investments in this industry have declined for the fourth consecutive quarter,” said Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US, in a PwC press release.
Lefteroff continued, “If funding levels in the second half of the year remain consistent with the first half of the year, VC investing in 2012 will fall short of the nearly $30 billion invested in 2011 but will exceed the $23 billion invested in 2010.
For all sectors, venture capitalists invested $7 billion in 898 deals in Q2 2012, a decrease of 12 percent in dollars invested and a 15 percent decline in deals, compared to $8 billion going into 1,057 deals in the second quarter of 2011. The Life Sciences share of total VC dollars invested declined to 20 percent in Q2, a 9 percent decrease from Q1 2012 to the lowest level since the third quarter of 2002.
During the second quarter, biotechnology and medical devices each accounted for 10 percent of total funding. In comparison, during the first quarter of 2012, Biotechnology captured 14 percent of investment in the sector and medical devices accounted for 12 percent of the total.
Medical device investments remained flat in dollars quarter-over-quarter while the number of deals increased 11 percent during the same time period. With $700 million going into 84 deals in Q2, the medical device industry ranked behind software and industrial/energy in dollars invested.
During the second quarter of 2012, 27 life sciences companies received VC funding for the first time, capturing $130 million. This represents a decrease of 46 percent in the number of companies and a 61 percent decrease in dollars invested compared to the second quarter of 2011. First-time deals in the life sciences sector fell to an average of $4.8 million in the second quarter of 2012 compared with an average deal size of $6.7 million in the second quarter of 2011.
Funding by Sub-segment
Two of the seven biotechnology sub-segments exhibited growth in the second quarter of 2012 compared to the second quarter of 2011. The biosensors and biotech equipment sub-segments both saw increases in funding, rising to $6 million and $53 million, respectively. Funding for all other sub-segments decreased during the second quarter. The human biotechnology sub-segment captured the largest share in the second quarter with $496 million going into 56 deals but declined year-over-year in both dollars and deals.
Within the medical device industry, only the medical/health products sub-segment saw an increase in Q2 2012 from Q2 2011, increasing 111 percent in dollars to $137 million. The medical diagnostics and medical therapeutics sub-segments both experienced declines during the same time period. However, the medical therapeutics category accounted for 73 percent of the dollars and 62 percent of deals in the second quarter with $508 million going into 52 deals.
"It may continue to be challenging for life sciences companies to raise funds until the regulatory environment becomes transparent for biotech and medtech companies trying to move new products into the market," noted Lefteroff. "However, if M&A activity picks up during the second half of this year, investors could see a clearer path to returns, which potentially could attract more money to be invested in this sector."
Investments by Region
The top five metropolitan regions receiving life sciences VC funding during Q2 2012 were San Francisco Bay ($470 million), Boston ($186 million), San Diego Metro ($173 million), Seattle ($78 million) and NY Metro ($67 million). Four out of the five regions witnessed dips in investing in Q2 when compared to Q2 2011. Seattle was the only region experiencing an increase in this timeframe, jumping 292 percent to $78 million.