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Pulse of the industry: medical technology report 2012 - Financing - EY - Global

Pulse of the industry: medical technology report 2012 – Industry performance


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Capital raised in the US and Europe by year

Jul 2005-
Jun 2006
Jul 2006-
Jun 2007
Jul 2007-
Jun 2008
Jul 2008-
Jun 2009
Jul 2009-
Jun 2010
Jul 2010-
Jun 2011
Jul 2011-
Jun 2012
Venture $3,739 $5,408 $5,216 $4,691 $4,895 $4,031 $4,344
IPO $1,192 $1,113 $711 $17 $345 $798 $426
Follow-on and other $3,672 $2,365 $2,081 $1,833 $2,572 $2,317 $825
Debt $10,215 $4,183 $3,876 $6,677 $13,482 $14,677 $21,853
Total $18,818 $13,069 $11,884 $13,218 $21,293 $21,824 $27,453

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Medtrack.
Numbers may appear to be inconsistent because of rounding. PIPEs and convertible debt offerings included in “follow-on and other.”

For the 12-month period ending June 2012, US and European public medtech companies raised a remarkable US$27.4 billion, an increase of 26% over the prior twelve month period. While this total represents the largest amount raised in at least the last seven years, the increase was driven not by a fundamental shift in investor sentiment toward medtech, but by a low interest rate environment that fueled a huge increase in debt. Indeed, 80% of all capital raised in 2011–12 was in the form of debt. Funding other than debt actually declined by 22% in 2011–12 relative to the prior year.

As in the last three years, this debt financing went to a few large “commercial leaders” — nine companies raised in excess of US$1 billion each — which used this capital to fund general operations, restructure balance sheets and/or make acquisitions. Meanwhile, many smaller firms struggled to obtain funds.

Indeed, the division between established and emerging companies has never been greater. Ongoing regulatory and pricing pressures, an anemic IPO market and increasingly selective buyers have made venture capitalists — the lifeblood of emerging medtech firms — extremely cautious. Even though the overall level of venture financing has remained relatively steady since the financial crisis, these challenges have squeezed VCs’ returns on investment and driven them to invest in later rounds that offer the promise of quicker, more predictable exits. While a relatively small cohort of companies — those with novel technologies or proven management, for instance — might still attract early-round financing, many emerging firms are finding it more difficult to finance their operations.

In an environment of increasing focus on health outcomes and health care costs, companies can no longer expect to receive funding, regulatory approval or reimbursement for technologies that deliver marginal improvements on existing technologies. Companies will need to be more selective in their development efforts and focus on demonstrating their technology’s ability to improve health outcomes.

Innovation capital raised in the US and Europe by year

Source: EY, BMO Capital Markets, Dow Jones VentureSource and Medtrack.
Innovation capital is the amount raised by companies with revenues of less than US$1 billion.

While total fund-raising has soared in recent months, the increase has largely gone to a few mature companies that issued significant amounts of debt. On the other hand, fund-raising by companies with revenues below US$1 billion — innovation capital — has been consistently lower since the start of the global financial crisis. In the 12-month period ending June 2012, innovation capital fell even further, to US$8.0 billion. While this figure is a 4% increase from the average for the previous three years (US$7.7 billion), it represents a decline of 22% from levels seen in the three years (July 2005–July 2008) prior to the financial crisis (US$10.2 billion). Commercial leaders raised US$19.5 billion in 2011–12, or 71% of the total.

Venture investment by round

Source: EY, Dow Jones VentureSource and Medtrack.

Despite a slight increase in the share of venture funding going into early rounds in 2011–12 versus the year before, more than 70% was still being invested in later rounds. As discussed in previous issues of Pulse of the industry, the venture investment model is under increased strain from regulatory and reimbursement pressures, challenging exits and more. With many VCs now carrying portfolio companies longer than they had initially expected, their returns have become increasingly squeezed. As a result, venture investors are favoring “de-risked” later-stage companies, which has unfortunately increased funding challenges for emerging, pre-commercial medtech companies.

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