Pulse of the industry: medical technology report 2013

Financing trends: mind the gap

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US and European medical technology companies raised a combined US$29.5 billion during the 12-month period ending 30 June 2013, a 1.3% increase over the prior year — which was itself a record high. Follow-on and other financing, rather than debt, drove this increase. In fact, this was the only investment category that increased during the year, growing by 311% to reach US$4 billion.

While total debt investment was slightly down in 2012-13, the overall story around the industry’s funding has remained largely unchanged in recent years. Debt has continued to constitute the vast majority of the industry’s total funding, driven largely by a handful of commercial leaders who have taken advantage of historically low interest rates.

At the other end of the spectrum, financing options for smaller, emerging companies have slowly eroded. Venture capital investment was down 21% in 2012-13 to its lowest level in more than a decade, while the total value of IPOs was cut in half from the previous year and was down more than 80% from pre-crisis levels. The venture capital that is flowing into medtech is increasingly skewed toward later rounds.

Mind the gap
The picture that emerges from these trends is a growing funding gap between the huge sums being raised by large medtech commercial leaders (largely in the form of debt) and the dwindling options for early-stage companies. In addition, more than 70% of the proceeds from debt financings have gone toward refinancing existing debt or restructuring balance sheets, rather than for growth purposes, such as company acquisitions or investing in early-stage companies.

A combination of higher risk and lower reward has resulted in a real change in the number of investors and their appetite to invest in medical technology.

Noah Knauf
Principal, Healthcare
Warburg Pincus

This, in turn, raises the question of another gap — a decline in innovation as the amount of capital going to fund medtech R&D declines.

Innovation capital continues to decline in the US and Europe
EY - Innovation capital continues to decline in the US and Europe

Faced with regulatory and pricing pressures, an anemic IPO market and selective corporate buyers, VCs will likely remain cautious and favor funding later-stage companies with clearer paths to exits. In this environment, early-stage companies will be better positioned to raise venture capital if they have a truly novel technology and can clearly demonstrate the clinical and economic benefits of their products.

There were 12 medtech IPOs in the US and Europe during the year ending June 2013. This was up from 11 the year before, but total proceeds were down 52% to US$202 million, the lowest total seen since the 2008-09 recession.

Only three of the year’s 12 IPOs were by therapeutic device companies. This says much about the regulatory and reimbursement challenges faced by this segment.

Debt has continued to constitute the vast majority of the industry's total funding.

Innovation capital continues to decline in the US and Europe

EY -Innovation capital continues to decline in the US and Europe

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