Medical Device Link.

Originally Published MX July/August 2005

FINANCE

Medical technology executives still have some work ahead to heat up the interest of potential investors.

Barbara A. Wrigley

According to a national poll of leading medtech business executives and venture capitalists, the climate for medtech investing has definitely warmed up over the course of the past three years. And this year—with the steady decline of expectations for growth in pharmaceuticals continuing—expectations for growth in medical technology are solidly in the fields of medical devices and biotechnology.

Those were among the key results of the "2005 National Medtech Investing Survey" conducted this spring by the law firm of Oppenheimer Wolff & Donnelly LLP (Minneapolis) and MX magazine. This year's results mark the third appearance of this annual survey, which investigates investing trends in the medical technology marketplace. The trends that have become apparent over the course of three years indicate that medtech executives and investors remain optimistic about the opportunities for investing in medtech start-ups.

This year's survey was conducted during April, when a questionnaire was e-mailed to readers of MX magazine and to attendees of conferences sponsored by International Business Forum (IBF; Massapequa, NY). Results of the survey were presented in May at the IBF Medtech Investing Conference in Minneapolis.

The respondents to this year's survey included senior executives, venture capitalists, angel investors, and other professionals, all of whom work directly in or serve companies within the medtech industry. Those working directly for medical technology companies accounted for 84% of all respondents; the top three business areas listed were medical devices (69% of respondents), pharmaceuticals (12%), and biotechnology (3%). Nearly 75% of those responding came from an organization with sales revenues of $50 million or less.

Warming Trend

In this year's survey, more than two-thirds of respondents (68%) described the current climate for medical technology investing as 'warm,' an increase of 7% over 2004. On the other hand, the percentage of respondents who described the current climate as 'hot' was smaller this year (17%) than in 2004 (22%). The percentage of respondents describing the current investment climate as 'cold' continued to drop from the high recorded in the first year of the survey (48%); this year less than a fifth of respondents (15%) felt a continuing chill in the investment climate (see Table I).

In 2003 and 2004, the survey asked respondents to indicate the percentage of growth they expected in the areas of medical devices, biotechnology, and pharmaceuticals. This year's question was a whole lot simpler, asking respondents merely to indicate the single area in which they most expected to see growth. Although this year's results are therefore not exactly comparable to the results from the past two years, this year's respondents indicated solidly that they expect to see more growth in medical devices (52%) and biotechnology (35%) than in pharmaceuticals (5%). Over the three years of the survey, there has been a fairly steady drop in the percentage of respondents who expect to see growth in pharmaceuticals.

Risks and Opportunities

Figure 1. Greatest threats to investing in medical technology companies, according to respondents to the 2003-2005 Oppenheimer/MX surveys. (click to enlarge)

In 2003, more than half of all respondents indicated that economic concerns were the greatest threat to investors in medical technology companies. The following year, economic concerns were still a major threat, though other threats also began to rise. This year, respondents indicated that the greatest threat to medtech investment is government regulation (31%), followed by lack of venture capital interest (23%), and rising healthcare costs (18%). Economic concerns (16%) dropped to fourth place on the list of threats to medtech investors (see Figure 1).

Respondents have identified heart and vascular disease treatments as the best medtech investment opportunity every year that this survey has been conducted. And each year, cancer treatment has consistently followed heart and vascular disease treatments. This year, the two areas gathered positive responses from 41% and 15% of respondents, respectively. What is interesting to note in this year’s responses is that the category of other opportunities—including investment areas such as electrophysiology, forensic diagnostics, monitoring technologies, mobile computing, devices used to replace pharmaceuticals, in vitro diagnostics, stem-cell therapies, and neurological therapies, among others—combine to make up the third-largest area of investment opportunity (see Table II).

Each year, the survey has asked participants what geographic area they believe offers the greatest opportunity for emerging medical technology companies. Three areas have consistently been in the top tier: Minneapolis/St. Paul, Southern California, and Silicon Valley. This year, respondents ranked these three with 26%, 21%, and 22%, respectively. Notably, this is the first year of the survey in which Northern California’s Silicon Valley has ranked higher than Southern California. Responses in the 'other' category included both Texas and Florida-both strong medical device manufacturing states, but not areas that have previously been mentioned by respondents to this survey (see Table III).

Company Strategies

Among respondents who are owners of or executives at medical technology companies, financial strategies most likely to be considered in the coming year include seeking to be acquired (26%), closely followed by focusing on organic growth (25%). Interestingly, acquiring another product line or technology—which had been ranked in the top three strategies for the past two years—dropped significantly this year (see Table IV).

Among the investors responding to this year's survey, three-quarters (75%) have invested less than $5 million in medical technology companies. Over the past three years, however, there has been a slight increase in the percentage of investors who are investing more than $50 million (see Table V).

Figure 2. Investment in medtech companies as a percentage of total funds under management, according to investor respondents to the 2003-2005 Oppenheimer/MX surveys. (click to enlarge)

According to 43% of the investor respondents, the amounts they have invested in medical technology companies make up less than 25% of their total investment dollars (see Figure 2). But as the three-year results of the survey illustrate, such patterns vary wildly from year to year, with investors committing greater or lesser percentages of their funds to medical technology companies as justified by the number of good opportunities they are able to identify.

With an overall investment climate that is merely warm, medical technology companies still have some work ahead to heat up the interest of potential investors. But the results of this year’s survey confirm that investor interest in medical technology companies is continuing to grow. And with more capital available for investment, medtech executives have reasonable hope of capturing investment dollars that might otherwise go into other industries.

Barbara A. Wrigley, Esq., is a partner and cochair of the medical technology industry group at the law firm of Oppenheimer Wolff & Donnelly LLP (Minneapolis).

Copyright ©2005 MX