FINANCE

• Capital available to fund biotech and medtech ventures.
• Roles of angel, VC, and public markets in supporting biotech and medtech companies.
• What start-up or emerging companies should know when seeking funding partners.
• What sectors are hot today.
• The role of corporate partners in funding private companies.

“Pension plans are flush with cash. Corporations are flush with cash. The oil countries are flush with cash. University endowments and private foundations have performed well and are continuing to grow. And hedge funds and companies providing venture debt are active in the healthcare arena,” he says.

“So there is tremendous interest from institutional investors to invest in private equity in general, including both buyout funds and venture capital funds. Investment in very large buyout funds may level off a little bit over the next couple of years, but I doubt that enthusiasm for venture capital will wane very much.

“My perception is that the returns on investments in venture capital partnerships funding life sciences companies look good, relative to other asset classes, over the next 5 to 10 years,” Dotzler adds. “So I think money will continue to flow into these venture capital partnerships—especially those that demonstrate they can earn a good rate of return.”

Topping the List

Venture capital partnerships investing in medical devices and biotech firms have risen to the top of investors’ lists because of the large number of liquidity events that have occurred in the healthcare sector comprised of companies that design and develop medical products, says Dotzler. “A number of biotech and medtech companies have launched initial public offerings (IPOs) over the past two years, and a significant number of venture-backed biotech and medtech companies have also been acquired.

“These liquidity events return capital to the venture capitalists, who pass that capital back to their institutional investors. Capital in excess of amounts invested flowing back to its source increases the resources available to the whole system.”

When acquisitions and IPOs are providing venture capital investors with a good return on their investment, says Dotzler, that trend stimulates further investment—both in the same sector and in other sectors.

“Existing segments are getting bigger, and thereby creating opportunities for specialization,” he says. “For example, as the worldwide stent market has grown to $6 billion, some relatively large, new subsegments have surfaced. Because the stent market in aggregate has become so big, it can support investments in companies that are exploring new technologies to treat lesions in specific locations, such as distal arteries and bifurcations.

The nature of the acquiring companies in the life sciences has changed dramatically, says Dotzler. “Historically, a group of large corporations have made a lot of acquisitions—companies like Abbott, Boston Scientific, GE, Guidant, Johnson & Johnson, and Medtronic. But if you look at medtech acquisitions over the past several years, starting in about 2004, the number of acquisitions done by these larger companies has diminished significantly.

“Instead, a new group of companies have gone public and have grown large enough so that they are now in the acquisition game. Companies in this group include Angiotech, Arthrocare, Cytyc, ev3 (which has just entered into a merger agreement with FoxHollow Technologies), Hologic Integra, Inverness, Kyphon, and St. Jude Medical. And there are also some international acquirers coming to the fore, such as Smith & Nephew and Terumo.

When companies reach a certain size, and they enjoy a high P/E ratio, it behooves them to acquire growth platforms, says Dotzler. “The bigger a company gets, the more likely it is that much of its R&D effort is being devoted toward line extensions and maintenance of existing platform technologies. Consequently, when these companies get to a certain size, they have to begin looking elsewhere if they are to achieve significant growth.

“One very productive strategy for these larger companies is to acquire emerging companies that are developing products to go after markets that have the potential to be very large.

“So the emerging company-acquisition cycle is endemic, certainly in the medtech sector and in the biopharma sector too,” says Dotzler. “Acquisitions will continue to take place well into the future. I don’t see any end to it.”

However, Dotzler believes that the amount of money flowing into venture capital partnerships that fund both biotech and medical devices will stabilize. “I don’t think it can continue to go up forever, and I’m not suggesting that it will,” he says.

“Over time, institutional investors will aggressively pursue firms that are doing well and earning high rates of return. And partnerships that don’t show good returns will disappear.”

Hot Investment Potential

Dotzler believes that investment opportunities are also emerging in a number of areas that haven’t been especially productive in the past.

“Pulmonology is one of those areas. There are a number of pulmonary diseases that affect very large populations and are currently not treated well, including asthma, bronchitis, emphysema, idiopathic pulmonary fibrosis, and lung cancer. So there is interest in a specialty such as this where there hasn’t been much innovation in the past 10 or 15 years. And several companies have been funded to develop devices to treat pulmonary diseases.

“Diabetes has always been a big area, and it remains a growing area. And it involves both devices and drugs, so that’s an area of opportunity worth noting.

“Also, more ophthalmology companies have been funded recently because of advances in technologies that can address eye diseases for which there have not been good therapeutic options for patients. A lot of money has been made by companies in ophthalmology over the past 5 or 10 years, and there are large potential acquirers.

“Aesthetics is also a field with potential. Because of the aging of populations worldwide, there is a great deal of interest in treatments that remove or attenuate the scars of aging.

“Obviously, the two largest markets continue to be cardiovascular and orthopedics, and a tremendous amount of product development is still occurring in both of those areas,” says Dotzler. “Now these markets are dividing into segments—just like the stent area is dividing into new subsegments. In orthopedics, the spine is probably the hottest area. And new companies are also working on ways to repair cartilage defects to obviate the need for joint replacement.”

Every organ system presents problems that are not being adequately addressed, says Dotzler. “In the brain, for example, there are many diseases, including epilepsy, Alzheimer’s disease, Parkinson’s disease, and cancer, for which better treatment options are needed.

“From a pure technology perspective, research and development is being pursued in such areas as the drug-device interface (e.g., drug-eluting stents and spine implants that deliver growth factors), neuro- and muscular stimulation, novel biomaterials, implantable sensors, and many others.

“I like to see entrepreneurs attempt to develop products to treat diseases that have not yet been pursued by others—the so-called ‘white spaces,’” says Dotzler. “For these pioneers, the technological challenges are often greater, but the lack of competition can be exhilarating and very rewarding.”