The funding environment for medical device startups isn’t a pretty scene, but there is a ray of sunshine through the gloom: lack of FDA approval is no longer a deal-breaker for a big exit.
In 2013 a few medtech companies managed "big exit M&A" deals (those worth $50 million or more) without having reached the FDA’s brass ring, according to a new report from Silicon Valley Bank.
More than 70% of all medtech big exits since 2009 have been FDA-approved, but the most active buyers in the space aren’t such sticklers for the regulatory nod.
"The common perception is that companies need to have FDA-approved product and be at the commercialization stage before they can attract an acquirer," according to the report. "Since 2009, the top 3 device acquirers (Boston Scientific (NYSE:BSX), Medtronic (NYSE:MDT) and C.R. Bard (NYSE:BCR)) have acquired FDA-approved companies nearly 50% of the time. The rest of their transactions were split between CE Mark (32%) and development-stage (21%)."
Cardiovascular companies were among the most likely to land a major deal without FDA approval last. Since 2009 only 2 of the 11 big exits in the cardiovascular space had FDA approval, 7 had CE Mark and 2 were development-stage. Vascular and imaging/diagnostic companies were mostly acquired at the FDA-approved/commercial stage, but SVB warned that its sample size was small.
There were fewer total big medtech exits last year as IPOs gained popularity, but the M&A deals were bigger than in previous years. In 2013 device makers closed 14 big M&A deals at an average value of $231 million in up-front cash and milestones. There were 4 big IPOs in 2013, compared with 1 in 2012, but that scene remains a tough one for device companies.
"The IPO market remains difficult to navigate for device as a successful IPO requires substantial revenues and profitability in sight," according to the report. "That leaves M&A as essentially the only alternative for liquidity."
That being said, SVB didn’t forecast a major surge in medtech M&A exits this year. Deal values are expected to remain about the same and SVB projected that there will be at least 14 deals by the end of the year.
General healthcare VC last year rebounded from 2010’s lows, but medical device startups are still facing a "funding drought" that "threatens company creation," according to the report. Device makers account for a dwindling share of the overall VC investment in the U.S., early-stage funding is still scarce and acquirers are still focusing on later-stage companies.
Corporate funders also backed off in 2013, with only Boston Scientific making more than a couple of investments in new companies, according to the report.
"It is difficult to attract capital to early-stage device opportunities when the exit is likely further away and development and regulatory risks are typically greater than in FDA-approved, later-stage companies," according to the report. "Big exits in device are concentrated around FDA-approved, commercial-stage companies. As a result, there is less capital available for new startup companies."
"We believe this reluctance of venture and corporate venture to support early- stage device investment is shortsighted and will impede innovation."
Healthcare companies in general delivered major returns to private venture backers last year, reaching highs not seen since SVB started tracking in 2005, according to the report. IPOs are projected to slow down but M&A activity will rise to take its place, according to SVB managing director and report author Jonathan Norris.
"We predict healthy access to capital in 2014 and into 2015," Norris said in prepared remarks. "While IPO activity is cooling in these sectors, we expect to see an increase in big exit M&A activity in the 2nd half of this year."
