Against All Odds: The Numbers Are In and Medtech Financing Holds its Own

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A 2020 half-year report by Silicon Valley Bank shows that medtech private financings have been surprisingly stable during the pandemic, with interest in late-stage companies compensating for a drop in early-stage investing.

The first results for H1 2020, which includes a full quarter of the pandemic era, are in for medtech venture capital activity.

And the situation is better than you might think. While not as robust as the red-hot record-setting biopharma and diagnostics and tools sectors, medtech private financing remains attractive, according to Jonathan Norris, a managing director at Silicon Valley Bank’s (SVB) healthcare practice, which on July 22 is set to publish a mid-year 2020 report on healthcare investment and exits. Details on data aren’t available until that date, but Norris has provided some highlights in a discussion with MedTech Strategist.

Uncertainty about elective surgery volumes, patient visits to providers, and an economic downturn with rising unemployment, all of which represent potential threats to exit strategies, do not seem to be hurdles for investors.

SVB’s latest financing report shows that while overall the venture ecosystem across industries slowed substantially this year, it remains robust in healthcare. The pandemic “did not affect the pace or dollars placed into healthcare companies at all,” says Norris, noting that biopharma and diagnostics and tools companies are benefiting most, but healthtech investment is also up and medtech investment is ever-so-slightly down to stable.

That said, the mix of investment within medtech is shifting, as Series A financings—both volume and dollars—declined slightly, hobbled by uncertainty over how to value assets if COVID-19 affects length of time likely needed to demonstrate clinical efficacy and get to market.

Compensating for those worries, however, are a growing number of attractive late-stage opportunities. Solid companies that would have been well positioned for IPOs under normal circumstances, throttled back on revenue projections as COVID-19 hit. Unlike biopharma, revenue growth is key to medtech IPO success, so near-term uncertainty around commercial performance, an inevitable byproduct of the pandemic, put a damper on plans for exiting via public markets.

Instead, these companies are staying private longer, and successfully raising money, sometimes in significant amounts, from their existing investors and new VCs, Norris continues.

This demonstrates that “the folks at the table making these investments believe when they get these companies through this revenue disruption, the IPO market is still there,” he says. Adding fuel to late-stage VC optimism is better-than expected performance of public medical device companies. The revenue drop-off as a result of cutbacks in elective procedures seems to be milder than corporate leaders anticipated. Top executives of public medical device companies have said as much at recent Wall Street investor events, such as the Goldman Sachs Healthcare meeting in early June. Whether this optimism can continue as virus infection rates rise in the US remains to be seen. (See “In Investor Briefings, Ortho CEOs See Electives Coming Back Strong,” MedTech Strategist, June 22, 2020.)

And while the IPO market is hobbled, it is not dead. At least three of the four largest medtech IPOs—all headquartered in Asia—in the second quarter are performing well in the aftermarket, Norris says—Peijia Medical Ltd, Shanghai Sanyou Medical Ltd., and Ianari Medical had respectable debuts. A fourth company, Boston-based Lyra Therapeutics Inc., which has a novel ENT drug-delivery device is trading down from its IPO share price of $16.

As an example, founded in 2012, Peijia raised $302 million (HK$2.343 billion) on the Hong Kong Stock Exchange in May, Hong Kong’s second largest IPO for the year. Its stock rose 67.97% in first-day trading and it has been doing well in the aftermarket. The company makes neurovascular and cardiac interventional devices for the Chinese market. Shanghai Sanyou Medical, which makes orthopedic implants, also had a successful IPO in March.

Ianari Medical, based in Irvine, CA, went public on May 27 at $19 a share, raising $179.2 million; as of July 14, the stock was trading at $51. The company makes thrombectomy devices for venous clots.

M&A, the other exit option, is more of a wild card, with valuations lower and projections on activity for the full year difficult to make, Norris says. SVB projects that device activity will continue to be stable, possibly reaching 8-10 M&A exits for the full year.

It’s not yet clear what the pandemic means for medtech companies selling capital equipment. This could have implications for robotics, which had been a red-hot subsector until the pandemic.

That said, it’s not yet clear what the pandemic means for medtech companies selling capital equipment. This could have implications for robotics, which had been a red-hot subsector until the pandemic. While robotic systems tend to be sold via capex budgets, these companies have alternative financing possibilities.

On a positive note, although the pandemic did not hit the US fully until late in the first quarter, first and second quarter financing activities were on par. Valuations year to date have held steady to slightly down, as some late-stage companies got smaller step-ups than typical for 2019—albeit they still got step-ups, not down rounds—a sensible reaction given the uncertain economic climate. Active areas of interest include imaging and noninvasive monitoring, and some companies that have portfolios that are positioned to leverage the pandemic, enabling them to raise capital, Norris says.

Meanwhile, he notes, VC financing for diagnostic companies is reaching records in part because of the high-profile role of diagnostics in tackling COVID-19 and in part because of the excellent performance of pre-pandemic diagnostic IPOs, such as 10x Genomics. COVID-19 has highlighted the importance of rapid testing across the healthcare ecosystem and put a spotlight on diagnostics, Norris says. 

As for medtech investors, several we’ve interviewed say the pandemic has not changed their strategic priorities, although it has accelerated adoption of technology themes they were advocating.  Amzak Health managing partner Joyce Erony, speaking at Bioventure eLabs Entrepreneurship program in New York on July 9, noted that COVID-19 may have changed medtech commercial models to rely more heavily on data analytics and remote technologies than in the past, when physician-sales rep relationships were so important. 

Data Collective VC partner Armen Vidian says that COVID-19 has accelerated interest in his firm’s strategic priorities, which focus on opportunities that apply data science to making traditional healthcare innovations more accessible. In medtech, this means enabling a wider variety of caregivers to undertake what once were considered complex procedures to be used only by the highly trained providers. Its investment in the cardiac ultrasound company Caption Health is an example, as it makes the imaging procedure much simpler and easier to do at point of care by less highly trained healthcare workers.

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