Financial rebound in med-tech sector continues with strong VC interest and public markets outperforming

Financial rebound in med-tech sector continues with strong VC interest and public markets outperforming
by Karen Pihl-Carey
Analyst, BioWorld
Life Sciences Connect

Life Sciences Connect featured a two-part series on the current robust financial climate for biopharma last week, “Biopharma IPOs gone wild” and “European biotech on course for record year.” Today’s feature, drawn from BioWorld MedTech, the daily med-tech news service from Clarivate Analytics, looks at the device industry at mid-year.

The med-tech financial landscape is continuing an upturn after investments languished following the 2008 recession. While other health care sectors recovered sooner, companies that produce medical technologies resurged last year with a growing interest from investors in digital technologies that fit well with an outcome-based reimbursement model. Financings tracked by BioWorld MedTech indicate that 2018 is holding steady with the prior year. Public markets are outperforming other health care sectors, and series A investing is at a decade high.

When comparing the first half of 2017 with this year, two mega-financings skew the numbers: Erlangen, Germany-based Siemens Healthineers AG’s $5.2 billion IPO in March, and Franklin Lakes, N.J.-based Becton, Dickinson and Co.’s $4.5 billion registered direct offering in May 2017. With them, the first half of 2017 and 2018 show total money raised at $13.6 billion and $14.8 billion, respectively.

Once removed, however, the gap is smaller, with $9.63 billion raised so far in 2018 and $9.07 billion raised during the same time frame of 2017. With the exception of IPOs, which climbed 41 percent in 2018 compared with last year ($470 million vs. $279 million), other types of financings show similar amounts collected: follow-on offerings, $2.13 billion in 2017 vs. $2.24 billion in 2018; private placements, $2.3 billion vs. $2.5 billion, respectively; and venture capital (VC), about $4.4 billion, nearly half of the total, for each year.

Although the modest rise in 2018 of med-tech financings pales in comparison to the biopharmaceutical industry, which experienced a two-fold increase from the prior year, med tech is offering larger returns to its public investors.

Med tech is the best-performing sector in health care.”
– Glenn Novarro, RBC Capital Markets LLC

“Med tech is the best-performing sector in health care” year to date, wrote analyst Glenn Novarro of RBC Capital Markets LLC in a research note this week, with the XHE (S&P Health Care Equipment) and IHI (Medical Devices) indexes up 25 percent and 18 percent, respectively. The sector has outperformed life sciences and tools, providers and services, and managed care. While large-cap biotech is up 9 percent according to the Ishares Nasdaq Biotechnology Index Fund (IBB), “it lags med tech, owing to a lackluster 1Q18 earnings season, drug-pricing rhetoric and fewer pipeline catalysts.”

This year, the second quarter was the stronger of the two for all health care sectors, but med tech remained on top.

“In our view,” Novarro said, “investors are looking for stable end-markets and predictable pricing.”

 

Tax and reimbursement challenges

Challenges affecting the sector have included a 2.3 percent medical device tax on sales instituted as part of the Affordable Care Act (ACA), costing the industry up to $2 billion a year, until the tax was put on a two-year hiatus in 2016. The tax is now under a second suspension until 2020 and the subject of a repeal bill expected for a House vote this month. (See BioWorld MedTech, July 11, 2018.)

Michael Abrams, a managing partner of consulting firm Numerof & Associates, of St. Louis, said the tax burden was “minor in comparison to the industry’s robust fundamentals. Suspension of the tax probably made investment more attractive, but again, in the context of growth fundamentals, it was likely marginal.”

In a June 2018 study published in Research Policy, author Daeyong Lee, economics professor at Iowa State University, concluded that the excise tax negatively affected med-tech R&D investment by $34 million, as well as sales revenue, gross margins and earnings, while manufacturers significantly reduced operating costs to accommodate the tax and increased global market diversification to avoid it. He suggested broadening the tax base to lessen the burden on med tech.

“If the U.S. government needs to raise tax revenue to compensate for the increase in health care costs but wants to maintain R&D activities in the medical device industry, policy makers should consider imposing the excise tax on other industries as well, such as health insurance companies which also reaped the benefits from the increased demand for their products after the ACA health care reform,” Lee wrote.

Investors also are keeping a keen eye on the changing reimbursement model from fee-for-service to value-based outcomes, as well as the slow adoption of technologies that may offer better solutions long-term, but are initially more expensive. With consumers gaining a louder voice and more control over their own health care needs, however, some investors see an opportunity with digital devices due to their ability to measure outcomes.

The shift to value and the assumption of risk by provider organizations [has] and will continue to have significant impacts on med-tech investments.”
– Michael Abrams, Numerof & Associates

“The shift to value and the assumption of risk by provider organizations [has] and will continue to have significant impacts on med-tech investments,” Abrams told BioWorld MedTech. “Products with a meaningful story to tell in terms of quality improvement or cost savings will be that much more attractive to investors and the market, and undifferentiated ‘me-too’ products, or those without a data-based value narrative, will have a difficult time.”

 

VC interest driven by digital products

An analysis by the Deloitte Center for Health Solutions and the Advanced Medical Technology Association indicates that the total percentage of VC investment focused on med-tech companies had fallen from 13 percent in 1992 to 4 percent in 2016. Nevertheless, the number of digital health companies increased by more than 500 percent from 2011 to 2016. Deloitte’s Sonal Shah blogged that venture investment in med-tech grew significantly in 2017, with series A investments rising by 30 percent. The biggest driver: digitally enabled devices and diagnostics.

Digital products are attracting a lot of investor attention… but ultimately the data-based case to be made, and the differentiation story will make or break each one.”
– Michael Abrams, Numerof & Associates

“Digital products are attracting a lot of investor attention, based on their potential for improved outcomes and downstream savings, but ultimately the data-based case to be made, and the differentiation story will make or break each one,” Abrams said.

BioWorld MedTech data show series A rounds brought in $432 million in the first half of 2017 for med-tech companies vs. $441 million so far this year. Toronto-based Swift Medical Inc., which works on digital wound care management technologies, raised $11.6 million in March in a series A round. Last year, Boston-based Circulation Inc. and New York-based Maven Clinic Co., both of which are focused on digital platforms, raised more than $10 million each in series A financings.

But Abrams said investor enthusiasm for digital technologies may be ahead of market acceptance due to a “substantial cultural barrier and learning curve” and because “at-risk contracting in health care delivery still accounts for a small percentage of revenue. That said, we are on the cusp of accelerating change, and market acceptance is likely to increase rapidly going forward,” he added.

VC investment group Life Sciences Partners (LSP) launched last year a second fund targeting medical devices, diagnostics and digital health products, after a successful first fund launched in 2012. Health Economics Fund 2 has €280 million (US$328.5 million) in investment money, 2.5-times that of the €112 million (US$131.4 million) fund available six years ago. LSP cites Neuravi Ltd. as an example of a successful investor exit that led to the second fund.

Galway, Ireland-based Neuravi designed the Embotrap revascularization device, which retains clots that cause ischemic stroke, with a dual-layer stent-like structure, restoring blood flow to the brain. In July 2012, the company completed its $6.5 million series A round led by Fountain Healthcare Partners and Delta Partners. Three years later, LSP led its $21 million series B round, and in November 2016, Neuravi announced a €15 million (US$17.6 million) debt financing from IPF Partners. The company was acquired in 2017 by Johnson & Johnson’s Codman Neurosciences Srl unit for an undisclosed amount, although LSP describes the deal as one “delivering a superior return to the investors.” Half a year later, J&J divested Codman for $1.045 billion to Integra Lifesciences Holding Corp., which completed a $307.3 million follow-on offering earlier this year.

 

Strong interest in cardiovascular, orthopedics

LSP’s second fund led the $23.25 million February series B tranche of Simplify Medical Pty Ltd., of Sunnyvale, Calif., following a $21 million first tranche in July 2017. The company has Simplify Disc, a medical device for cervical degenerative disc disease.

The VC firm also participated in the $39 million series B round in April of Kirkland, Wash.-based Cardiac Dimensions Inc., which has the Carillon Mitral Countour System to treat functional mitral regurgitation in patients with heart failure.

Public investments echo VC interest in orthopedic and cardiovascular products. The end-markets “remain stable with regard to volumes and pricing,” Novarro said. Cardio is a focus for the year “as we see new product cycles driving fast growth in 2018” especially for Boston Scientific Corp. and Edwards Lifesciences Corp.

About 20 percent of VC investments tracked by BioWorld MedTech in 2018 are for companies focused on cardiovascular products.

Aside from Siemens Healthineers’ IPO and Integra’s follow-on, some of the largest med-tech financings this year include:

  • Menlo Park, Calif.-based Grail Inc.’s $300 million series C round;
  • Marlborough, Mass.-based Hologic Inc.’s $1 billion private placement of notes;
  • Amsterdam-based Wright Medical Group NV’s $675 million private placement of notes; and
  • Madison, Wis.-based Exact Sciences Corp’s $690 million public offering of notes.

 

 

 

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