Medical devices, once the poor stepsister to pharmaceuticals, are beginning to appeal to more investors who are warming to the value of lower-risk investments.
That was the message from a panel discussion at the 10th Annual 2004 Venture Capital & Private Equity Conference, held at Harvard Business School on February 7.
Moderator David Cassak, managing partner of Windhover Information and editor of In Vivo: The Business & Medicine Report, asked panelists why they thought it took so long for devices to catch on with private equity investors.
"Anecdotally there seems to be a lot of interest these days in the medical device sector, particularly in the life science sector, that for years was biased toward biotechnology," he said. Until recently, "biotechs have gotten the lion's share of the interest, the lion's share of the valuations, the lion's share of the glamour of life science investing…There's a lot of biotech and biopharmaceutical investors calling us up today saying, 'Talk to us about device investing. We understand the returns aren't that great but there's a lot of stuff we like.' "
"Biotech is sexy. You're selling stories. The public markets aren't buying a product; they're buying a hope and a dream," said Lee Wrubel, MD, general partner of Foundation Medical Partners.
"I think devices are seen as a little more pedestrian, and the exit multiples are rarely on the order of what you see in biotech when it runs hot," said Lee, whose three-year-old firm has a $60 million fund that invests in early-stage device companies.
Three Arch Partners, a fund with about $1 billion under management, understands the appeal of devices with about 70 percent of its assets invested in that market. Partner Dr. Richard Lin said the metrics of the business just appeal to different investing sensibilities.
"A good outcome for us is in the $200 million, $300 million exit, where in the biotech space they would just kind of shrug at that," he said. "On the flip side, we don't write off companies nearly as much."
Leslie Bottorff, general partner with ONSET Ventures, said device investments represent the lower-risk, lower-return portion of a venture portfolio, so it is sometimes difficult for them to capture the respect they deserve.
| Another appeal of devices is the far shorter time to market for most devices versus pharmaceuticals. |
"During the head of the days of the bubble, I was in there with all my IT partners and they'd snarl every time they had the thought of doing a medical deal, but they knew it was good for them to diversify," she said. "Effectively, it's a steady, solid portion of the portfolio, not nearly as risky as biotech or some of the IT stuff that depends on momentum.
"So I think that's why there's renewed interest, like 'Hey, maybe we need a component of our portfolio that is more low-beta, more predictable.'"
ONSET has $280 million under management with about a third of it invested in health care companies.
Time to profit
Another appeal of devices, Bottorff said, is the far shorter time to market for most devices versus the long regulatory ramp up for pharmaceuticals. "You can get a liquidity point at an earlier date than biotech certainly, so I think that's the draw."
Juliet Tammenoms Bakker, general partner with Pequot Ventures, said the situation for device investment specialists has changed significantly from the atmosphere of the late 1990s.
"Pre-bubble, a lot of the tech partners booted their health care partners, so you had fewer health care investment firms, and of those even fewer did devices only," she said. "So those of us who are device-only feel much in demand when companies are raising money or when limited [partners] have only a limited number of plays in the device space."
Cassak asked the panelists if they believed recent advances had dried up opportunities in cardiovascular disease, an area that has attracted a huge amount of investment.
Wrubel's firm is closely aligned with the Cleveland Clinic, the largest cardiovascular clinic in the world. He said while some major opportunities in cardiology are gone, many still remain.
"There are a whole host of cardiovascular areas that are huge unmet needs," he said. Further, cardiologists' propensities for being early adopters of new technology means they are eager for the next new technology and will serve as a market for it.
"You know, cardiologists, [if] you put it in their hands, they'll use it with six months of data," he said.
"The big guys, Medtronics, Guidant, they're all focused on this area so they're going to be looking for innovation," Lin added.
The hot zone
Cassak asked the panelists for other treatment areas where they saw the best opportunities.
"Anything related to diabetes" is hot right now, Bakker said. "Opthalmology is another one, and anything related to GI."
"There are much more difficult areas—gynecology's one of them, hearing's one of them, wound healing is one of them—that have difficulties because of their sectors," she added. "But they're interesting, and improvements are needed, so you have to keep looking at them.
Lin agreed with Bakker that ophthalmology is a rich arena. "You'll find that the doctors there are total cowboys. It's amazing what they will do with very little data," he said.
"Neuro-anything… is an area I think has tremendous potential," said Bottorff. "Technology is just now being pioneered for the neurologic system, and I think there's a lot of potential there." 