Medical Device Daily

According to a new study released this week, the life sciences market was the place for the investment dollars of venture capitalists in 1Q07, with the medical device sector in particular seeing record numbers.

National Venture Capital Association (NVCA; Arlington, Virginia), which published the study together with PricewaterhouseCoopers, based on data from Thomson Financial, found that medical devices reached a record of $1.08 billion for 96 deals, a 60% jump from the 4Q06 level of funding.

Biotechnology was the single largest industry sector with $1.5 billion going into 102 deals, unseating software, traditionally the largest sector. Life sciences (Biotechnology and Medical Devices together) accounted for roughly 36% of the quarter's dollars, an all-time high.

As a whole, investors poured $7.1 billion into 778 deals across more than 17 covered industry sectors, the highest level of funding for any quarter since late 2001, according to the study.

"It was the strongest quarter ever for biotech and medical devices since we started keeping numbers 10 years ago," said Mark Heesen, president of NVCA

Heesen noted that it is important to watch where the money is going. "The life sciences sector is receiving a lot of attention right now," he said, "but it is an industry that is indeed scalable. Biotech and medical device companies require a substantial amount of capital to get through the regulatory process and the VC industry is responding to this demand."

This interest in life sciences has grown despite the longer investment cycles for biotech and medical devices startups.

"Life sciences is so long term that once you start out, they are going to take a long time to come to fruition," Heesen said. "You have an aging population and a population that is willing to pay to stay well."

Emily Mendell, VP strategic affairs and public outreach for NVCA, told Medical Device Daily that the breadth and variety of healthcare are attractive to VCs. "There are so many different places to put the money."

The high cost of bringing healthcare products to fruition doesn't chill venture capital market expectations, she said, because the sector has the needed investment dollars, and the dollar amounts "are going to continue to increase because you have to get through the FDA and you have to get through CMS. Life sciences "is the longest-term investment of all areas to invest."

As for whether the trend of increased funding will continue for medical devices, Mendell said it would take several consecutive quarters of similar numbers to be considered a trend.

She said she would not be surprised or concerned "if the number fell in the second quarter," especially since "this is the highest it's ever been." She predicted that the life sciences sector is expected to continue to receive "a strong amount of VC investment going forward."

The flood of venture capital in the first quarter, across all the industry sectors, comes at a time when initial public offerings are increasing, and promising startups are being snapped up by public companies.

Investments in later-stage companies increased significantly in 1Q07, with $3 billion dollars going into 245 deals. This was the highest dollar level in over six years. Average post-money valuations were $95.33 million for the 12-month period ending 4Q06, according to the study.

While late-stage funding flourished, funding dollars for seed and early stage companies declined 30% in Q107 to $1.1 billion in 259 companies, an overall 26% decline in deals. Average post-money valuations of early stage companies were $11.13 million for the 12 months ending 4Q06.

Investments in expansion-stage companies experienced a modest dollar increase in 1Q07, rising nearly 9% to $2.9 billion,invested into 274 deals. The average post-money valuation for an expansion stage company was $68.9 million for the full-year 2006.

Overall for 1Q07 the number of deals was spread relatively evenly among the stages. Seed/early-stage companies accounted for 33% of the deal volume; expansion stage for 35%; and later stage for 32%.

Fewer companies received funding for the first-time in 1Q07 compared with the previous quarter. However, the dollar value of the rounds was collectively higher.

A total $1.5 billion went into 223 deals this quarter compared with $1.4 billion going into 266 deals in 4Q06. seed/early stage deals continued to represent the bulk of first time deals and dollars with 72% and 48% of the total, respectively, which is in line with historical norms.

Software companies continued to attract the most first time deals at 48 followed by media and entertainment companies at 31 and medical devices & equipment at 27.

Hansen said the quarterly increase in later stage investing "may be reflective of an improving exit market as venture capitalists are now willing to invest an additional later stage round with the hopes that an IPO or a robust acquisition is around the corner. "

Topping the list of venture capital investments was a medical device company, CardioNet (San Diego), which offers real-time monitoring of ambulatory cardiac patients. The firm garnered $110 million (Medical Device Daily, March 27, 2007), according to the study.

Investments in Internet-related deals rose 31%, with $1.3 billion going into 167 deals.

Software investments declined 10% from 4Q06 but still ranked third for the quarter with $1.1 billion for 193 deals.

Investments in media and entertainment jumped 16% to $489 million involving 72 deals, while telecommunications rose 27% with $588 million invested in 63 deals.

Reflecting the growing interest in environmentally friendly technologies, the report recently added a clean tech category to cover deals focused on such issues as alternative energy, pollution and recycling.

Investments in this category totaled $264 million involving 23 deals, a 41% jump from the previous quarter.

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