Q1 med tech venture dips to lowest since 2013--but med tech IPOs outpace biotech

It's not unusual for first-quarter venture financing to take a bit of a breather. But for med tech, this time seems like a pretty profound pause. The venture capital invested in med tech startups dipped below $500 million during the first quarter--for the first time since the fourth quarter of 2013, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters.

However, a real market for med tech IPOs is emerging--for the first time in several years. This could translate into a continued upswing for med tech venture financing through the remainder of the year. Med tech accounted for 7 of the 13 venture-backed life sciences IPOs last quarter. That's a huge improvement upon the 5 med techs that made it out during the whole of 2014.

Still, investors have remained quite selective with several med techs withdrawing or postponing IPOs this quarter.

"We are seeing med tech pick up in terms of liquidity in the public markets. As companies get more liquid, where we saw venture money going to later stage med tech companies in the past, those dollars won't have to flow to them anymore," PwC Partner Greg Vlahos told FierceMedicalDevices. He noted that public market investors are looking for med techs with multiple product lines and with revenues of more than $100 million, unlike biotechs which typically enter the public markets around Phase II or Phase III of clinical testing.

The by-the-numbers details: Med tech VC financing in the U.S. fell to $469 million in the first quarter--that's one-third below the $670 million the segment raised during the fourth quarter of 2014. But the first quarter of this year was coming off of a very strong 2014 funding environment with $2.7 billion raised, more money for med tech than since 2011.

However, these numbers are super choppy because of a handful of megadeals that exceed $100 million. When those pop up, like one did in the fourth quarter for diagnostic imaging company Butterfly Networks that raised $100 million, they make quarters without them, like the first one of this year, look poorer by comparison.

Still, the decline of almost one-third was much deeper than that for overall venture financing, which fell 10% to $13.4 billion last quarter from the prior one, and that for the broader life sciences, which slipped 18% to $2.2 billion.

Last quarter saw 69 U.S. medical device and diagnostics startups gain venture financing. But almost half of the total money raised in the sector went into the 10 largest financings.

The top 3 largest med tech financings last quarter were EndoChoice, which raised $57 million to make a better endoscope; Xenex, which raised $25 million for its ultraviolet disinfecting robot; and Invuity, which got $23 million for its surgical lighting tools.

Other top first-quarter med tech fundraisings included $16.3 million for MfxenexRI radiation therapy company ViewRay, which pulled off a $52 million IPO earlier this month, and $20 million to Sera Prognostics for its preterm birth diagnostic as well as $19 million to OrthoSensor for its knee implant.

Vlahos said that in addition to increased biopharma investment into diagnostics and drug/device combo plays, he's also seeing more med tech activity from crossover investors. These are shareholders who usually invest on the public markets but may sometimes invest on the private side as well.

Crossover investors can prove an advantage to a private company looking to go public, as they can help familiarize and validate the startup for the rest of Wall Street. Their ilk includes the likes of Deerfield Management, Fidelity, Federated Investment and Wellington Management, whose first-quarter med tech investments included EndoChoice, SteadyMed (ahead of its March IPO), ViewRay (which withdrew its IPO) and Invuity.

Vlahos concedes that these first-quarter figures put 2015 on track to come in near the low end of its typical $1.75 billion to $3 billion in annual venture financing. But he suggests that if we continue to see med tech make it out onto the public markets, we will continue to see strengthening venture investment going forward.

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