Devices Are ‘Flavor of the Month’ for Investors

Medical devices have unseated computer-related technology and drug-development as the most favored sector for venture capital investment, according to an article in today’s New York Times.

The paper says a combination of factors — including how long it takes for devices to reach the market, and a health-conscious baby boomer generation — have led to financing for “a range of technologies, including devices designed to unclog arteries, rebuild heart valves, monitor body functions from within, limit chronic pain and spinal problems and treat sleep dysfunction, acid reflux, epilepsy and diabetes.”

The Times reports that the first of 2007 was a quarter of record for medical devices when it came to seed funding — the sector raked in $1.1 billion, a 60 percent jump from Q1 2006.

Although time to market for any medical product is significant, devices typically can be developed in half the time it takes for a pharmaceutical or biotech drug to complete their R&D cycles. “The investment and time required, while substantial with devices and frankly longer than it used to be, is still modest compared to what you need for drugs,” Luke Evnin, a venture capitalist at MPM Capital, tells the Times.

In addition to quicker ROI, technological advancements in devices have made med tech firms more appealing than in years past: Less risky and more minimally invasive surgical products, for example, can replace drugs in some cases. To illustrate this point, the Times points to EndoGastric Solutions of Redmond, WA, which makes a device to combat acid reflux, a condition traditionally addressed by pharmaceuticals. (Other companies mentioned include Seattle-based NeuroVista, which is working on an implant to recognize epileptic seizures, and NeoVista, a Fremont, CA, company whose technology targets wet macular degeneration — both firms recently received significant venture backing.)

The article also notes that for life sciences VCs, devices tend to be easier to understand than drugs, which may be a contributing factor to the sector’s growth. “Devices are much easier to understand for a repurposed venture guy,” Paul Kedrosky, executive director of the William J. von Liebig Center for Entrepreneurism and Technology Advancement at the University of California, San Diego, tells the paper.

No doubt, a plug by the Times like this one is a boost to small med tech firms in search of funding — convincing investors that the industry is one worth looking at is a battle already won — but the piece concludes on a sobering note: “Medical-device investing was also strong in the mid-1990s, but crashed later in the decade as public-market investors turned to information technology. The current record investment in devices has spurred some to say that the market might be overfinancing technologies.”

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