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Medical device startups hit by decline of venture capital investment

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Saturday, Nov. 30, 2013, 9:00 p.m.
 

Peter DeComo raised $20 million from investors for Renal Solutions Inc. in 2002, when the Pittsburgh medical device company had only a working prototype for an artificial kidney and no money.

During the next five years, he brought in $20 million more in capital before selling Renal Solutions to a German outfit in 2007 for nearly $200 million.

“That company couldn't even get funded today,” lamented DeComo, the CEO of South Side-based ALung Technologies Inc., because venture capital investors have pulled back from startup companies in his industry.

With that important funding source drying up, DeComo worries many promising young companies in the Pittsburgh region may never get off the ground.

“What it means, I believe, is that innovation will be stifled and good companies won't survive,” he said.

Across the country, the amount of money invested in startup companies is rebounding after taking a nosedive during the recession of 2008 and 2009. But the portion of venture capital going to medical devices has continued to decline since hitting a high in 2007.

The industry is feeling the hit, said John Taylor, head of research for the National Venture Capital Association.

“There's a real reticence to make a real commitment to the next crop of (medical device) companies,” Taylor said.

Investments in all industries totaled $32 billion in 2007 and fell to $20.3 billion in 2009, according to association figures. This year it's projected to reach $27.7 billion, a 37 percent rebound from the low point.

But funding for medical device companies is projected to reach $2.1 billion this year, down from $3.7 billion in 2007 and its lowest point in nine years.

Taylor said even more troubling for the industry is a huge drop in number of first-time investments in equipment makers this year. Only 49 device companies are expected to receive their first venture capital investments this year, down from 124 in 2007.

Meanwhile, investments in software companies are skyrocketing, association numbers show, going from $6.2 billion in 2007 to an estimated $10.6 billion this year.

“You're seeing less of the venture dollars available going to the life sciences and more going to information technologies,” DeComo said.

ALung is attracting large venture capital firms, he said, because regulators in Europe, Canada and Australia approved the sale of its artificial lung.

“It was very difficult getting venture to come in prior to those approvals,” he said.

Information technology is a hot industry as the Internet becomes a larger avenue for commerce, and the time and money required by new IT companies to take a product to market is much lower than medical devices.

“I do think that the process of getting drugs and devices to market has become more complex and more expensive in recent years,” Taylor said.

Venture capital once flowed to medical device companies that had promising ideas and paid for product development, clinical studies and other business expenses. Today, the money is coming later, after a company gains regulatory approvals and starts selling.

David Groll, CEO of Circadiance Inc. of Export, which produces masks and other products used to treat sleep apnea, said he spent the early years running his business from his basement in his spare time while working a full-time job to keep expenses down.

Once he had a product that worked and had established revenue, Circadiance was able to attract investments, Groll said.

“I think a lot of (young) companies are looking everywhere they can and not having a lot of success” finding funding, he said. “It's going to be tough to bring new medical technologies to market.”

One saving grace has been Pittsburgh's robust “angel investor” market. Angel investors are individuals with high net worth who make their own investments in companies, often in a company's early to middle stage of development.

Mel Pirchesky, president of Eagle Ventures Inc., a Shadyside investment firm, said there are many opportunities to invest in startup medical device companies in the Pittsburgh region, but he acknowledged that investing standards have tightened.

“The last five, six years, it's been a pretty good market if you have a great deal, not a good deal,” said Pirchesky, who raised more than $35 million for medical device companies in the past six years.

Companies that want money must present a great deal to funders — by targeting a market worth at least $1 billion, having patented technology, the potential for at least a 50 percent gross margin and a great CEO, he said.

“What falls by the wayside when funding gets more challenging are the good deals,” he said.

Alex Nixon is a Trib Total Media staff writer. Reach him at 412-320-7928 or anixon@tribweb.com.

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