Companies get creative as venture investment in medical devices stalls

Washington

TODAY'S venture capital market is one where a company with less than 200 employees can rake in more than US$100 million from investors. But one corner of the market has largely been left behind: companies offering medical devices.

Total venture funding for medical device firms dropped after the 2008 recession and never recovered, even as funding has rebounded elsewhere, data shows.

Between 2008 and 2009, total US venture funding for device companies dropped 27 per cent, to about US$2.6 billion, according to a multi-year analysis of Thomson Reuters data by PricewaterhouseCoopers and the National Venture Capital Association. In the seven years since the recession, funding for device companies ticked up only slightly, to US$2.7 billion, and the number of deals dropped from 394 in 2008 to only 308 last year. In other words, what funding is available is being captured by an increasingly smaller pool of companies.

Pushing a new device through regulatory review typically requires tens or hundreds of millions of dollars in research and development (R&D), all to prove to a panel of scientists that it is safe and effective. Investments with that level of risk are usually the domain of specialised venture funds with expertise in the medical field. And many prefer drug development to devices because the rewards can be bigger.

The scarcity of venture capital means that biotech companies trying to push potentially pioneering medical devices through the regulatory pipeline are engineering creative deals to sell stock to the general public in order to raise the necessary funds - no easy chore when the financial markets are in such turmoil.

Take Senseonics, a Germantown, Maryland, biotech company working on an app-based blood sugar monitor that is implanted under a person's skin. It is attempting a public offering on the New York Stock Exchange by going through a rather circuitous process.

Its flagship product is a tiny sensor implanted under the skin of a patient's shoulder, designed to continually monitor blood sugar and communicate to a smartphone app that displays real-time blood-sugar levels and trends. The goal is to give diabetics a way to monitor blood sugar without pricking a finger, which is a daily annoyance for about 29 million Americans.

That is a potentially huge market. But the company's dream of profitability hinges on whether it can get its product across the regulatory finish line before funding dries up. At least two other companies - Britain-based Abbott and San Diego-based Dexcom - also have continuous blood-sugar monitors. Dexcom sprinted ahead of the pack last year when an important component of its product won Food and Drug Administration approval and launched on the iPhone.

To catch up, Senseonics began a clinical trial last month in patients with diabetes in the US. The company has spent about US$150 million in investment capital on R&D, including money from specialised venture funds Delphi Ventures and Chevy Chase-based New Enterprise Associates.

To raise more funds, the company started trading on the pink-sheet market last month through a reverse merger, in which a private company can go public by buying a publicly traded entity and taking its spot on the listing. A pink-sheet listing means that a company's stock is traded over the counter and not on any of the major exchanges. Companies with such listings do not face the same filing requirements with the Securities and Exchange Commission and tend to be regarded as riskier bets.

Senseonics is in the process of moving to the New York Stock Exchange. It filed last month for an initial public offering on that exchange worth up to US$52 million. Senseonics pulled in revenue of only US$38,000 for the nine-month period ended Sept 30, hardly enough to fund itself through regulatory review. During the same period, it ran an operating loss of US$20.6 million, driven primarily by R&D expenses.

That is not unusual for a company looking to bring a drug or device to market. BioElectronics, a device company based in Frederick, Maryland, has been trading on the pink-sheet market for years, and it has spent close to US$30 million on R&D since its founding in 2003. WP