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MedTech investment market

Over the past 18 months investment trends in the US, Europe and Israel have shown a steady quarterly increase with MedTech investment reaching $700m for Q1 2006. Recent deals have focused on two types of businesses: those companies that have an established product and are either building sales in a local market or moving from a regional business to the world stage, and companies with an exceptional product in development.

Over the lifetime of its relationship with a company, 3i would expect to invest somewhere between $10m and $60m, says 3i partner Andrew Fraser. “The judgement call for us is how much capital overall the business will need to raise to get to a major value milestone or a liquidity event.”

In the past 12 months, three of 3i's new MedTech investments were in businesses with revenue run-rates in excess of $10m and growing. Sweden's Carmel Pharma, for example, has developed PhaSeal, a totally closed system for handling toxic drugs. The system is firmly established in the Swedish health care system and is used mainly for the preparation and administration of cytostatics and antibiotics. However, the funds and knowledge invested by 3i have enabled Carmel Pharma to market and distribute PhaSeal in the US – an area with considerable untapped potential for the company.

3i has also made seed and early stage investments in companies with promising technologies, “whilst in 2005 about two thirds of our money invested went into the revenue scale-up model, the remainder has gone into high upside earlier stage investments,” says Fraser. The additional requirement of investing in an early stage company is that its product has a combination of high sales potential or the ability to secure a dominant position in a niche market and to complement existing clinical pathways and payor systems.



3i typically expects to lead or co-lead a funding round in most deals, and will sometimes invest alone – as it did recently with Ulthera, a US company with a ground breaking ultrasound device for performing non-surgical facelifts and treatment of wrinkles. With Ulthera expecting US regulators to clear the device for marketing this year, “we felt the amount we needed to get to the key value milestone was well within our own reach,” says Fraser. So in December 2005, 3i invested $5.5m in a Series A funding.

In contrast with Endosense, a Geneva-based business developing solutions for atrial fibrillation, “our assessment was that we needed to spend at least $20m to get to a product with FDA approval and so committed $12m, syndicating the balance with another venture fund,” says Fraser.

Orthopaedics is another important area of focus for the 3i healthcare team. At the start of the year they invested $12m (out of a total funding round of $42.2m) in US firm Small Bone Innovations, which makes and distributes implants and instruments used by surgeons treating injuries to small bones and joints. It has also looked at areas such as obesity, diabetes management and occasionally at other therapeutic areas such as oncology and urology.

On the increase is 3i’s investment in the US MedTech market – in the last year, four out of six 3i investments were in the US. 3i is still keenly interested in investing in companies in the UK, France, Germany, Switzerland and the Nordic region. The company’s healthcare team is also actively looking to invest in Israeli firms – alongside a local partner, Giza Venture Capital.

But what does 3i look for in a company? “Management must have a good understanding of the market for which they are attempting to develop a product,” says Fraser. Occasionally, however, the individual comes before the company. In 2005, 3i teamed up with Eric Le Royer, a former European Marketing vice-president at MedTech giant Guidant. As a result of the collaboration, 3i decided to take a stake in Endosense in November 2005, with Eric joining as CEO.

“We are also very focused on products and therapies that national payment systems will be willing to pay for and in understanding how eventual buyers will view the timing of an acquisition, whether this is close to US regulatory approval or at a key point of market impact,” says Fraser.

Six years on, the technology bubble still casts a long shadow. In 2000 there were over 202 venture-backed initial public offerings (IPOs) in the US – just shy of the 1999 high. Then flotations plummeted. “Only this year will the cumulative total of all IPOs for the years 2001 to 2006 surpass the 2000 figure,” says Cabot Brown of Seven Hills, a San Francisco-based boutique investment bank.



MedTech has broadly followed the same trend – there were few US or European IPOs in 2003 then a surge in 2004 and 2005. So far this year public markets have not proved welcoming. “It looks like we're towards the back end of the IPO window that we've had over the last couple of years,” says Fraser. Acquisition has been the preferred exit route for many medical device anddiagnostic companies in the last few years. “If you look at the cardiology sector alone over the last 10 years, you can identify more than 75 mergers and acquisitions that have taken place,” says Fraser.

The burden of cost on healthcare and payor systems is a significant factor, “with an increasing test of cost benefit now being applied in the UK and other parts of Europe as well as the US,” says Fraser. “We look carefully at the impact of the reimbursement process on the potential for marketing a new product.”

One trend that favours 3i's style of investing is the substantial increase in cross-border activity. With a strong healthcare team in the US, “We can play the transatlantic bridge well,” says Fraser. And international deals give 3i a competitive advantage. “Other investors may find complex investments, such as these, more difficult to execute and manage,” he says.

To all these deals 3i brings an extensive network wealth of contacts with advisors, banks, other VCs and the larger MedTech companies. Seven Hills’ Cabot Brown says the larger US firms are cash rich and looking to use it productively. “We have a good contact base in a number of the bigger MedTech corporates now,” says Fraser. “That’s invaluable when we’re evaluatingand exiting the deals we're in.”



In March 2006, 3i invested $20m in the latest fund run by Israeli venture capital firm Giza. Israel is a natural extension to 3i's international network given the country’s position as one of the major global technology markets – last year Israeli companies raised over $1.3bn in venture capital. Today, emerging technology companies need to internationalise at an earlier stage in their development. The partnership between 3i and Giza allows Israeli companies to draw on 3i's international expertise and network of contacts.

Giza's fund, its fourth, is a specialist technology fund, investing in communications, software and semiconductors as well as healthcare companies. Israeli IT firms have had an important impact on the world stage and the country is also a significant innovator in the healthcare industry, with worldleading research. “[As a result] most of the key corporates, for example Johnson & Johnson, Medtronic and Boston Scientific, have development and/or investment teams in Israel and each of them have made acquisitions of Israeli MedTech businesses,” says Fraser.

The partnership with Giza may also create co-investment opportunities for 3i in the region. Currently 3i and Giza are reviewing a number of MedTech opportunities, and Fraser is enthusiastic about the potential. The 3i team has seen a number of interesting businesses in imaging, ophthalmology and diabetes management. “You can see the rich stream of ideas and innovation coming through. There is a very vibrant and entrepreneurial culture.“

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