Medical-device companies are raising big venture rounds to fortify their business and position themselves for a strong public offering or sale
Venture investors are writing large checks to maturing medical-device companies as the bar to sell or take these businesses public has continued to rise.
Developers of medical devices—the bits of hardware used to treat conditions like heart disease and back pain—are finding that strategic acquirers and public-market investors are favoring startups that already have revenue as well as products gaining traction with doctors and hospitals.
But to attain that traction, companies often need significant funding. Investors, among them Ally Bridge Group, Longitude Capital and Andera Partners, are stepping in with large financings that allow medical-device makers to stay private longer and position themselves for a strong initial public offering or sale.
In the first half of this year, U.S. and European medical-device startups raised $4 billion, putting such deals on pace to surpass the $6.8 billion raised in all of 2023, according to HSBC Innovation Banking.
In June, for example, Haifa- and Miami-based Insightec secured $150 million to increase sales of its technology to treat tremors in certain patients with Parkinson’s disease and essential tremor.
Last week, Kestra Medical Technologies, which makes wearable cardioverter defibrillators, disclosed a $196 million financing, while Campbell, Calif.-based Imperative Care, a company targeting stroke and other vascular diseases, said it had an initial closing on a financing that could total up to $150 million.
While later-stage companies usually have proven products, their survival still isn’t guaranteed. To become self-sustaining businesses, they need to line up things like insurance reimbursement, manufacturing capacity and a commercialization strategy. In addition, there are fewer acquirers in the medical-device industry than in other sectors, like biotech, observers said.
“Therefore you need to be prepared to take on this complexity and move further down the road,” said Olivier Litzka, a partner with Andera, whose investments include early- and later-stage medical-device companies.
Medtech IPOs have grown scarce, partly because of the poor performance of many companies that went public in 2021, analysts said. Only three medtech companies went public on Nasdaq or the New York Stock Exchange in the first half of this year. That was a bump up from zero in 2023, but well below the 47 of 2021, according to J.P. Morgan.
Acquisitions of private, venture-backed medical-device companies in the U.S. and Europe in which at least $50 million was paid up front also have declined, falling to just two in the first half of 2024, from nine last year and 23 in 2021, according to HSBC Innovation Banking.
Medtech acquirers typically look for startups that won’t hurt their bottom lines, analysts said. Eight of the nine venture-backed companies bought in 2023 were commercial-stage, said HSBC Innovation Banking Managing Director Jonathan Norris.
Later-stage investors, then, are vital to the ecosystem, according to Norris.
“A lot of the acquirers are demanding commercialization and growth before you get to that exit point,” he said.
Ally Bridge has been shifting to later-stage medtech investments to capitalize on the opportunity and the firm’s expertise. Five years ago, it would often look at companies in the early stages of commercialization, or even before their product had gotten regulatory approval. Today, it is typically targeting companies with $30 million to $50 million in revenue or more, and gross margins of 50% or more, said Kevin Reilly, managing director and head of medtech at the firm.
“The strategics and capital markets are becoming so much more picky; healthy margins are extremely important,” said Frank Yu, founder, chief executive and chief investment officer of Ally Bridge.
Ally Bridge joined Longitude, Andera and Omega Funds in leading the recent financing for Kestra Medical, whose treatment system detects potentially deadly arrhythmias, delivers a shock to convert the heart rhythm back to normal, and, through an app, alerts an emergency medical services operator when a shock has been delivered, according to the Kirkland, Wash.-based company.
With the money, Kestra will enlarge its sales team to cover nearly all the U.S., up from about 40% now, CEO Brian Webster said, adding that with the current unpredictable public markets, the company had decided to raise enough capital to reach break-even in a couple of years.
“That way, we will have flexibility in our options moving forward,” he said.
As the pipeline of revenue-generating medtech companies grows, IPOs will follow, some analysts predict. For some later-stage investors, the big payoff may come when a portfolio company is acquired after first going public.
And an analysis by Andera and research provider PitchBook data showed the number of acquisitions of private and publicly traded U.S. and European medical-device companies per year has been stable over the long term.
Since 2014, there have been more than 20 acquisitions of surgical and therapeutic medical-device companies below $10 billion every year except 2020, when there were 13, according to Andera and PitchBook. The analysis excludes deals above $10 billion, which aren’t typical of venture-backed companies.
“Over a long period of time, we see the market as pretty stable,” Andera Partner Aneta Sottil said.
Write to Brian Gormley at brian.gormley@wsj.com
Original article: https://www.wsj.com/articles/late-stage-investors-seek-to-bring-medtech-startups-to-the-home-stretch-a855dacb
