Life sciences venture funding perks up, national report says

Here's some good news in the wake of dire economic reports and wild sways in the stock market: U.S. venture capital investment in the life sciences, which includes Minnesota's signature medical device industry, surged 37 percent in the second quarter, according to a report released Thursday.

The PricewaterhouseCoopers/National Venture Capital Association MoneyTree report found that venture capitalists invested $2.1 billion in 206 biotechnology and medical technology deals in the quarter -- the seventh-best quarter since 1995. (The report uses data from Thomson Reuters.)

But the real picture is a bit more nuanced.

When compared with the second quarter of last year, the amount invested in the life sciences nationally declined 3 percent, and overall deal volume decreased by 21 percent.

Tracy Lefteroff, global managing partner of PwC's venture capital practice, attributes the increase of VC money into the life sciences sector in the past two quarters to an uptick in mergers and acquisitions in the sector.

"The exit market for biotech and medical device companies has been more active in the past year," he noted, This allows "venture capitalists who have experienced these exits to put more money back to work in this space."

The medical device industry saw a 9 percent increase in venture capital investment, but the number of deals in the quarter declined 17 percent when compared with the same period last year. All told, $841 million was invested in the 90 med-tech deals in the second quarter -- the highest funding level for the industry since the third quarter of 2008, the report says.

But challenges remain for venture capitalists looking to invest in med-tech, said Dan Carr, president and CEO of the Collaborative, a Minneapolis group of entrepreneurs and investors.

Concerns about changes in the way the Food and Drug Administration (FDA) regulates medical devices has dogged medical device start-ups for the past year. Investors are leery of investing in med-tech start-ups because the regulatory process can be unpredictable, Carr said. And investors don't like uncertainty.

In addition, government reimbursement for medical devices, usually a key component to a device's success, is also uncertain due to health care reform, he said.

On top of it all, "the recession had already weakened the space to begin with," Carr said.

PwC's Lefteroff said despite investor unease regarding the FDA, "if you take a longer-term view, we have an aging population base that will eventually need these products. The demand is huge and growing, and will continue to grow. There are great opportunities for innovative products to treat unmet health care needs."