Corporations Chiming In On Device Financings

Medical device corporations are getting involved in more venture capital financings.

With public market capitalizations sagging and venture capitalists hesitant to commit new capital, large publicly traded medical device companies were expected to feast on capital-starved device start-ups during this recession. However, this clearly hasn’t happened. If not for the $1.25 billion spent by Medtronic PLC for Medtronic Ablation Frontiers LLC, Medtronic CoreValve LLC and Ventor Technologies Ltd., the strategic acquisition market would be just as bleak as the market for initial public offerings of stock. [See Deal] [See Deal] [See Deal]

But the business development offices at Johnson & Johnson, St. Jude Medical Inc. and others have been busy. The fruit of their labor is strategic investments, not acquisitions. A review of medical device deals recorded in FDC-Windhover's Strategic Transactions database shows an increase in corporate participation in venture capital raised by companies at all stages. (See Exhibits 1 and 2.) Over the past 15 months, corporate investors have played a larger role in financing medical device start-ups, participating in one quarter of the total financings completed as this magazine was going to press. The contributions clearly don’t come close to matching the output by traditional venture investors, but these investors have been active.

It’s worth noting that corporate investors aren’t limiting themselves to later-stage rounds. According to the data, corporate investors invested in an equal number of Series A, B, C, D and E or later rounds. But even more interesting is the willingness of corporate investors to climb out of the back seat and lead a financing. Medtronic, for example, led the $47 million Series C of Ardian Inc., the neuromodulation company developing technology to treat hypertension. In January, Johnson & Johnson Development Corp. stepped up to lead the $26 million Series D round in Acclarent Inc., the maker of an endoscopic surgical device used to treat severe sinusitis. [See Deal] Acclarent raised the round after scuttling its planned IPO last year.

The increased willingness by corporate investors comes at a nice time for medical device companies. First, cash is crucial, so anyone willing to bring some to the table is appreciated. Corporate investors do add a level of validation, not that many of these companies needed validation, and they provide the potential—and only the potential—for an exit down the road. This connection obviously comes with back-end risks if the portfolio company is up for sale and the corporate investor has no interest in buying it. But at this time corporate investors, particularly those leading the deal, may provide something more immediate: the willingness to provide fresh capital without demanding too harsh a nick on valuation as some venture investors might seek.

Tom Salemi