Medical Device Daily National Editor

MINNEAPOLIS — So the outlook for med-tech as a sector of interest to investors is pessimistic, right?

Well, that depends on who you're talking with — or listening to.

The opening session of the 7th annual IBF Med-Tech Investing Conference at the Radisson Plaza Minneapolis Hotel on Tuesday featured optimism and pessimism riding alternating waves.

In the leadoff position and taking an optimistic stance was Jay Hare, partner in the Technology Industry Group at PricewaterhouseCoopers' Minneapolis office, who cited findings from the firm's MoneyTree Survey, a quarterly study now in its 13th year.

In Hare's view, the outlook for the industry, even in troubling times for the overall economy, "is a mostly sunny forecast." He supported that view with snippets from MoneyTree surveys past and present, including $4.1 billion in national medical device venture capital investments in 2007, up from $2.9 billion in 2006.

Another significant figure is the percentage of overall venture capital investment going to medical device companies — a very healthy 13.5% in 2007 that nudged even higher — to 14.3% — in the 1Q08 survey. That's more than double the percentage of just a few years ago.

Playing to his local audience, Hare noted that medical device investment in Minnesota grew to $244.2 million in 2007, continuing a growth trend in place since the bursting of the dot.com bubble at the beginning of this decade. "Medical devices has been the No. 1 venture investment sector in Minnesota since 2001," Hare said.

Overall, the state attracted 5.9% of all U.S. medical-device investments last year, placing it third behind California and Massachusetts in that category.

As usual, California was the runaway winner in the "total dollars invested" category, garnering $2.02 billion in device-related deals, or 48.9% of the total invested nationally. Massachusetts' total was $346 million, or 8.4%, and Pennsylvania and Washington rounded out the top five. All told, those five states accounted for 72.8% of U.S. medical device funding.

He also cited the growth in average size of med-tech investment deals nationally, hitting $10.5 million last year compared to the traditional range of between $7 million and $8 million. In Minnesota, the average deal size exceeded the national figure, topping out at $12.1 million.

As for where the industry is headed, Hare said venture firms are looking more at development-stage companies, and forecast that the positive momentum for the sector will continue, at least in the near term. He said the industry "should see a very good year in the remainder of 2008, and that may extend into 2009 as well."

Clearly on the opposite side of the spectrum was Phil Nalbone, managing director for equity research at RBC Capital Markets (San Francisco), who cited numerous "big challenges" facing public companies in the sector in a fast-paced presentation that was coated in pessimism.

Nalbone, who has more than 15 years of experience as an analyst covering the medical technology sector, cited "the slowdown in growth for the big players and generally disappointing results among newcomers" as reasons for the decidedly disapproving looks being given the sector by both large and small investors.

While acknowledging that "there is plenty of good science and products out there," he said the path to an initial public offering (IPO) "is a lot less clear" these days. In fact, Nalbone said he expects to see "a lot more deals to sell [companies], rather than waiting for an IPO."

Noting that the past three years have been "very difficult for the major players," he said cardiovascular and spinal markets — two traditional high-growth sectors — "have slowed down a lot."

Nalbone said one of the reasons for the poorer financial performances by many public med-tech companies is that "reimbursement and product approvals have gotten a lot more challenging," which in turn has meant that there has been "no big surge in new, game changing-type products."

As an example, he said that the U.S. market for implantable cardioverters defibrillators (ICDs), once just about the hottest of hot new device markets, now is growing in the low single digits. He characterized ICDs as "a $5.5 billion-a-year market that is moving sideways."

As for drug-eluting stents, the go-go growth market of the early part of this decade, Nalbone said that now is a static, $2 billion-a-year market in which "an increasing number of players are duking it out for market share."

He cited the aesthetics market, long regarded as one of the honey pots for med-tech because it is a largely self-pay field not influenced by the foibles of reimbursement policy, as providing graphic evidence of the industry's problems.

"The party for aesthetics companies ended abruptly with the economic downturn," Nalbone said.

An accompanying slide headlined "The Economy Trumps Vanity" underscored that view.

"There really are no safe havens" in the present economy, Nalbone said. Noting that he has been keeping records on IPOs in the med-tech sector since 1991, he said that only two IPOs have been done in the sector thus far this year, with another six or seven postponed because of market conditions.

"I expect the public markets to be more receptive [to such offerings] later this year," he said, "but the companies going public will need to be more mature, since public investors just aren't willing to take VC-type chances."

That's because, according to Nalbone's statistics, of 26 deals done over the past 24 months, 60% were priced below their original range.

And from the investors' perspective, even worse news is that in looking back, "the average deal has a company now trading at 18% below its offering price. Obviously, those investors aren't happy."

Backed by another slide titled "The Land of No Second Chances," Nalbone said that quarterly financial performance "is imperative," especially with the average holding period by an institutional investor now being just over six months.

"We have seen tremendous changes in volatility and turnover," he said.