Med tech investors paying up for patents

Med tech startups with patents or patent applications saw more funding at higher valuations than non-patent peers last year, a new PitchBook report finds.

Why it matters: Intellectual property is a value creator, particularly in a market as mature as med tech.

By the numbers: Companies with patents saw the majority of overall VC deal funding last year.

• Nearly 50% of funding went to seed-stage companies with patents, and this increased to 81% and 95% for late-stage and venture growth rounds, respectively, the report says.
• Since 2020, median venture deal sizes were about 15% to 30%-plus higher for companies with patent applications.
• In 2022, there were 439 VC deals in med tech with a combined deal value of $8.7 billion in 2022, down from 561 deals valued at $9.7 billion in 2021.
• Early-stage deals saw the biggest slump, with funding down 30% year over year.

Meanwhile, private equity deal activity in the space was muted, with only 16 buyouts.

• The report cites surgical devices, dermatology and precision medicine as areas within med tech likely to garner PE interest, given their long-term business models.

Zoom in: In Q1 2023, VCs poured more than $50 million into the surgical technology market, outpacing all other med tech segments, per the report.

• Last year saw a handful of notable deals, including Medtronic's $904 million acquisition of cardiac tech company Affera from Bain Capital Life Sciences.
• "Medtronic was also a previous investor in Affera, and medtech CVC involvement in mid- to late-stage deals can be a strong sign of potential future deal interest," the report says.

What they're saying: "Med tech is unique and incumbent heavy and that raises the bar for new entrants," says Aaron DeGagne, an emerging technology analyst, digital health and med tech at PitchBook.

• "You need a robust business model and a high degree of recurring sales," he says.

Yes, but: "There have been and will be plenty of exit opportunities," he stressed, with public incumbents like GSK, J&J, 3m, GE and Medtronic all seeking to innovate their pipelines.

• "The peers of the incumbents are not looking to grow, and that creates more opportunity for providers at good prices," he adds.
• DeGagnge predicts the IPO market will open next year, adding, "We expect to see a good amount of these med-tech companies go public"

The intrigue: Not all med tech deals are a slam dunk — just ask Illumina, whose ill-fated Grail acquisition is at the crux of a bitter proxy fight with activist investor Carl Icahn.

• Illumina founded Grail in 2016 and later spun off the company at a valuation of around $1 billion to $2 billion, keeping a minority share, but in 2021, brought the business back into the fold for $8 billion.
• It has since faced heavy pushback from regulators, and a formal proxy fight from Icahn, though the two parties were close to settling before the fight broke out.