Venture Capitalists Invest $217M in Devices, Drugs in '08

Orange County Business Journal, Sep 1-Sep 7, 2008 by Reed, Vita

HEALTHCARE: Financial favor falls on device makers with $216M

Venture capitalists are buying devices instead of drugs in Orange County.

About $217 million has been invested in 12 healthcare companies through the first half of 2008, according to figures from Dow Jones & Co.'s VentureSource.

Nearly all, $216.2 million, went to 11 medical device makers. One drug maker received $700,000 in funding.

In the same period in 2007, 16 device and drug makers raised $260 million.

For all of 2007, $313 million was invested in 22 local device and drug makers, according to Dow Jones.

Of that amount, $224.9 million, or 72%, went to device makers.

This year's lower funding mirrors "trends in the rest of the nation," said Gina Chan, a research manager for Dow Jones VentureSource.

"Overall, both deals and dollars are down, but not down significantly," she said.

VentureSource attributes the deal drop to the overall economy, including the dormant market for initial public offerings and fewer acquisitions. Chan said.

Investors here traditionally have been attracted to medical device makers. They have deeper roots in OC than drug or biotechnology companies, which traditionally are anchored in San Diego and the Bay area.

Investments also have slowed as venture capitalists nurse investments made in the past few years and make fewer new deals.

"There may be a disproportionately greater interest in growth equity as compared to very early stage investments," said Ralph Sabin, managing director in the Irvine office of Pacific Venture Group, an Encino healthcare investor, earlier this year.

Versant Ventures, a healthcare-focused firm with a Newport Beach office, has had "a steady year and a busy summer," said Charles Warden, a managing director.

Versant has invested in three new companies, and has four or five that either have closed large rundings or are in the process of doing so, Warden said.

"We don't invest based on the (economic) cycle today. We look at the fundamentals," Warden said.

Such fundamentals, he said, include market size and a device's benefit to patients and clinicians.

There have been some sizable deals this year.

San Clemente-based Cameron Health Inc., a maker of heart devices, raised a reported $50 million, according to VentureSource.

Versant Ventures, Sorrento Ventures, Delphi Ventures and Three Arch Capital were among Cameron's investors.

Cameron is developing an implantable defibrillator that administers electric shocks to the hearts of people at risk of having heart attacks.

Cameron has said its defibrillator is easier to use than existing models because it does not require lead wires to be guided through the veins. Lead wires are challenging to insert and can break. In rare cases, broken leads have led to fatal shocks to the heart.

Boston Scientific Corp. of Natick, Mass., owns a minority stake in Cameron.

Rox Medical Inc., also in San Clemente, raised $35 million in a third round of funding. Rox makes devices to fight chronic obstructive pulmonary disease, or narrowing of the airways of the lungs.

Essex Woodlands Health Ventures, which has offices in PaIo Alto and Houston, led Rox1 investment. Versant, Domain Associates LLC, which has offices in San Diego and Princeton, N.J., and Prism Venture Management LLC of Venice, also participated in the round of funding.

Rox was started in 2004 with technology from Stanford University. The company originally was based just over the county line in Carlsbad.

Another big funding came along in March, when TherOx Inc., an Irvine developer of heart attack treatments, got $30 million (though the funding isn't named in Dow Jones' tally).

DAG Ventures LLC of PaIo Alto led TherOx's funding. Kleiner Perkins Cauficld & Bycrs, New Science Ventures, Integral Capital Partners, Aperture Venture Partners LLC and Cross Creek Capital also participated.

TherOx will use the investment to take its Supersaturated Oxygen Therapy product through the Food and Drug Administration approval process and potentially launch it, said Shelley Thunen, the company's chief financial officer.

TherOx has been around since 1994 and has raised more than $100 million in all.

Irvine cardiovascular device maker Arbor Surgical Technologies Inc. received $20 million in January.

Medtronic Inc., a Minnesota-based device maker with a heart valve plant in Santa Ana, led the investment and also acquired a minority stake in Arbor.

Arbor makes heart valves from cow tissue as well as surgical instruments to implant them. The company's approach differs from other companies that are developing heart valves by designing a device that can work with catheters or in tradional open-heart valve replacement surgery.

Medtronic is also planning to make, market and distribute Arbor's valves.

Cianna Medical Inc. in Aliso Viejo received $9 million in a deal that closed in February. The Fog City Fund, a San Francisco venture firm, led CJanna's investment.

Cianna will use the money to help commercialize its Savi device, which provides high-dose radiation therapy for women who've had lumpectomy surgeries for breast cancer. Cianna was created last year in a spinofTfrom Aliso Viejo's BioLucent Inc.