Medical device/Dx VC funding has gotten 'a little' better

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Polaris Venture Partners and the National Venture Capital Association hosted a panel discussion in Boston Monday night on how to address a chilly biotechnology investment environment, as part of the 2012 BIO International Convention in Boston. But what I also wanted to hear was if VC investment for medical device and diagnostics companies had begun to thaw.

So I asked that question to one of the panelists after the event ended: Terry McGuire, a founding general partner at Polaris, a well-known Massachusetts venture capital operation that invests in biotech, medical devices and high tech, among other areas.

McGuire told me the medical device investment climate is "a little bit better now for devices and diagnostics."

Investors turn to diagnostics more now, he said, because of the advance of molecular diagnostics and personalized medicine. That's because they're making a lager bet that both will become increasingly significant parts of the drug development process moving forward.

As far as any improvement in medical device investment, McGuire said it comes down, in part, to the realization that investors can make far more from device company startups than they once realized. And he credits Medtronic's ($MDT) 2010 acquisition of CoreValve for more than $700 million, to access that company's transfemoral aortic valve replacement product, as a watershed moment that helped change things. That deal, he said, turned the idea on its head that "exit transactions were smaller for devices than biotech." CoreValve, he said, "broke the rules."

Another reason CoreValve changed things is it went for a CE mark first, rather than pursuing the old stand-by of gaining FDA approval before looking internationally. And medial device companies are increasingly doing the same thing. The example, McGuire said, showed that companies could get a CE mark and generate commercial revenue without rushing to the FDA right away.

That idea goes back to another that McGuire mentioned during the initial panel discussion, that good "disruptive" technology addressing an unmet need will ultimately win venture financing, even in today's market. He said he believes the same for medical device startups, even with venture funding much tighter than it was just a few years ago. After all, he notes, the CoreValve technology drew Medtronic's attention, and investors were left with a stunning exit to the tune of $700 million-plus.

So if disruptive medical technology gains McGuire's interest, what does he look for these days?

McGuire said he focuses a lot on areas such as smart implantable devices. One example of that is MicroCHIPS, a startup co-founded by MIT researcher and legendary entrepreneur Robert Langer, and funded, in part, by Polaris. The product is an implantable, wireless drug delivery microchip that recently passed a successful human trial, where the coin-sized device was shown to work in people and be easy to use. Another example is Neuronetics, a Polaris portfolio company that recently gained a CE mark for its magnetic brain stimulation device to treat depression.

"That is a brand new approach to treat an age-old disease," he said.

Even more than before, however, McGuire said VCs avoid "fast followers," his words for devices that make incremental improvements.

"They will be less interesting to people," he said.