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Maturity Matters in Funding Hike for Medical Device Makers Here

Financing for Orange County’s medical device industry is growing even as investors remain cautious about new regulatory standards that could slow approvals for new products, a new report from Ernst & Young shows.

The London-based accounting and consulting firm’s annual State of the Medtech Industry report shows that financing from the entire field of publicly traded and privately held medical device makers here has already surpassed 2010’s total.

Local companies have raised a total of $269 million in the first half of the year, compared to $222 million in 2010.

Venture capital—which often flows to companies that are developing products, seeking initial regulatory approvals, and have yet to see significant profits—has accounted for most of the funding. Companies here have drawn $211 million in venture capital so far this year, compared with $186 million in all of 2010.

Lion’s Share

Cameron Health Inc., a San Clemente-based maker of an implantable heart defibrillator, got the lion’s share, with a $107 million round announced in May.

That’s the biggest deal of the year here. It also points to the caution flag investors are flying—Cameron is relatively far along on its flagship device, with clinical trials ongoing and plans to submit data to the FDA early next year.

“The devil is in the details” on the funding trend, according to Kim Letch, an Irvine-based Ernst & Young partner who specializes in medical devices. “A lot of what we have, in fact, seen is that (funding) is going to the more mature companies in terms of financing, rather than the new, early stage or innovative companies.”

This year’s funding falls well short of a high-water mark in 2009, when local companies drew $799 million. That year included an anomaly, though, with Brea-based Beckman Coulter Inc. accounting for $500 million raised through debt to help it buy the medical diagnostic unit of Olympus Corp.

Beckman now is a division of Wash-ington, D.C.-based conglomerate Dan-aher Corp., which acquired it for $6.8 billion in July.

This year’s Ernst & Young report also tracked revenue and profits for the medical technology in-dustry in Orange County. The 11 publicly traded medical device makers here combined for an 11% increase in revenue last year, to $5.9 billion. Beckman led the way with $3.7 billion.

Profits

Full-year 2010 profits for those companies rose 1% to $454 million, including $84 million from Beckman, which saw its profit fall in the wake of quality and regulatory problems with one of its heart tests.

“Local device makers have turned in an impressive performance among challenging economic conditions,” Letch said.

Letch also noted that there’s been “a significant decrease” in medical device approvals.

The report shows that 510(k) approvals, which cover the majority of medical devices, have steadily declined from 3,200 in 2006 to 2,778 last year.

Premarket approvals, which are used for devices that require a more stringent review, fell from 39 in 2006 to 20 a year ago.

“That time to market is taking longer and longer, while financing, for VCs in particular, is getting harder and harder” for younger companies, according to Letch.

Ernst & Young also addressed the possible effects of regulatory uncertainty on reimbursements from government insurers here and in Europe (see related column, page 60). The report said that obtaining reimbursement for devices is not easier in Europe because countries there are wrestling with “sovereign debt crises that will only exacerbate the pressures.”

That could have bigger implications in an industry because faster approval times in Europe have made it an early market for new medical devices, with U.S. approval often following a few years later.

Despite the fact that the United States is the largest device market, “an outside U.S. strategy —in which emerging companies first obtain marketing approval of new product in non-U.S. markets —has become increasing-ly common in recent years,” Ernst & Young said.

Greater Convergence

Now there is talk about greater regulatory convergence among the U.S. and Europe, along with Japan—a triumvirate of top markets. Typically, device makers seek FDA approval here after a product is on the market in Europe, with a launch in Japan often coming about three years later.

“The geographical strategy that device makers have historically relied on may change now that we’re seeing greater regulatory convergence among the three major markets for device makers,” Debbie Wang, an analyst with Chicago-based Morningstar Research Inc., said in an earlier interview.

Wang suggested that approvals could become tougher in Europe rather than easier in the U.S.

Recent changes indicate as much. Medical device makers recently were required to show European regulators a risk-to-benefit ratio of their products based on clinical data. Before, they only had to show the safety of the device at the time of implant, with no effectiveness requirements.

Wang said she expected device makers to face a longer clinical process, as well as higher development costs in Europe.

“This could lessen the incentive to head for Europe first,” she said.

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