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Are Taxes Hurting Medical Device Startups?

Source: PitchBookIs the Affordable Care Act’s (ACA) medical device tax, which went into effect in January 2013, having an impact on venture funding? Not necessarily.

Only 60 VC investments were made in the healthcare devices & supplies sector in 1Q 2014, as we report in our upcoming 2Q 2014 U.S. VC Industry Report, to be released tomorrow. At that pace, 2014 deal flow would decline about 32% from 2013 levels, which was a down year itself, 18% off 2012 levels. Compared to funding activity in other segments of the healthcare industry, devices & supplies commands much less VC attention these days (35% of deal flow) than it did in, say, 2011 (46%). By percentages, the current prom king is biotechnology & pharmaceuticals.

Taking a look at the capital invested numbers, though, and we find that VC firms funneled $886 million into the devices & supplies space in 1Q 2014, which is actually a little ahead of 2013’s pace ($3.4 billion total, averaged out to $849 million per quarter). Granted, capital invested in 2013 was a tad down from 2011 and 2012 levels, but both were standout years for VC dollars in devices & supplies.

Source: PitchBookWith all the talk about VC investment drying up after Obamacare passed, you’d think that 2009 or 2010 would be a high-water mark for VC investment in healthcare devices. Just the opposite, actually—both deal flow and capital invested rose incrementally every year from 2009 until 2012, according to the PitchBook Platform. Devices & supplies financings, believe it or not, hit a 10-year high in 2012, two years after the ACA was passed and just a year before the medical device tax went into effect. It seems odd that VC firms, which look several years down the road before investing, would complete more financings and invest more capital in the industry every year right until January 2013.

From a bird’s eye view, the data doesn’t suggest the tax has been a concern for investors, unless there was widespread hope in the investment community that the tax, like so many other aspects of the ACA, would be delayed indefinitely or scrapped altogether, or that the Supreme Court would have struck down the legislation back in 2012. Now that it’s been firmly in place for more than a year, perhaps investors are adjusting to a new financial reality.

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