Hey, Where Is Everybody Going? The Flight from Healthcare Investing


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I know the people at most of these firms—great investors like Mark Brooks (Scale), Rod Altman (CMEA) and Bijan Salehizedah (Highland)–and they are smart, successful and have contributed greatly to the establishment of important healthcare companies that have become leading industry players. It is really a drag to see them heading into a game of musical chairs where someone has already taken all the chairs away. Hopefully all the really good ones will rapidly be back in active investing action before long.

Most of the firms who are jettisoning healthcare are planning to spend all of their capital on information technology deals. Because the world needs another Zynga and Groupon. Not. I mean, I get it. You can build these companies with no significant regulatory entanglement, grow them rapidly through direct-to-consumer sales, take them public with magic fairy dust (Groupon is worth $11.5 billion? Nice infinity multiple of EBITDA) and come home the conquering hero. Yes, people want and love these companies and their products; just try to tear someone away from Angry Birds.

But seriously people, we are not going to maintain world dominance because we are totally awesome at World of Warcraft, not to mention have access to Groupon’s wide world of super cheap pedicures. We can only re-establish our economic world dominance by having an economy to come home to. And if we don’t fix the healthcare system by changing the way we do things, we aren’t going to have that. So given the massive opportunity to bring companies to the fore to fix this problem, why are healthcare investors waving the white flag?

The primary reason given for why firms are running way from healthcare like Road Runner from Wile E. Coyote is the vastly more complex regulatory environment that has created a dark cloud over the biopharma and medical device industries. It is getting increasingly more difficult, more unpredictable and more expensive to get drugs or devices approved by the FDA. Over the last few years a trail of tears has been formed by companies that got surprised in the FDA process when they met their end points and still didn’t get approval or where the rules of the approval game were changed mid-field. Where many young U.S. companies didn’t even bother getting European regulatory approval in the past, now it is becoming the primary path to market. There is a rising crop of these companies that have decided never to seek U.S. regulatory approval, trying to make it by marketing only in countries where the FDA is not. Today’s regulatory environment is fraught with mistrust and confusion and it has had a real, measurable and negative impact on U.S. bio-medical dominance. Increasingly investment dollars are going overseas to China, India and elsewhere, taking with it the innovations that used to be ours alone. The net result of all this has been an environment where it costs far more and takes far longer than used to be the case to get a new drug or device to market in the U.S. These are two characteristics that those who invest in venture funds simply can’t stand–they want shorter time to liquidity, not longer; and they want a good return on investment, not an increasingly high cost to get to any outcome. As a result, money is drying up for those who specialize in biotech and medical devices and thus funds are wrapping up instead of bulking up.

A second but important issue is the advent of much greater scrutiny around what drugs and devices can get reimbursed in our public and private insurance systems. Even if you can get a regulatory approval, you may never see the light of day on getting payment for what you have to offer. It has always been challenging to get a new reimbursement code for a new product, but now it is becoming an act of God. For very good reasons payers don’t want to open the floodgates to new products that might simply increase costs further and add no meaningful clinical value. Purveyors of new products are being forced to … Next Page »

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6 responses to “Hey, Where Is Everybody Going? The Flight from Healthcare Investing”

  1. Rob McCray says:

    Well spoken, Lisa. We have seen this phenomenon before. In the early 1990’s biotechnology lost favor and great firms like Mayfield and Accel Partners were investing in healthcare services (actually supplying clinicians) in physician practice management and physician partner business models. Imagine that! By 1999, a healthcare service company might receive a polite reception but it was all about technology. Networking gear and online pet supplies was where the action was! In the U.S. we need some transformational change in healthcare delivery and that is going to be accomplished in smaller companies where a handful of really good investors will help make it happen. The others will return when there is less uncertainty about the shape of the new market. In the meantime, strategic investors may be an entrepreneur’s best friend. Look beyond the U.S. and it is hard to believe that there will not be great returns for companies who help to open access to healthcare for an additional 5 billion residents of this planet. I cannot paint a rosy picture about highly regulated products, though. We need systemic change in the allocation of healthcare financial resources before rational decision making returns to therapeutics research and development.

  2. Krassen says:

    There is a bit of discrepancy with this headline:
    ” Biotechs raised record amount of funds in 2010″


  3. Hi Rob, yes you’re right…these things tend to be somewhat cyclical. The problem is that this is the first time that there are other countries jumping in to fill our void and take the focus of capital away in medtech and biotech. It should be interesting and I agree that the companies that enhance access to primary care will be important ones. Lisa

  4. Lisa
    Thank You for an excellent article. We need more positive forward-looking views for our industry, while still being realistic of the challenges. The picture of “doom and gloom” painted by some can be an unfortunate self-fulfilling prophecy.
    I would guess that part of your more positive outlook is in part in the description of Psilos Group ” . . . focuses on the medical device, healthcare information technology and healthcare services sectors”.
    Business will not be the same in the future and we as an industry must embrace that change. I personally feel it will be interesting and creative combinations of technologies across your investing spectrum that will be able to meet the healthcare challenges of the future. These will also include embracing the healthcare consumer and helping them become a more knowledgeable participant in the healthcare decision making process.

  5. Jack, thanks for the note. We definitely see opportunity in the health services, health IT and even selected medtech areas in the near future. Companies that can demonstrate a way of improving quality of care while reducing cost of care meaningfully will find their way through the darkness. When a company can align the financial and clinical incentives of patients, payers and providers, they will find a market. Lisa