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


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make a strong economic case to get coverage for their drugs and devices, which further complicates the ability of new companies to get traction. It is very hard to build your real life economic case when you can’t get the product paid for to begin with, companies will argue. Frankly, it is hard to argue with the payers’ orientation, as the biotech and medtech focus has too long been on technology and not on value. However, there is a fine line between “prove it is worth paying for” and “when hell freezes over” and the latter is becoming the more dominant theme on the reimbursement front.

Some argue that all of the money fleeing biopharma and medtech is heading for the unregulated parts of healthcare, such as healthcare IT and healthcare services. There is a small bit of truth to that as healthcare IT, in particular, has become flavor of the month. But the amount of money rolling into healthcare IT is no where near that being displaced in the biotech/medtech side of the market and, oh by the way, the FDA has initiated processes to regulate healthcare IT, so nice try folks. This adds to why many venture investors are getting out of healthcare faster than Rick Perry’s backers are fleeing his campaign….oops!

The federal government should be very uncomfortable seeing the flight from healthcare investing. They are the ones leading the charge for change in the healthcare system but clearly they are not the ones who will create the innovations that satisfy their policy goals. If the government, whether it be the White House, the FDA, CMS, the Treasury or the Congress, doesn’t recognize that its policies are flattening the innovation curve, they are going to be left with a sorry mess where healthcare costs continue to double every 10 years, eventually eating up the entire GDP. Rather than take an adversarial regulatory, tax, hiring stance, the government needs to find ways to work hand-in-hand with industry to ensure that the healthcare goals they have set out can be met through the delivery of new products and services. If you kill the source of innovation now (venture capital and entrepreneurship go hand in hand), there will be no new ideas to implement 2-5-10 years from now when the rubber really hits the road.

Thankfully, there are still a few of us stalwarts (fools?) left who continue to believe there is real money to be made by investing in innovation in the healthcare system. A few of us are even crazy enough to continue investing in medical devices or biopharma, although the criteria to get funded are definitely more complex than in days gone by. Clinical efficacy, capital efficiency and evidence of real value to patients, payers and providers are the yardsticks by which these new investments must be measured if they are to have a chance in today’s increasingly complex healthcare economy.

So far this year only $264 million has been invested in venture-backed healthcare services deals as compared to over $5.5 billion in biotech/medtech; healthcare IT doesn’t even merit its own category in the PriceWaterhouseCoopers survey that tracks these things. It is definitely worth noting that the biggest challenges impeding the health our healthcare system are in the areas of how services are delivered and how technology could improve those functions. Thus one can hope that the investors that invest in venture funds will see the great opportunity, and thus great returns, that can be made by supporting innovation in these subsectors.

Furthermore, there are a lot of contrarians out there who make it their business to invest heavily in the areas from which everybody else is running away. Sometimes this doesn’t work out—I wouldn’t want to be investing in in horse-drawn carriages right now while everyone is standing in line to buy a Fisker—but when it comes to the healthcare economy, you gotta believe people are going to keep getting older, sicker, and needier of services no matter what else is happening out there in the world or how annoying the FDA may be. Thus I hope our industry begins to benefits from the wisdom of the contrarians, who must recognize the vast investment opportunity presented by an industry under dramatic transformation.

In Michael Lewis’ recent book, The Big Short, he writes about Charlie Ledley, a money manager who made out like a bandit while the financial markets collapsed, murdering the majority of the investment community. He writes that Ledley “was odd in his belief that the best way to make money on Wall Street was to seek out whatever it was that Wall Street believed was least likely to happen, and bet on its happening. Charlie and his partners had done this often enough, and had had enough success, to know that the markets were predisposed to underestimating the likelihood of dramatic change.”

While investors must be prudent about the risks inherent in investing in the healthcare marketplace, I think it is worth considering this thesis. The healthcare marketplace will undoubtedly look far differently 10 years from now than it does today given all of the changes underway. As the Age Wave crashes over our country, we will need the next generation of drugs, devices, services and technologies that can effectively serve the needs of our population. Those who are there with innovations that grease the wheels of progress will be tomorrow’s Charlie Ledleys.

John F. Kennedy once said, “Change is the law of life. And those who look only to the past or present are certain to miss the future.” Let’s hope that the government can remember that their actions today will result in outcomes for tomorrow. Moreover, let’s pray that the venture capital community and its backers can heed JFK’s words and hang in there long enough to reap the benefits of building tomorrow’s U.S. healthcare economy.

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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