Increased Healthcare Investment (aka Recession)

From the January 2008  edition of MedMarkets

As we begin 2008, the economic picture globally and in the U.S. in particular is not very rosy.  A consensus is being reached that we are in the early stages of a “recession” and in mid-January the Federal Reserve Board has lowered the prime rate by 3/4 point, an unusually steep drop being made under these “emergency” conditions.

However, as was made clear in the 2007 Dow Jones VentureSource report on venture capital investment in the U.S., considerable optimism remains for U.S. companies, with  capital investment reaching $29.9 billion in the United States, a 7% increase over 2006 investment, led by biopharmaceutical, medical device and energy.

Looking at health care in particular, 2007 represented a year with a 17% increase in health care investment, from $8.5 billion in 662 health care deals in 2006 to almost $10 billion in 671 deals in 2007. Within the health care field, biopharmaceutical and medical devices drew big increase, with growth from $5.4 billion in 327 biopharmaceutical deals (12% increase over 2006) and $3.7 billion in 251 medical device deals (a remarkable 37% increase).

With this level of investment during an economic downturn, it is worth noting two forces we see in health care that support its investment.

Insensitivity to Economic Variables.
The health care market by its nature, involving matters of life and death, make it insensitive to economic variables.  Of course, this is the bane of health care industry stakeholders (third-party payers, health care systems, even legislatures), who must face the compelling need to provide affordable health care regardless of the state of the economy.  While this has historically been the nature of the health care industry, the steadily rising cost of health care as it delivers clinical outcomes through more and more technologically sophisticated means has made its expense a prime target for policymakers, not least of whom are the presidential candidates, whose need to respond to health care costs will now be challenged even further by economic constraints.

Contrarian or “Safe Haven” Investment.
We have seen frequently, through numerous economic cycles, the insensitivity of health care to economic variables, as noted above.  An additional factor that drives investment in health care ensues from this.  In economic slowdowns, when real estate, telecommunications, electronics, internet stocks and others find disfavor due to the economy squeezing discretionary income, investment in health care frequently occurs since it appears (at least to investors) that the economy has less capacity to squeeze income that is not discretionary–the health care dollar.

In Exhibit A are shown the top (in excess of $20 mln each) financing deals of 2007 tracked by MedMarket Diligence in MedMarkets for early stage (<5 years old) companies. These deals represent about an aggregate 15% of all health care deals in 2007, so it would be a bit of a stretch to assert how representative they are of health care at large.  Yet, the breadth of innovation at these companies is noteworthy and certainly suggestive of why health care remains a strong investment–product types span drugs, devices, diagnostics; applications from cardiology to neurology, aesthetics, ophthalmology, diabetes, orthopedics, spine surgery, wound management and others.

By its nature, at least in principle, investment in new companies has its premise in the fact that the new companies are developing products that will take away market share and/or expand markets or simply create new markets.  The range of possibilities in health care, considering the countless clinical applications from diagnostics to therapeutics, implies the size of the opportunity.  But add to this the range of alternative technologies–biomaterials, sensor technology, drug/device hybrids, cell therapy/tissue engineering, minimally invasive technologies, etc.–and there should be little surprise that health care is leading venture capital investment.

Exhibit A:  Financing at Early Stage Companies; Deals of $20M or More Tracked by MedMarkets, 2007

 

Company

Amount
($millions)
RoundProducts and Technologies
Sientra, Inc.$85Series BDevice company focused on plastic surgery and aesthetics medicine
Pelikan Technologies Inc.$69Series FHand-held diagnostics and monitoring
Evalve, Inc.$60Series DMinimally invasive heart valve repair implants
InnerPulse Inc. $50Undisclosed roundPercutaneous ICD
Paracor Medical, Inc.$44.4Series DMesh devices for congestive heart failure
Optherion, Inc.$37SeedDiagnostics and therapeutics for dry and wet AMD and other chronic diseases
Ophthotech Corporation$36Series ACompounds for treatment of wet and dry macular degeneration
NeuroVista, Inc. $33.8Series BDevice company focused on management and treatment of epilepsy
Tengion, Inc.$33Series CCell-based organ regeneration
EndoGastric Solutions, Inc.$30Series DNatural orifice GI surgical tools
FlowCardia, Inc.$30Series CEndovascular devices for recanalization of coronary and peripheral chronic total occlusions
Satiety, Inc.$30Series DObesity management device delivered via transoral procedure
Medingo Ltd.$27Series AInsulin patch for diabetes
Direct Flow Medical, Inc.$27Series BPercutaneous aortic tissue valve prosthesis
PneumRx, Inc.$27Series BSteerable biopsy needles
Advanced BioHealing, Inc.$25.5Series CTissue-engineered wound healing
LDR$25Series CFusion and non-fusion spinal implants
Mitralign, Inc.$24Series CCatheter-based mitral valve surgery
Atritech, Inc.$22Series DTreatment of blood clots susceptible in patients with atrial fibrillation
Ablation Frontiers, Inc.$21.8Series CAblation treatment of atrial fibrillation
Carbylan  BioSurgery, Inc.$20Series BTherapeutic medical devices for rhinosinusitis and osteoarthritis based on chemically engineered polymers of hyaluronic acid
Artificial Muscle, Inc. $20Series BDeveloping “Electroactive Polymer Artificial Muscle” for use in pumps, valves and other devices
CircuLite, Inc.$20Series BCirculatory assist for chronic heart failure
Pegasus Biologics, Inc.$20Series CBioimplants for soft tissue repair and treatments for diabetic ulcer wound care
CircuLite, inc.$20Series BSuperficially implanted ventricular assist device for CHF
NovaVision$20Series CDevice technology to restore vision using brain neuroplasticity

To be clear, this investment must be put in context, the appropriate context being that venture capitalists no longer fund companies based on idle internet-startup-type promises.  VCs now intimately monitor and/or manage the process of development, from having seats on the boards of directors, to installing their own CEOs, to going all the way to creating incubators for the companies so that no single part of the innovation process is out of their control.  Moreover, any early stage company that doesn’t explicitly address cost as a factor in innovation will find itself short of funding.  (A 2007 MedMarket Diligence “advanced medical technologies” blog noted the imperative of factoring cost in the development of innovation.) Without a consideration of cost, innovations become irrelevant; but, conversely, the thrust of some early stage company innovations are precisely focused on cost for their ability to achieve a specific clinical outcome at lower cost.

It becomes eminently possible to forecast the overall state of the economy by tracking health care investment for its tendency to be inversely proportionate to a healthy economy.  In other words, when the recession is nearing its end, one should anticipate news of investment in health care switching to investments with “higher growth potential.”  There’s a certain irony in the fact, in more ways than one, that health care will be here when we need it.

 

8 thoughts on “Increased Healthcare Investment (aka Recession)”

  1. With baby boomers needing more medical care in record numbers it only pushes the growth of the healthcare industry as a good investment option during these hard economical times.

  2. With baby boomers needing more medical care in record numbers it only pushes the growth of the healthcare industry as a good investment option during these hard economical times.

  3. I think that if the health related industry gave the public some sort of a benchmark of what their efforts a re leading to, it would be easier to gauge how viable those specific companies are.

  4. Thing the federal government has to do to help the economy is stop the housing crisis — although he did not lay out how that should be done. Romney also advocated for middle-class tax cuts, lowering gas prices in a broader effort to be energy independent, and making significant R&D investments in science and technology.
    ——————
    Tonnywilliams
    MLS

  5. Lamictal (lamotrigine) for Bipolar Disorder: Started on this 6 months ago. My own personal miracle drug. I had never known peace or stability before Lamictal. I hope to stay on it forever, and also hope it continues working this well.

Leave a Reply