From the January 2008Â edition of MedMarkets
As we begin 2008, the economic picture globally and in the U.S. in particular is not very rosy.Â 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, withÂ 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.Â 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.Â 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.Â An additional factor that drives investment in health care ensues from this.Â 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.Â 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.Â The range of possibilities in health care, considering the countless clinical applications from diagnostics to therapeutics, implies the size of the opportunity.Â 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:Â Financing at Early Stage Companies; Deals of $20M or More Tracked by MedMarkets, 2007
|Round||Products and Technologies|
|Sientra, Inc.||$85||Series B||Device company focused on plastic surgery and aesthetics medicine|
|Pelikan Technologies Inc.||$69||Series F||Hand-held diagnostics and monitoring|
|Evalve, Inc.||$60||Series D||Minimally invasive heart valve repair implants|
|InnerPulse Inc.||$50||Undisclosed round||Percutaneous ICD|
|Paracor Medical, Inc.||$44.4||Series D||Mesh devices for congestive heart failure|
|Optherion, Inc.||$37||Seed||Diagnostics and therapeutics for dry and wet AMD and other chronic diseases|
|Ophthotech Corporation||$36||Series A||Compounds for treatment of wet and dry macular degeneration|
|NeuroVista, Inc.||$33.8||Series B||Device company focused on management and treatment of epilepsy|
|Tengion, Inc.||$33||Series C||Cell-based organ regeneration|
|EndoGastric Solutions, Inc.||$30||Series D||Natural orifice GI surgical tools|
|FlowCardia, Inc.||$30||Series C||Endovascular devices for recanalization of coronary and peripheral chronic total occlusions|
|Satiety, Inc.||$30||Series D||Obesity management device delivered via transoral procedure|
|Medingo Ltd.||$27||Series A||Insulin patch for diabetes|
|Direct Flow Medical, Inc.||$27||Series B||Percutaneous aortic tissue valve prosthesis|
|PneumRx, Inc.||$27||Series B||Steerable biopsy needles|
|Advanced BioHealing, Inc.||$25.5||Series C||Tissue-engineered wound healing|
|LDR||$25||Series C||Fusion and non-fusion spinal implants|
|Mitralign, Inc.||$24||Series C||Catheter-based mitral valve surgery|
|Atritech, Inc.||$22||Series D||Treatment of blood clots susceptible in patients with atrial fibrillation|
|Ablation Frontiers, Inc.||$21.8||Series C||Ablation treatment of atrial fibrillation|
|CarbylanÂ BioSurgery, Inc.||$20||Series B||Therapeutic medical devices for rhinosinusitis and osteoarthritis based on chemically engineered polymers of hyaluronic acid|
|Artificial Muscle, Inc.||$20||Series B||Developing “Electroactive Polymer Artificial Muscle” for use in pumps, valves and other devices|
|CircuLite, Inc.||$20||Series B||Circulatory assist for chronic heart failure|
|Pegasus Biologics, Inc.||$20||Series C||Bioimplants for soft tissue repair and treatments for diabetic ulcer wound care|
|CircuLite, inc.||$20||Series B||Superficially implanted ventricular assist device for CHF|
|NovaVision||$20||Series C||Device 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.Â 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.Â Moreover, any early stage company that doesn’t explicitly address cost as a factor in innovation will find itself short of funding.Â (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.Â 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.” Â There’s a certain irony in the fact, in more ways than one, that health care will be here when we need it.