Innovation in health care requires new ideas and the capital to develop and commercialize those ideas into products or services. The necessary capital is often "venture capital," but the link between public policy and the venture capital industry has not been well examined. In this paper we explore the link between venture capital and innovation in health care, and we present new descriptive data from a survey of health care venture capital fund managers. Respondents generally viewed policy levers (for example, reimbursement and regulations) as important risks to venture capital investments, potentially affecting their ability to raise capital for early-stage investment funds. [Health Affairs 28, no. 1 (2009) M e d i c a l a dva n c e m e n t through research and development in prescription drugs, devices, and services has had a dramatic impact on health care in the United States. Innovation has shifted surgical procedures from highly to minimally invasive, moved therapies from late-stage treatment to early treatment and prevention, and created treatments for previously incurable diseases. 1 The growing burden of disease in the United States and worldwide suggests that the need for innovation will remain high.Innovation in health care requires new ideas and the capital to develop those ideas into marketable products. Increasingly, innovation occurs in small, early-stage companies that rely heavily on venture capital. 2 After a product reaches a certain stage of development, these small companies are frequently acquired by larger companies to complete the development, production, and marketing of products. 3 This is particularly the case in the pharmaceutical industry, in which larger companies look to start-up companies to supplement their product pipelines. 4 It has been estimated that 17.5 percent of sales from the twenty largest pharmaceutical companies in w 6 8 2 D e c e m b e r 2 0 0 8 2002 was derived from in-licensed products and that this proportion would increase to 26.1 percent in 2010. 5 Thus, venture capital funds play a critical role in providing early-stage financing to bring technologies past the financial "valley of death," to the point at which they become attractive to a wider spectrum of investors, including larger pharmaceutical companies and even the public through initial public offerings (IPOs). 6 The positive impact of venture capital funding on innovation can be dramatic. 7 Venture capital is a large source of financing for developing new ideas into health care products (more than $10 billion in 2007 alone). 8 One dollar of venture capital is about three times more effective in producing patentable ideas than a dollar spent on traditional corporate research and development (R&D). 9 Because the health sector is unique in the sheer volume and magnitude of risks facing companies (regulatory, reimbursement, liability, and so on), changes in policy-induced risk can be expected to affect both the ability of fund managers to raise capital and the types of health care investments made...
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