Fueling Innovation In Medical Devices (And Beyond): Venture Capital In Health Care

Abstract

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...

How does venture capital operate in medical innovation?

“…But this is likely to happen by accident, not by design. Survey findings indicate that up to 85% of capital investors consider ‘not at all or somewhat important’ public health impact 19. Investors also contend that regulatory requirements decrease the ‘chance that an investment will be made in a ‘new area’’ and increase the chance an investment will be ‘made in a ‘me-too’ space’ (eg, where a slightly different technology is already implemented and marketed) 19.…”

“…Survey findings indicate that up to 85% of capital investors consider ‘not at all or somewhat important’ public health impact 19. Investors also contend that regulatory requirements decrease the ‘chance that an investment will be made in a ‘new area’’ and increase the chance an investment will be ‘made in a ‘me-too’ space’ (eg, where a slightly different technology is already implemented and marketed) 19. To strike lucrative ‘homeruns’ within a predefined period of time, venture capitalists seek indeed to ‘de-risk’ the deal at the outset by enforcing stringent agreements 18…”

Seeking Innovation: Incentive Funding for Biodefense Biotechs

“…In 2007, healthcare venture financing accounted for 31% of the $30 billion in total venture investments. 1,11 Within the pharmaceutical sector, venture capital-backed biotechnology acquisitions accounted for more than two-thirds of big pharma product pipelines, in essence supplanting in-house research and development efforts. 12 This phenomenon is so pronounced that approximately 26.1% of sales from the 20 largest pharmaceutical companies will be derived from in-licensed products in 2010.…”

“…12 This phenomenon is so pronounced that approximately 26.1% of sales from the 20 largest pharmaceutical companies will be derived from in-licensed products in 2010. 1 According to the data, venture capital has become the de facto engine of product development for *Delivery of the first million doses into the SNS occurred in May 2010. The remaining doses are expected by 2013.…”

“…It is easier to secure funding for late-stage therapeutic agents that proffer incremental improvements to their in-class counterparts, because they present less scientific and regulatory risk and offer greater risk-adjusted economic returns in established markets. [1][2][3] This funding paradigm is problematic not only for the advancement of basic science and translational medicine, but also for the development of biothreat countermeasures such as antibiotics, vaccines, and antitoxins. Since, as investment propositions, these agents are predisposed to less quantifiable economic returns, venture funding for their development is significantly less likely.…”