VC Funding Drops for Biotech, Medical Devices. Should We Worry?

Venture capital investment in New England dropped 45 percent in the most recent quarter, largely due to fewer deals in biotechnology and medical devices. The national trend is down, too, though not as much, according to a new report from the National Venture Capital Association and PricewaterhouseCoopers.

It’s definitely a challenge for the Boston area, where biotech startups in particular have been a good source of new, high-skill jobs and the infrastructure spending that accompanies business formation and growth. Quarterly figures bounce around, and the overall year still looks ok. But the trend is clearly something to worry about here.

The long-term (15-100 year) potential of life sciences is amazing, and I do expect investment to increase dramatically over the course of the next few decades. Still, the near term picture is not so pretty. Commentators are quick to blame difficulties with the FDA and the choppy IPO market for the slowdown in investing. There’s some truth underlying their whining about FDA on the medical device side, but in general the explanations are too simplistic and off base.

Investing in biotechnology drugs has always been a big gamble, and it’s unclear to me whether there’s ever been a great return on investment argument for early stage investors, considering the time, cost and risk of development. The additional problem now is that it’s unlikely that society will be prepared to pay rich rewards for those few products that do make it to market. A lot of biotech drugs are priced at tens to hundreds of thousands of dollars annually per patient. That worked ok when drugs like Cerezyme were introduced with breathtaking pricing. Insurance companies actually liked to point to the high reimbursement for those products as proof of their compassion. The unit costs were high but the number of patients was very low.

Life’s different today now that everyone’s latched onto the idea of pricey cancer treatments. As a society we haven’t yet faced up to the fact that we can’t afford to pay so much, especially for products that have only modest benefits on average. However, investors have already concluded that by the time newly funded drugs make it to market that day or reckoning will have arrived. And I agree with their conclusions.

VC-funded drug and device companies have generally contributed to the growth of medical costs by introducing expensive substitutes for existing treatments or layering additional therapies on top of existing approaches. That game is ending, but luckily a new one is beginning. For the next 10 to 20 years the name of the game is constraining the growth of health care costs while increasing quality and improving the patient experience. There is a (small) role for drugs and devices, but much larger opportunities in health care service innovation and health information technology. Some of these emerging opportunities are appropriate for venture funding, but others don’t require much capital or lack the potential for venture-style returns.

Some specific growth areas include:

Clinical decision support for clinicians and patients
Navigation tools for patients and providers that take into account clinical and financial choices
Remote patient monitoring
Provider/patient/plan communications
eLearning to replace traditional continuing medical education approaches
Consumer oriented tools to enhance the patient experience in the outpatient and inpatient settings
Tools to speed and reduce the cost of clinical development of pharmaceuticals and devices

There is a mobile overlay to all of these points.