SV Life Sciences, Fresh from Closing $523M New Fund, Looking at Health IT Deals

8/2/10

While many venture firms are struggling in the aftermath of the Great Recession, there are a few outfits with plenty of capital to invest. SV Life Sciences, which has operations in Boston and the Bay Area, is one of those few. Last month the firm closed one of the year’s largest healthcare-focused venture funds, its $523 million Fund V.

It turns out that SV Life Sciences—which we have known primarily for its bets on biotech firms like Lebanon, NH-based Adimab, and Waltham, MA-based NKT Therapeutics—plans to take a slightly greater interest in the health IT sector with its latest fund.

SV Life Sciences has made investments in six health IT firms to date, and perhaps the best known of those is Waltham, MA-based clinical trials software provider Phase Forward (NASDAQ:PFWD). Eugene Hill, the managing partner at SV Life Sciences who leads its healthcare services and health IT investing, says that the firm plans to be “a little bit more” active in funding tech startups focused on healthcare because of new incentives for U.S. physicians to adopt technology.

With the government providing $17 billion in incentives for doctors to adopt electronic medical records over the next several years, physicians who three years ago weren’t considered receptive to new technologies are now a viable market. Hill, who cited the federal incentives as a reason to be bullish on health IT, says that there are still some major barriers for startups that wish to enter this market with new products. (Notice he said the firm will be “a little bit more” active in this sector.)

One major hurdle for startups is the lack of interoperability among health information systems. That puts the burden on a startup to integrate its software with each of established players—such as Cerner, GE, and McKesson—if they want to break into the lucrative hospital market. That costs time and money, both of which are often scarce for tech startups.

“So it’s not as simple as downloading an app onto your iPhone,” Hill says.

Hill, who spends his time between the Bay Area and Boston, acknowledges that his group takes a conservative approach to health IT investing, looking at the sector as part of the much more established and predictable health services sector. Yet when it comes to health IT, even for companies with vastly superior technologies than the incumbents, there’s often the question of whether hospitals and physicians will adopt new products, he says.

Still, Hill sees interesting ways to make money in health IT that might get around some of those questions. For instance, SV Life Sciences in recent years helped launch Vitalize Consulting Solutions, a health IT staffing firm. “What we decided was that, if it’s going to be difficult to find good [health IT] products that we could finance and develop, and we were certain that there’s a huge shortage of information technologists trained in all these industry-specific healthcare applications, we could develop a staffing company that would provide assistance and staffing for organizations that were installing these new clinical systems,” he says.

That is not to say, however, that Hill and SV don’t see opportunities to invest in tech firms that are developing new products. As an example of an ideal health IT startup in the eyes of his firm, he pointed to Phase Forward, which SV Life Sciences initially backed in 1999. Phase Forward, which the California database giant Oracle agreed to buy in April for $685 million, began selling drug companies its software for automating management of clinical trials in the late-1990s, when almost all such studies were organized in paper-based systems. Its customers can also access the trials management software over the Internet, reducing customers’ need to maintain the software and all the data it collects on their own servers.

When SV Life Sciences backed Phase Forward, Hill says, the company’s technology had three key elements that the firm seeks in its health IT investments: Its software served a major need for a customer with the means and desire to pay for it; the product wasn’t heavily reliant on other technologies to provide value to the customer; and it was clear how the firm was going to market and distribute the product. Nowadays, Hill says he is interested in tech companies that have the capabilities to mine and organize data for customers in healthcare, using as examples Eden Prairie, MN-based Ingenix, which is part of UnitedHealth Group (NYSE:UNH), and Norwalk, CT-based IMS Health.

So far, Hill’s conservative approach to health IT investing has led to some positive results. Of the six companies in the sector his firm has backed, two have already provided healthy returns for the firm—Phase Forward, of course, and eMed Technologies, a former Burlington, MA-based provider of Web-based radiology software. Canada’s Cedara Software (now part of Merge Healthcare) bought eMed in 2004 for $48 million.

“I would says it’s a decent investment model,” Hill says. “It’s not been an easy space for investors to invest in.”

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