Hey, Where Is Everybody Going? The Flight from Healthcare Investing
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I know the people at most of these firms—great investors like Mark Brooks (Scale), Rod Altman (CMEA) and Bijan Salehizedah (Highland)–and they are smart, successful and have contributed greatly to the establishment of important healthcare companies that have become leading industry players. It is really a drag to see them heading into a game of musical chairs where someone has already taken all the chairs away. Hopefully all the really good ones will rapidly be back in active investing action before long.
Most of the firms who are jettisoning healthcare are planning to spend all of their capital on information technology deals. Because the world needs another Zynga and Groupon. Not. I mean, I get it. You can build these companies with no significant regulatory entanglement, grow them rapidly through direct-to-consumer sales, take them public with magic fairy dust (Groupon is worth $11.5 billion? Nice infinity multiple of EBITDA) and come home the conquering hero. Yes, people want and love these companies and their products; just try to tear someone away from Angry Birds.
But seriously people, we are not going to maintain world dominance because we are totally awesome at World of Warcraft, not to mention have access to Groupon’s wide world of super cheap pedicures. We can only re-establish our economic world dominance by having an economy to come home to. And if we don’t fix the healthcare system by changing the way we do things, we aren’t going to have that. So given the massive opportunity to bring companies to the fore to fix this problem, why are healthcare investors waving the white flag?
The primary reason given for why firms are running way from healthcare like Road Runner from Wile E. Coyote is the vastly more complex regulatory environment that has created a dark cloud over the biopharma and medical device industries. It is getting increasingly more difficult, more unpredictable and more expensive to get drugs or devices approved by the FDA. Over the last few years a trail of tears has been formed by companies that got surprised in the FDA process when they met their end points and still didn’t get approval or where the rules of the approval game were changed mid-field. Where many young U.S. companies didn’t even bother getting European regulatory approval in the past, now it is becoming the primary path to market. There is a rising crop of these companies that have decided never to seek U.S. regulatory approval, trying to make it by marketing only in countries where the FDA is not. Today’s regulatory environment is fraught with mistrust and confusion and it has had a real, measurable and negative impact on U.S. bio-medical dominance. Increasingly investment dollars are going overseas to China, India and elsewhere, taking with it the innovations that used to be ours alone. The net result of all this has been an environment where it costs far more and takes far longer than used to be the case to get a new drug or device to market in the U.S. These are two characteristics that those who invest in venture funds simply can’t stand–they want shorter time to liquidity, not longer; and they want a good return on investment, not an increasingly high cost to get to any outcome. As a result, money is drying up for those who specialize in biotech and medical devices and thus funds are wrapping up instead of bulking up.
A second but important issue is the advent of much greater scrutiny around what drugs and devices can get reimbursed in our public and private insurance systems. Even if you can get a regulatory approval, you may never see the light of day on getting payment for what you have to offer. It has always been challenging to get a new reimbursement code for a new product, but now it is becoming an act of God. For very good reasons payers don’t want to open the floodgates to new products that might simply increase costs further and add no meaningful clinical value. Purveyors of new products are being forced to … Next Page »