Report Confirms Venture Capital at Risk in Medtech

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Venture capitalists in the United States are decreasing their investments in biopharmaceutical and medical device companies, reducing their concentration in prevalent disease areas and shifting investment away from the United States toward Europe and Asia, according to a report released today by the National Venture Capital Association’s MedIC Coalition.

What’s the reason? The survey of more than 150 venture capital firms pointed fingers at U.S. Food and Drug Administration (FDA) regulatory challenges as being the most significant factor driving away investment from startup companies. Other factors included reimbursement concerns and an adverse financial environment.

According to a 2011 Global Insight study, venture-backed companies—across all industries—accounted for 12 million jobs and $3.1 trillion in revenue in the United States in 2010.

The report, titled “Vital Signs: The Threat to Investment in U.S. Medical Innovation and the Imperative of FDA Reform,” indicates that America’s medical innovation economy is in grave danger of losing its primary source of funding.

“For decades, the U.S. has been the leader in delivering medical innovations to our citizens due to the thousands of startup healthcare companies that have been brought to life with venture capital funding. Millions of high quality jobs have been created, and iconic companies such as Genentech, Amgen, Medtronic, Biogen-Idec and Lifescan have been built. But our leadership is now at risk,” said Dr. Beth Seidenberg, partner at Kleiner Perkins Caufield & Byers and chairwoman of the MedIC Coalition. “This report confirms what has been suspected for some time, which is that venture capitalists are shifting investment capital away from lifesaving and life-sustaining products and into areas less regulated by the FDA as well as into other countries.

This trend is one that the venture industry and, we believe, the FDA, wants desperately to reverse.”

During a recent press conference on Capitol Hill, Sen. Michael Bennet (D-Colo.) expressed what has become a bi-partisan and bi-cameral concern among lawmakers.

“As a driver of our global economy, the FDA should constantly examine its regulatory framework with a 21st century lens,” Bennet said. “This is an urgent issue both for giving our patients the greatest access to life-saving therapies and for our national economic competitiveness. We must strive to provide our nation’s drug, biotechnology, and medical device startup companies with regulatory clarity and predictability in a way that is safe for patients but also meets their expectations regarding innovation.”

The survey found that U.S. venture capital firms have been decreasing their investment in

biopharmaceutical and medical device companies during the past three years and expect to further curtail such investment in the future. Overall, 39 percent of respondent firms have decreased their investments in life-sciences companies during the last three years and the same percentage expect to further decrease these investments over the next three years, some by greater than 30 percent. This is roughly twice the number of firms that have increased and/or expect to increase investment. While 40 and 42 percent of firms expect to decrease investment in biopharmaceutical and medical device companies respectively, 42 and 54 percent expect to increase their investment in non-FDA regulated healthcare services and healthcare information technology companies respectively. Notably, survey respondents also noted significant investment decreases in companies fighting serious and highly prevalent conditions including cardiovascular disease, diabetes, obesity, cancer and neurological diseases.

“More than 100 million Americans suffer from diseases for which there are still no cures, or even meaningful therapeutic options. To conquer disease and relieve suffering, we must have a medical innovation pipeline that is as strong and robust as possible,” said Margaret Anderson, executive director of FasterCures, a Washington, D.C.-based nonprofit medtech think tank that works across sectors and diseases to improve the effectiveness and efficiency of medical research. “Bringing critical therapies to market requires venture capital investment to spur a thriving life sciences industry as well as having a regulatory system that’s appropriately resourced and equipped to ensure innovation is translated to better health.”

Among the multiple factors impacting investment decisions, FDA regulatory challenges were most frequently cited as having high and significant impact in driving these investment trends followed by reimbursement challenges. Respondents believe these challenges are primarily related to an imbalance in risk/benefit assessment, and unpredictability at the FDA.

“Venture capitalists have always embraced risk and long-term investment to fund breakthrough innovation and form great companies,” said Dr. Jonathan Root, general partner at U.S. Venture Partners and MedIC Steering Committee member. “While many factors are at work in driving away investment from U.S. medical innovation, it is the FDA approval process—and the cost, time, and unpredictability that it adds to the development of innovative products—that weighs most heavily on investors. The FDA and the [Obama] Administration are already taking significant actions to reverse these trends, but we need the support of Congress to make sure these reforms are effective and lasting.”

In response to FDA challenges, venture capitalists and the companies in which they invest are increasingly looking to Europe and Asia to bring their medical products to market. According to the survey, 36 and 44 percent of firms plan to increase investment in life-science companies in Europe and Asia, respectively, while only 13 percent plan to increase in North America. Correspondingly, 31 percent of firms indicated plans to decrease investment in life-science companies in North America, while 7 percent plan to decrease investment in Europe. Nobody reported a decline in Asian expansion.

Additionally, a majority of the respondents indicated a continued trend for U.S.-based startup medical companies to seek regulatory approval and commercialization of their products outside the United States first and to establish and grow operations abroad. Based on the survey responses, America can anticipate approximately half a billion dollars less of investment into healthcare start-up companies in the near term, placing American jobs at risk, according to the report.

Nearly all respondents indicated that FDA reform would have a significant positive impact on venture investment in biopharmaceutical and medical device companies in the United States. Improvements that were favorably rated as showing promise include better predictability of decisions, increased efficiency and speed of decisions, rebalancing of risk/benefit requirements, expanded accelerated approval pathways and improved transparency in communications.

Recently, the FDA and the White House have begun a broad set of reform initiatives that are intended to address some of these problems, including new guidances on risk/benefit assessment, clinical trial design and new pathways for approval of innovative medical devices.

“The venture capital and startup communities are committed to working with lawmakers and regulators to continue to reform the FDA approval process so that Americans can have access to these important medical innovations without compromising safety,” said Mark Heesen, president of the National Venture Capital Association. “We are encouraged by our constructive dialogue with senior FDA officials, who recognize the gravity of the situation and are taking action. However, fundamental reform is urgent and will require a dedicated, bipartisan effort. We must give FDA the vital tools and resources it needs—along with a clear legislative mandate—to promote and protect the public health in a manner that encourages the development of innovative products for patients in need. We must act now or the U.S. public will lose access to breakthrough innovation at a very high cost to public health and the economy.”

A copy of the survey data can be found here.