Once the darling of investors, the future of the health care industry is in question. A recent report from the Wall Street Journal on venture capital trends showed that investment in the health care industry is on the decline.
http://online.wsj.com/article/SB10000872396390444772804577623422593171382.html#project%3DNBT092012%26articleTabs%3Darticle
In fact, Castlight, which placed #1 on the Wall Street Journal's list last year, is nowhere to be found in the top 25 this year.
So what gives?
The article states that the decline in health care investment is due to the difficulties health care startups face in "exiting" their venture investment. Exits happen when investors sell their equity in the company: usually through an IPO (Initial Public Offering) or through an acquisition. However, these exits are becoming harder to come by for venture backed companies. Underlying this problem is the uncertainty that companies face with respect to obtaining regulatory approval for their products in the US. The FDA may say yes, no, or maybe (let me see more data) to health care companies. Increasingly, the FDA's answer is no or maybe. If the answer is maybe, investors must inject more money into the company to keep things going until the next FDA decision. Each injection of new funds dilutes ownership in the company while keeping the company's value unchanged. Because of the FDA's vacillation, investors are wondering if their money is best spent elsewhere.
However, Castlight believes that while investment in high capital sects of health care like medical devies and biotech are declining, health IT remains a hot space. Is this true? Well, there have been few to no successes in the health technology industry. Health care technology could very well be a bubble like the dot com. Afterall, the value proposition of product compnies like drug and device companies is well understood and accepted, but health IT requires a leap of faith. Often, regardless of industry, IT investments don't achieve the efficiency benefits that they claim to achieve (take it from an ex-SAP employee).
What do other reports say?
http://medcitynews.com/2012/01/rumors-of-healthcare-venture-capitals-death-have-been-greatly-exaggerated/
This report from June of 2012 points out that "medical device companies (38 percent) were the focus of the highest number of deals, followed by biotechnology (20 percent) and pharmaceuticals (13 percent)." The only issue of concern was a "Series B crunch" for health care companies in which Series B investments were more difficult to come by.
Despite this report, the majority of reports are less bullish on health care investing. Take this report:
http://www.reuters.com/article/2012/10/02/us-medtech-investing-idUSBRE89104D20121002
This report seconds the prevailing opinion that greater pricing pricing pressures, increased regulatory scrutiny, and slower economic growth are stifling the industry. In addition, the article states that new technologies must show greater outcomes and reduce payer costs for reimbursement.
Finally, this report highlights the strength of Healthcare IT:
http://www.healthcarefinancenews.com/news/healthcare-it-venture-capital-and-ma-hold-strong-q3-2012
This report cites Health IT's ability to "touch everybody" as one of the main driver's of the sector's attractiveness.The report also highlights investments in companies like Connecture, Doximity, and Clinipace.
In conclusion, while there are conflicting reports about the state of early stage health care investing, I believe that traditional health care investing is on the decline. The question is does Health Care IT investing show continued momentum in the quarters and years to come. And, will there be solid successes in Health IT to show that this sector is for real? We shall see.
http://online.wsj.com/article/SB10000872396390444772804577623422593171382.html#project%3DNBT092012%26articleTabs%3Darticle
In fact, Castlight, which placed #1 on the Wall Street Journal's list last year, is nowhere to be found in the top 25 this year.
So what gives?
The article states that the decline in health care investment is due to the difficulties health care startups face in "exiting" their venture investment. Exits happen when investors sell their equity in the company: usually through an IPO (Initial Public Offering) or through an acquisition. However, these exits are becoming harder to come by for venture backed companies. Underlying this problem is the uncertainty that companies face with respect to obtaining regulatory approval for their products in the US. The FDA may say yes, no, or maybe (let me see more data) to health care companies. Increasingly, the FDA's answer is no or maybe. If the answer is maybe, investors must inject more money into the company to keep things going until the next FDA decision. Each injection of new funds dilutes ownership in the company while keeping the company's value unchanged. Because of the FDA's vacillation, investors are wondering if their money is best spent elsewhere.
However, Castlight believes that while investment in high capital sects of health care like medical devies and biotech are declining, health IT remains a hot space. Is this true? Well, there have been few to no successes in the health technology industry. Health care technology could very well be a bubble like the dot com. Afterall, the value proposition of product compnies like drug and device companies is well understood and accepted, but health IT requires a leap of faith. Often, regardless of industry, IT investments don't achieve the efficiency benefits that they claim to achieve (take it from an ex-SAP employee).
What do other reports say?
http://medcitynews.com/2012/01/rumors-of-healthcare-venture-capitals-death-have-been-greatly-exaggerated/
This report from June of 2012 points out that "medical device companies (38 percent) were the focus of the highest number of deals, followed by biotechnology (20 percent) and pharmaceuticals (13 percent)." The only issue of concern was a "Series B crunch" for health care companies in which Series B investments were more difficult to come by.
Despite this report, the majority of reports are less bullish on health care investing. Take this report:
http://www.reuters.com/article/2012/10/02/us-medtech-investing-idUSBRE89104D20121002
This report seconds the prevailing opinion that greater pricing pricing pressures, increased regulatory scrutiny, and slower economic growth are stifling the industry. In addition, the article states that new technologies must show greater outcomes and reduce payer costs for reimbursement.
Finally, this report highlights the strength of Healthcare IT:
http://www.healthcarefinancenews.com/news/healthcare-it-venture-capital-and-ma-hold-strong-q3-2012
This report cites Health IT's ability to "touch everybody" as one of the main driver's of the sector's attractiveness.The report also highlights investments in companies like Connecture, Doximity, and Clinipace.
In conclusion, while there are conflicting reports about the state of early stage health care investing, I believe that traditional health care investing is on the decline. The question is does Health Care IT investing show continued momentum in the quarters and years to come. And, will there be solid successes in Health IT to show that this sector is for real? We shall see.
