|Trends & Perspectives|
The current climate is sunny when it comes to securing capital for IVD entrepreneurs and start-up companies. While IVDs might have been the forgotten stepchild to devices and therapeutics when it came to healthcare investors in the past, they are fast becoming a foremost area of interest.
According to Mark Heesen, president of the National Venture Capital Association, there has been a huge jump into life sciences investing, specifically into biotechnology, medical devices, and healthcare services.
Industry experts agree that IVDs are an area of growth, and most healthcare investors are turning their eyes toward the field. Heesen says that investing into the device arena might be one of the largest areas of growth for 2007.
Andrew Jay, DDS, managing partner, medical solutions fund at Siemens Venture Capital, goes a step further. “I think IVDs are becoming very hot,” he says. “We are seeing biotechnology investing becoming much more challenging. The public markets have an appetite for earlystage developments and that has become sated.” Jay adds, “Diagnostic companies can generate very high margins—in the 70% range safely.”
Logistics surrounding IVDs can also play a key role in garnering the high margin projections that help companies secure venture capital. For example, Heesen says, reimbursement is a major issue. Many people will pay out of pocket for these tests, so there is a greater likelihood that providers will see returns, and they do not have to rely on insurance or federal programs like Medicaid. He believes reimbursement will remain an increasingly important issue for investors.
Still, Gary Kurtzman, MD, who teaches entrepreneurship in life sciences in the Health Care Systems Department at the Wharton School of Business, University of Pennsylvania, says that there is some historical bias against investing in diagnostics. “There were a lot of missteps, and investors didn't make the returns they expected, so diagnostics lost a lot of its luster for investors.” However, he says that while some might never overcome their historical biases, “it is inevitable that diagnostics are becoming a big part of the healthcare paradigm.
“Diagnostics represent 5% of healthcare spending, but drive about 75% of costs. So diagnostics are here, but the question is more one of traditional venture return,” adds Kurtzman, who is also vice president of life sciences for Safeguard Scientifics Inc.
Kurtzman adds that the typical, old-school venture capital model expected 10-fold returns, but that the dynamics are now shifting. “Maybe the expectation should be a 3–5-fold return, and you can do that in diagnostics,” he says.
From an investment standpoint, the critical issue remains how to make money. “Investors no longer like the model of having to invest $200–300 million to get a drug developed,” says Kurtzman. Compared to investing in therapeutics, “diagnostics can be a less expensive investment and yield a more timely return.” Kurtzman believes that easier tests, such as tests that determine how a patient will respond to a particular drug, will do well, because those tests are less difficult to develop and tend to earn much higher margins.
Jay says that investors want to know what problem a company solves with the information its diagnostic test gives. Investors next want to know about the value that the information gained from the test provides, and the accuracy of the test, including its specificity and sensitivity. Finally, investors want to know how defendable the test is. For example, how tight is the patent? Is the price point for the test justifiable and maintainable?
While venture capital firms have a deliberate focus and look at how well a potential test would complement their current strategic partnerships, IVD entrepreneurs and startups that have their ducks in a row and can answer key questions for investors have the greatest chance of securing capital and forming mutually beneficial partnerships.
“Entrepreneurs have to look specifically at what fits their needs, because the benefit isn't just the money venture capital companies can provide,” Heesen advises, “it is also the expertise.”