U.S. venture capitalists 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.
The survey of more than 150 venture capital firms identified Food and Drug Administration (FDA) regulatory challenges as the most significant factor driving away investment from startup companies that are bringing critical therapies to market. Other factors included reimbursement concerns and an adverse financial environment. The report, Vital Signs: The Threat to Investment in U.S. Medical Innovation and the Imperative of FDA Reform, strongly indicates that America’s medical innovation economy is in grave danger of losing its primary source of funding, causing serious harm to both U.S. patients and the national economy.
“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.”
Investment Decline in Innovative New Therapies
The survey found that U.S. venture capital firms have been decreasing their investment in biopharmaceutical and medical device companies over 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 over 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.
In another alarming sign, survey respondents expect to see 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, FasterCures. “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.”
Drivers of Investment Decisions
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 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.”
U.S. Competitiveness and Job Creation at Risk
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 seven percent and zero percent of respondents plan to decrease investment in Europe and Asia, respectively. 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. This major shift will reduce the availability of lifesaving and life-sustaining treatments for Americans and will result in a decrease in U.S. job creation, threatening the global leadership of the U.S. in medical innovation.
If left unaddressed, patient health care, job creation and the U.S. economy will suffer substantial further damage. 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.
U.S. Game to Lose
Despite the grim prognosis, there remains an opportunity to address these challenges. Nearly all respondents indicated that FDA reform would have a significant positive impact on venture investment in 3 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.”
For a copy of the survey data slides, please visit: http://www.nvca.org/vital_signs_data_slides.pdf
About NVCA’s MedIC Coalition
The Medical Innovation and Competitiveness (MedIC) Coalition educates policymakers on the critical role America’s medical innovation plays in the U.S. healthcare system and high quality job creation, where and how disruptive innovations are developed and the challenges currently facing the medical innovation system. MedIC educates stakeholders and policy makers and supports legislation to address the threats facing America’s medical innovation system. Founded in 2010 as a partnership between the National Venture Capital Association (NVCA), member venture capital firms and their early-stage portfolio companies, the coalition aims to preserve U.S. leadership in medical innovation and ensure that America remains the primary incubator for global innovation. MedIC is based in Washington, DC.
Venture capitalists are committed to funding America’s most innovative entrepreneurs, working closely with them to transform breakthrough ideas into emerging growth companies that drive U.S. job creation and economic growth. According to a 2011 Global Insight study, venture-backed companies accounted for 12 million jobs and $3.1 trillion in revenue in the United States in 2010. As the voice of the U.S. venture capital community, the National Venture Capital Association (NVCA) empowers its members and the entrepreneurs they fund by advocating for policies that encourage innovation and reward long-term investment. As the venture community’s preeminent trade association, NVCA serves as the definitive resource for venture capital data and unites its nearly 400 members through a full range of professional services. For more information about the NVCA, please visit www.nvca.org.