Don’t tell Ted Driscoll now’s a bad time to be a healthcare investor.
Despite frequent industry complaints of an overly burdesome regulatory environment and a soft IPO market, the Claremont Creek Ventures partner says technology and demographics have combined to create favorable circumstances for healthcare investors.
A digital imaging expert with a PhD from Stanford University to prove it, Driscoll holds 40 imaging-related U.S. and foreign patents and has helped found five imaging companies.
Claremont Creek’s healthcare portfolio includes wound closure technology company Zipline Medical, “bionic leg” company Tibion and genomic technology company GigaGen.
In the Q&A below, Driscoll talks about how federal health reform has changed his approach to investing and why he hasn’t been a very active investor in the mobile health space.
I’m not sure how many VCs would agree with it, but you say now is a great time to be investing in healthcare. Why is that?
We are experiencing a convergence of technological and demographic events that have combined to make this a great time to be investing in healthcare startups. The Internet has made communications and information access practically free, and everyone is now carrying the Internet in their pocket. Health records are being digitized, opening up huge health data sets to analysis.
The genomic revolution is poised to unlock the basic code of our biology. Demographics is delivering the boomers to their golden years and the developing world is demanding first world healthcare. And the healthcare system is being forced to focus on outcomes and efficiency. There are plenty of investments in healthcare that are not limited by the regulatory pathway. And the investments we make in the next couple of years will be influenced by the IPO outlook in five to seven years, not today.
Has federal health reform affected your investment strategy at all? In what ways?
We have always operated under the mantra that a technology must affect the course of treatment. Healthcare reform is just emphasizing that with its focus on outcomes. But we have also added the corollary that you must improve the course of treatment, at the same or lesser cost than the old way.
Your firm hasn’t been a particularly active investor in mobile health companies. Why is that and do you see anything changing that in the future?
I’m a big believer in the technological opportunities offered by our mobile phones. It’s become a “last 3 feet” problem, i.e. how do you measure a medical indicator and get it to the connected device in your pocket? But the problem today is it is hard to see how you will get paid for that monitoring. Current reimbursements aren’t geared to monitor otherwise healthy patients, just like they have never been geared toward preventive treatments. So although I’ve seen dozens of mHealth companies, I haven’t seen strong business models. In the end, I’m investing in a business, not an idea.
Have you consciously sought to avoid investing in companies that won’t have a lot of exposure to the FDA process? What do you think are the implications of this for healthcare investing in the future?
We don’t avoid companies with an FDA hurdle, but it is harder to make those investments. We have to factor in the delay and cost of FDA approval, so the opportunity has to be richer to gain our investment. And fortunately, the world market is getting much bigger and more sophisticated so you can often build a business offshore and only tap the U.S. market a few years later. In the end, the FDA regulations will only push the most modern medicine overseas.
Why are VCs now less interested in investing in drug and device companies than in the past, and where are they investing?
The cost of bringing a drug to market is now so great that it has priced itself out of the VC price range. Only big pharma can make those bets. And the early drop out rate makes any early stage investing too risky for VCs. Devices are laden with FDA risk, and have classical development cycles and costs. In contrast, healthcare IT deals often have capital efficiencies that are like software companies. And the costs to scale the business can be much lower. VCs are always looking for capital efficiency and the right timing. Nowadays that is less available in capital equipment or pharma companies.