Embargoed Until:
December 2, 2008
12:01 a.m. Eastern Time



Christopher Fleming

Survey Reveals High Level Of Concern About Regulatory And Reimbursement Risk Among Venture Capitalists

Second Study In Health Affairs Examines Ways In Which Venture Capital Flows Affect Market Entry And Exit By Biotech And Medical Device Firms

Bethesda, MD -- Federal public policies can have an important impact on the flow of venture capital that helps fuel innovation in biotech, pharmaceuticals, medical devices, and other health care sectors, according to an article by Duke University’s Clay Ackerly and coauthors published today on the Health Affairs Web site. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w68

When Ackerly’s team surveyed twenty venture capital fund managers, they found evidence that changes in the level of regulatory and reimbursement risk have "a major impact on the investment strategies of venture capital funds. Approximately two-thirds of respondents said that increases in risk would lead them to shift investments within or across health care sectors or to reduce health care investments altogether," the researchers report. "Therefore, given venture capital’s important contributions to innovation in health care, policymakers should make a concerted effort to better understand the link between their policy levers and the venture capital industry," they add.

The study by Ackerly and coauthors is one of two articles published today by Health Affairs that examine the role of venture capital in health care. http://content.healthaffairs.org/cgi/content/full/hlthaff.28.1.w68/DC3 The second article examines the ways in which venture capital affects innovation in the biotech and medical device industries. Lawton Burns of Wharton and coauthors report that venture capital plays some role in fostering the entry of new firms into these sectors. However, they say that venture capital’s more important role comes in fostering successful market "exits" by biotech and device firms, through acquisition by other firms or through transitions to the public markets via initial public offerings of stock. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w76

The venture fund managers surveyed by Ackerly and his colleagues manage funds collectively invested in more than 1,100 companies. The survey respondents had a total of $13.5 billion currently under management, $7.0 billion of which was devoted to health care. "Respondents largely agreed on the importance of the relationship between returns and regulatory and reimbursement policies, ranking reimbursement, intellectual property protection, and the efficiency of the Food and Drug Administration review process as the most important risks affecting portfolio companies’ returns," the researchers report.

Ackerly and coauthors report that venture capital managers expect reimbursement risks to worsen in the future, and they warn that this could cause fund managers to decrease health care investments. Of the $67 billion in venture capital invested in health care since 2000, less than 20 percent was invested by "pure-play" firms focused solely on health care; thus, "the scope for shifting out of health care investment and into other areas is large." As an example of a public policy decision that positively affected investors’ perceptions of risk, the researchers cite the Pediatric Exclusivity Provision of the FDA Modernization Act of 1997, which granted six additional months of market exclusivity to companies for conducting pediatric safety tests of certain drugs.

For their study, Burns and his colleagues tracked the fortunes of 863 biotech and 889 medical device firms. The researchers comprehensively examined the influences on market entry and exit, including both successful exits (through acquisition or IPO) and unsuccessful exits (through bankruptcy). They found that market entry for biotech and device firms was not correlated with venture capital funding. This suggests that "firms enter the market with promising science/technology and backed by personal capital or other investors and then look for venture capital funding later," the researchers write.

However, Burns and coauthors emphasize that through its role in facilitating acquisitions and IPOs, "venture capital funding is nevertheless important for supporting those start-ups whose promising technology pans out in terms of actual product sales." They note that venture capital firms have gradually increased their investments in the biotech and medical device sectors over time, but the number of companies financed has remained stable. This suggests that venture capital firms "are concentrating their growing investments in a fixed number of start-up companies," a strategy "associated with good exit and, thus, with technologies that get successfully commercialized," according to the researchers.  

After the embargo lifts, the article by Ackerly and coauthors will be available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w68.

The article by Burns and coauthors will be available at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.28.1.w76.



Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org. The full text of each Health Affairs Web Exclusive is available free of charge to all Web site visitors for a two-week period following posting, after which it will switch to pay-per-view for nonsubscribers. Web Exclusives are supported in part by a grant from the Commonwealth Fund.


©2008 Project HOPE–The People-to-People Health Foundation, Inc.