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Survey: VCs Pulling Back from Biopharma, Devices Companies

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A survey of venture capital (VC) companies investing in health care enterprises says they have shifted funding away from businesses that develop drugs and medical devices toward less regulated services and information technology firms. The survey, conducted by the National Venture Capital Association (NVCA) from July to September 2011, covers 156 of its members with investments in health care or life sciences companies, representing 60 percent of the 259 questionnaires sent out.

Overall, a large percentage of the companies — but not a majority — say their health care investments have declined over the past few years and indicate they could decline further. About four in 10 (39%) say their funding of health care enterprises has declined over the past three years, compared to less than two in 10 (17%) who say the amount has increased. Similar numbers of VCs say they plan to decrease their health care investments during the next three years, compared to about half that number (21%) that plan to increase health care funding.

Respondents indicate they changed the mix of their health care related investments, reducing the funds for biopharmaceutical and medical device companies and increasing the amounts for firms in health care services and information technology. About four in 10 VCs say they reduced investments in biopharma (41%) and device companies (40%), with half or less (14% to 22%) of that number increasing their funds. By about a three to one margin, VCs say they increased funding in health care I.T. and services enterprises (34% and 31% respectively), compared to decreases in those sectors (10% and 9%).

NVCA says this change in the mix of companies shows a preference by VCs for sectors less regulated by the Food and Drug Administration (services, I.T.) rather than those more closely regulated (biopharma, medical devices). However, the results also show that VCs increased rather than decreased investments in companies making diagnostics — part of FDA’s medical device portfolio — by a 27 percent to 17 percent margin.

A similar change in sector mix occurs in investments planned by VCs over the next three years. Four in 10 VCs plan to reduce investments in biopharmaceutical (40%) and medical device (42%) companies while four to five in 10 plan to increase their investments health care services (42%) and health care I.T. (54%). About three in 10 VCs also plan to increase their investments in diagnostics companies.

Regulatory issues appear to weigh heavily on the VC health care investment decisions. About six in 10 respondents (61 percent) cite regulatory challenges as factors having the highest impact on their investments. Another three to four in 10 each said reimbursement concerns (38%), financial markets (35%), and capital requirements (28%).

More than half (58%) of the respondents say they do not invest outside the U.S., but of those intending to invest offshore, more (38%) cite regulatory challenges as a reason. About two in 10 (18%) indicate reimbursement concerns.

Editor’s note: This story is taken from a press release and presentation slides released today at a news conference, NOT from the full report cited in the story, which a spokesperson for the National Venture Capital Association says is still in preparation. Science Business has requested the original wording of the survey questions and data tables showing the full distribution of responses to the questions, not just the responses given on the slides.

Read more: 2011 Q2 VC Funding Up for Life Sciences, CleanTech Stalls

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