Healthcare Venture Capital

Archive for August, 2010|Monthly archive page

De-escalating the Medical Arms Race: Why Lower Tech Is the Future of Medicine

In healthcare on August 10, 2010 at 6:14 pm

This post will offend some of my biotech and medtech friends. Sorry.

I firmly believe that we are in the final chapters of “The Great Medical Arms Race.”  And unlike the Cold War, I don’t think the United States will be the winner of this arms race. We might feel like we are winning, but in fact, we will end up losing due to the perfect storm of three unsustainable realities: healthcare cost growth, a federal budget crisis, and demographics.

Some of the advances we have made in life expectancy and quality of life due to some of these new technologies is amazing.  The US healthcare system has been very good at developing innovative new technologies that improve outcomes and increase costs.  Unfortunately, we are also very good at approving new technologies that just increase costs but have little or no effect on medical outcomes.

Lots of people have written about the the vast amounts that Medicare spends on end of life care. In particular, as a society, we spend too much on technology in the last few months of life and too little on basic access to primary care.  We spend too much building new heart hospitals and spine surgery centers and too little on hospice care or access to preventive care.  In short, we don’t “let go” well as Atul Gawande wrote so eloquently last week in the New Yorker.

I think everyone can agree that despite having the most access to technologically advanced therapies, the US taxpayer is not getting any bang for the buck.  A recent study showed that there is little correlation between reduced mortality and increased spending on several major health conditions.

Despite spending 17% of GDP on healthcare, the outcomes are dismal.  According to the WHO, amongst developed nations, the US is

-37th in overall health

-34th in life expectancy

-28th in infant mortality

-30th in obesity

In the world of medical technology, one of my favorite examples of questionable bang for the buck is colonoscopy.

-There are 4 million colonoscopies per year in the US.  Many adults who need colonoscopies still don’t get them due to fear of the procedure, lack of access to care, etc.

-Yet despite that, there is a growing $1b/yr medical device market for colonoscopes and related equipment in the US alone

-Colonoscopy is the bread-and-butter income for most of the 12,000 GI docs in the US and has aided greatly in the proliferation of GI focused ambulatory surgery centers that doctors often own a financial interest in.

-However, there exists little long term cost-effectiveness data showing that screening average asymptomatic risk populations with colonoscopy every 3 to 5 years is actually cost-effective in the long-run.

-In fact, more and more data shows that colonoscopy is being done way too often on average risk patients. High risk patients should of course be screened with colonoscopy.

-Health Affairs recently published an elegant paper postulating that lower-tech and lower cost screenings (ie, FOBT) for colonoscopy would “would result in more individuals’ getting screened, with more life-years gained”

So how about this crazy idea?

What if an lower-tech therapy or diagnostic had 80% of the effectiveness of a new technology but at 20% of the cost of the new technology?  Would society favor the older technology or the newer one? Would patients and families accept that they aren’t getting the absolute latest and greatest?

A totally rational society should choose the older technology and then invest the dollars saved into other areas with higher societal needs (ie, education) and potential benefits. But I fear that without some financial incentive, most individuals would not choose the cheaper technology if given a choice.

My favorite recent paper on this topic reviewed almost 1000 cost-effectiveness studies and concluded that only 0.4% of the interventions in those papers actually reduced cost significantly while only decreasing quality a small amount.

The authors of that study also concluded that “less-expensive, lower-quality innovations are ubiquitous in other economic sectors but have not been described in health care.”

This should frustrate every one of us as consumers of healthcare.  It certainly frustrates me as a investor in healthcare technology companies.

I think cost-effectiveness studies should be mandatory for US approval of new medical technologies.  If you pitch me a new medical technology company, be prepared to answer what your cost-effectiveness streategy is.

Cost-effectiveness is clearly the holy grail and where healthcare is headed in this country given the two big trends of the next 25 years: massive federal and state budget constraints and inevitable demographics.

Getting this issue right is the only fighting shot the US has at not having rising healthcare costs cripple the economy.  I’m really hoping the new government funded Patient Centered Outcomes Research Institute does the right thing here as well.

So, taking off my policy wonk hat and back to venture capital for a second: where is the investment theme here? Better decision support tools for doctors? Generic drugs or “generic” medical devices? Cost transparency services like Castlight?

If you can think of others, please comment below.


Venture Capital Investing: Micro vs. Macro-Economics

In healthcare on August 1, 2010 at 3:09 pm

The economic headlines these days are bad….and getting worse.  GDP growth net of inventory replenishment is a feeble 1% per annumSmall businesses and average workers are suffering. Banks are shutting down at record levels not seen since the Great Depression. Housing and commercial real estate markets are stuck. Deficits are ballooning. And the world is facing a deflationary cycle that will likely be toxic to investment in all asset classes.

Yet, while having slowed down quite a bit since the heady days of 2007, one corner of the world of start-up investing seems to be largely immune, or perhaps oblivious, to the broader economic slowdown.

Out here on Sand Hill Road, investment in consumer internet companies is fast and furious. It’s almost as if the 20 and 30-somethings who start these companies and the super-angels and VCs who fund them are living in a totally different world than the average American.  To witness this firsthand, I attended the CrunchUp conference put on by TechCrunch last Friday in Palo Alto. The buzz in the standing room only auditorium was totally infectious.

These start-ups seem to be living and thriving at the micro-level and totally ignoring the macro-economic picture.  How else could you explain the logic of starting a consumer-facing business in 2010 amidst all of the pain the economy is going through today? Or the fact that multiple term sheets and bid up pre-money valuations are the norm right now in the consumer internet hallways of the Valley.

The answer is that, while unemployment has been stuck near 10% for months and threatens to become long term and structural in nature, and the average American is struggling with a mountain of credit card debt and little prospect for higher paying work, consumers seem to still be spending money in one area: their digital lives.

People’s wallets are closed tightly for big purchases in their “real lives” like houses, cars, and major appliances.  Those same wallets are wide open for buying FarmVille credits and $100 per month cell phone data plans and shiny new iPads and flash sale sites and Groupons etc etc.  And this trend is being validated by big acquisitions like Disney’s purchase of Playdom last week for $560M upfront.

In healthcare venture, we live in an exactly opposite universe that has everything to do with the macro-economic picture, especially when it comes to liquidity and the funding of our portfolio companies:

-The FDA or health reform threaten big incumbents or start-up development cycles: kiss M&A goodbye
-The VIX (measure of public market volatility) is over 30, no chance for healthcare IPOs

And yet the limited partners of VC funds actually live squarely in the macro since they usually hold large diversified portfolios across a variety of asset classes.

So as long as the macro picture is bad, average venture fund-sizes will continue to shrink, which some argue can actually be good in the internet world.

Yet sectors that require major venture capital infusions before liquidity (ie, healthcare and cleantech) will continue suffer.

How else to explain the fact that only 5 new Series A medical device companies were funded in the Bay Area in 1H:2010, a record low for the last 12 years…It cant be that innovation has actually stopped or all unmet medical needs have have been solved.

OK I admit it: If it sounds like I am jealous of internet investors at this moment in time, I am…

What I don’t know yet is if the economy is going through a major structural change in the way consumers spend money (ie, the updated version of the dreaded “new economy” of 10 years ago) or if we are all just blissfully driving off a cliff together while we tweet about it and check-in on FourSquare from the edge of that cliff.

Moving to WordPress

In Uncategorized on August 1, 2010 at 10:40 am

I’ve moved to WordPress.

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More posts coming very soon.