October
2007 issue
Health Care VC Is Here To Stay--
Partners At Six Leading Firms Talk With Us About The Current Market
Recent conversations with several investors led us to feel optimistic about
the state of the health care venture capital market and where it’s headed.
...
Services Deals
Boost Quarterly Results--
According To Third Quarter 2007 Health Care Venture Capital Data
During the third quarter ended September 30, 2007, health care venture
capital deal flow continued at a steady pace, with more dollars than usual
invested in health care services companies.
...
IPO Market
Just one health care company priced an IPO during September, but its stock
has been doing notably well in the aftermarket, and several more filed for
initial public offerings during the month.
...
Mergers & Acquisitions
Pharmaceutical deals dominated the health care M&A market during September,
which also saw a fair amount of activity in the medical device sector.
...
Private Placements
One deal accounted for more than half of the
total dollars raised through private placements during September, but not
many deals were announced.
...
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Companies Mentioned in this issue:
October 2007
A
Abbott Molecular p7
ACT Venture Capital p11
Adams Street Partners p10
Adnexus Therapeutics p8
AdvanDx p11
Aerocare Holdings p8
Aescap Venture p11
Agilence Health Advisors p6
Aldagen p11
Allen & Co. p10
Allen & Company p9
Allergan p8
Alnylam p11
Alphatec Holdings p4, p8
Alseres Pharmaceuticals p4
Alta Partners p2
Altheus Therapeutics p11
ALZA p9
Amerigroup p8
AMR ProNurse p8
Anesiva p12
Antigen Laboratories p8
APEX Intl. Clinical Research p8
Aphelion Capital p10
Archemix p12
Array BioPharma p7
Arura Pharma p8
Ascension Health p12
Ascension Health Ventures II, LLC p12
AstraZeneca plc p7, p8
Athena Net India Pvt. Ltd. p6
athenahealth p4
Atlantis Components p8
Atlas Venture p11
Atria Genetics p7
Atritech p11
Austin Ventures p10
Avicena Group p13
Azimuth Opportunity Fund p13
B
Barrier Therapeutics p13
Baystar Capital p11
BB Biotech p9
Bellevue Woman’s Hospital p8
Berkeley HeartLab p7
Best Medical p8
BioDelivery Sciences p8
Biogen Idec p10
BioHeart p4
bioMerieux p11
BioMicro Systems p11
Bionovo p4
BioPure p4
Biotest AG p8
BioVentures Investors p11
Birmingham Associates Ltd. p13
BlueLine Partners p13
BMO Capital p4
Boston Life Science Venture p10
BridgePoint Master Fund p11
Brimberg & Company p13
Bristol-Myers Squibb p8
Brookside Capital p15
Bru II Venture Capital Fund p11
Business Development Bank of Canada p1
C
Callisto Pharmaceuticals p4
Canaan Partners p2
Canaccord Adams p4, p13
CapMan p11
Cardiosolutions p11
Care Improvement Plus p9
CareSeek Inc. p16
Caring.com p11
Catholic Health East p12
Catholic Health Initiatives p12
Celera Group p7
Celgene p7
Cellerix p10
Cellular Technical p8
Center for Venture Research at the University of N p16
Cerexa p2
CHL Medical Partners p11
CHV II, LP p12
CIBC p4
Clarus Ventures p9, p11
CNF Investments p11
Concateno Plc p8
Corium International p10
Cowen & Co. p4
Cozart Plc p8
Credit Suisse p4
Cross Atlantic Partners p11
CTI Life Sciences Fund p10
Cyntellect p9, p11
D
DaVita p8
Dawson James Securities p4
Delcath Systems p4, p13
Desjardins Venture Capital p10
DexCom p2
DFJ Dragon Fund China p10
Diffusion Pharmaceuticals p11
Doll Capital Management p11
Domain Associates p2, p9
E
Early Stage Partners p11
Echo Therapeutics p8
Eclipsys p6
Edmond de Rothschild Investment Partners p11
Electro-Optical Sciences p4
ElectroSonics Medical p11
Elixir Pharmaceuticals p4
Elliott Associates p13
Ellis Hospital p8
Emeritus Assisted Lvg. p8
Eminent Venture Capital p10
Emphasys Medical p4
Enobia Pharma p10
Eppendorf AG p8
Esprit Pharma p8
Essex Woodlands Technology Ventures p10
Evotec AG p8
Exelixis p4
F
f-star p11
Flexible Medical Systems p11
Fonds de solidarite FTQ p10
Forest Laboratories p7
Forward Ventures p11
G
GenomeQuest p11
GlaxoSmithKline plc p8
GlobeImmune p10
Globus Medical p9
Goldman, Sachs p4, p6
GS Capital Partners p9
H
HBM BioMed China p10
HBM Partners p1
Health Systems Inc. p15
HealthCap p11
Healthcare Realty Trust p4
HealthCare Ventures p10
Heights Capital p10
Henry Schein p8
Highland Capital Partners p10, p11
HLM Venture Partners p11
HomeChoice Partners p8
Humana p8
Hyperion Therapeutics p10
I
IDG Ventures Boston p11
Imalux p11
Imperial Innovations Group p11
Insulet p2
InterMune p4
Interventional Spine p12
InterWest Partners p3
IRIDEX Corporation p13
Isis Pharmaceuticals p7
Israel Seed Partners p11
ISTA Pharmaceuticals p8
J
JenaValve Technology p11
JP Morgan Securities p13
JPMorgan p4
K
KMG America Corporation p8
L
Laserscope p15
LD Pensions p11
LDR Holdings p10
Lectus Therapeutics p11
Leerink Swann p13, p16
Legg Mason p9
Legg Mason Capital Management p10
LeMaitre Vascular p8
Leprechaun, LLC p9
Life Sciences Partners p10, p11
LifeBond Limited p11
Lilly Ventures p10
Lothian Partners p10
Lovell Minnick Partners p16
M
MAKO Surgical p4
MAP Pharmaceuticals p4, p15
MatlinPatterson Global Advisors p9
Mawell p11
Mayes College of Healthcare Business and Polic p16
MD-X p15
Meda AB p8
MedAssets p6
Medica Venture Partners p10
Medical Staffing Ntwk. p8
Medicis p10
Medicure p13
Medivation p13
Medtronic p11
MedVenture Associates p10
Mellon Family Investment Company p10
Memphis Managed Care p8
Merck p9
Mercy CarePlus p8
Meritech Capital Partners p11
Merrion Pharmaceuticals p4
Microbia p7
Millennium Pharmacy Systems p12
Modigene p4
Molecular Vision p11
Molina Healthcare p8
Morgan Stanley p4
Morgenthaler Ventures p10
Mosaix Ventures p11
MPM Bio IV NVS Strategic Fund p11
MPM Capital p1
N
Nabi p8
NanoCor Therapeutics p11
Nanostart AG p11
NeoStem p4
Neuromed Pharmaceuticals p9
New Brunswick Scientific p8
New Enterprise Associates p1, p10
New Leaf Ventures p11
New Science Ventures p9
Nexstim p11
Nile Therapeutics p8
North Bridge Venture p11
Northstar Neurosciences p2
NovaCardia p4
Novartis AG p7
Novartis Venture Fund p10
Novate Medical p11
Novelos p4
Novo A/S p1
NPS Pharmaceuticals p4
Nycomed Pharma p8
O
Obagi Medical Systems p4
Octillion p4
Oculus Innovative p4
Oklahoma Seed Capital Fund p11
OpGen p11
Ophthotech Corporation p12
Oragenics p4
OrbiMed Advisors p10
Ortho-McNeil, Inc. p7
OTC Asset Management p11
P
Pacific Growth Equities p13
PAREXEL p8
Pearl Therapeutics p11
Pequot Ventures p15
Perseus-Soros Biopharmaceutical Fund p15
Pfizer p16
Pharma-Bio Serv p4
Phreesia p11
Piper Jaffray p4, p6
Planet Technologies p8
Polaris Venture Partners p11
Prana Biotechnology Limited p13
Precision Dynamics p9
Prism Venture p11
Progenics p4
Prolog Ventures p11
Proteon Therapeutics p11
PSS Medical p6
PTC Therapeutics p11
PTV Sciences p10
Punk Ziegel p4
Q
Quantel p8
Quantum Technology Partners p10
R
R.W. Baird p4
Radianse p12
Radius Health p7, p11
RadNet p8
Regulus Therapeutics p11
REM Sleep Diagnostics p8
Renovis p8
Richard King Mellon Foundation p10
Roche Venture Fund p10
Rothschild Private Equity p10
S
SafeStitch p8
Sagent Pharmaceuticals p10
Sequel Pharmaceuticals p11
Sequel Venture Partners p10
Sermo p9
Seroba BioVentures p11
SightLine Healthcare Vintage Fund p11
Silkit Pharma Corporation p8
Skyline Ventures p1, p11
Sleep Holdings, Inc. p8, p13
SMI Products p8
Sofinnova p1
Sofinnova Ventures p10
Software of Excellence p8
Solantic p9
Sontra Medical p8
Spinal Dynamics p3
Split Rock Partners p11
Spring BioScience Corp. p8
STAR Physical Therapy p8
Stifel, Nicolaus & Co. p4
StrataGent Life Sciences p10
superDimension p11
SupplyScape p11
Symphony Capital Partners p7
Symphony GenIsis p7
T
T2C2/Bio 2000 p10
Takeda Pharmaceutical p11
Targanta Therapeutics p4
Telegraph Hill Partners p10
The March Group p16
The Zitelman Group p11
TheFunded.com p3
ThinkEquity Partners p13
Three Arch Partners p3
Tobira Therapeutics p11
TomoTherapy p4
Toucan Capital p10
Trans1 p4
TransMedics p4
Trophos p11
Tullis Dickerson p11
TVM Capital p11
U
U.S. Physical Therapy p8
UBS p4
Ucyclyd Pharma p12
UltraShape p11
University of the Sciences at Philadelphia p16
V
Valley Imaging Centers p8
Valley Ventures p10
Vascular Architects p8
Ventana Medical p8
Ventech p10
Vermillion p4
Versant Ventures p10
Versant Ventures p9
Verus Pharmaceuticals p7
VirtualScopics p11
Vital Therapies p10
Vivo Ventures p10
vSpring p11
W
Water Street Healthcare Partners p9
WaveLight Aesthetic p8
Wellcome Trust p11
Welsh, Carson, Anderson & Stowe p9
Wexford Capital p10
WRF Capital p10
X
XactiMed p15
XLHealth Corporation p9
Y
Ysios Asset Management p10
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Health Care VC Is Here To Stay--
Partners At Six Leading Firms Talk With Us About The Current Market
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Email Editor
For at least the past few
years, certain firms have consistently been among the most active venture
capital investors in health care. We talked with partners at several of
these firms to better understand what criteria they use to make their
investment decisions and why they are successful, as well as how current
economic forces may be affecting the health care venture capital market.
Not surprisingly, no one wanted to talk much about the potential changes
in capital gains treatment for limited partnerships, but Chip Linehan of
New Enterprise Associates made a statement that probably
encapsulates what most people in the business are thinking. “If anything
is passed, I hope it doesn’t apply to VC,” Mr. Linehan said. “Venture
capital is really an engine of job creation. We are not trying to make
money based on financial engineering, but instead based on investing in
high-growth companies that are really delivering an innovative or unique
new service.”
Since 1978, New Enterprise Associates has funded more than 550 companies
in the health care and information technology sectors, and is currently
managing approximately $8.5 billion in committed capital. We wondered how
may business plans are presented to the firm every year, compared to how
many get funding—but that number, Mr. Linehan said, “is not really a
number we track, because we find that more than 50% of the deals we do are
with entrepreneurs and other professionals that we already know. Most of
business comes from referrals and existing relationships.” The other
investors we talked with also stressed the importance of personal networks
as a primary source of deal flow.
For example, we also talked with Bob More of Domain Associates, a
firm that was founded in 1985 to invest exclusively in emerging life
sciences companies. Most of the plans that Domain Associates backs come in
through referrals, and, “Thirty to forty percent of the investments we
make are in startup companies of our own,” Mr. More stated. “We want to
back the right entrepreneurs with the most exciting, worthwhile
technology. We want our portfolio companies to be phenomenally successful,
because then, of course, our investments are successful.” Domain focuses
on three main ideas when making a deal, he said, “Alignment of interest.
Targeting big areas where there are big markets. And, we want to invest in
the best people with the best ideas.”
Dan Janney, who focuses primarily on biopharmaceutical investments, is
part of the team at Alta Partners. Alta Partners has funded roughly
130 life sciences companies since 1996. Mr. Janney told us, “We have a
pretty tight early screening process so we really don’t get into due
diligence on any ideas that we think aren’t likely to be big winners.” The
firm also invests in later-stage opportunities. “We like to see early
visibility of whether or not the company is going to succeed with their
product,” he said. Among the therapeutic areas that Alta Partners
currently views as spaces where there are opportunities to meet unmet
needs, he noted, “We like age-related diseases, so we have some
CNS-related investments, as well as glaucoma, and metabolic and related
disorders, including diabetes and obesity.”
On the medical device side, there are compelling opportunities in the
metabolic disease space, as well as the cardiovascular space. “For
example, we invested in Insulet (NASDAQ: PODD), a developer and
manufacturer of a disposable insulin pump for diabetics. The company has
great technology that improves quality of life for a large population and
meets a real need. Insulet went public earlier this year, and we are still
invested in the company. The stock is performing very well, and we think
it still has lots of upside potential.” In part, the proceeds from
Insulet’s last venture financing and its IPO have been used to scale up
production. “We think market acceptance is going really well. The main
challenge with Insulet was actually meeting demand, so the company has
expanded some manufacturing to China now,” he explained.
Dr. Mickey Kim, the most recent addition to the Canaan Partners
health care team, which now includes five partners, also talked about some
successful investments. “We have had nine positive health care exits over
the past four years, including DexCom (NASDAQ: DXCM), the largest
diagnostic IPO of 2005, Northstar Neurosciences (NASDAQ: NSTR), the
second-largest med-tech IPO of 2006, and Cerexa, the largest
biotech acquisition of 2007,” noted Dr. Kim. “We have very strong deal
flow in health care.” Canaan Partners has invested in more than 250
companies since its founding in 1987, in sectors including
biopharmaceuticals, medical devices and diagnostic products.
Dr. Wilf Jaeger of Three Arch Partners gave us the impression that
deal flow has been strong at his firm, and probably will continue to be
strong in the health care industry. “It’s a seller’s market right now,
particularly with so much cash,” he noted, and besides, “Health care is so
personal and so real. The entrepreneurs, clinicians and scientists in the
industry are all amazingly innovative, and there is definitely sufficient
scientific expertise in the market.” Three Arch Partners was formed in
1993 to provide young companies with access to relevant clinical and
business resources, as well as capital, and has helped create, build and
fund more than fifty health care companies. One big win for the firm was
its investment in Spinal Dynamics, we learned. Regarding the types
of opportunities the firm invests in, Dr. Jaeger explained, “We wouldn’t
invest in anything that we didn’t find exciting. In technology, generally
we are looking for what is disruptive. In services, we are looking for a
business model that is relatively new, but also proven on some scale.”
Chris Ehrlich of InterWest Partners had some advice for
entrepreneurs who want to get in front of top-tier health care venture
capitalists, noting that, “In this business it’s equally important who you
know as what you know.” He also suggested an Internet resource for
entrepreneurs and VCs, called TheFunded.com, which features a
collection of posts written by entrepreneurs (mostly anonymous) to
describe experiences with various partners and firms, and a rating scale
that ranks venture capital firms on key aspects of doing business.
InterWest Partners has been investing since 1979 and currently has more
than $2 billion in capital under management. When the firm is evaluating
investment opportunities, Mr. Ehrlich said, “We start off by looking for a
large, underserved market being addressed with breakthrough technology and
an experienced management team.” As its portfolio companies grow and
evolve, he said, “If we’re betting on a management team, we want to keep
that team intact. Sometimes, though, if different skill sets are required
to move a company forward, we make appropriate management changes.” One
point Mr. Ehrlich made, which applies to InterWest, as well as some other
top firms these days, is that, “One area we are really looking at and
investing in is companies that are developing or producing technologies or
services that will be paid for out-of-pocket by consumers, instead of
reimbursed.”
The top health care venture capital firms like to play a major role in the
development and growth of the companies in which they invest, and usually
take board seats when they invest—not always based just on who put in the
most money, but often on expertise, as well. Each firm we connected with
focuses on specific areas of the health care market, based primarily on
the experience and expertise of its partners—but for the top firms, there
is still a lot of ground to cover. These VCs are looking at business plans
numbering from the high hundreds up to 1,500 per year, and generally
investing in a single-digit percentage of them. Expectations vary somewhat
from one investment to the next, and although the firms we contacted do
not, for the most part, disclose their exact financial results, we did get
the sense that business has been good and returns have been getting
better. There have been some changes in the market, of course, so these
days VCs are generally looking for a shorter space of time between initial
investment and exit, and in some cases, utilizing more milestone-based
financing plans. In the case of Domain Associates, Mr. More said, “Our
returns have been fairly steady over time,” and although the firm doesn’t
reveal its exact financial results, he said, “We’re looking for about a
20% return.” One thing Three Arch Partners’ Dr. Jaeger has noticed is that
over the past several years, “Fund sizes have increased and investor
expectations have changed somewhat. Right now we are looking for multiples
in the 2x to 3x range, and IRR’s in the mid-to-high teens.”
But what about the success of the companies these firms invest in? Dr.
Jaeger of Three Arch Partners estimated that, “About 20% of the companies
in our portfolio have revenues at the time that we invest… more than half
have revenues when we exit.” Essentially all of the companies that Alta
Partners invests in are are pre-revenue, but 10% or so have revenues when
the firm exits. Domain Associates’ Mr. More stated, “Most of the companies
we get involved with are pre-revenue at the time we invest, with maybe 10%
to 15% that have some revenue. By the time we exit, I’d say up to half
have revenues.” He put into words what may be one of the best basic
formulas for success in venture capital investing, stating, “I think that
our greatest strength is in identifying what a company is going to be,
what the assets are and putting the right people in the right position.”
Sometimes the factors in the formula need to be adjusted over time,
because, he continued, “It’s important to have the right person in the
right place at the right time.” The venture capitalists we talked with
have made many investments over the years, with the majority of these in
early-stage companies. New Enterprise Associates, for example, “is
actively investing in both startup companies as well as companies
producing revenues. Right now we are making 20 or so new deals a year,”
according to Mr. Linehan. Of the companies in InterWest’s portfolio, Mr.
Ehrlich said, “I can only recall one that had revenues at the time we
invested. We like to joke that biotechs are pharma companies unencumbered
by revenue.”
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