Pending health care reform should not distract from making medical technology investments

Aug 6 2009

In spite of the tremendous attention being paid this summer to health care reform, it is critical that investments in medical technology startups not go into a “holding pattern,” but continue unabated. So says ONSET Ventures partner Rob Kuhling.

There is a danger that investors will take a “wait and see” attitude, Kuhling believes, as the health-care ecosystem works through what could be far-reaching legislative and policy changes in coverage, funding, reimbursements, and even clinical standards and procedures. And there are several key reasons why he thinks that waiting is a mistake.

First, he says, is that the underlying fundamentals of medical technology investments will not change – regardless of what happens with reform. “Today’s health care imperatives are very simple,” says Kuhling: “provide the highest quality health care to as many people as you can at the lowest attainable cost.” To reach this goal, Kuhling says, there are tremendous opportunities for advanced technologies to simplify treatment and thus lower both near-term and long-term costs of care.

Second, he believes that it is always a poor strategy to build business plans around the expectation of government subsidy or regulatory relief. Simply put, he says, “If a company’s business plan can’t stand on its own merits without government support, it is most likely not a good investment.”

In particular, Kuhling believes that startups should be careful about focusing on healthcare IT. “There is a lot of discussion today about electronic health records for all,” says Kuhling. “While this very important evolution clearly must happen, we think that the problem is simply far too big – and expensive – for traditional venture-capital-funded startups to tackle.” Instead, the very large IT companies that have already been focused on this area and the very large customers within it are most appropriate to deal with the profound security, privacy, real-time data management, and integration with complex systems issues involved, Kuhling maintains.

The most interesting medical technology investments, Kuhling and his ONSET partners believe are: those that use advanced technology to lower total costs for improved treatment of major acute conditions or chronic diseases such as diabetes, heart and lung diseases, or morbid obesity; and those that deal with the special needs of the growing aging population. To this end, the firm has been very active investing in these areas, with companies such as Apieron (www.apieron.com), BAROnova (www.baronova.com), Enteromedics (www.enteromedics.com), Relievant Medsystems (www.relievant.com), Sadra Medical (www.sadramedical.com), Valeritas (www.valeritas.com), and others gracing their portfolio – all of which meet these criteria.

“We are less concerned about the potential increased involvement by government in health care,” adds Kuhling. “Since today the government is already the largest payer of health care expenses, medical technology companies have needed to be aware of complex regulatory and reimbursement issues for years; at the end of the day, changes will be incremental, not revolutionary. And although health care reform is a very complex problem and will undoubtedly take some time to be worked out, medical technology startup investments will continue to be attractive.”