During the Internet’s heyday, Orange County medical device and drug start-ups played second fiddle to flashy dot-coms and other technology companies when it came to venture capital. Not anymore.
“Very recently,after the Internet crash,healthcare starts to look great,” said Barbara Lubash, a managing director at the Newport Beach office of Versant Ventures.
With proven markets, healthcare investments tend to be more stable with solid returns, Lubash said, “although it never boomed like the Internet.”
“Healthcare is back on the rise,” said Elliot Parks, managing director of life sciences for Irvine-based venture capital firm Ventana Global Ltd.
Local health companies in Ventana’s portfolio include Core Inc., an Irvine disability and absence management company, and OptimumCare Corp., a Laguna Niguel-based provider of behavioral health services.
Healthcare always has grabbed its share of venture funding in OC. But in the past few years, the sector has been overshadowed by big sums going to Internet, telecommunications, software and chip companies. Now healthcare may be luring additional funding as investors turn away from troubled segments.
“There’s more money available to non-dot-com companies than two years ago because of the (Internet) problems,” said Michael Henson, founder of MedFocus Fund, a new Irvine-based fund focusing on medical device makers.
Consider the numbers. In the fourth quarter, OC medical device makers, biotechnology and healthcare service companies got $69 million in venture funding, second only to software, according to PricewaterhouseCoopers LLC. In all, OC companies took in $184 million in fourth-quarter venture capital.
In the second quarter,when OC tallied a record $264.1 million in venture funding,device and other medical companies grabbed only $49 million. Back then, software makers, including dot-coms, took the lion’s share at $101.6 million.
Still, firms are being picky about healthcare deals. In the fourth quarter, venture capitalists made three placements with medical companies, down from nine in the second quarter.
IntraLase Corp., an Irvine-based optical laser maker, was the largest local healthcare venture recipient in the fourth quarter with $22 million. Alsius Corp., which also is based in Irvine and develops catheters and body temperature monitors, followed with $20.2 million.
Other medical companies to receive funding include: WorkWell Systems Inc., a San Clemente medical information systems company that got $7 million; and Laguna Niguel-based Novalar Pharmaceuticals Inc., which got $511,000 in seed money for its plans to develop a local dental anesthesia product.
Another medical company that got money in the fourth quarter was Irvine-based device maker TherOx Inc., which received $30 million in December. The private financing, led by American Express Financial Corp., isn’t included in the PricewaterhouseCoopers figures. The company’s president, Paul Zalesky, calls the funding late-stage rather than venture.
The trend appears to be holding so far this year. Recent investments include a $13 million round closed by EndiCor Medical Inc., a San Clemente catheter maker, and $9 million for MyDrugRep Inc., a Newport Beach pharmaceutical data company (see story, below).
“On a relative basis, there will be increasing interest in healthcare in 2001, as compared to 2000,” said Ralph Sabin, managing director at Irvine-based Pacific Venture Group, another healthcare investor.
Citing statistics from Thomson Financial’s Venture Economics, Sabin said healthcare as a percentage of national venture investments shrunk from 23% in 1997 to 6% in 2000. Still, he said, actual dollars invested in the segment rose from $3 billion in 1997 to $6 billion last year.
Pacific Venture Group’s portfolio includes LifeMasters Inc., a Newport Beach company that’s developing what Sabin calls “technology-enabled self care.” The firm also has invested in Sub-Q Inc., a San Clemente maker of arterial and biopsy closing devices.
Still, healthcare investors offer this warning: don’t come to them with gassy, fluffy business plans like those of the dot-com era.
“We clearly want to see a need and solid technology,” Ventana Global’s Parks said. “There has to be clear evidence that the company is addressing the market with a solution.” n
