Things are relatively quiet these days for healthcare venture capital investors.
After dominating local venture funding for much of this decade, healthcare investors now are idle, sitting on investments longer and funding little in the way of new deals.
“When the economy took such a dramatic shift last year, it sort of put everybody in a holding pattern because of the very real uncertainty,” said William Link, a Newport Beach-based managing director for Versant Venture Management LLC, which invests in medical device companies, drug makers and some health services companies.
Healthcare investors still lead funding here.
In the first quarter, they made up 65% of the $144 million in venture money invested in Orange County, according to the latest available figures from Dow Jones & Co.’s VentureSource.
But the $94 million invested in healthcare startups here in the first quarter is down from prior years. In the first quarter of 2008, venture capitalists invested $118 million in healthcare companies here, 90% of the total for the period.
In the second quarter of 2006, healthcare investors put $127 million into startups here.
Behind the slowdown: a dry market for initial public offerings, less money from investors for healthcare venture funds and a relatively slow pace of big company buyouts of healthcare startups.
The shock from the financial meltdown last fall also has been a factor.
“The investment pace has begun to recover a bit,” Link said, “mainly because we have figured out what the changes in the economy mean to the venture community.”
Five local healthcare companies raised venture funding in the first quarter, down from seven a year earlier and eight two years earlier, according to VentureSource.
Those include a pair of companies Versant has invested in: LensX Lasers Inc., an Aliso Viejo medical device maker that raised $22 million, and WaveTec Vision Systems Inc. of Aliso Viejo, a maker of devices for vision correction surgeries that raised $20 million.
Companies that have attracted venture capital before are of greater interest to investors these days. Venture capitalists are generally focusing on existing investments rather than new ones.
Versant is “busier than ever making sure that we’re working appropriately with our existing portfolio,” managing director Charles Warden said.
“We are looking to fundamentally build companies over time,” he said.
In some cases, Versant has targeted its investing toward companies in its portfolio that are showing more promise, Link said.
Tough Fundraising
Since the fall, venture capitalists have had a tough time raising money from traditional sources, including insurance companies and pension funds, said Terrence McGovern, managing partner of Numoda Capital Innovations, a firm with offices in Irvine and Philadelphia.
Numoda has raised $150 million for a fund and is looking to invest in biotechnology companies that are undergoing trials of their products.
Versant closed a $500 million fund a year ago, before the fall meltdown.
“We felt fortunate that we were not fundraising during this highly uncertain time,” Link said.
With long product development timelines, healthcare venture capitalists hold investments longer than their counterparts in computer technology and Internet companies.
Public Offerings
Now lower company valuations and a lackluster market for stock offerings has investors holding on even longer.
“It doesn’t make any sense at all to exit in this environment unless you absolutely have to,” said Ralph Sabin, a managing director in Encino-based Pacific Venture Group’s Irvine office.
Pacific isn’t looking for new investments, according to Sabin. He said its funds are fully invested in companies in various stages of development.
Investments include LifeMasters Supported SelfCare Inc., an Irvine disease management company.
The last big healthcare public offering in the county came in 2007 when Irvine-based Masimo Corp., a maker of patient monitoring devices and supplies, raised $233 million for the company and investors.
The ability,or inability,to cash out in a stock offering isn’t as much of a concern for Laguna Beach’s Okapi Venture Capital LLC. Its $30 million fund closed in 2006 with investments in three early-stage healthcare companies.
“Our companies are earlier in their life cycles,” said Sharon Stevenson, Okapi cofounder and managing director. “We don’t have any that are approaching an IPO at this moment.”
Okapi’s investments include Irvine-based medical device maker OrthAlign Inc., Helixis Inc., a molecular diagnostic testing company in Carlsbad, and Obalon Therapeutics Inc. of San Diego.
Aquisitions
Acquisition by big healthcare companies,always an option for startups,is about the only game in town right now.
There have been some big buyouts this year.
Minneapolis’ Medtronic Inc., which has 550 workers at a Santa Ana heart valve plant, earlier this year spent $700 million to buy Irvine heart valve maker CoreValve Inc., whose backers included Apax Partners of London and Sofinnova Ventures Inc. of France.
Medtronic also spent $225 million in January for Ablation Frontiers Inc., a Carlsbad maker of devices to treat irregular heartbeats. It was one of Versant’s investments.
There are deals to be had for companies that are “honestly ready for exit,” Versant’s Link said, “even though the IPO market is for all intents and purposes closed.”
Big companies with good cash flow are expected to be active buyers of device and drug makers, said Bryant Riley, founder and chairman of B. Riley & Co., a Los Angeles-based investment bank with a Newport Beach office.
“It’s going to be larger buying smaller,” Riley said.
