SLOW RECOVERY
VC Funding Lags, but Interest in Healthcare Startups Seen Solid
By VITA REED
Is healthcare venture funding poised for growth in Orange County?
Yes, say local investors.
The evidence is more opinion than fact, however, as venture totals remain at modest levels compared to the recent funding boom from 1999 to 2001.
In the first quarter, OC-based life sciences companies,biotechnology and medical devices,attracted $16 million in venture funding. That’s down from $19.1 million a year earlier, according to the MoneyTree Survey from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
The county’s life sciences sector alone attracted $73 million in funding in the second quarter of 2001. Overall, OC startups nabbed $54.1 million in the first quarter this year.
Venture investors are concentrating on taking care of their current portfolios, said Michael Henson, founder of the MedFocus Fund LLC, an Irvine-based incubator fund designed to speed development of new biomedical businesses.
“Without a strong IPO market, you end up having to carry these companies a little longer than you normally would,” Henson said. “Therefore, instead of two to three (stages of) financings, you’re looking at three to five financings.”
But Henson contended there’s plenty of activity in the healthcare venture funding arena.
“I can’t put a percentage on that, but based on what I’ve seen, it’s a lot more active, a lot more vibrant,” he said. “The financings are being done,none of them are easy, but they’re being done more quickly with more interest.”
One recent funding: TC3 Health LLC, a Costa Mesa-based healthcare information technology company, received $2.3 million in second-round financing from Ticonderoga Capital Inc. in late May.
Ticonderoga is an investment firm with offices in Menlo Park and Wellesley, Mass. The money came from Ticonderoga’s e-Services Fund II.
TC3 makes software for doctors to manage medical claims processing. The software is designed to fit into existing insurance claim payers’ systems and is intended to complement, rather than displace, them.
Medical claims processing is a large market, said Craig Jones, the Menlo Park-based managing partner and cofounder of Ticonderoga. Jones said there are some 1.5 billion claims filed in the U.S. a year, and it costs about $10 per claim.
“You have to find a business model that allows you to implement your improvements without causing a lot of disruption to the current system,” Jones said.
Dr. Elliott Parks, executive director of life sciences for Irvine’s Ventana Capital Management LLC, said venture investing “keeps pumping along.”
“I think we’re holding our own up here in medical devices, but there’s been a tremendous increase in biopharmaceuticals,” Parks said.
OC primarily is known as a hub for the medical device industry, while San Diego’s life sciences strength is in traditional biotechnology and pharmaceuticals.
In the first quarter, one OC-based biotech company got the big share of life sciences funding: Laguna Niguel-based Orexigen Therapeutics Inc. nabbed $11 million to develop drugs to treat obesity and related disorders. Other healthcare-related fundings in the quarter included Irvine-based Onset Medical Corp., which received $4 million to develop its minimally invasive surgical products; and Irvine-based Arbor Surgical Technologies Inc., which got $1 million to work on its aortic heart valves technology.
Interest in healthcare-related funding remains high in the U.S. In the first quarter, life sciences companies continued to dominate other industries as they have for the past six consecutive quarters with 27% of all venture capital invested, according to the MoneyTree Survey. That percentage is near a 12-year high reached in 2003.
Then there are healthcare-related venture investments made out of the public eye.
MedFocus’ Henson said he found “zero value” in paying for a press release to call attention to an investment in a privately held company. TC3’s funding, for example, wasn’t publicized.
“I don’t care whether the newspaper picks it up or not,that’s not the issue,” Henson said.
A pair of OC medical device startups attracted funding in the first quarter, but wouldn’t disclose the amounts. Cameron Health Inc., a San Clemente-based developer of implantable devices to treat cardiac disorders, saw Boston Scientific Corp. take a stake in the company. Glaukos Corp., a Laguna Hills-based glaucoma device maker, also got an undisclosed amount of funding.
As for the rest of the year, Parks of Ventana said his colleagues are interested in making sure their existing portfolio companies are healthy, “but I think there’s a renewed interest in investing in new opportunities.”
Those could be either new companies or existing companies that have weathered economic challenges, Parks said.
In terms of the types of medical and life sciences companies getting funded, venture capitalists say cardiovascular and orthopedic fields are magnets for investment.
Orthopedic companies are attractive, according to Henson, because of the aging of the baby boomer generation and its desire to continue active lifestyles.
“As the population gets older, you see more and more people with spine problems, with back problems,” Henson said.
MedFocus Fund was the primary financial backer of Vertelink Corp., an Irvine maker of rods used to hold the spine in place for patients with back problems that was sold last November for $22 million to Medtronic Inc. of Minneapolis.
Funding should “continue fairly strong” through the remainder of the year, MedFocus’ Henson predicted. That’s because a number of venture funds raised new money last year.
