February 13, 2012


Amid US Uncertainty, Life Sciences VCs Take Global Approach

Surging demand for medical services abroad and uncertain regulatory and financial climates at home are driving U.S. venture capitalists to take an increasingly global approach to investing in health care.

Several venture-backed start-ups are traveling abroad to escape the financial and regulatory problems they face here. With late-stage funding sources dwindling, some U.S. companies are choosing to go public in other countries, such as Australia, or turning to foreign investors like Rusnano, the Russian nanotechnology investor. Many U.S. medical-technology players also are going to market initially in Europe, where medical devices often pass regulatory muster more quickly than they do in America. And multiple U.S. venture firms are backing companies that aim to satisfy rising demand for health care in markets such as China, India and Latin America.

The activity comes as venture capitalists and start-ups strive by bypass obstacles here and tap into opportunities they see emerging outside the U.S.

American medical-device makers such as GI Dynamics Inc., for example, are finding warmer welcomes from public markets overseas. Having raised $76 million privately, the Lexington, Mass., company still needed funds to market its treatment for obesity and Type 2 diabetes in Europe and other foreign markets. Executives considered going public here, but with so few start-ups doing so now, they feared that prepping for a U.S. listing would be a waste. Only three U.S. venture-backed device companies have gone public in the U.S. since January 2008, according to VentureSource, which is owned by VentureWire publisher Dow Jones & Co.

Following the lead of U.S. companies such as Reva Medical Inc., which went public in Australia in 2010, GI Dynamics held its initial public offering there in late 2011, raising 80 million Australian dollars. A future U.S. listing is possible, but after talking with investors, executives decided that their IPO was more likely to succeed on the Australian Securities Exchange than on Nasdaq.

"What happens all too often is go [you] down the road, spend a lot of money, and can't get it done," said Robert Crane, GI Dynamics's chief financial officer. "Risk-reduction was foremost on our minds."

U.S. IPO buyers may shun young device-makers, but Australian investors, accustomed to speculative mining stocks, are comfortable with risk, said Brigitte Smith, a managing partner of GBS Venture Partners, an Australian firm. Moreover, several medtech concerns have prospered in Australia, including ResMed Inc. and Cochlear Ltd., she said. Australians backed GI Dynamics's IPO along with investors from other regions, including the U.S., Europe and Hong Kong, Crane said.

Like many U.S. medtech companies, GI Dynamics is selling initially in Europe and other areas where the route to regulatory clearance is relatively short. Since European regulators approve devices mostly on safety and performance, complex products often reach market there before they do in America, where the standard is safety and efficacy. But while some urge the U.S. to adopt a European-like system, industry players worry more about clarity than speed. Many say they're deterred from investing here because the Food and Drug Administration often fails to make clear the standards that new devices will have to meet.

"The real problem in the U.S. is not the level of requirements for approval, but [that] they're unpredictable," said Mark Wan, a partner of Three Arch Partners, a U.S. firm that's backed a few foreign companies, including Singapore-based Quattro Vascular Pte. Ltd. "Those have been driven by opportunity and a belief that the U.S. is a far more challenging environment to do medical-device investing than it used to be."

U.S. investment in medical devices, drugs and other health-care markets has been slipping, falling to $8.3 billion last year from $11 billion in 2007 amid a general slide in venture activity, according to VentureSource. Venture firms' struggle to raise money since the downturn is one reason, but regulatory uncertainty also is a factor, according to a recent survey of more than 150 venture firms by the National Venture Capital Association.

Thirty-nine percent of survey respondents said their firms cut life sciences investment in the past three years, with the same percentage saying they would reduce it further over the next three years, the association said in October. Regulatory challenges were the most frequently cited reason, the group said.

FDA officials have acknowledged a need for predictability and are trying to improve processes. The agency early last year launched its "innovation pathway," an effort to shorten the time needed to develop, assess and review breakthrough devices, for example. It already completes at least 90% of 510(k) reviews--used to clear lower-risk devices, those substantially equivalent to an existing, U.S.-marketed product--within 90 days or less, the agency said in November. And its medical-device group last year issued several draft guidance documents to describe the agency's latest thinking on specific matters.

Regulatory and financing concerns aren't the only matters prompting investors to look abroad. Venture firms also see growing opportunity in Asia and Latin America as middle classes expand and as governments strive to improve access to medical care. Vivo Ventures, for one, plans to invest 40% to 50% of its new, $375 million fund in China, up from 20% with its previous pool, said Albert Cha, a managing partner. The firm, which has offices in Palo Alto, Calif., and China, seeks to help mature Chinese companies expand and to facilitate cross-border deals between U.S. and Chinese businesses, he said.

Meantime, Burrill & Co. recently gathered $125 million toward its first Brazilian medical venture fund and Essex Woodlands Health Ventures has just made its first Latin American deal, teaming up with Advent International at the end of 2011 to buy a controlling interest in Grupo Farmaceutico Biotoscana S.A., a Colombian drug company.

VCs also are encouraging some American holdings to tap foreign private equity sources. In October, BIND Biosciences Inc. and Selecta Biosciences Inc. each raised $25 million from the Russian investment firm Rusnano, a government-owned group investing in nanotechnology and high technology. The Massachusetts companies also formed Russian subsidiaries, which gives them easier access to patients for their clinical trials. Regulatory bodies around the globe like to see multinational studies that reveal a medicine's activity in a cross-section of people who will receive a drug in their countries, according to BIND Chief Executive Scott Minick.

Access to investors such as Rusnano and various other government initiatives make Russia a good place for young companies to raise capital and conduct lab and clinical research, according to Evgeny Zaytsev, co-founder of U.S. venture firm Helix Ventures and an advisory council member of the Russian Venture Co., a Russian-government fund of funds.

"The biomedical industry is becoming very global, and this is a part of it," Zaytsev said. "In many cases it's becoming difficult to fund-raise in the United States, [so] international strategies could be a good solution for companies."