Firms' healthcare-related investments up 16% in first half
Venture capitalists showered healthcare companies with money in the first six months of 1997, and the rest of the year looks just as lucrative.
Investments in all healthcare-related sectors rose 15.7% to more than $1.2 billion over the six-month period in the previous year. Investments in healthcare service companies alone jumped 52% to $483.7 million. On a percentage basis, medical instrument and device companies did even better, pulling down $294.6 million, an 87% increase from the year-ago period.
Intuitive Surgical, a Mountain View, Calif.-based maker of tools to improve minimally invasive surgery, raised more venture-backed money than any other healthcare firm during the period. The $30 million second-round financing was backed by Mayfield Fund, Morgan Stanley Venture Partners and Sierra Ventures.
In the service sector, Franklin Health, a managed-care services company specializing in complex cases, drew the largest investment. Willis Stein & Partners, Chicago, furnished nearly $27 million for management's buy-back of the Upper Saddle River, N.J., company from Corning.
"The good news is if you're an entrepreneur, this is a wonderful time to go looking for money," says Kirk Walden, national director of Price Waterhouse's venture capital survey. "At this level, good ideas should not go wanting for financing."
Price Waterhouse's Dallas office released special reports of its venture capital survey results to MODERN HEALTHCARE. The survey tracks quarterly venture capital investments in U.S. companies in all industries.
In general, venture capital funds are pouring more money into entrepreneurial companies than ever before. "Going into 1997, the consensus was that we probably would not sustain 1996's investment level," Walden says. That erroneous prediction, he explains, was based on stock-market projections and the relatively risky nature of investments made in 1996.
Most funds have two- to five-year time horizons during which they invest partners' funds, and that, to a large extent, drives investment activity, Walden explains. In recent years, he says, returns on those investments have been very strong, typically generating 40% annual rates of return to partners. As a result, Walden says, pension funds and other institutional investors have been eager to give venture capitalists some of their money to invest.
In the first six months of 1997, venture capital investments in all industries topped $5.5 billion, a 9% increase over the year-ago six-month period. "If we continue at this pace, we'll break $11 billion," which would be a record, Walden says. Total venture capital spending jumped to $9.5 billion last year from $7.5 billion in 1995.
Of the $1.2 billion invested in healthcare-related companies, nearly 40% of that went to healthcare service companies. Venture capitalists' favorites in the sector included managed-care firms and physician practice management companies.
Venture capital firms cooled a bit on the biotechnology sector, investing $277.5 million, a 37% decline from the first half of 1996. Generally, biotech investments fluctuate based on the regulatory testing process and Food and Drug Administration approvals. Meanwhile, investments in pharmaceutical companies rose 21% to $155.7 million in the same period.
"Basically we're just seeing a lot of good opportunities out there," says Buzz Benson, a managing director with Piper Jaffray Ventures, Minneapolis. So far this year, the firm has closed $9.3 million worth of investments in four healthcare companies and expects to complete two more this month.
Most recently, the firm invested in Aesthetics Medical Management, a Windsor, Conn.-based PPM in the reconstructive and cosmetic surgery business, and NeuroSource, a Chicago-based PPM for neurosurgery. It also invested in Vision 21, a Largo, Fla.-based PPM in the eye-care industry, and Pacific Dental Benefits, an Oakland, Calif.-based dental HMO.
Venture capital firms have a lot of money to put to work, Benson notes. Piper Jaffray Ventures, for instance, recently closed a new $50 million fund devoted to healthcare investments. The fund's investors are a mix of state and company pension plans, foundations and financial institutions.
Asked about competition for deals, Benson says healthcare partners in some larger venture capital firms are being pressured by the success of their technology sector colleagues to invest more money and achieve greater returns. As a result, he says, "I think there's less sharing of investment opportunities." Where three firms may have taken stakes in a healthcare company, now there might be just two investors, he explains. Without a good flow of deals, smaller venture capital firms are having a tougher time, Benson says.
Even so, Price Waterhouse's survey captures a wide variety of investments, reflecting activity by 568 firms in the first quarter and 698 firms in the second quarter.
In healthcare, in particular, there seems to be no shortage of enterprising ideas. The companies that venture capital firms are betting on include:
Dallas-based Odyssey Healthcare, which provides critical healthcare and counseling to terminally ill patients and their families. It raised $8 million in a second-round financing from Highland Capital Partners, Boston; Oak Investment Partners, Westport, Conn.; Three Arch Partners, Menlo Park, Calif.; Weiss Peck & Greer, San Francisco; and Venture Partners, Kensington, Conn.
American Holistic Centers, a Chicago-based provider of traditional and holistic medical care. It raised $2 million from Essex Woodlands Health Venture Fund III, Woodlands, Texas, and the Sprout Group, a subsidiary of New York-based Donaldson, Lufkin and Jenrette.
Nashville-based American Pathology Resources, a PPM for anatomical pathologists. It received $5 million in a third-round financing from HLM Management Co., Boston, and Richland Ventures, Nashville.