Originally Published IVD Technology April 2005
INDUSTRY NEWS
Venture capital trends uncertain for IVD companies
Matt Grebow
After charting three years of declining investments, the MoneyTree survey of venture capital investment in the United States sounded a bullish note earlier this year. Driven largely by late-stage funding, investments in 2004 nudged past $20 billion, with the health and life sciences sectors accounting for the lion’s share—30.2% of the total. However, while the results of the poll carried out by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association noted that health industries investments as a whole are at their highest in the survey’s 10-year history, the verdict on IVD start-ups is less clear.
“The venture capital market is probably tighter than it had been. On both the pharma side as well as the diagnostic side, healthcare is becoming a tough climate,” says Tammy Reilly, vice president, commercial operations at XDx Inc. (South San Francisco, CA). XDx, whose AlloMap molecular expression test is billed as the first blood-sample-based test for cardiac transplant patients, is, by many accounts, a venture capital success story. Since its founding in 2000, the company has raised $44 million in four rounds of funding, the latest bringing in $20 million.
According to Reilly, while there seems to be plenty of money to go around, some IVD products, especially those that rely on cutting-edge technologies, may be perceived by venture capitalists as too risky to invest in. In the case of XDx’s AlloMap technology, Reilly, who previously served as vice president of oncology and dermatology at Roche Pharmaceuticals (Nutley, NJ), says the company conducted prospective trials to ease concerns about the efficacy of the test. The idea, she says, was to set up an evaluation process that duplicated the rigor and feel of the process for a therapeutic, to the greatest degree possible.
“The venture capital climate for IVD companies that fit specific criteria is improving, though it is still a very long way from the pharmaceutical and medical devices sectors in terms of access to capital,” says Vijay Lathi, a partner at Sprout Group, a venture capital company that led the last round of funding for XDx. Following the financing, Lathi joined XDx’s board. “I believe the trends in diagnostics are pointing out that content is the critical differentiator. Whether the test is genetic, proteomic, chemical, pathological, etc., the real issue is around the value of the output in making a current or predictive diagnosis, not necessarily in the underlying technology.”
IVD companies, explains Lathi, can differentiate themselves to investors not only by developing protectable, proprietary technologies, but also by clearly demonstrating the clinical need for and economic benefit of their products. “Personally, I do not believe there is currently any single ‘magic bullet’ technology for the diagnostic industry. On the other hand, multiparameter tests are appearing with greater frequency, and will probably continue to do so,” he says, although he adds that these types of tests are often best commercialized by reference labs.
Reilly notes that while different investors have varying appetites for perceived risk, the tighter investment climate over the last few years seems to have increased the overall diligence of venture capitalists. “In the future, large clinical studies for diagnostics such as ours are probably going to become more of the norm rather than the exception,” she says. “Investment in the healthcare market, I believe, will become more risky as the market for healthcare faces more scrutiny. People will want to place their money where there’s less risk.”
Copyright ©2005 IVD Technology
