PE Week Managing Editor Alastair Goldfisher recently caught up with
Kelly shared his views on the potential for venture returns in the health care sector.
Q: How risky of an investment is the health care sector right now?A: While there is a lot of upside if you pick the right deals, there is still considerable risk in health care investing. With such long timelines to exit, there is no guarantee an early stage investor is going to get paid for taking on early stage risk. Also, there is a great deal of uncertainty about what health care is even going to look like under Obama’s administration, especially on the regulatory and payer sides.
Q: What do great health care deals look like today?A: It’s no longer enough just to have ‘neat-o’ technology. Health care companies must really be solving a pressing problem for the market. A good example is Fluidigm [which is backed by Alloy].Their integrated fluidic circuit technology increases test throughput, lowers costs and enhances sensitivity compared to conventional laboratory systems. Similarly, we’re seeing quite a few companies get funded that meet critical research needs in academia and pharma.
Q: What’s your take on the state of pharmaceutical deals?A: We are staying away from biotech therapeutics, at least for the foreseeable future. This market is extremely capital intensive with no guarantee of returns. Instead of investing directly, we are focused on investing in lab instrumentation and reference lab diagnostics, with companies such as Fluidigm, Artemis, Raindance, Labcyte and ForteBio. This strategy lets us participate in the pharma/biotech space without having to take on drug development risk.
We’re basically selling picks and shovels to the gold miners… and we all know it was the hardware guys who made all the money in the gold rush!
Q: Are there any VC-backed health care companies poised for an exit in the months to come?A: Actually, we’ve seen several high-profile M&A exits in the health care space recently, and we expect to see more in the coming months as large medical device and health care companies go shopping for innovations and differentiated technologies to boost growth.
For example, SurgRx, a maker of technology that uses heat and electric current to cut and seal tissue for surgery, was recently acquired at a great price. Acclarent, which provides treatments for ear, nose and throat treatments, and our gastrointestinal device company, BARRx Medical, both have ferocious revenue growth rates, are at or near break-even, and are attractive acquisition targets.
Q: Would you invest in a potentially groundbreaking health care technology that has a less clear exit strategy?A: There is still room for revolutionary technology and ‘big science,’ as long as the potential payoff is big enough.
For example, we’ve made several investments in the genomics space, including Pacific Biosciences, a cross-disciplinary gene sequencing company run by former tech exec Hugh Martin. Although expensive to develop, if their technology works the way they’ve envisioned, Pacific Biosciences will enable the first $1,000 whole genome sequence and directly threaten the multi-billion dollar businesses of many large sequencing and lab instrumentation companies.