Annual Outlook on healthcare growth capital

Change , Innovation and Investment in the
"New Healthcare Economy"

2009 Outlook on Healthcare Venture Capital
Published By Psilos Group, January, 28, 2009

EDITOR’S NOTE: This paper is the first “annual outlook” published by healthcare venture capital firm Psilos Group. Psilos has been investing in the healthcare economy since 1998, and the firm’s partners have more than 135 years combined experience in healthcare venture investing and healthcare company management and consulting. The outlook is intended to provide investors, analysts, businesses and policy-makers with a guide to the issues and trends that will shape healthcare growth investing in 2009 and beyond.

Healthcare investing will not be for the faint of heart in 2009. The combined impact of a tough economy, spiraling healthcare costs and a new U.S. presidential administration will result in significant uncertainty and risk for investors.

At the same time, the “change” that swept President Obama into office will have to find its way into the hospitals, clinics, labs, doctor’s offices and insurance providers that make up the U.S. healthcare system if America is to remain competitive. The rate of healthcare inflation – which is currently twice the core inflation rate – can clearly no longer be supported, and changes are required to address the explosion in America’s aging population over the next two decades. Experts estimate that roughly one
third of all medical care delivered in the United States is wasted or in error, suggesting there is ample room for improvement.

In spite of the bleak near-term indicators, we predict that the United States is poised to establish a “new healthcare economy.” Starting in 2009, we expect to see a ten-year transformational
cycle that will re-define many dynamics of the American healthcare system. The new healthcare economy will depend on innovation to simultaneously drive down costs and improve quality of care – core criteria cited by President Obama in his inaugural address. It will also require better alignment of
economic incentives across payers, providers and patients.

As long-term healthcare investors, we are optimistic about the incredible opportunities and growth ahead in the new healthcare economy. At the same time, we can’t ignore the shocking contrast in priorities between President Obama’s healthcare plans, which call for billions of dollars in funding to improve healthcare IT and services, and the venture industry’s traditional investment focus. According to 2008 data released by the National Venture Capital Association, just $195 million of the $28.3 billion
invested by venture firms in 2008 went to healthcare services – less than one percent. Similarly, Dow Jones VentureSource shows only $354 million invested in healthcare IT and $357 million for healthcare services in 2008, accounting for less than three percent of all venture investing. Unfortunately, this lack of investment in a critical area of our economy is not a new phenomenon.

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