Tuesday, July 19, 2016

Uncertain Health in an Insecure World – 88

“AdVenture Capital”

If you already play Pokéman GO, then skip the next paragraph.

If not - Pokéman GO is an augmented reality game released earlier this month by a Google startup, Niantic Labs. The virtual world GPS mobility experience is so engrossing that two San Diego men fell off a Pacific coastal cliff while playing, while others have caused car accidents or been stabbed by muggers. Banned as disrespectful in the Washington D.C. Holocaust Museum and Arlington National Cemetery, Canada is considering whether it’s an invasion of privacy. One alien-seeker who found Pikachu in New Mexico’s Area 51 (below) worried that, “Pokéman GO is a government surveillance PSYOP conspiracy.”

How you perceive a game is how you play it.

Venture capitalists use other peoples’ money in a high-risk search for market-changing products. This real world startup life & death adventure could well be confused with game play.

How you play with venture capital is how you perceive it. 

Capitalist Bill Gates was recently asked by Bloomberg's Erik Schatzker what the Darwinian venture capital (VC) environment meant to medical research, bio-engineering and biotech. The Billionaire's response was... well, interesting. "Capitalism in general underfunds research because the benefits to society are much greater than what the innovator captures." So, Bill... You're saying that society doesn't need VC to improve.

Philanthropist Bill Gates followed up by observing, "The other thing that's underfunded is things that benefit people with very little money because their voice in the marketplace is weak." And that's why the Gates Foundation funds safe, low-risk vaccines for the Third World. 

The VC meat grinder that chews up entrepreneurs is clearly more interested in innovation than research.

Toby Coppel, co-founder of the highly thought of London-based early stage VC Mosaic Ventures, recently blogged, “the vast majority of start-up firms should not take money from our industry.” Most entrepreneurs crave independence; so much so that only one of every 2,000 U.S. start-ups takes VC cash. In fact, family & friends and personal savings account for 11x more startup funding than does VC. And before the Brexit misadventure began, EU seed investors funded >2,000 tech startups, of which <16% went on to raise Series ‘A’ funding. 
According to Texas Mercom Capital Group, the health IT sector bucked this VC trend in 2016.

Health IT rapidly expanded by 27% in the first quarter of 2016 (versus 2015), delivering $1.4B to 146 VC deals. Healthcare practice companies received 42% of this funding ($569M in 49 deals), while consumer-centric firms received 58% ($796M in 97 deals). Within these categories were wearable tech/sensors ($260M), data analytics ($197M), telemedicine ($171M), mobile health apps (mHealth, $120M) and consumer health information/education ($100M). Beyond early-stage deals <$2M, the big winners were Flatiron ($165M), Jawbone ($165M), Healthline ($95M), Health Catalyst ($70M) and inviCRO ($46M). An all-time high 58 M&A’s occurred among mHealth, practice management, personal health, data analytics, EHR and telemedicine companies – IBM bought Truven Health Analytics for $2.6B, while Allscripts paid $950M for Netsmart Technologies.

Big data analytics giants like Alphabet and Facebook are playing the internal startup game.

Evidation Health, a company started up by a $6.2M GE Ventures and Stanford Health Care VC Series ‘A’ round, raised $11.6M in June with a financing round that attracted Facebook’s VC shop (B Capital Group, set up by FB co-founder Eduardo Saverin). This company has the potential to tackle an emerging digital health technology problem – how to assess endless emerging tools and apps for their actual utility in improving health outcomes. In hyperbole typical of digital sector CEO’s, Evidation’s Deborah Kilpatrick gushed, “The company has the core capabilities to make precision digital medicine a reality. We envision a digital health-enabled future where clinical interventions can be customized and concentrated in ways that maximize clinical and economic benefit for payers, providers, and most importantly, patients.”

Nice pitch, Deborah.

In the pharma and biotech sectors, the IPO heat and VC sizzle that characterized 2014-15 has given way to a 2016 chill. Despite a brief 2015 year-end rally, an early 2016 slide in stock prices has nearly wiped out a year’s worth of Nasdaq biotech index gains (below).  Before this, a total of 17 exiting companies received big floats >$100M in 2015. The top five 2015 biotech VC deals of >$200M each were Moderna, Acerta, Immunocore, Stem CentRx and Denali. In the final quarter of 2015, biotech IPO’s (excluding medtech) fell on all western exchanges.

Year-to-date market volatility and economic concerns have been acutely worsened by the Brexit vote. 

Even in 2015, EU-originated companies were under-represented in the top global VC deal ranks, although UK’s Adaptimmune raised $191M prior to its early 2016 listing on Nasdaq. As the IPO window closed in late 2015, the UK’s Shield Therapeutics and Apellis pulled back their float plans. Shield IPO’d in early 2016, while Apellis sought another VC round to get its rare disease treatments further advanced in the US. While EU companies were a small fraction of 2015’s disclosed VC funding rounds, the average EU round was $36M versus $24M in the U.S.

In 2016, the air came out of the biotech valuation bubble. At the end of the 2nd quarter, VC had invested $15.3B into 961 deals, down -12% and -22% from the same quarter in 2015.

The soul-crushing downturn has affected both biotech and med-tech.

In the immune-oncology pharma sector, 2015 valuation expectations outstripped 2016 product realities. And eased FDA approvals in 2015 launched new blockbuster drugs into an adverse 2016 pricing and reimbursement climate. Persistent global instability and post-Brexit EU market uncertainty aren’t going to help matters.

Biotech VC players are becoming less adventuresome and more exit focused.

Companies pursuing their end games – either IPO or acquisition – are in need of second or later round investments.  In 2015, Series ‘A’ rounds declined in favor of later stage ‘B’ and ‘C’ raises, representing less than one-fifth overall.  Biotech’s 2016 decline saw risky IPO’ing companies launching into a falling stock market, which has further soured investors.

A safer mode of exit – sale – appears to be the smart play for early stage biotechs in 2016.

It’s just 110 days to the US Presidential election. If Hillary Clinton beats Donald Trump, Obamacare gets a new life. Until then, post-Brexit uncertainty will further reduce biotech VC enthusiasm and slow IPO exits. Smaller pre-revenue start-ups are hunkering down and cutting their cash burn rates. “Who knows when we will be able to raise money again,” said one worried financial analyst.

Game theory is “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.” EU game theorist were playing hard in the days leading up to June 23, 2016.

How you play a game is how you perceive it.
The Square is chock-a-block full of gamers, some seeking adventure, others just looking to exit.

One capital proposal is to issue free Pokéman GO games to ISIS, and watch them walk over the cliff.

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