What venture capitalists look for in personalized medicine investments

News | 04. 02. 2012

Companies like Starbucks (NASDAQ:SBUX), Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) aren’t healthcare companies, but one venture capitalist believes their example can guide personalized medicine.

Bob Kocher, a partner at venture capital firm Venrock, said that these consumer-focused companies have all taken steps toward personalizing their offerings. Personalization increases the value of those offerings and helps the companies make delivery of services and products more efficient.

“Because they can offer the right product, they can take away unnecessary costs,” Kocher said. “And in healthcare, that’s what we really need to do.”

Personalized medicine will help doctors determine what to treat, how to treat and how much to treat. That knowledge, Kocher said, will mean fewer medicines, not more. Evidence and data will guide treatment to the optimal level that strikes a balance between risks and outcomes.

Kocher spoke last week at a symposium held by Duke Medicine’s Center for Personalized Medicine in Durham, North Carolina. He and Turner Jenkins, an associate from Durham venture capital firm Pappas Ventures, were the only representatives from the venture capital community speaking at the event. From their perspective, here’s what VCs look for in personalized medicine investments:

Substantially saves money. Incremental ideas are not good enough, Kocher said. Investors are looking for ideas that substantially save money. If it substantially costs money and there’s little to no return on investment, the product won’t do well. And even the good ideas that are commercialized will take time to demonstrate just how much money they’ll save. Pappas is an investor in Palo Alto, California cardiovascular genomic diagnostics company CardioDx. Turner Jenkins, an associate at Durham venture capital firm Pappas Ventures, said that there is a gap between the launch of the product and its reimbursement by payers. Until payers start paying for the CardioDx’s genomics diagnostic, the company must subsidize its use.

Substantially changes outcomes. Investors want technologies that are substantially better than existing treatments or technologies. Plexxikon, a California biotechnology company that was acquired by Daiichi Sankyo last year for just shy of $1 billion, provides an example. The company’s melanoma treatment Zelboraf was developed to treat cancer that can’t be removed by surgery. Clinical trial results that showed some patients able to return to work after just two weeks of treatment had doctors clamoring for the drug even before it received U.S. Food and Drug Administration approval. But the drug works only in certain patients whose tumors express a particular gene mutation, which is identified by a companion diagnostic. Under priority review, FDA approval for Zelboraf and its companion diagnostic came last August, well ahead of the target dates for both products. If a personalized medicine technology doesn’t substantially save money or improve outcomes, its probably not a good idea, at least from an investment perspective, Kocher said. So what does Kocher mean by “subtantially?” Kocher said that it should be about 20 percent. “It has to be a large difference because once it gets scaled, you lose most of it,” he explained.

Must be a company. Investors are looking for companies to invest in, not just ideas. And even if your good idea has a company, there are a lot of other companies vying for VC dollars. Jenkins said Pappas Ventures receives 800 investment applications each year. Of that total, the firm invests in only one or two. “We see a lot of interesting science but say ‘no’ to a lot of companies,” Jenkins said. Pappas Ventures’ Plexxikon investment proved to be a successful one — the firm saw a return of about 10 times its original investment. But Jenkins said it remains to be seen whether these are the kinds of returns investors can expect from personalized medicine technologies. Molecular diagnostics company Genomic Health (NASDAQ:GHDX) has developed and commercialized diagnostic tests for cancer that help doctors make treatment decisions based on an individual patient’s cancer. The California company raised $60 million when it went public in 2005. But Jenkins said that in the years since, it’s still not clear if that success can be repeated, or if commercialized technologies will win reimbursement.