By Allan Maurer
Healthcare has traditionally been a recession-proof industry. People don’t stop getting sick and the huge baby boomer python lump moving through the demographic belly of America is not getting any younger. But this time, we’re seeing the first signs of a different set of behaviors, says Sherrill Neff, a partner at Quarter BioVentures, a leading VC firm with $700 million under management that invests in Mid-Atlantic life science companies.
Even on the normally less-affected healthcare and life science front, the economy is taking its toll on a broader economic level as well.
“In a number of drug categories, we’re seeing reduced compliance with people taking prescription drugs,” he says.
May not be recession-proof
“Consumers are looking at co-pays and other healthcare expenses as things that can be viewed as discretionary expenses. They think, ‘Maybe I can skip my cholesterol meds.’ It’s not such a good long term idea. But the industry may not be as recession-proof as we thought.”
Still, says Neff, “On balance, it’s more recession-proof than the rest of the economy.”
Still, for venture capital in general and no less in the life sciences, he says up front that “The absence of an IPO market for venture-backed companies is dampening everyone’s enthusiasm.”
However, he also notes, “The large pharma company universe is still loaded with cash with $150 billion or more on their balance sheets and as a group, they have a pipeline problem. They have to replace products going off patent in the next four to five years.”
That means, Neff says, “We’re going to see relatively aggressive shopping by most of the large pharmas that will balance what would otherwise be a rough spot in the market.
Take a deep breath
“But in this environment, everyone wants to take a deep breath and see what happens in another quarter or two. We hope the strategic need of large pharmas for the kind of companies we are developing will outweigh other factors.”
Neff says that other factors affecting the venture industry are certainly a concern. “The sources of our (venture fund) capital come from large public and private pension funds, large endowments, insurance companies, large charitable foundations and high net worth individuals. They’re all under stress now.
“Allocations to investors are largely out of whack across that limited partner universe. So we’re all constantly monitoring the health of our committed limited partners to make sure they can honor their commitments and can invest in future funds.
Neff says Quaker is fortunate that it closed a $420 million fund in April and is less than 20 percent into it, so the firm is not immediately affected.
The Southeast understands transformation
“Right now, we’re keeping our powder dry, and being prepared for what we think will be extraordinary bargains on the other side of this.”
He warns, though, that if a number of funds have trouble raising money in the next 12 months, it could have a long term negative impact on the biotech industry.
As a public policy matter nationally, he says, “It’s hard to underestimate the importance of a continued dollar flow into the venture industry. We are, ultimately, the group that helps give birth to the great companies of tomorrow.
“Somebody has to replace the GMs of the world and it’s this industry that does that. We’re hopeful that in the broader discussion in Washington and on Wall Street, people realize that there is a bright spot in the job formation industry.
One model the nation might observe: “The Southeast certainly understands the transformation from an old industry that realized tobacco and textiles had seen better days and redeployed assets into more interesting technology.
Southeast Venture Conference, February 29 – March 1, 2012 at the Ritz Carlton in Tysons Corner, VA – Where Smart Money Meets Smart People.
www.seventure.org
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