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Venture capitalists to spend more on health IT, less on devices this year

Brandon Glenn

When it comes to healthcare investment, information technology is at the top of many venture capitalists’ priority lists.

Medical devices and biopharma? Not so much.

A recent survey from the National Venture Capital Association (NVCA) found that 61 percent of venture capitalists expect investment in health IT to increase in 2012. That’s a much rosier outlook than VCs see for medical devices and biopharmaceuticals. Fifty-eight percent of VCs surveyed expect investment in each of those two areas to decrease next year, according to the survey.

Angel investors are also growing wary of devices. The Minnesota Angel Network’s executive director recently called the outlook for devices “worse than bleak,” the Minneapolis Star-Tribune reported.

The numbers from the NVCA confirm what’s been observed in the industry for awhile: Spooked by a weak IPO market and what they perceive as regulatory uncertainty, VCs are abandoning biotech and device companies to seek refuge in information technology.

For example, 63 percent of VCs expect more technology initial public offerings this year compared with 2011, but just 18 percent expect more life sciences IPOs, according to the survey.

Recent numbers show that the VC migration away from drugs and devices to health IT has already started. In the third quarter, the number of venture capital life sciences deals fell to its lowest level since the first quarter of 2009, according to the latest MoneyTree report. Additionally, venture investment in health IT rose about 20 percent to $460 million in 2010, according to Dow Jones VentureSource.

But there’s another reason for the switch to health IT: cost. Cost will likely become the single most-important factor driving change in the U.S. healthcare industry in coming years, and VCs already sense that. So why’s that a problem for drug and device companies seeking investment?

Drug and device firms are often perceived as contributing to the growth of medical costs by introducing expensive substitutes for existing treatments or layering additional therapies on top of existing approaches. Health IT, in contrast, is seen as having the potential to cut costs out of the system while improving efficiency, which explains why it’s become the apple of health investors’ eyes.

These new cost-saving health IT tools include patient-monitoring technology, clinical decision support for medical providers and software to streamline communication between providers, payers and patients, for example.

Nonetheless, the desirability of health IT investment comes with an obvious drawback — the threat of a bubble. Twenty-six percent of VCs expect to see investment “froth” in health IT next year, while just 3 percent see the same thing happening in the medical devices sector and only 2 percent anticipate froth in the biopharmaceuticals market.

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