20/20 Vision

From the introduction of the soft contact lens in the 1960s to the launch of laser refractive surgery in the 1990s, sufferers of eye disease and vision impairment have seen a steady flow of new treatments emerge over the last few decades. But if recent venture funding levels are any indication, the pace of progress is poised to accelerate.

So far this year, at least 20 companies have raised a combined total of more than $290 million to develop diagnostic tools and therapies for eye disorders (See Table), according to Thomson Reuters (publisher of VCJ). Three companies—one developing robotically controlled treatments for eye inflammations, another testing a stent for glaucoma patients, and yet another producing custom lenses—have individually raised rounds of $44 million, $41 million and $26 million, respectively, since spring. The second-largest funding recipient, Menlo Park, Calif.-based Transcend Medical, managed to secure funding even with a requirement that prospective investors personally test its device on a cadaver eyeball.

Morbid diligence notwithstanding, venture investors are finding appeal in the eye space for a number of reasons. Large pharmaceutical and medical device companies have shown a willingness to pay handsomely for compelling new technologies. Private health insurers and the Medicare system are actively seeking to cut expenses, lower risks and find more broadly effective treatments for common ailments. And Americans are getting older, so their eyesight is worsening.

“Much of our medical device investing over the last decade has been focused around the strategy of graceful aging,” says Robin Bellas, a partner at Morgenthaler Ventures and a Transcend board member. “And the eye, like a lot of parts of the body, is subject to a lack of graceful aging, particularly over the age of 40.”

Demographics—in particular the 70-million-plus members of the Baby Boom generation entering their sixties—are on the side of investors. That’s one reason why startups developing treatments for glaucoma (an age-correlated disease affecting the optic nerve) represent one of the largest single categories of ophthalmic venture investment. Bellas estimates that glaucoma treatment adds up to a $6 billion market. Given that many current treatments are effective for fewer than half of patients, he says, it’s also a field that’s ripe for disruption.

Crowded Field

Glaucoma is one of several areas in which venture investors are competing fiercely to find – or in some cases, found—the next crop of innovators. A number of firms have made multiple investments over the last couple of years in startups developing eye therapies, and three have pooled resources to fund an incubator, ForSight Labs, devoted exclusively to medical device startups with ophthalmic applications.

Much of our medical device investing over the last decade has been focused around the strategy of graceful aging, and the eye, like a lot of parts of the body, is subject to a lack of graceful aging, particularly over the age of 40.”

Robin Bellas

The most active investors include: SV Life Sciences, which has made at least seven eye-related investments; InterWest Partners and Versant Ventures, which have each done at least five; and Kleiner Perkins Caufield & Byers, Morgenthaler Ventures and Split Rock Partners, which have each done at least two.

Competition has its price. Bellas says that the presence of multiple rivals developing treatments for glaucoma, impaired near vision and macular degeneration has added to pressure on founders to get products to testing quickly. “The market is large enough to support several successful competitors,” he says. “But the bad news is multiple competitors dictate that you hasten the pace of development.”

One way firms have responded, says Lutz Giebel, a managing partner at SV Life Sciences and board member at ophthalmic drug developers Lux Biosciences and Panoptica, is to shift to large single rounds, often reaching as high as $50 million in Series B. A portfolio company receives the money in tranches as it meets clinical milestones, thus saving the hassle of closing multiple separate rounds.

Vision for Exits

Overall, Giebel says, the high level of startup competition in the eye space “is not necessarily a bad thing, because that means the potential acquirers are also very aware and keenly interested to get their piece of the pie.”

Certainly investors can take some encouragement from past experience, which indicates that strong performers produce lucrative exits, both through M&A and the occasional IPO. In the last two to three years, firms have scored profitable exits for several eye-related investments. Looking back a decade, the sector has provided some of the most profitable exits in firms’ entire portfolios.

M&A remains active today, as well. Venture deals aside, two of the largest pharmaceutical M&A transactions of the year have involved companies in the vision space. The costliest and most recent is Novartis’ $10.4 billion July purchase of a 25% stake in Alcon, a leading maker of pharmaceutical, surgical and consumer eye care products, from Nestlé. A distant second is Abbott’s aggressive leap into the space in January, with its acquisition of publicly traded Advanced Medical Optics, a provider of products used in cataract and laser vision correction surgery, for $2.8 billion, including assumed debt.

Today, someone comes with a gigantic needle and injects it in your eyeball. That’s not very pleasant.”

Lutz Giebel

VCs haven’t scored those kinds of numbers. But they haven’t done badly on the exit front, either, particularly before last year’s market contraction. Several firms profited when Bausch & Lomb acquired Eyeonics, maker of lenses that correct for cataract-impaired vision, in February 2008. The company had previously raised $6 million from investors including Bessemer Venture Partners, J.H. Whitney & Co. and U.S. Venture Partners. One source estimated the purchase price at $300 million. “It’s not a disclosed amount,” says William Link, managing director at Versant, regarding the deal. “But it’s known that it was a very handsome acquisition price.”

Investors in ForSight Labs, meanwhile, got a quick exit with their second startup, ForSight Newco II. The company, launched in early 2007 with $5 million in initial funding, was acquired a few months later while still in stealth mode by QLT, a publicly traded biopharmaceutical company based in Vancouver that focuses on ophthalmic applications. “It was very successful: Four times the money in for the initial cash, with potential for 15 times if milestones are met,” says Bellas. ForSight Newco II was developing a device that fits into a tear duct and delivers drugs into the eye.

A startup that is still privately held but on track for acquisition is AcuFocus. Bausch & Lomb made an equity investment in the Irvine, Calif.-based company in 2007, and at the same time secured an exclusive option to purchase it for an undisclosed sum. AcuFocus previously raised $57 million from backers including The Carlyle Group and Bausch & Lomb as well as Versant and SV Life Sciences. Its core product, the AcuFocus Corneal Inlay, is intended to reduce the need for reading glasses and is currently in clinical testing.

The biggest exits for venture investors date back to early in the decade. Intralase, a provider of software and devices used in vision-correcting laser surgery, provided an IPO exit for its backers in 2004, and the company was acquired three years later by Advanced Medical Optics for just over $800 million in cash. The company had previously raised $73 million between 1997 and 2002 from nine venture investors, including Brentwood Venture Capital, Domain Associates, EDF Ventures, InterWest and Versant.

Eyetech Pharmaceuticals, which develops treatments for glaucoma, was another big win for VCs. Giebel says it was one of SV Life Science’s most successful investments. The New York-based company raised a total of $168 million between 2000 and 2003 from more than a dozen investors before going public in January 2004. Six venture backers, including Bellevue Asset Management, J.P. Morgan Partners and SV Life Sciences, collectively held 18.9 million shares worth more than $610 million a month after the IPO. The following year, Eyetech was bought by OSI Pharmaceuticals for $935 million in stock and cash.

Though the field of potential acquirers has narrowed, it remains deep-pocketed. Thanks to the aggressive series of acquisitions this year, the short list of the major M&A players active in the eye space includes Abbott, Bausch & Lomb, Johnson & Johnson and Novartis.

Focusing on Now

We like to get the band back together again.”

Gil Kliman

Given that they’ve done well in the past by backing a few prominent entrepreneurs, VCs are eager to invest in new eye-focused startups launched by repeat founders.

“We like to get the band back together again,” says Gil Kliman, an ophthalmologist and general partner at InterWest, which based its decision to invest in LenSX Lasers, a developer of surgical lasers to repair cataracts, heavily on the founding team. The company’s president, Ronald Kurtz, was a co-founder of IntraLase, which went public in October 2004.

Other firms have followed a similar approach. ForSight Labs was founded by Eugene de Juan Jr., a surgeon and a founder of at least three venture-backed companies developing ophthalmic applications. And one of SV Life Sciences more recent eye-related investments—in Ophthotech, a developer of treatments for age-related macular degeneration—was largely the brainchild of former Eyetech CEO David Guyer, who is currently a partner at the firm.

Over the next startup-to-exit cycle, investors say they expect to see dramatic changes in both the state of the art in ophthalmology and the way in which eyecare providers are compensated.

“It’s going to become much more cash-pay,” says Kliman, who sees the business model for Lasik vision correction, which is typically not covered by insurance, spreading to other outpatient treatments, such as cataract surgery. “The government will only pay for the base level of technology,” he says. “And by paying more you can get the state of the art technology.”

There are also some easy targets for innovation, such as finding alternate delivery channels for drugs. “Today, someone comes with a gigantic needle and injects it in your eyeball. That’s not very pleasant,” says Giebel. He says he’s looking at several “non-needle options,” including polymer capsules or other drug-containing devices that can be implanted in the eye and slowly release a drug over several months.

Versant’s Link says he continues to scout deals in several areas, including improved laser technologies for refractive surgery and innovative approaches to drug delivery to the posterior segment of the eye. He estimates he invests in only one out of every 20 or 30 deals he sees.

VCs are fussy about adding new portfolio companies in the ophthalmic space in part because it’s so expensive to fund a typical startup. In most cases, Link estimates, it costs from $40 million to $100 million to fund from seed to late-stage clinical trials.

Given the prices acquirers will pay for top performers, the math still works. But only for a promising few.