Taking Aim at Diabetes

A century ago, most doctors could go an entire lifetime without ever seeing a diabetic patient. Today, they’d be lucky to go an entire day. Twenty-four million Americans now suffer from diabetes and about 1.6 million more contract the disease each year.

“The fact of the matter is that diabetes has just exploded over the last 30 or 40 years, and it’s easy to figure out why,” says Bill Ericson, a general partner at Mohr Davidow Ventures. “It’s a combination of bad eating habits and lack of exercise.”

All told, diabetics spend $174 billion annually on drugs, devices and services that help them manage and monitor their condition.

Clearly, VCs see an opportunity to capture a healthy chunk of those billions. But it’s not entirely clear where they should steer their money in a market that is rife with just as many opportunities as dead ends.

The thing that makes diabetes so intriguing (and frustrating) for VCs is there are so many different ways of attacking the disease, whether it’s a pill, a bottle, a device, an exercise routine or even an online social network.

“It is not lost on anyone that lots of companies have tried to get at this issue, but have not succeeded,” says Michael Greeley, a general partner at Flybridge Capital Partners. “Diabetes is a very complicated condition and there is no silver bullet. What approach is ultimately the most productive way to manage the disease? That is still to be determined.”

Almost every VC interviewed for this piece agrees that 80% of the problem, at least for type 2 diabetics, could be solved by changing behavior and diet. But almost no one is convinced that will happen anytime soon. Still, investors like Ericson believe that the disease can be significantly forestalled, or even completely eliminated, through early intervention.

“We can’t do much as investors about the eating and exercising patterns of society, but we can provide tools to physicians that teach their patients what their individual risk levels are,” says Ericson.

The fact of the matter is that diabetes has just exploded over the last 30 or 40 years, and it’s easy to figure out why. It’s a combination of bad eating habits and lack of exercise.”

Bill Ericson

He believes that if patients are told well in advance that they are on course to become diabetic, they are more likely to do something about it. That’s why he invested in Tethys Bioscience, which makes a test that allows medical professionals to predict the likelihood of diabetes in patients five years before the actual onset of the disease.

Avoidance

The test is basically a preemptive strike on diabetes. It uses a complex algorithm to analyze a defined set of biomarkers common in the development of diabetes. Patients who take the test are given a personalized diabetes prediction score between 1 (low risk) and 10 (high risk). But what they do with the information after that is up to them.

“My view is that it is better to avoid the problem altogether than to try to treat it afterwards,” says Ericson. “As an investor, I think there is opportunity in being able to predict and prevent diabetes before it turns into a full blown disease.”

Given the monstrous size of the diabetes market, it should come as no surprise that venture capitalists have invested a sizable amount in the space over the past five years. All told, U.S. VCs invested close to $2 billion in 166 diabetes-related startups in the medical/health/life sciences sector from 2005 to 2009, according to Thomson Reuters (publisher of VCJ). Those numbers are poised to increase in the next few years, as venture capitalists do follow-on rounds for the 33 seed and early stage diabetes-related companies they backed from 2008 to 2009. Interest in early stage deals has increased in the past two years, which eclipsed the 32 seed and early stage diabetes-related companies funded in the previous three years combined. (See tables.)

The U.S. investors that have been most active in the diabetes space since 2005 are MPM Capital (with investments in eight diabetes-related companies), Burrill & Co. (five), Domain Associates (five) and Versant Ventures (four), according to Thomson Reuters. At least 13 other firms, including Kleiner Perkins Caufield & Byers, New Enterprise Associates and Venrock, have each invested in three diabetes-related companies during that time period. (See table.)

Lisa Suennen, a founding partner at Psilos Group, says she has noticed more diabetes-related deals coming across her desk. On the one hand, that’s great news for patients who can potentially benefit from newer treatments. On the other hand, it makes it harder for VCs to figure out where to place their bets.

“The problem I’m seeing is that there is too much evolution and not enough revolution,” says Suennen. “I’m a little tired of looking at yet another insulin pump with a slightly new twist. Those kinds of deals are not so interesting.”

It is not lost on anyone that lots of companies have tried to get at this issue, but have not succeeded. Diabetes is a very complicated condition and there is no silver bullet.”

Michael Greeley

She believes this “evolutionary” approach is the reason why so many diabetes-related startups have failed to take off. They basically mimic what’s come before, with perhaps incremental improvements in how they treat or monitor the condition.

Tough Market

Most recently, for example, Oculir Inc., a startup developing a non-invasive glucose-testing device for diabetics, closed its doors after raising $7.3 million from Canaan Partners, Onset Ventures, Three Arch Partners and others. The company was working on a new technology for measuring blood sugar levels. Instead of having to prick a finger, patients would have been able to measure their blood sugar by bouncing infrared light off their eyes.

Another company that fell by the wayside is diabetes drug maker DiObex. It shut down last year after raising $30 million from Domain Associates, Inventages Venture Capital, Pequot Capital and Sofinnova Ventures. The company was developing a drug that prevents hypoglycemia in diabetes patients. DiObex was reportedly a victim of stricter standards laid out by the Food and Drug Administration. Industry watchers say the FDA is cracking down on diabetes drugs, requiring much greater safety and efficacy data.

“Diabetes investing is not for the faint of heart,” says Kelly Close, founder of consulting firm Close Concerns, which focuses exclusively on the diabetes market. Of course, the space has seen its share of success stories, but it has also seen a significant number of washouts. “There have been some billion-dollar exits over the years, including TheraSense and MiniMed, but I’m not sure we’ll ever see those multiples again,” she notes.

Why not? For starters, the negative regulatory environment is having a chilling effect on the market. At one point, it was mostly drugs that faced stringent regulations, but now it’s just as hard for devices to win FDA approval. “If your clinical trial results don’t show efficacy and safety and better outcomes in spades, you can forget about it,” says Close.

Diabetes is also a very competitive market. Some companies, especially makers of blood glucose monitors, are being forced to lower their prices because of the glut of options now available, says Close. In fact, last year was one the first times in 30 years that the glucose monitoring market failed to grow in size, primarily because of pricing pressure.

Despite the various challenges, venture investors such as Lou Bock of Scale Venture Partners still see promise in the diabetes market. But Bock is intent on taking as much risk out of the equation as possible. He realizes that longer and more intense clinical trials mean that startups require a greater amount of capital to see them through to completion. He also believes it is possible to find diabetes-related deals that don’t require an overwhelming amount of time or money to get to profitability.

The problem I’m seeing is that there is too much evolution and not enough revolution. I’m a little tired of looking at yet another insulin pump with a slightly new twist.”

Lisa Suennen

For instance, Scale is an investor in Alimera Sciences, a device company that delivers steroids for the treatment of degenerative eye diseases brought on by diabetes. Scale found Alimera appealing because it takes approved drugs already on the market for other conditions and leverages them to treat conditions caused by diabetes. For example, it is in trials with a drug called Iluvien to treat patients with diabetic macular edema, an eye disease.

Alimera’s approach, says Bock, allows the company to eliminate significant risk. “Alimera is using a known steroid in its device, so that’s a whole bunch of cost that we as a venture group don’t have to absorb in terms of clinical studies and safety profiles,” he says. “We look for deals where we can put a smaller amount of capital to work and still have the same large outcomes.”

Ready to Serve

For investors like Psilos’ Suennen, the secret of diabetes investing is not devices or drugs, but services. Her firm spearheaded a $40 million investment in SeeChange Health, an insurance provider that offers health plans tailored to patients with diabetes and other chronic conditions.

For patients insured by SeeChange, the company uses proprietary algorithms to sort through medical information—including lab reports, drug prescriptions, diagnostic codes and claims data—to identify diabetic and pre-diabetic patients. It then reaches out to those patients and makes them an offer they can’t refuse: If they do the four or five things that are the proper standard of care for dealing with diabetes, such as regular biometric testing and seeing an eye doctor once a year, then SeeChange will drop all co-pays and extra costs associated with the disease, potentially saving patients up to $600 per year in out-of-pocket health expenses.

“Our strategy is to invest in deals where you can materially improve quality at a reduced cost to the health care system,” says Suennen. “SeeChange falls smack in the middle of our investment strategy.”

She adds that diabetes is a disease whose cost and trajectory can be meaningfully impacted through early diagnosis and effective treatment. “It’s no fun to invest in diseases that you really have no chance of fixing,” she says. “But with diabetes, you can actually stop the disease and turn it around before it’s too late.”

While most venture firms are homing in on either drugs or devices or services, Versant Ventures wants to remain agnostic. The firm believes the opportunities in diabetes are too vast to commit to any single approach or strategy.

There have been some billion-dollar exits over the years, including TheraSense and MiniMed, but I’m not sure we’ll ever see those multiples again.”

Kelly Close

And if anyone knows diabetes investing, it’s Versant. The company has been involved in the three biggest exits in the space: TheraSense, which sold to Abbott Laboratories for $1.2 billion in cash in January 2004; MiniMed, which was bought by Medtronic for $3.7 billion in May 2001; and Insulet (Nasdaq: PODD), which went public for $15 a share in May 2007 and is currently trading slightly above that price, giving it a market cap of about $575 million.

“We are very opened minded about the type of sector and the type of approach to diabetes,” says Charles Warden, a managing director at Versant. “Who is to say where the next innovative thought will come from?”

Simpler Is Better

Actually, Warden has a pretty good idea where the next big innovation will come from. In late December, his firm participated in a $64 million series D round for Intuity Medical, which makes a cutting-edge glucose monitoring device. The deal was one of the largest medical device funding events in the last 12 months and brought the 8-year-old company’s total funding to date to $92 million, according to Thomson Reuters.

Intuity’s goal is to greatly simplify blood glucose testing. Today, diabetics have to prick themselves with a finger stick device, aspirate the blood, transfer the sample to a meter and wait for a read-out. It’s an awkward process, so many patients don’t test their blood as often as they should.

By contrast, Intuity’s all-in-one device promises to automatically combine these steps in one single procedure that takes about 4 seconds. The device is currently awaiting FDA review. “This is an example of an improvement that is a huge leap forward and can have a big impact on the management of diabetes,” Warden says.

Also causing a degree of excitement (and some anxiety) in the diabetes market is health care reform. If some kind of reform ultimately passes, insurance companies will suddenly become very interested in preventative care. “Last year we spent $40 billion on long-term diabetes complications,” says Close, the consultant for the diabetes market. “Those are costs that insurance companies will have to start picking up if they are no longer able to deny patients based on pre-existing conditions.” As a result, she says, insurers will be motivated to reimburse device companies and service providers that can help patients stay healthier for longer periods of time.

Whether reform happens or not, investors such as Phil Reed at Highway 12 Ventures believe that people are more eager than ever to get involved in the management of their own health. That was one of his reasons for investing in Alliance Health Networks, which runs an online social network called Diabetic Connect. The site currently boasts some 120,000 members who go online to meet other people with the disease, ask questions about diabetes products and build a support network.

We are very opened minded about the type of sector and the type of approach to diabetes. Who is to say where the next innovative thought will come from?”

Charles Warden

“Alliance understands that diabetic patients want to do more than search for information on the web,” says Reed. “They want to socially interact with other people to find out what treatments have worked for them and see how they are coping with the disease.”

Alliance makes money through advertising and sponsorships, and is even starting to leverage its user base to recruit candidates for drug trials by big pharmaceutical companies.

Diabetes is getting to be so pervasive in American society, it is even going Hollywood. DLife, a company founded in 2004 and backed by $19 million in venture capital from Battery Ventures, Cross Atlantic Partners and Milestone Venture Partners, now produces a half-hour television show dedicated to all things diabetes. The show, which runs weekly on CNBC, offers a wealth of health and cooking tips, as well as interviews with famous diabetics, like Nick Jonas of the Jonas Brothers. And, of course, it uses the airtime to introduce patients to lots of diabetes-related gadgets and products.

Whether it is TV shows, social networks or personalized devices that put greater information at the patient’s fingertips, people are relying more on themselves to treat diabetes and less on their doctors. “Diabetes is a consumer disease, especially in light of the Internet and the way people are now sharing information,” says Close. “This is not your father’s disease. It’s not just about what the doctor says. VCs who understand the market dynamics from a consumer perspective are more likely to succeed.”

Patients, Not Docs

For investors such as Greeley of Flybridge Capital, the shift from a doctor-centric model to a patient-centric paradigm represents huge new venture opportunities. That’s why he invested in MicroChips, which is developing a continuous sensing platform designed to transform how people with diabetes manage the condition. The MicroChips monitoring device is implanted directly into the patient’s body, and wirelessly delivers continuous glucose measurements. If glucose levels fluctuate beyond normal boundaries, a series of alerts and alarms can automatically warn the patient, thus providing a higher level of safety and security.

“We’re really starting to see the advent of intelligent devices that can capture, analyze and report actionable clinical insights,” says Greeley. “I believe in five years, everyone will have an iPod-like device near their body that serves as a medical hub. It will aggregate all kinds of medical data and report the information directly to you and your health care provider.”

Greely believes this iPod-like device will ultimately be supplied by a major medical device company, such as Medtronic. He also believes a startup such as MicroChips could be a very attractive acquisition candidate because of the valuable health information it provides. “There are a handful of big device companies going down this road,” he says. “If you can complete the loop for them, you become essential to own.”

For every diabetes startup that has a successful outcome, there will surely be many more that end up in intensive care. But, no matter the risks, one thing is increasingly certain: Diabetes is too huge for VCs to ignore. “This space is absolutely a high priority for us,” says Versant’s Warden. “We are eagerly searching for the next great diabetes technology to invest in, because we know it’s out there.”