VCs Predict Potential Health Care IT Bubble In 2011

Health care investing, and specifically opportunities that meld information technology with care delivery and automation, could be big in 2011.

In fact, already the “b” word is being used (“b” for potential bubble).

There are good reasons for this brightening prospect. VCs have had a chance to digest some of the uncertainties and changes expected with health care reform. They are becoming more comfortable with opportunities created by the new law. They also are coming to terms with a more rigorous Food and Drug Administration.

The new zeal is obvious in a survey of venture investors released this week by the National Venture Capital Association and Dow Jones. The study found 77% of VCs expect an increase in health care IT investment dollars next year. Only 8% foresee a decrease.

In contrast, medical devices and biopharma investing see no such consensus. About a third of venture investors see an increase and about a third foresee a decrease.

One of those anticipating the health care IT trend is Lisa Suennen, a managing member of health care investors Psilos Group. In an e-mail discussing her outlook for 2011, she says:

“My prediction is that life sciences VCs will look to make up lost pharma opportunities by straying into healthcare IT and that this could be our next bubble…VCs (will) move to fund consumer-focused healthcare IT ideas that are somewhat free of business models.”

David Mauney, a managing director at early stage investors De Novo Ventures, sees a companion shift away from risk to more established companies. It remains unclear how valuations could ultimately fare:

“Healthcare investors will shy away from Series A deals with longer regulatory trials and focus more dollars on late stage deals that are being aggressively re-priced.  There are also more VC firms that are using cross over vehicles to transact insider led deals.”

His colleague, Richard Ferrari, also a De Novo managing director, is upbeat about medical technology.

“VC investments into medical technology will definitely pick up in 2011. Many of the uncertainties, like the FDA, will begin to ease and become definable, which in itself will reduce risk. Those opportunities where clinical benefit is proven and the technology is disruptive, differentiated and represents growth will be high on the M&A target list.”

A brighter outlook for medical IT seems to be in the cards. Hopefully the health of the sector will improve as well.