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Opportunities and pitfalls in the healthcare investment landscape: A conversation with McDermott’s Brian Bunn

Brian Bunn, a partner with international law firm McDermott Will and Emery, shared his perspective on healthcare investment in the runup to the healthcare conference MedCity INVEST in Chicago April 23-24, in which he will take part in a panel discussion on M&A and investment trends.

Brian Bunn

We’re barely into the second quarter of the year but 2019 is already shaping up to be different than the previous year for health tech. At least two companies, Livongo and Dignity Health, have registered for IPOs. Investment in health tech dipped in the first quarter of the year, bucking a trend that has seen more and more capital pumped into the sector. Are these signs that this will be the year of multiple health tech IPOs?

Brian Bunn, a partner with international law firm McDermott Will & Emery isn’t convinced. In the runup to the healthcare investment conference MedCity INVEST in Chicago April 23-24 in which he will take part in a panel discussion on M&A and investment trends in healthcare, Bunn shared his perspective on healthcare investment.

“Everyone thinks it will be a breakthrough year every year but it never comes to fruition. I think there will be more than zero health tech IPOs but M&A is still preferential path for most of these companies, as long as health tech funding momentum continues. Every experienced management team realizes the pitfalls concerned with IPOs, the disclosure needs and meeting various expectations.” But for drug development in particular, IPOs will continue to be vital, he observed.

It takes a lot of money to get to phase 1-2. We are starting to see a lot more acquisitions by big pharma earlier along with IPOs.”

One notable development in the past year has been seed investors raising larger funds, becoming more ownership focused. The size of seed rounds has doubled and valuations have increased substantially. Bunn observed that many seed stage investments look more like the size of a Series A. Moreover the time elapsed between both of these stages is getting closer. He noted that can be a positive trend.

It means that companies get to focus on research and development. Bringing in VCs earlier can also focus companies on business relationships earlier and make the most of their investors’ networks to bring about commercial deals. These investors can also use their influence to persuade others to invest. It doesn’t necessarily mean skipping over investment from friends and family that traditionally marks the pre-seed stage of a startup.

As far as hot areas for investment are concerned, Bunn points to immunotherapy. Of course, the challenge with many of the novel cell and gene therapy companies is that their treatments come with big price tags, posing a challenging ethical dilemma for insurers particularly at a time of high deductible plans. That has spurred Bunn and his team to push the biopharma startups they work with to have a plan for addressing reimbursement as early as possible. He believes this factor, perhaps just as much as pioneering technology, will be what helps set companies apart in this field.

For the past few years, a significant source of health tech investment has been corporate venture capital, particularly technology companies and the venture arms of providers and payers. From Bunn’s perspective, these investments are logical but are not without potential obstacles.

“Corporate VCs in healthcare have realized the incredible advantage of making investments in startups. It gives them an opportunity to get an early look under the hood through small investments. Also, it can play to their advantage when they are negotiating a commercial deal with startups.”

Still he acknowledges that there are also some potential disadvantages in payers and providers taking equity investments, particularly on the issue of whether startups should give these corporate venture capitalists a board seat. Potential conflicts of interest lurk in these deals when it comes to commercial rights compared with other customers.

It’s a sensitive discussion payers and providers investing in startups need to have with the management teams, Bunn said.

“I have seen proactive corporate VCs who say to startups, ‘Don’t give us a board seat.’

Startups are also likely to be wary of giving up too many rights like right of first refusal for M&A deals.”

The past few years have seen a fair few health tech startup shutdowns and Bunn expects to see more this year. Overvaluation is a frequently cited factor but it is far from the only reason. It is always a risk, Bunn acknowledged, and his firm takes care to advise the startups they work with to avoid raising too much funding too early because “a down round is the end of your company”.

“I think most people think they are better than they are. They really do need to think about the implications down the road. Rely on VCs to push back and bring a company’s valuation down.

On the other hand, if you go out and throw out a valuation and it is accepted, it can take a few years to find out it was too high or unrealistic.”

Photo: McDermott Will & Emery