Personalized Medicine May Need Deeper Pockets

Perhaps no other investment theme sparks as much enthusiasm from healthcare investors as personalized medicine. Combining advances in computer processing with breakthroughs in gene sequencing and analysis, the sector offers sophisticated diagnostics that will determine not just an individual’s risk profile for a particular disease – but the optimal personalized therapy to treat it.

Naturally, VCs have been among the biggest boosters of the nascent but fast-growing sector. Venture firms have invested more than $1 billion in the past three years in the sector, including at least two companies that have gone public in the last couple of quarters: Pacific Biosciences and Complete Genomics.

But while investors have seen a handful of exits to date, speakers at this week’s J.P. Morgan Healthcare Conference in San Francisco told attendees they expect the climate for returns to remain challenging. One issue is that reimbursement around many of the newer diagnostics remains unsettled. Additionally, there’s the prospect of increased federal regulation in the diagnostics space, which could add significantly to product costs.

“Our system regulated drugs and devices, but now the question is: How do you regulate information? “ said Randy Scott, executive chairman of Genomic Health, a provider of genomic-based diagnostic services for cancer, speaking in a panel on personalized medicine. “You don’t want to regulate information the same way you would a drug.”

The VC industry has been pressing regulators to adopt an industry-friendly approach. A position paper put out a little more than a year ago by the National Venture Capital Association maintains the current regulatory and reimbursement systems are not designed for the new generation of molecular diagnostics, and that modernizing it will require a joint effort by government and industry players.

The U.S. Food and Drug Administration is expected to release guidance within the next several weeks regarding plans for regulation the next generation of diagnostics. A common expectation among conference attendees is that the decision will result in a testing and approval process for diagnostics. This could help new tools gain credibility, but it could also add quite a bit to development costs.

Still, it’s not as if uncertainty is prompting VCs to withhold capital.

I haven’t performed a comprehensive data crunch for 2010 investment numbers, but a quick search unearthed plenty of large financing rounds, particularly for providers of genetic screening. Large funding rounds include $28 million in November for DNA analysis provider 23andMe, $12 million the same month for in vitro fertilization genetic test provider Gene Security Network, $18 million for pre-pregnancy genetic screening provider Good Start Genetics, and $18 million for personal genomic screening provider Navigenics.

In 2009, U.S.-based venture firms invested $467 million in 57 companies developing medical diagnostic biotechnology and DNA probes, according to Thomson Reuters (publisher of VCJ). That compares to $594 million invested in 54 such companies a year earlier.