Investing in healthcare has never been so exciting and this year has seen unexpected growth. So, will this trend continue? During the recent Ophthalmology Innovation Summit (OIS), a panel of seasoned investors shared critical insight into industry players, as well as opportunities within the ophthalmic investment space.
In this session, five active investors with direct experience in the ophthalmic sector shared their invaluable insight in healthcare investing. OIS Chairman Bill Link, Ph.D., who is also the managing partner for Flying L Partners and a seasoned investor, moderated the session which revealed deeper observations of 2020 and expectations for 2021 and beyond.
The discussion began with personal introductions by each member of the panel to lay the groundwork for the discussion.
OrbiMed Managing Director Anat Naschitz has 25 years of experience in ophthalmology and healthcare investing. Her company OrbiMed is currently investing in Azura Ophthalmics, which deals with meibomian gland dysfunction (MGD), as well as ForSight VISION6, a company producing ophthalmic products for the visually impaired.
New Enterprise Associates (NEA) General Partner Dr. Ali Behbahani is currently investing in NEA17, a US$3.6 billion venture fund focusing on healthcare. In addition, he’s worked with a wide range of ophthalmic drugs and devices at various stages.
H.I.G Capital is a US$4.2 billion private equity firm; Bruce Robertson is the co-head of H.I.G. BioHealth Partners, which invests in healthcare (i.e., drugs, devices and clinical diagnostics). They’re currently investing in ophthalmology in companies like Iconic Therapeutics, which is dedicated to developing a novel Tissue Factor (TF) targeting drug for wet age-related macular degeneration (AMD). They’re also investing in RxSight® — a novel IOL that allows doctors to fine tune eyesight postoperatively with a UV light adjustable lens (LAL). Another investment is the ForSight VISION5 which is known for its Helios insert and is a novel, non-invasive delivery system for glaucoma and ocular hypertensive patients. The firm also bought Barnet Dulaney Perkins and Southwestern Eye Center in the United States in 2017, which has now turned into American Vision Partners.
KKR Director Arjun Arora brings eight years of experience in healthcare venture investing, one of which is Falcon Vision (both medical devices and biopharma). KKR has not more than US$200 billion in assets and he said they invest in equity across various world regions, usually finding investment ideas across early stage private equities based on a thematic approach in healthcare.
Visionary Venture Fund Managing Partner Jeffry Weinhuff shared that his firm invests solely in the eyecare business and has partnered with 80 leading key opinion leader doctors as investors and partners. “This helps us with insight into deal flow and clinical utility,” he said, adding that they invest in areas like ocular surface, glaucoma, cataract surgery, the posterior segment and more. “I think this panel will be useful for thinking about how you monitor and maximize the value of your portfolio,” he said.
Link shared his portfolio as the founder of Versant, a healthcare-focused fund, noting they were an active partner investor in Versant 5. In 2017, he formed Flying L Partners which is focused entirely on the ophthalmic space. They have now 11 investments and have recently put US$11 million in the sector, looking to broaden in the medtech and biopharma side. They have also co-invested with most firms represented in this panel.
COVID-19 impact on portfolio companies
Arora led the discussion by sharing that the services portfolio had taken a hit, as well as anything that was linked to surgical volumes. “It really was a year of two worlds: One was of surgical-oriented devices and services, and the other was biopharmaceuticals which came back incredibly fast.” From a portfolio perspective, it was easier to lean into biopharma.
For Anat, while there has been a lot of enthusiasm for biopharma in general, there were also operational hiccups, where some company sites were in lockdown, whereas others were not. “So you’re constantly juggling that landscape just to deliver on the trial and accomplish targets. I think that has required agility, flexibility and creativity, which is always a good thing.”
On the non-pharma side, Naschitz said she was fortunate to invest in companies that have benefited from COVID-19. She cited TytoCare, their telemedicine device platform which had been quite popular. “We have MD Clone, a digital health synthetic data platform analysis which has shifted into a more COVID-oriented research offering. All these have morphed into things that have benefited from these fairly unusual circumstances,” she said.
Year of pivoting investments
How has COVID-19 impacted investors’ thinking on new investments? Behbahani recapped how incredulous the situation had been — watching the Dow fall about 2,000 points daily and looking toward a “bleak, bleak year.”
“One of the remarkable things was when investors started to do things in a different way — a few companies starting to go public.” He couldn’t believe it when Zentalis and Auric made a go at it, but until the industry adapted to virtual roadshows and IPOs materialized, did he see how adaptable humans could be. “We saw an epic run of biopharma companies going public and that started to bleed to the devices side,” he said, adding that the opening of public markets and companies raising money this way has led to continued private investment.
Naschitz concurred with this view on human adaptability, while Robertson reminded everyone of the role of the pharmaceutical industry. “As shocking as it sounds, this (crisis) is needed by the American public,” he said. “They’re reminded that the healthcare industry — pharmaceuticals, vaccines, deliveries and even medical devices — are some things they really need. These are not industries that pole high in the public opinion and that has been shocking to me, given the life-saving efforts and R&D of these industries.” He thought that there had been political rhetoric around drug pricing, which has contributed to the negative opinions of the industry. “Yes, companies do make money along the way, but these are companies doing good things for humanity, if you will,” Robertson added.
Attractions in ophthalmic sector investment
Robertson said his firm is bullish on ophthalmology and there are several reasons. “The basic reason everyone is the aging population — and eye diseases tend to be the disease of the aging.” He stated that it’s a matter of “when” a person would need cataract surgery. Another reason is that the dynamics of ophthalmology are also as such that “practitioners and their practices tend to be quite business focused” and this has helped practices bounce back and recover from earlier effects on surgical volumes, for instance. “One other thing we like is the evolution of optometry as a sort of primary care part of ophthalmology. As they lost some of their business in spectacles and contact lenses to cheaper sources and many of them became more clinical, it provides another avenue for our products, in particular those who were diagnosed in the optometry segment and then referred to the doctors in the ophthalmology sector.”
Besides these reasons, ophthalmology investments are attractive due to new technology and innovation. Robertson said it’s the small companies that are currently providing that innovation. Public markets are also more receptive to the healthcare and ophthalmology industry IPOs, making them more viable.
Room for growth
Naschitz said another part of the attraction is the room for further innovation and growth. “In many areas, we’re still treating symptoms, so we’re actually not treating underlying causes. Dry eye is a good example, and that’s the next wave.”
Arora added, “Unlike other specialties, ophthalmology has real engagement with the patient, whether it’s reimbursement or whether if they’re Medicare covered, there’s a willingness to go out-of-pocket. For instance in premium IOLs, that engagement and willingness to pay is attached to a really strong base need, and I think that creates a tailwind for all the innovation that comes after.
“What is currently setting ophthalmology apart seems to be the interest and growth driven by smaller companies in innovation, as Behbahani said. But to grow a small company, ultimately, they would need to scale — and that’s where public investors are needed,” he said.
Caution for exits
However, there should still be some caution. Weinhuff said having Alcon as an independent company is a powerful benefit for the industry. “I think the emerging ones that are starting to act like ‘mini majors’ for want of a better term, like Glaukos, deciding they’re going to build a big company … I think that provides us with more buying power. And there’s going to be more.” Weinhuff added: “I think the IPO alternatives that have emerged in the last year are marvelous options for us. But then, we really have to price our rounds correctly so that we have enough room for value to grow — and that each subsequent round in those IPO transactions has an ability to make money. That means we have to be very disciplined in the initial valuations,” he explained.
Robertson echoed that it’s more important to build a great business, rather than building one for the aim to be sold. After all, he said he’s never been able to dictate the timeline of an acquisition. “They’ll acquire you when it’s the right time,” he said.
Arora added:. “What that helps us is to control valuation to allow for those exits,” he shared. “For us, it’s important to make sure that the base plan is supportable. Second, it is to make sure that we can interact with all the strategics from a position of offence and to try and figure out when is the right time for them to leap into any given company.”
Therapeutic advancement leads opportunity
Speaking about subsectors of the ophthalmic investing arena, Naschitz reiterated that because the solutions are still focused on treating symptoms and not going into the core of the disease, there are many opportunities still in going into the root causes. “It would be compelling to create disease modifying therapies,” she said, adding that dry eye is a “gigantic market that’s being underserved,” which is why she is looking into meibomian gland disorder. “I think there’s also a lot to do for the back of the eye in terms of reducing the invasiveness of the solutions that are available, and increasing outcomes in terms of acuity and other things,” she said. Gene therapy-oriented opportunities are also attractive.
Weinhuff agreed to an extent, saying the problems are things which are a crossover between lifestyle, drugs and therapeutics. “Presbyopia falls into that category, and it’s a giant market with two billion people. Myopia is another great example,” he said. However, he deemed dry eye as a crowded category with a lot of room for improvement. “For the back of the eye, anti-VEGFs are very effective and everybody’s looking for longer duration and that’s an interesting space.”
When to jump in?
Next, Link posed a tough question: When looking at a tough disease like retinal pathology or glaucoma, what stage would be good for investment?
For Behbahani, he said there has to be a reason to believe that something works. They take the risk in investing at the preclinical stage based on a good model of the disease and details of a particular disease. “It’s that specific thing that makes you think, ‘okay, I think there’s enough here to make that bet early’.” Robertson’s investment criteria is on the other end of the spectrum. “The earliest we would invest in a drug would be post-human proof-of-concept and we define that fairly broadly, particularly in an indication or approach where the mechanism has been reasonably well-established,” he shared. In less established mechanisms, he said the data burden for them goes up. “We’re effectively more of a growth investor,” he said. While they wait for FDA approvals, they will observe with the bits of revenue coming in, for instance a million or two, to see how the payment reimbursements or self-pay model is working. They also go out and talk to real-life customers to gauge their prospects.
Link summed up the session: “As we continue to be committed to innovation in this space, access to capital and having investors that care is critical.”
Editor’s Note: OIS Year in Review, presented by Ophthalmology Innovation Summit (OIS), was held on 9 December 2020. Reporting for this story took place during the event.