BioWorld Today Contributing Writer

According to a report by the National Venture Capital Association's MedIC Coalition, FDA regulatory challenges, reimbursement concerns and an adverse financial environment are driving venture capital (VC) investment outside the U.S. and away from major disease areas.

The survey of more than 150 VC firms confirmed fears that funding for new drug discovery and development in life-saving disease areas is drying up and flowing into less-tightly regulated technologies and markets.

Beth Seidenberg, a partner with Kleiner, Perkins, Caufield, and Byers, described the report as "Chilling," expressing concern for the implications for health care investment in the U.S. in coming years.

"We're very worried for patients and their longer-term access, and even short-term access to innovative breakthrough therapies and devices. We're worried about economy and loss of high-quality, high-paying jobs," Seidenberg told BioWorld Today.

According to the survey, 39 percent of U.S. venture capital firms have decreased their investments in biopharmaceutical and medical device companies in the past three years and expect to further reduce their investments in the future. Forty-two percent of firms indicated they would increase investments in non-FDA regulated services and 54 percent are looking into health care information technology companies.

The NVCA sent the survey to 259 member firms that invest in health care sectors. Sixty percent, or 156 firms, responded, representing 92 percent, or about $10 billion, of NVCA invested capital between 2008 and 2010.

The results showed a mass defection from once hot disease areas like cardiovascular disease, obesity and diabetes.

Sixty percent of respondents said that they would decrease investment in cardiovascular disease.

Fifty-four percent will decrease investment in diabetes and endocrinology, and 53 percent are backing away from obesity and metabolic disease.

The survey also tracks trends toward decreased investment in North America, and increased investment in Europe and Asia.

NVCA estimated that, overall, there will be about $500 million less invested in U.S. health care start-ups in the near term.

The primary reason given for the shift was "regulatory challenges" related to the U.S. FDA.

Seidenberg cites lack of predictability and inefficient decision-making as major contributors to those challenges. The FDA also, according to Seidenberg, has shifted to a perspective of "complete risk aversion" with less balance on potential benefits of drugs and devices.

"Look what's happened to obesity drugs," Seidenberg said.

The FDA announced a forthcoming general advisory committee in 2012 to address requirements for cardiovascular assessments for obesity therapeutics. That announcement left late-stage obesity companies like Orexigen Therapeutics Inc., Vivus Inc. and Arena Pharmaceuticals Inc. in regulatory limbo.

One bright spot in the report is that nearly half (46 percent) of respondents indicated they intended to increase financing for orphan disease indications.

The orphan disease pathway includes a number of benefits for the company, including seven years market exclusivity and fast-track review. That combination of predictability, accountability and incentives has made orphan diseases attractive for VC funding at a time when there is decreased interest in the major indications.

The NVCA report included a call for reform at the FDA. It cited predictability of decisions, speed of decisions, rebalancing risk and benefit, expanded accelerated approval pathways and more transparent communications as areas in need of improvement.

The FDA has already announced a set of initiatives to stimulate innovation in biomedical science. Its list is somewhat different from the list of suggestions made by NVCA, but both agencies agree that the FDA needs a rapid pathway for important therapies and some overall streamlining. (See BioWorld Today, Oct. 6, 2011.)

Although VCs are demonstrably frustrated with the FDA, ultimately overall economic conditions may have as much to do with the financing drought. Venture capital firms that are not able to secure new funding from their limited partners and other sources may pull back on investments or choose investments they perceive as less risky.

For example, Prospect Venture Partners announced Thursday that it has released its limited partners from their commitments after failing to raise sufficient capital for its latest fund. The goal for the fund was $250 million, but it fell $100 million short. Prospect will instead focus on its existing portfolio companies.