A new report blasts the U.S. Food and Drug Administration for putting the United States at risk of losing its leading position as a home of biomedical innovation. The report, based on a survey of venture capitalists, says regulatory challenges posed by the agency are the main factor for declining investment in experimental drug and device startups in the United States and a shift toward investment in Europe and Asia.

The National Venture Capital Association’s MedIC Coalition released the report based on a survey of 15 venture capitalists. It warns that America’s medical innovation is in critical danger of losing its primary source of funding, causing serious harm to both U.S. patients and the national economy.

“For decades, the U.S. has been the leader in delivering medical innovations to our citizens due to the thousands of startup healthcare companies that have been brought to life with venture capital funding,” says Beth Seidenberg, a partner at Kleiner Perkins Caufield & Byers and chairwoman of the MedIC Coalition. “Millions of high quality jobs have been created, and iconic companies such as Genentech, Amgen, Medtronic, Biogen-Idec, and Lifescan have been built. But our leadership is now at risk.”

Other factors leading to a decline in investments cited by the report include reimbursement concerns and an adverse financial environment.

The survey found that 39 percent of U.S. venture capital firms have been decreasing their investment in biopharmaceutical and medical device companies over the past three years and expect to continue decreasing such investment in the future, some by greater than 30 percent. This is roughly twice the number of firms that have increased or expect to increase investment.

More than 40 percent of firms expect to decrease investment in biopharmaceutical and medical device companies, while almost half of firms expect to increase their investment in non-FDA regulated healthcare services and healthcare information technology companies. Respondents also said they expect to see significant investment decreases in companies fighting serious and common disorders such as cardiovascular disease, diabetes, obesity, cancer, and neurological diseases.

“This report confirms what has been suspected for some time, which is that venture capitalists are shifting investment capital away from lifesaving and life-sustaining products and into areas less regulated by the FDA as well as into other countries,” says Seidenberg. “This trend is one that the venture industry and, we believe, the FDA, wants desperately to reverse.”

FDA regulatory challenges were most frequently cited as having significant impact in driving these investment trends followed by reimbursement challenges. Respondents believe these challenges are primarily related to an imbalance in risk/benefit assessment, and unpredictability at the FDA.

“While many factors are at work in driving away investment from U.S. medical innovation, it is the FDA approval process – and the cost, time, and unpredictability that it adds to the development of innovative products – that weighs most heavily on investors,” says Jonathan Root, general partner at U.S. Venture Partners and a member of MedIC’s steering committee.

He credits the FDA for taking action to reverse those trends, but feels more must be done.
Interestingly, the FDA issued its “Innovation Initiative”, which includes ideas to improve its review process, at the same time as the results of this survey were published.

The report did note that the FDA and the White House have begun a broad set of reform initiatives that are intended to address some of these problems, including new guidance on risk/benefit assessment, clinical trial design and new pathways for approval of innovative medical devices.

Venture capitalists also said they are looking more and more to Europe and Asia to bring their medical products to market. According to the survey, 44 percent of firms plan to increase investment in life science companies in Asia, 36 percent of firms plan to increase investment in Europe, while only 13 percent plan to increase in North America. Correspondingly, 31 percent of firms indicated plans to decrease investment in life science companies in North America while no one had plans to reduce investment in Asia and only seven percent said they planned to decrease investment in Europe.

They also said there was a growing trend for U.S.-based startup medical companies to seek regulatory approval and commercialization of their products outside the United States first and to establish and grow operations abroad. This major shift will reduce the availability of lifesaving and life-sustaining treatments for Americans and will result in a decrease in U.S. job creation, threatening the global leadership of the U.S. in medical innovation, warns the MedIC report.

Almost all of the survey respondents indicated that FDA reform would have a significant positive impact on their investment decisions. “Venture capitalists have always embraced risk and long-term investment to fund breakthrough innovation and form great companies,” says Root.