Dr. Carvlin and Dr. Schilling are General Partners, and Mr. McPhee is a Managing General Partner with Mi3 Venture Capital, Wellesley, MA.

In 382 BC, Hippocrates accurately summarized the arduous but honorable labor of the radiologist when he observed, "Life is short, the art long, opportunity fleeting, experience fallacious, judgment difficult." These same comments could describe the work of the venture capitalist in healthcare equally well.

The delivery of medical imaging services in the United States comprises approximately 10% of the $1 trillion in U.S. healthcare expenditures, or roughly 1.5% of the GNP. As most harried radiologists can attest, the volume of medical imaging procedures is increasing at a rate twice that of healthcare procedures overall. Furthermore, the type and complexity of medical imaging services are growing and changing as new discoveries in the life sciences and digital and imaging technologies are integrated into daily clinical practice. In the 1970s and 1980s, the repertoire of imaging modalities was expanded dramatically, with the consequence that one-third to one-half of the imaging procedures performed in a busy hospital-based practice today were not even available at the time that man first walked on the moon. Today, medical imaging is used routinely to guide intervention, monitor response to therapy, and select more appropriate treatment. In these areas, medical imaging is achieving the same degree of precision, relatively low cost, and favorable patient outcomes characteristic of its use in diagnosis.

While the larger equipment, and pharmaceutical and medical product companies have received much of the credit for past innovation in medical imaging, increasingly, innovation is originating from visionary, entrepreneurial companies. These companies share many attributes with the prototypical, Silicon Valley, high-technology start-up company. The companies are small, the ideas and technologies are innovative but unproven, the teams are inexpert operationally, and each one has a persistent, pressing need for capital. These prototypical high-tech start-ups have turned to venture capitalists (VCs) to meet part or all of their funding needs. In 1999 alone, venture capital funds invested more than $50 billion into entrepreneurial companies with software, business services, new media, networking and equipment, with retailing and distribution receiving the lion's share of the money (figure 1). These types of investments, while highly risky, earned an impressive return of 143%.

Historically, almost 25% of venture capital was deployed into the healthcare sector. In the "dot-com" crazed atmosphere of the late 1990s, however, this level of investment dropped to an all-time low of 11%. For the most part, the equity capital needs of entrepreneurial companies in healthcare, generally, and medical imaging, specifically, are dramatically under-served. Furthermore, these young companies have been unable to ally themselves with skilled, active investors, those that can provide not only the capital but also the sophisticated managerial, technical, and marketing expertise necessary for success.

Why are most VCs not willing to invest in medical imaging?

That venture capitalists have chosen to redirect their investments from healthcare is in part rational and in part irrational. Healthcare is largely thought of as an "old economy" industry, one that is strapped with regulations that tend to make the development of new, innovative products a lengthy, expensive, and uncertain enterprise. The adoption of innovative products is often slow, particularly when their use requires healthcare customers, primarily physicians, to change their behavior. Finally, the science and technology of medical imaging is exceedingly complex and not well understood by mainstream venture capitalists. For these reasons, a large number of investment dollars have fled from healthcare into sectors that appeared to offer larger returns in less time and with less risk. Pharmaceutical companies, medical device companies, and equipment companies fell out of favor with Wall Street while the telecommunications and Internet companies have enjoyed unprecedented (some would say ill considered) levels of investment.

Why are a few VCs willing to invest in medical imaging?

Contrary to the prevailing sentiment regarding investments in healthcare and medical imaging companies, there are a number of reasons to believe that this sector offers good or even extraordinary investment opportunities. Medical imaging is poised to undergo a period of rapid and, in some cases, even disruptive innovation. This kind of innovation, seen in the 1970s and 1980s, is characterized by the introduction of new technologies, proliferation of competitors, and eventual standardization and consolidation. From a venture capitalist's perspective, the factors critical to investing successfully in this evolving environment are: having an intimate understanding of medical imaging; finding these companies early (while they are still affordable); and understanding the impact the innovative products and services are likely to have in the healthcare marketplace. Finally, the forces that are reforming the healthcare industry are also helping to create conditions under which entrepreneurial companies can flourish (figure 2).

Market pressures are forcing all segments of healthcare to simultaneously reduce costs and increase quality of outcomes. This is true not only in the practice of medicine but also in the practice of business. Many larger companies routinely outsource their innovation, that is, large entities purchase services and technologies from small, innovative companies that can function more cost-effectively. A second trend is the "digital revolution" (i.e., the impact of the Internet, ubiquitous bandwidth, increasing computer capacity, and radically declining storage costs on healthcare information systems), with its implications for reducing costs by improving productivity. A final trend is the "life-sciences revolution," scientific breakthroughs that are occurring at a rapid rate in molecular biology, genomics, proteomics, and ultimately phenomics.

First trend--Market pressures

In the last few years, healthcare costs had been contained by the rise of HMOs and by Medicare's slashing of reimbursements. This cost containment has proven not to be sustainable, however. As costs have begun to rise again, there is enormous pressure to find new ways to reduce them. Baby boomers represent the largest and most powerful healthcare customer group in U.S. history, a group determined to maintain or even improve their quality of life. They are sophisticated consumers who will actively seek out healthcare services and products and will find out which ones achieve the desired outcomes. HMOs and provider organizations intent on ensuring that medical services are worth their price will support them in this endeavor. New imaging products and services can be used not only to improve outcomes, but also to demonstrate proof of these outcomes in the form of performance-related databases and decision support technology.

Second trend ­ Digital revolution

As a whole, the healthcare industry lags far behind most other similarly sized industries in its use of information systems. Healthcare organizations and clinicians typically do not have the systems required to determine whether they are managing care efficiently. They need decision support systems to document the value of reducing utilization and standardizing clinical decision-making. Imaging can play a significant role in enabling these information systems. Medical imaging handles more data and information in digital form than any other discipline in healthcare. In addition to its purely medical uses, imaging technology is also a critical part of healthcare information systems, the computerized communications linking all the players in healthcare networks: payers, providers, physicians, and patients.

In the digital revolution, the reduction of all information types to the digital common denominator foreshadows new approaches to medicine. The resulting structural reorganization of healthcare will spawn not only new market leaders, but also entirely new technologies and markets. The impending discontinuity represents great investment opportunities.

Third trend--Life science revolution

Medical imaging is an early adopter and extensive user of advanced technologies. Nowhere is this more evident than in the application of genomics and proteomics. Knowledge gained through recent advances in biotechnology has extended the ability of medical imaging to identify and characterize states of health and disease. Concomitant improvements in the sensitivity, specificity, accuracy, spatial, temporal, and contrast resolution, achieved through innovation in imaging hardware and software, provide enhanced capabilities. Imaging now can assess, in a noninvasive and nondestructive manner, the physical expression of the genome at levels ranging from the whole body, to organs, tissues, cells, and individual molecules.

Where are the investment opportunities to be found in medical imaging?

The medical imaging sector extends well beyond the traditional boundaries of diagnostic radiology. It cuts across the investment categories of biotechnology, healthcare services, medical devices, and information systems/e-health (figure 3). This "new" imaging sector has been created by the application of genomics, computer technologies, communications infrastructure, and analytic tools to classic radiological procedures. It includes designing, producing, marketing, delivering, and supporting healthcare imaging-related products and services. The sector also includes all the technologies that allow images to be created, acquired, stored, manipulated, transmitted, and interpreted. Early-stage companies in medical imaging are developing innovative products and services that transcend the "traditional" categories of venture capital investment.

Conclusion

There are a large and growing number of new medical imaging ventures that are striving to produce the innovative products and services that will provide higher quality healthcare at lower costs. The skilled, active investor amplifies the potential value of these ventures by meeting more than the entrepreneur's persistent, pressing need for capital. Venture capitalists now provide entrepreneurs with incubator services ranging from office and laboratory space, to managerial expertise, to information technology support, to a full range of business infrastructure activities. In his Aphorisms, Hippocrates displays a keen understanding of medicine and human nature. He wrote: "Healing is a matter of time, but it is sometimes also a matter of opportunity." So also is the nurturing of innovation in medical imaging. AR