Invest in What You Know

This article is the first in a 4-part series about biotech and healthcare investing.

How many of your investments are in the field you know best—healthcare? If you are like many doctors and medical professionals, the answer is probably “not many.”

In the last 12 months, the healthcare sector has registered

some of

the highest investment returns of any major sector and has been among the top 5 performing sectors for the last 5 years. And yet many physicians invest in sectors such as real estate or in new ventures started by friends or acquaintances, instead of the area in which they have the most expertise.

In fact, physicians are in an excellent position to invest in the biotech and healthcare industry—not simply in mature public companies, but in early- and mid-stage private entities, some of which have significant growth potential.

Because of some major changes in U.S. securities law, you have a better opportunity now than ever before to invest in young, innovative companies that are developing tomorrow’s treatments and cures.

New legislation, new opportunities

Historically, one of the obstacles to investing in biotech and healthcare startups has been a lack of publicly available information. Up until last year, it was illegal for private companies to advertise that they were seeking capital.

Because of this rule banning advertising—or “general solicitation”—the average high-net-worth investor had no way of finding out about companies seeking investors. In many cases, only friends, family, or those with connections to elite investor groups knew about opportunities to invest in emerging companies.

However, in April 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act marked the biggest changes in US securities law since the Roosevelt Administration; its goal is to simplify, streamline and enhance the capital-raising process for young companies.

One of the central parts of the legislation lifts the ban on general solicitation. That means private companies are now allowed to publicize they are seeking funding. As of this writing, investment is limited to accredited investors (those with a net worth of at least $1 million, not including the value of their primary residence, or with income of at least $200,000 each year for the last 2 years or combined income with spouse of $300,000). A proposed rule to allow non-accredited investors to invest in private companies is not yet finalized.

Because companies can now advertise they are seeking capital, they have greater visibility with investors now than ever before. More information means investors can find out about opportunities appropriate for their interests and portfolio. Physicians who want to use their medical training and clinical knowledge to invest in private biotech and healthcare companies will now have easier access to that information.

So now that emerging companies are allowed to solicit potential investors, where do they go to do so? How would an interested investor find them?

Funding platforms as a vehicle

Under the JOBS Act, private offerings can now take place online, on internet-based platforms where companies can be listed and promote themselves. These platforms, sometimes referred to as equity crowdfunding sites, provide a method of raising money from many individual accredited investors. These platforms bring together a community of high-net-worth, private investors and match them directly with companies seeking capital. For investors, funding platforms are a valuable tool for locating and evaluating companies that are fundraising.

Platforms that specialize in healthcare-related enterprises can include startup companies focusing on products or services, such as new drugs, devices, diagnostic equipment, healthcare IT products and services. Some companies may be very early stage; some may already be in Phase III clinical trials.

Public vs private equity

The changes brought about by the JOBS Act will have far-reaching effects over the long term, both on capital-market investing and on the healthcare industry in general.

While many investors are well accustomed to purchasing public equities in the form of stocks or mutual funds, most are not familiar with private placements or investment in private companies. By raising awareness of young companies seeking investment, the JOBS Act will prompt more people to invest in those private companies. If the enterprises are successful, investors who get in early stand to benefit far more than they would by investing in a mature, publicly traded company.

Another far-reaching impact of the JOBS Act is its potential to support and nurture long-term innovation in biotech and healthcare. Across the healthcare industry, greater investment in innovation will promote new cures, reduce costs, and improve efficiency in healthcare delivery.

In the pre-JOBS Act world, many young companies in healthcare and the life sciences were unable to secure capital past the angel or foundation phase, falling into what the investment community refers to as the “valley of death.” JOBS Act-related investment will create a bridge of life for companies that otherwise would not have survived.

With the US population of people over the age of 65 set to double over the next 25 years and Medicare and Medicaid already under stress, investment in innovation is essential. As individual investors with specific and relevant sector knowledge, medical professionals are equipped to make strategic investments that have the potential to benefit both their portfolios and the entire healthcare industry.

Do you have questions about biotech and healthcare investing? Part IV of this 4-article series will be a Q&A about the changes, opportunities and challenges of investing in the sector. Send your questions to Rania Nasis at rnasis@poliwogg.com.

Rania Nasis, MD, is a managing director at Poliwogg, a financial firm that specializes in early-stage investments in healthcare and life sciences, indexes that measure the impact of public companies in unique subsectors of healthcare, and sector-specific venture funds focused by healthcare vertical. Contact Dr. Nasis at rnasis@poliwogg.com.

Private investment marketing and other broker-dealer services are currently offered through a partnership with SDDCO Brokerage Advisors, LLC, member FINRA/SIPC ("SDDCO-BA"). Poliwogg and its affiliates are independent and unaffiliated with SDDCO-BA. All such services offered by Poliwogg-associated persons are done so in their capacities as registered representatives of SDDCO-BA.