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Since the recession's onset nearly two years ago, risk capital has mostly targeted health care. Deal activity suggests this will continue, but transactions will have to start producing big returns for money to continue flowing.

Venture-backed companies
In the second quarter (2009), health care surpassed information technology as the largest industry in money raised for the first time in a decade. For every dollar health care companies collected in 2008, IT firms brought in $1.37. So far, in 2009, the levels are equal.

The table below illustrates the relative portion of funds raised between the two industries over the past seven quarters, and compares this to the dollar amount for all venture-backed companies. (Source: Dow Jones VentureSource)

2008
Period
Q1
Q2
Q3
Q4
Total
Health Care

26%

31%

28%

30%

29%

Information Technology

43%

38%

38%

39%

39%

Total Raised (million)$8,559$8,347$8,170$6,086$31,163
2009
PeriodQ1Q2Q3 Total
Health Care

34%

41%

34%

37%

Information Technology

40%

36%

37%

37%

Total Raised (million)$4,082$5,420$5,086 $14,588


While health care and technology accounted for about 70 percent of funds in each quarter, the mix shifted. Health care increased its portion by nearly 50 percent, from 26 to 37 percent of total.

Comparing the first three quarters of each year, total dollars shrank by 42 percent, from $26 billion to $16 billion. Money invested in IT narrowed by 45 percent, but decreased by a more modest 25 percent in health care, from $7.1 billion to $5.3 billion.

Mergers and acquisitions
Though more quiet in recent months, the biopharmaceutical industry featured several large-scale, strategic transactions in the first half of 2009. This next table showcases the biggest deals.

Type
Acquirer
Target
Value
StrategicAbbott LabsAdvanced Medical Optics$2.8 billion
StrategicJohnson & JohnsonMentor Corp$1 billion
StrategicPfizerWyeth$67 billion
StrategicMerckSchering-Plough$41 billion
PipelineJohnson & JohnsonCougar Biotechnology$1 billion
PipelineRoche Genentech$47 billion
PipelineBristol-Myer SquibbMedarex$2.4 billion
PipelineSanofi-AventisFovea Pharmaceuticals$500 million


Through October, across all industries, bankers closed nearly 5,800 deals in the US worth $620 billion. Despite levels being down considerably from 2008 and 2007, health care's share is a robust 21 percent, six percentage points higher than industrials (second rank) and seven points better than financials (third rank).

Debt placements totaling $58 billion have fueled buyout firms, making 2009 a peak year, surpassing 2007. Just in November, Goldman Sachs financed TPG Capital and Canada Pension Fund's $5.2 billion acquisition of medical data provider IMS Health—the largest private equity transaction so far in 2009.

Economic model
Whether the house or senate reform bill, or some combination of both, don't expect legislation to alter health care's fundamental economic framework. Supply and demand still won't transact with each other, and cost growth will only accelerate.

We can be sure that what we know health care to be today will continue indefinitely, at least until the system can no longer afford itself.

Give market dynamics a chance. If financial and strategic investors want to commit capital, then it's their choice, and their choice alone—win or lose. It would be the most effective, and least politicized, way to make health care more efficient.

One day, dealmaking and investing might even repair the economic model.

Disclosure: No Positions