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Investing in Health Sciences

FLYING SQUIRRELS AND PORTABLE CAT-SCANS:

INVESTING IN HEALTH CARE

Annual lecture to the MBA class at McGill

December 2003

Jim de Wilde

jim_dewilde@yahoo.ca

Jim de Wilde is a Canadian venture capitalist. Since 1993, he has divided his time between Montreal and Toronto , focusing on the commercialization of early-stage technologies through JdW Strategic Ventures. The business model has emphasized the design of companies around specific markets. He has advised financial institutions on their strategies for developing early-stage technologies and has been involved in a number of universities in developing commercialization strategies.

Dr. de Wilde has also taught at a number of Canadian business schools, including the Rotman School at the University of Toronto where he currently lectures on venture capital strategies and technology commercialization. He has lectured in Finland, Mexico and Argentina on venture capital strategies. He was on faculty at McGill from 1991-1993 and the University of Western Ontario School of Business Administration from 1984 to 1991.

Dr. de Wilde has a PhD in political science from McGill with a dissertation on the capacity of Canadian political institutions to promote technological competitiveness. He has spoken and written extensively on federalism and Canadian capital markets and the preconditions for Canadian global competitiveness.

 

 

Research on flying squirrels in Malaysia is leading to a knowledge base about animal-to-human virus transmission. Arcane research in infectious diseases and epidemiology now produces a knowledge base waiting to be commercialized in a post-SARS world. The whole area of biocontamination becomes a significant area in which a profitable set of industries can be developed.

Portable CAT-scanners make possible first-contact diagnostics which will significantly cur down the costs of health-care coverage. The Star Trek gimmick of the hand-held diagnostic device is not far away in terms of the image of mobile MRIs. By making diagnostics accessible and cheaper, companies commercializing research into portable CAT scanning capabilities will be able to take advantage of a market shaped by the need to gain organizational efficiencies in health-care.

A new body of science is growing in the area of toxicogenomics and envirotoxicology, understanding how the body processes external chemicals and what are the predispositions to disease as a result of chemical interactions. This will create a new space of commercializeable scientific research in the borders between environmental toxicology, industrial economy, environmental chemistry and bioremediation.

Bacteriology makes possible the understanding of water-born diseases and the possibility of managing them with the appropriate anti-biocontaminants. The ability to monitor the development of water-born bacteria and develop environmentally appropriate decontamination technologies, including water purification technologies using ultraviolet light, and biotechnological products targeted at microbes.

Food toxicology research makes possible the detection of spoiled foods, the measurement of insecticides and other kinds of contaminations in the food supply. The economics of the management of the food supply makes food toxicology an important area at the intersection of nutrition, sensing technologies and medicine.

Medical entomology is an area where there is some overlap with bacteriology (malaria research, for example), but which opens up a number of possibilities for new commercial products deriving from the management of disease-causing insects and insects which destroy the crop supply.

  1. Animal to human virus research www.biota.com.au
  2. Portable CAT scanners www.xorantech.com
  3. Toxicogenomics http://www.niehs.nih.gov/envgenom/home.htm
  4. Bacteriology and water purification technologies www.trojanuv.com
  5. Food toxicology research www.cantox.com
  6. Medical entomology www.insectbio.com www.ento.csiro.au

Each of these six areas presents an opportunity for venture capitalists to commercialize knowledge in the life sciences in a manner which creates some potential for real value. Despite the market realities that health care demand will be influenced by the search for organizational efficiencies in the system (Portable CAT-scanners) and detection of biocontaminants in an era of West Nile Virus and SARS, most life sciences investment strategies are oriented towards the more headline-grabbing research in biotechnology.

As will become apparent in the next few paragraphs, there is also value to be created in the restructuring of the biotechnology industry. Investment in the life sciences has focused on the commercialization of genomic research for the past decade, with a significant number of biotechnology companies formed in both the European and North American venture capital communities. The activity in this area is now approaching consolidation with significant merger and acquisitions activity generating a new pattern of growth in the health sciences industry. However, the early-stage opportunities presented by the new characteristics of global medicine and health needs are potentially as attractive on the upside.

The Nature of the Market in Health Care:

The diseconomy is with us right now. The debate about scientific standards and junk science have stalled the commercialization of genetically modified foods. The spread of SARS has produced an awareness of biocontamination as an area both of public policy and the management of globalization. The concerns about BEM have led to an awareness of the market in food toxicology and food system management. The cost of spoilage of foods has created a market for commercialization of food preservation technologies, (e.g. www.sunblush.com and www.bioenvelope.com ),

There are three things which should be driving investment activities in the health sciences:

1. How is the market in health science structured? As in all venture capital activities, it is important not to be seduced by the technology and look at what the customer is asking for. In health sciences, the customer has many faces: insurance companies, governments, consumers, hospital administrators, doctors) and it is not always clear which each of them is focusing on as a service point. Much of the health care system has to be determined by consumer choice. Do I want an annual MRI body-scan or not? If so, how much am I willing to pay for it? The assumptions of health-care policy were formed in an era where there were a finite number of extremely expensive pharmaceutical products and where their relative effectiveness and the tradeoffs involved in using them were structured into the regulatory oversight. Now the questions are more complex: how much is it worth to have a biotech product which prolongs life but costs a great deal per prescription? Who makes this judgment?

2. Growth is at the convergence of environmental, health and agricultural aspects of quality of life. There is a new market, long realized by the pharmaceutical companies which comes from the intersection and convergence of health, environment and agriculture in terms of quality of life issues.

3. Scientific reliability and public policy are fundamentally linked in health-care issues: Enthusiasts for new technologies think that all regulatory skepticism is Luddite. That was the tone of the challenging book by Virginia Postel, The Future and Its Enemies. However, public policy decision-makers have long confronted the reality that risks are difficult to measure accurately (the problem of tainted blood creates appropriately overdefensive responses about risk factors that are based on the reality of widespread innumeracy as presented in John Allen Paulos' still highly-relevant Innumeracy. This problem has been exacerbated in the legal jungle of the United States litigation process where exaggerated claims make it difficult for a realistic assumption of the costs and benefits of new technologies to be appropriately assessed as is set out in Huber's Galileo's Revenge. For this reason, the market for health science innovations has to be understood in the context of a public policy background for the introduction of new technologies and consumer testing standards. This requires elaboration as we look at new business models and portfolio strategies below.

PORTFOLIO STRATEGIES IN HEALTH CARE INVESTING AND SOME CASE STUDIES

Examples of portfolio strategies:

www.acaciavp.com

www.crossbowventures.com

CASE STUDIES:

1. Given Imaging (www.givenimaging.com) cost-saving diagnostics

2. Total Renal Care (www.davita.com) cost-saving through structural reorganization.

3. Israeli medical technologies cluster (www.meduck.com; www.vascular.co.il; www.envision.co.il .

5. The opportunities presented by restructuring biotechnology. A number of biotechnology IPOs are planned in the next few months, including Canadian plays like www.neurochem.com . Other scheduled are Eyetech www.eyetk.com , Myogen www.myogen.com, Acusphere www.acusphere.com, Genitope www.genitope.com, Advancis www.advancis.com. Cancervax www.cancervax..com, Nitromed www.nitromed.com , Pharmion www.pharmion.com, Acorda www.acorda.com, Cordentech www.cordentech.com .)

Early stage health sciences venture capital is now starting up again. While there are some interesting new investment categories around specific scientific trends (e.g. patient cooling and cooling technologies is an example of a small trend as it results in less invasive surgery ( www.croycath.com) and emergency treatment procedures (e.g. www.biotimeinc.com ), a significant amount of medical venture capital is tied up with creating successful business from biotechnology research.

The next generation of investments will reflect some of the opportunities presented by research in biocontamination, what flying squirrels have taught us about animal to human virus transmission . We will also find a number of investment opportunities in health care medical restructuring. Portable CAT-scanners and specialized medical facilities will create new efficiencies in the delivery of health care and these new efficiencies will create profits in an era where the demand structure is affected by cost-based considerations.

New spaces and new scientific disciplines will emerge simultaneously: the study of medical entomology and insect management; environmental toxicology and envirogenomics; food toxicology and nutraceuticals; water purification and applied bacteriology. The convergence of science, driven by market needs is what creates opportunities for venture capitalists. The next generation of life sciences investors will understand the opportunities presented by portable CAT-scanners and flying squirrels in Malaysia.

AN INVESTMENT POSTSCRIPT

The categories for investing in health sciences now overlap with environmental technologies and agricultural sciences. Nutriceuticals are extensions of agricultural science, including agricultural biotechnologies, but are also, obviously health investments being pursued by investors and by pharmaceutical companies diversifying their pipelines.

Similarly, there will be new investment opportunities in companies designed to commercialize research in recognizing and tracking biocontaminants and recognizing the DNA of new viruses. These grow from genomic research, but are discrete categories when one looks at it from the perspective of a discipline focused venture capitalist.

Water purification is a health investment but is usually seen in the category of environmental engineering. One of the advantages of commercialization is that venture capitalists, acting with investment banking style software will break down the categories to bring together scientists operating in different disciplines, while university and research institutes will still require some degree of "specialization" in order to organize experimental science effectively.

Some extremely interesting health-related opportunities are derived from the commercialization of medical botany as a discipline, both as biotechnological products are designed from certain kinds of interactions and as a result of the direct application of nature-based therapies to a number of special needs. Kalahari cactus yields a diet pill; coffee beans are one of many mild stimulants found in nature and commercialized a long time ago.

New investment strategies and bioincubation plans for economic development should understand the intersection of health, agriculture and environment and focus on areas that are just belonging to be commercialized: food preservative technologies, bioremediation and bioconversion activities, biomonitoring technologies which offer finely-tuned assessments of ecological patterns.

We need a new approach to the investment in healthcare. To pursue some of these kinds of activities, it is necessary to build some new practices in the fusion of environmental, agricultural and medical sciences.

Last Updated ( Tuesday, 05 July 2005 )