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.
- Animal
to human virus research www.biota.com.au
- Portable
CAT scanners www.xorantech.com
- Toxicogenomics
http://www.niehs.nih.gov/envgenom/home.htm
- Bacteriology
and water purification technologies www.trojanuv.com
- Food
toxicology research www.cantox.com
- 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.