The Life Sciences in New York State

Shortages of qualified CRO professionals in India

I've been hearing various rumblings of this growing problem in India. What's concerning is that it's a broad array of capabilities that are being faced with shortages...data management specialists, clinical investigators, specialists in pharmacokinetics, etc. So it's MDs and PhDs and MS-level scientists, AND their supporting technicians.

I recently spoke with a toxicologist in The Netherlands who told me
that his CRO does work for Indian pharmaceutical companies. When I
asked him why, the response centered around their desire to enter
European markets. This answer didn't make a lot of sense to me, but I
didn't probe further.

This is a real problem. Is the Indian CRO market capacity constrained due to lack of personnel? Will CROs in India begin to outsource to other countries?


Clinical research sector faces shortage of 10,000 professionals

Clinical research sector in India is facing an acute shortage of technical people with the increasing flow of contract research jobs to the country. According to an industry estimate, this sector is in short of 10,000 professionals currently, and at the same time attrition rate has risen to 20 per cent.

PE in Biotech: If it were only this simple

Nice idea, but it's challenging to find the right opportunity for this model. Once you start risk-adjusting developmental projects, the value that you obtain for them may not provide much cash in order to service the debt in the short term.

Where I do see opportunities to execute LBOs in biotech are with CROs and other service companies who have a blend of service revenue and a pipeline with substantial upside. If you sell the pipeline, the cash can be used to build the service side by acquiring low-cost infrastructure in India, Asia, Russia, and Eastern Europe. Once the new assets are in place, cash flow will increase in order to service the debt over the long term.

Private-equity firms not making splash in biotech

Seasoned biotech companies should be prime candidates for private-equity firms, which could strip out less profitable projects and sell them to drug giants or through initial public offerings.

Do you need access to CROs in India? I can help.

I will on occasion help my clients identify and develop relationships with contract research and services firms in India. It never occured to me until recently that many US-based companies really struggle with this.

In my experience, the keys to success are:

1. Ignore any preconceived (or ill conceived) notions about the quality of the work that will be done, the language issues, the time zone issues, etc. All the folks I've ever worked with in the Indian life sciences sector are very professional, highly skilled, highly educated, and keenly interested in growing their business by serving their clients (you) well.

2. Start small. Find one or two small projects and begin to develop a relationship with one or more CROs. Grow the relationship from there.

3. Don't let concerns about the loss of IP hinder you. It's a valid concern, but only if you choose to work with people that are not ethical. That's just as true here as it is there. Nobody wins when IP is stolen.

What's available? You name it:

>Discovery services
>Lead optimization
>Assay development
>Any Preclinical animal model you can think of
>Clinical data management
>Market research services

The list goes on and on.

If you need help, send me a note and I'll try to steer you in the right direction.

Predictions for 2006

Let me first wish all of you a safe, healthy, and prosperous 2006!

It seems as if everyone else with a blog has predictions for 2006. So, I'll simply follow suit with a few of my own.

Diagnostics - I think we will continue to see more news surrounding diagnostics, especially from companies seeking to co-develop diagnostic/monitoring tests with therapeutics. Most of these will likely come from small, innovative companies. Look towards the FDA for more guidance this year.

Vaccines - I think we'll continue to see an increase in announcements surrounding novel vaccines in development. They may not be billion dollar products, but certainly very successful. We might see a big pharma company (Merck? Pfizer?) may some acquisitions in vaccine development companies.

Venture Capital - I think we'll continue to see an increase in the number of smaller, niche funds with narrow industry and/or geographic focus. While the mega funds get all the attention, these smaller funds will post impressive gains when they close out in 10 years.

Big Pharma/Big Biotech Woes - Here's an easy one...they'll continue, and they'll get even worse. Will Merck end the year without being merged into Schering-Plough? I'm not so sure. Is this a good time to short PFE? Which of the major biotechs will face litigation? Genentech? Amgen?

Go East - We'll see more and more start ups and development-stage companies strike development and/or commercialization agreements with companies in Europe, India, China, and Australia. The Bentley/Biocon agreement I wrote about recently is one example of this. We may even see some VC funds bring venture partners with international experience to help portfolio companies facilitate this.

Markets - I think the US markets will continue their sideways movement. We'll see a 5% or less gain on the Dow and NASDAQ.

Web 2.0 - More blather, little real innovation. In my mind, the widespread usage of Internet Telephony was the biggest story in 2005. The rest is just window dressing. I'm not sure what Microsoft Vista will do to change all this, other than tax our CPUs even further. Having a Google-like, built-in, efficient search function is a must.

Personal - Every year, in lieu of a resolution, I choose a theme for the year. I try to keep it to 1-3 words so it's easy to remember. Last year's theme was "Take the plunge" because I left my full time job to fly solo. This year, it will be "Resolve". Why? Because I am working on a few initiatives/business opportunities, but some will invariably fail. Others might succeed. Perhaps all will fail. One way or another, I want to resolve all of these fairly soon, and focus my energies and resources appropriately.

NY second for 'insourcing' jobs

We don't hear about insourcing much. Insourcing is defined as ex-US companies who open or expand their presence in the US. NY is second to California in jobs insourced.

Link: NY second for 'insourcing' jobs - 2005-12-14 - Business First of Buffalo.

Business Plans from India

I've posted on India and China in the past. Over the past few months, I've received a number of business plans from companies in India looking for capital and/or strategic partnerships in the US. If anyone has any ideas or contacts who can help, please do let me know.

Venture capitalists in rush to seize opportunities in India

Good article in today's San Jose Business Journal on the rush of local VCs into India. Focus of article is on IT/software, but nevertheless instructive. For example:

"Smart people in India are realizing that their jobs can be commoditized very soon to lower-cost companies eventually and that's why they're looking at product companies," Mr. Stjernfeldt says.

Carl Stjernfeldt is a partner at Battery Ventures. What I find interesting is that the arbitrage that exists in labor/development costs between India and the US is, in his view, unsustainable. Therefore, entrepreneurs in India are shifting away from cost-centric value propositions to product development initiatives.

This is also interesting:

Recognizing this trend of companies choosing to be cross-border at birth, Silicon Valley Bank spent five years scoping out the Indian market while building a network of consulting and business services for U.S. based and India-based technology companies and private equity firms that are pursuing cross-border business. Establishing an international subsidiary in Bangalore in September 2004, Silicon Valley Bank has 12 venture firms as consulting partners.

The bank's global markets head, Ash Lilani, recently traveled to India in relation to events targeted at young product companies in India and venture firms. "We really believe in India and that's why we've invested so much time and money there," he explains.

Developing a global company from scratch is not an easy task. The usual model is to start in the home country first, and expand from there. Now, an infrastructure is emerging to satisfy the demand by companies to be global from day 1. I wonder how many East Coasts banks do this as well.

Lastly,

The earliest of the venture capitalists to enter the Indian market, William H. Draper III explored uncharted waters in 1995 when deciding to focus on venture investments in India through the formation of Draper International, which is now fully invested.

After making an average of four trips a year over five years, he realized that it was better to incorporate companies in the U.S. and have others invest in the companies. Bringing a 15x return to the fund's limited partners, Mr. Draper decided to co-found a domestic fund that actively promotes Indian entrepreneurial activity in the U.S.

"Indians are one of the best talent pools of all times and they're starting to give back to the U.S.," he says. Out of 100 portfolio companies since 1994, Mr. Draper estimates that one-third have a connection to India.

Draper's model is to fund companies here in the US which have operations/ presence in India, and not the other way around (directly fund companies in India). Does this reduce some of the risks discussed in previous posts, e.g., IP risk? Is this model applicable to other industries?

To be continued...

 

Preliminary Thoughts on India/China/Outsourcing Issue

Having recently completed Prestowitz’ excellent book, I’ve decided to take a stab at codifying what these trends and issues mean for life science companies here in New York State, especially start ups, and their investors. Much of this thinking was complemented by email and verbal exchanges of ideas with a few like-minded people, but these comments are expressly my own.

 First, I’ll start with a gross generalization, namely, these trends simply cannot be ignored. It is also clear to me that the “solutions” require politically unpopular (Unfeasible?) changes in how we (Americans) view our relationship between government and industry. Because of this, I do not see these trends reversing any time soon. Thus, I think anyone who is contemplating starting a life science company must have a strategy for tapping into these global resources. I think a business plan must address two critical questions:

Can research and development be accelerated via joint ventures with academic or corporate researchers globally? If so, how? If not, why not? I concede the point that protection of trade secrets and technologies can be an important factor for keeping this internal.

How can prototyping and “manufacturability” be built into the design and development process to ensure a smooth outsourcing transition? This is a particularly thorny issue. I’m all for the use of venture capital to create companies and jobs. However, we also have to judicious with our capital deployment. I would much rather create 20 jobs and a lower burn rate (thanks to outsourcing) versus 35 jobs, a faster burn. Why? Because a lower burn rate gives the company more time to take corrective actions when things go wrong (and they will), negotiate deals, etc., etc. This gives the company the greater chance of succeeding, if not surviving, which may be sufficient to generate a reasonable return. I don’t think that the outsourcing of manufacturing is necessarily an all or none proposition. There may be creative ways to, for example, import components from Asia for final assembly in New York.

I also believe that anyone involved in a venture capital fund, or even contemplating raising one, must develop some thinking along these lines, perhaps even a paragraph or two in the offering memorandum. There are at least two reasons for doing so: 

First, from a competitive perspective, how can these trends (shifts to the East) impact prospective investments in the particular industrial segment of interest? What are the competitive implications for prospective portfolio companies? How will the fund/portfolio companies address (embrace?) unforeseen competitors from half a world away? As a prospective limited partner, would I want to invest in a fund which is targeting a segment in which an unknown competitor can quickly emerge from India or China?

Secondly, one can flip this around and ask if the fund managers have the network to turn these trends to their advantage. What contacts and resources does the general partner have at their disposal to leverage these trends, to the advantage of the portfolio companies? 

Let’s create a hypothetical example. Suppose a company is planning a series of Phase II trials for their lead compound, and is seeking a round of financing to pay for these trials. Does the management team have the experience to select a CRO to handle international trials, thereby reducing costs, reducing burn rates, and reducing the capital required? If not, can the investors (VCs) add value here? Does the Board have the experience to advise the company on this issue? It’s one thing for a VC to say “Run your trials in India, then make the device in China,” but it’s an entirely different matter for the VC to be able to say “Let’s call my contact at Pfizer who has overseen international trials by CROs, and who I know is willing to advise us on this issue.”

As I write this, I realize that the implications for life science venture capitalists are quite interesting. While a track record and historical performance (IRR) is important, it also means that a deep understanding of life science product development process, both strategic and tactical, is important. No, it’s more than that. It’s really a requirement to get the proverbial seat at the table. Flipping this around, as the CEO of a capital-seeking company, I would not accept capital from an investor who does not have these resources/contacts at their disposal. 

To boil this down to four points: 

• Study and understand these trends.
• Develop contacts and relationships accordingly.
• Incorporate this thinking into product development and fund raising.
• Make sure that your Advisory Board (current and future members) has experience in dealing with these issues, and then adjust Advisory Board composition as needed.