The Life Sciences in New York State: 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.