iSight - Ambition in healthcare
The art of picking winners
How do investors like 3i identify the one market segment, management team and product that together forms a world leading company?
Take a clever scientist with a focus on an innovative new product and you may have the basis for a business. Add the right market conditions and a healthy injection of funding and the business begins to take shape. But what makes it a winner? What turns an early stage piece of medical research into a world leading company?
Clearly there is no single answer, but a combination of factors that must be nurtured and drawn together to ensure the business can move forward from its original premise.
In simple terms you need people who know the healthcare market, how to build and run these companies and, if possible, have done it before. “You have to spot the opportunity through a window that is not open forever,” says Klaus Stoeckemann, 3i healthcare investment partner based in Munich, Germany. “It is a question of being able to spot an opportunity and turn it into a commercially viable business. If all that comes together you can end up with significant results.”
With more than 30 healthcare professionals operating out of 14 countries, 3i is better placed than most to spot these opportunities. “We have very experienced people,” says
Stoeckemann of a team that has invested over €1 billion in healthcare businesses in the last five years. Recent success stories range from the sale of high profile drug discovery company Domantis to the market success of handheld ultrasound technology of Zonare Medical Systems, two very different examples of innovation but with the common denominators of world-leading innovation, market focus and leadership, with 3i funding to support their development.
For its part, Zonare, which has been supported by 3i and other investors through a number of rounds of funding, perfectly fits the model of a more flexible, more individual patientfocused healthcare system. “Instead of carting the patient off to the ultrasound site, the ultrasound can now come to the patient,” says Stoeckemann. Aside from its portability, the system is supported by a software platform that will continue to deliver improved image quality as processing power increases.
Spotting a gap in the market and acting on it is about contacts and context, says Nigel Pitchford, a 3i partner. His message: understand what’s happening in a particular area of the market and call on the right network of contacts when it comes to assessing the potential of a new treatment or medical technology. “In many cases we’ve got a deeper knowledge of the technologies because we can call on the teams with that knowledge.”
This knowledge was brought to the fore when 3i backed pharmaceutical company Newron Pharmaceuticals over multiple rounds of funding since its spin-off from Pharmacia & Upjohn in 1998. 3i recognised that Newron’s experience and focus on novel therapies for diseases of the central nervous system was a key success factor. Homing in on diseases like Parkinson’s and Alzheimer’s, the company has been successfully developing a new generation of drugs for these significantly unmet medical needs. Parkinson’s disease, for example, which is a severely debilitating and progressive brain disorder, is believed to affect more than 1% of the population aged over 60. The current market for Parkinson’s disease drugs is approximately £3 billion and patient numbers are predicted to double globally over the next 30 years as the population gets older.
Perhaps not surprisingly given its pipeline, Newron completed an IPO on the Swiss public market last year, raising €74 million, one of the largest biotech IPOs of 2006. In addition, of Parkinson’s disease was partnered in a landmark deal with Merck Serono last year. And Newron can thank investors like 3i who, at IPO, was its largest venture capital shareholder, for helping it develop its pipeline.
Aside from a company’s focus, part of the challenge of picking winners is taking a long hard look at the people, says Stoeckemann. “If we have the right management team and the business model is convincing then we may be willing to put a lot of money on the table.” He stresses that this doesn’t mean that management has to be fine tuned from the word go or even necessarily heading exactly in the right direction – but they must be seen to have the capacity to get there.
This has proved a key factor in numerous other 3i exits, among them the sale of the mail-order pharmacy DocMorris to pharmaceutical distributor Celesio AG earlier this year. Commenting on the sale, Stoeckemann points out that 3i was an active member of the DocMorris supervisory board as well as ensuring that its network of contacts was put at the company’s disposal. “We set the strategic course,” he says. “DocMorris played an important role in the restructuring of the pharmaceutical market, and in doing so advanced the development of an entire sector.” This has been achieved with the vision of DocMorris management, including founder Ralf Däinghaus, who was awarded German Entrepreneur of the Year in 2003 and whose company had grown to service 700,000 people in Germany at the time of the sale.
“One of our main tasks as a lead investor,” says Stoeckemann “is ensuring there is the team in place to execute the full business plan. In some cases this may involve bringing
the best CEO for the job – with good support from the Board. It’s a question of finding the right places where people can create value.”
The breadth of 3i’s coverage in the healthcare sector is neatly matched with the focus of portfolio companies like Santhera, in which 3i first invested in 1998 and again subsequently to support its research for the treatment of diseases like congenital muscular dystrophy and Friedreich’s Ataxia (FDRA) which causes degeneration of nerve and muscle tissue. “This is a very focused, niche market and Santhera is an expert in its field,” says Stoeckemann.
The reward in this case has been a successful IPO for Santhera and the company is currently seeking market approval for SNT-MC17, its FDRA drug treatment, in Europe and the US. Another challenge is to develop a specialist US sales force and global marketing franchise, again working with investors to develop the right partnerships. “It varies from investor to investor but if you are patient you will wait until the company launches a drug and participate in that value creation,” says Stoeckemann.
With 3i-backed pharmaceutical companies Kudos Pharmaceuticals and Arrow Therapeutics, success has come earlier. Homing in on diseases like cancer, Respiratory Syncytial Virus (RSV) and Hepatitis C, they have been successfully developing new generations of small molecule drugs to meet these unmet medical needs. Perhaps not surprisingly given the novelty of their pipelines, both Kudos and Arrow were purchased by AstraZeneca for $210 million in 2005 and $150 million earlier this year, respectively. The strategic rationale was to complement AstraZeneca’s own work and knowledge in this area.
And that is perhaps the crux of it all: the ability to see where value can be created and act on that insight. It’s about turning that opportunity into business success.