Investing in Biotechnology: 2 Things Investors Should Look For

At the recent Biotech Showcase in San Francisco, companies, market players and investors congregated in an effort to find the next big thing in the healthcare industry. One way that effort played out was in a panel discussion titled “Advanced Medical Technology: What Investors Need to Know.”
Of the topics, two main things stood out: the importance of identifying new areas of investment, and key role in success that management plays. Panelists included Stephen Dunn, senior manager and director of Research at LifeTech Capital, an institutional research firm, as well as three venture capitalists: Vijay Pande, general partner at Andreessen Horowitz; Phyllis Whiteley, venture partner with Mohr Davidow Ventures; and Peter Young, executive in residence with Pappas Capital
All in all, there was a lot to learn in terms of how the different sectors view investing in biotechnology and medical technology.

Investing in biotechnology: Identify new areas

As with most areas of interest, one must first identify new areas to investigate further. With transformative technologies – for which there is no established predicate, or necessarily any market to do any comparibles – investors must ask themselves the same question.
For Pande, the clue to identifying if a good investment is in “key data that demonstrates some sort of efficacy.”
Pande explained that for him, “Even if we are talking about something that is not a traditional therapeutic, like a digital therapeutic that’s applying a whole bunch of different aspects like compute and mobile and social, one can still address efficacy in a quantitative way.”
Contrarily, Whiteley’s approach to an investment relies more on taking a company at its word, that its product does what they are claiming it does. Instead, she has three questions that she applies to every meeting:

1. What’s the big problem you are really trying solve?
2. What the ultimate solution would be?
3. Why are you the solution?

Once she can answer those questions, Whiteley will drill down further into understanding the key data that Pande alludes to. “People just don’t spend enough time articulating the specific problem that they are solving, and not just this generic problem that the world has,” she said.
From an institutional research perspective, Dunn’s method of identification is slightly different. “We are not actually looking for the ‘world changer'” Dunn told the audience. What is is interested in however, is looking for things that solve a “very real problem”
Perhaps because Dunn is further down the big investment track, he is looking for the validation at the end, “we are looking for the game changer in small areas.”

Investing in biotechnology: Look at management

People play a large role in the grand scheme of a company’s success.
From Dunn’s perspective, management is a key part of a company. “Does the management team include people that used to work for the potential acquirers” “when we get a small medtech company in, the first thing we look at is there somebody from the industry that could be a potential acquirer.
“Early stage investors look at it a little differently,” Whiteley said, speaking from a venture capitalist perspective, “Is the team you have today is the team you need going forward. Very often we are investing in a team that we think can make the product, we probably don’t think that they are necessarily the commercial team at all.”
On the venture capital side, Whiteley is less concerned with the team at an early stage.
For software and technology, Pande noted that developers can often times see a product from the beginning to the end. Although, they will eventually require people with access to see the product to the end.
“When you are looking at new companies, you get a sense of whether the management and the founders have their head around – a mindset- what they know and they don’t know and will embrace the expertise that will come into the company and will either get out of the way or coexist and go along for the ride.” Young commented.
Ultimately, Whiteley hit the nail on the head “You don’t invest in a team that you don’t believe in.”

In the end…

While their opinions varied in some cases, in the end, they were all on the same page. Investors, and investment partners need to pay attention to the end game. It is not always as simple as “if you build it, someone will buy it” – which Dunn was adamant applies more to biotechnology than it does to the rest of the medical technology sector. Instead, investors should also consider “if they build it, WHO will buy it.”
All this to say that as with all higher-risk investments, investors must do their due diligence.

Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned.