In Pennsylvania, we currently have the modern day equivalent of a gold rush going on in our state (the Marcellus Shale) after the discovery of the country’s largest natural gas deposit. To get in on the rush, gas exploration companies are offering vast amounts of cash to landowners in exchange for future development rights. I say future because the economics of natural gas drilling is not yet on par with gasoline, leaving the widespread adoption of the fuel very much in question. Yet, even with that risk, large exploration companies are willing to spend considerable amounts of money up-front in the hopes that they will receive a handsome payday in the future.
The economics of natural gas exploration in Pennsylvania is somewhat analogous to that of life sciences product development, wherein investors are willing to spend large amounts of money up-front on the development of life science products, hoping that those products can tap into future markets that are expected to be in the billions of dollars.
Taking on such risk, whether in natural gas exploration or life science product development, can be daunting for all but the most intrepid entrepreneurs and investors.
How does one participate in sexy investment trends, such as natural gas exploration, but not take on the risk associated with it?
The answer is to identify products and services that support those companies working at the bleeding edge of an investment trend. In the case of natural gas, that means identifying those companies that provide the infrastructure (raw materials) and logistics (housing, food, transportation) that are required by the exploration companies to prospect for gas.
Like the natural gas industry, there are those life science companies that swing for the fences, identifying new trends and investing big in them, and those companies that provide infrastructure and services to support the homerun approach of their peers (sometimes even these companies can be home runs). Below is my analysis of two such companies and the products they created to support the development and adoption of bleeding edge technologies.
With an aging US population, the prevalence of Alzheimer’s is growing at an astonishing rate. Every major drug developer has tried to develop medicines to treat the disease, but with little success. A key development challenge for drug developers is that Alzheimer’s, especially in its early stages, can be challenging to diagnose. Poor diagnosis has meant that drug developers have typically sought later stage patients. These patients are harder to treat as much of the damage done by amyloid aggregates (I am not mentioning tau or prion in this blog post) likely cannot be reversed by therapy alone. Early diagnosis is therefore a priority of patients, clinicians, and drug developers.
Avid Radiopharmaceuticals (an Osage portfolio company) has created a radiolabeled ligand that binds to amyloid-beta, a protein that often aggregates in Alzheimers’ patients brains and is considered by many to be a hallmark for the disease. Unlike drug developers focusing on homerun therapeutics, Avid chose to develop a diagnostic that could aid clinicians in their ability to track disease progression. While the diagnostic has yet to be approved, Eli Lilly bought Avid for $300 million upfront and is making the company it the cornerstone of its Alzheimer’s drug discovery effort.
As percutaneous procedures mature and increase in complexity, device companies and clinicians are attempting to insert ever-larger catheters through the arties of patient’s. Large catheters have a high likelihood of rubbing against artery walls, knocking off plaque and debris that has accumulated on the epithelium. Once freed, that flotsam may embolize on its passage through the arteries and into the brain where it eventually could cause a stroke. Early clinical trials for Transcatheter Arotic Valve Implantation (TAVI) procedures in Europe have confirmed the risk of stroke as several patients did, in fact, have strokes.
Embrella Cardiovascular created a simple solution to the floating debris problem; it developed a small net that catches embolisms when inserted into the patient’s heart. The product is simple to use, relatively cheap, and provides a nifty solution for decreasing TAVI-associated stroke, which could been a stumbling block for the adoption of TAVI procedures. Being a relatively simple device, Embrella required only $7 million of capital before it was acquired by Edwards Life Sciences for $43 million.
There will always be those companies that are willing to invest significant up-front resources in risky projects in hopes of generating a substantial future windfall. What is often less talked about is the role that numerous other companies play in supporting the efforts of those “wildcatters”.
Adjunctive technologies, when applied to bleeding edge markets, can often generate significant interest from strategic acquirers as those companies seek to build out their product offerings and expertise around a specific development area, such as Alzheimer’s or TAVI. Identifying trends and products that companies need to better facilitate the development and adoption of core products around a growing trend is a surefire way to start a company that will have significant strategic value to potential acquirers.