Recently, I went to an event hosted by a regional director of business development for Medtronic. The presentation focused on the company’s thought process in terms of M&A as well as making minority equity investments in medical device start-ups. The theme of the presentation was pretty simple, which was, even though Medtronic is the world’s largest medical company, it only plays in a select number of areas in which it has a long-standing history. Unless a technology falls within the scope of one of its six business units, namely cardiac rhythm, cardiovascular, diabetes, spinal, neuromodulation and surgical technologies, it is not of interest. The reason for this is economies of scope.
Economies of scope (not to be confused with economies of scale) occurs when the average cost of producing two products is less than that of producing just one. As an example, suppose you have three companies: one that produces dog food, another than produces cat food, and a third that produces both. Given that the resources required to produce and sell dog food and cat food are similar (i.e. ingredients, manufacturing equipment, distribution channels, etc.), the average cost per can of food incurred by the third company is likely to be less than the other two individually. This also holds true for medical technology. Once you have one cardiovascular product in market, it is comparatively easier and cheaper to bring another than it would be starting from scratch.
Multinational life science companies tend to exhibit very strong economies of scope within particular areas for two reasons. First, once a disease pathway, organ system or medical technology is understood, other products can be developed that build on that. Second, market adoption involves engaging providers, payors and regulators, and those relationships can also be leveraged going forward.
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If you have worked with KOLs or decision makers on bringing a product to market, you can better predict, manage and possibly influence their behavior for subsequent products.
For start-ups, this is a very valuable insight (in my opinion) because it tends to also explain the behavior of venture capitalists. Whereas a multinational life science company is a portfolio of products or divisions, a venture capitalist is a portfolio of investments. Similar to a multinational, once a firm is comfortable and successful in a particular area, they are likely to continue leveraging that competency. Although it does not constitute a representative sample, looking at the only two dedicated life science venture capitalists in Toronto, both seem to have their areas of expertise. Of the ten portfolio companies invested in by Genesys Capital, three are in the CNS space and two are gastrointestinal. Similarly, Lumira Capital is heavily invested in therapeutics and also has experience in ultrasound (with two exits). I imagine that most the portfolios of most life science VCs can be grouped into a handful of areas.
With that being said, there really is no such thing as a “life science” VC, in that the scope of life sciences is so broad that to invest in breadth over depth is to risk losing economies of scope. As an entrepreneur, it is important to target those firms and partners that are active in your area and understand the landscape.
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