CHICAGO – On several occasions in this column, I have commented on the importance of developing new business and financing models for the rapidly evolving areas of medical technology and biotech. These have included:

So Far, Venture Capital Relatively Unsuccessful in Biopharma Market (11/14/2006)
A Time to Make Friends: More Partnerships in Biotech, Med Tech? (7/12/2006)
Tech Convergence a Key Theme at Orthopedics Conference in Chicago (4/3/2006)

The Nov. 14, 2006 column on venture capital also referenced a significant new book entitled “Science Business” by Harvard Business School professor Gary Pisano. While the book provides suggestions for future directions, it unfortunately is less than definitive in its recommendations.

Last Monday, Michael Rosen in his MidwestBusiness.com column headlined MoneyTree Report Points to Ongoing Saga of Life Science Financing also commented on the increasingly challenging financing environment for early stage biotech ventures.

In particular, Rosen pointed out how the growing emphasis on deal size has put the $2 million to $10 million range out of the deal radar screen for most venture firms. Most angel groups and universities only put up between $500,000 and $5 million at the high end. This creates a well-acknowledged problem with so-called “gap financing”.

From both the business model and financing perspectives, this is clearly a hot and important topic these days.

In this light, it was very interesting to come across some of the recent news around the awarding of the Nobel Peace Prize to Muhammad Yunus of the Grameen Bank, which provides microcredit to the large numbers of poor people around the world and particularly in India. What’s the connection?

A related and interesting thought is in an article in the International Herald Tribune headlined Microcredit Pioneer Criticizes Globalization at Nobel Ceremony in which Yunus rails against globalization:

Yunus called for legal recognition of a new category of corporation that would be neither profit-maximizing nor non-profit. It would be a ‘social business’ like Grameen Bank – the microcredit institution based in Dhaka, Bangladesh – that he started 30 years ago.

First, I should say that I disagree with the Nobel Laureate’s position on globalization.

After all, once some of these impoverished populations are brought out of poverty, would it not stand to reason that they can only benefit by an expanded global market for their goods and services? More to the point, he may be onto something in recommending entirely new ways of thinking on this front.

While some of his suggestions are certainly extreme, the problem deserves out-of-the-box thinking when we talk about advanced business models for biotech and med tech. While Wall Street is often right, any venture capitalist or investment banker should respect the concept that ideas can come from anywhere and even from the third world.

In his book, Pisano also hints at this “popularization” of biotech financing when he points out how various disease-oriented non-profit groups, charities and government groups are actively providing venture financing to new biotech start-ups.

The point that this is happening more and more is further substantiated by the Economist article headlined “Bench to Bedside” on Nov. 4. These groups and charities include the Cure Alzheimer’s Fund (CAF), which was started by several families with VC experience.

The Milken Institute (a non-profit) is also sponsoring efforts to look into new approaches to biotech and pharma financing. If the trend of socially driven popularization of biotech investment continues, investors would be looking not just at financial returns but also at social returns of the sort that Yunus is speaking.

Ultimately, this is what most patients want. Though it is not yet clear whether or not this will require new legal frameworks, it is clear that it would involve new paradigms. For example, it may imply regulations that make it easier for smaller companies to access the public or semi-public financial markets.

While Sarbanes-Oxley has clearly made this much more difficult, recent trends – as highlighted in the Dec. 10 New York Times article headlined SEC to Ease Auditing Standards For Small Publicly Held Companies – may reverse this tendency and make it easier for smaller companies to become and stay public.

Another important paradigm would be to create disease-oriented holding companies that are large enough to sustain themselves as a public company but would have individual private holdings that would roughly correspond to today’s start-up firms.

One of the problems with early stage biotech and medical technology firms is that many of these technologies and ideas do not necessarily require a full-time management team at their beginning stages.

Nevertheless, it goes without saying that one needs a management team to secure funding. The current system may be creating an environment fraught with inefficient management overhead and/or just bad management teams. (Disclaimer: Not all of them are bad. In fact, some are really good. They just may not be completely necessary).

The investment community (investment banks and VC firms alike) abhor holding companies because they complicate deals and are more challenging to valuate.

While these are valid concerns, they are more technical than fundamental problems. After all, General Electric is the quintessential holding company and some would argue that the only thing really holding that firm together is its unique and powerful approach to creating, developing and sustaining great management teams.

In conclusion, models for biotech and medical technology should consider:

1. Facilitating earlier entry of biotech and med tech start-ups to the public markets to enable investment and engagement by investors who could be patients (or related to patients) potentially impacted by this technology

2. Facilitating holding company arrangements that can justify the management overhead (including public company cost structure) within which private company start-ups can be nurtured and developed

When it comes to biotech and medical technology, investors and patients deserve better. Change is clearly in the wind.