This is the final post of a four-part series on start-up companies that sell instruments and supplies for research, the “tools of science.”
- Part 1: The grad student entrepreneur who started a tools company
- Part 2: The engineers who started a tools company
- Part 3: The corporate scientists who started a tools company
The last three case studies showed founders and their investors exiting their venture through a sale to a larger acquiring company. They describe the path of the entrepreneur and the experiences to be expected.
This example is a company that sells cell culture media for growing stem cells. It takes a different path.
The insights here concern economic policy and a country’s technology and industry strategy.
Last week, the UK overwhelmingly voted for a party whose message was to get Brexit done. That sentiment was building for a generation: a convergence of many different factors affecting all parts of societies.
Just one of those factors is how technology and business are affecting the future of jobs, not just in dying industries, but also in high technology industries with PhDs. The founder of this company chose a path that acknowledges the changing world of global business.
Early stem cell research
Stem cells have the potential to develop into different types of cells. There are two broad types of stem cells in humans.
- Embyronic stem cells are found in the blastocyst, a stage of the early embryo. They can differentiate into all cell types of the body. However, their use is restricted due to ethical concerns.
- Adult stem cells can be found in matured humans. Different types of these adult stem cells can be found in different tissues in the body, providing a source of repair and regeneration for that tissue type. Use of these cells are not controversial. However, they are difficult to find, and they are difficult to isolate.
Of all tissue types, blood is the most accessible to research, because it is a liquid. Cells from solid tissues are more difficult to isolate for research. Perhaps it is not so surprising that most early breakthroughs in stem cell research came from the field of hematology, the branch of medicine concerned with blood.
In the early 1960’s, at the University of Toronto and the Ontario Cancer Institute, Ernest McCulloch, a hematologist, and James Till, a biophysicist, conducted experiments using bone marrow cells of mice. They discovered the first type of stem cell, the hematopoietic stem cell that forms blood cells. They identified the self-renewing properties of this type of cell and developed methods to characterize these properties. Till and McCulloch are recognized as the pioneers of stem cell research.
The growth of stem cell research
Figure 1a shows the number of stem cell research papers published each year. Since Till and McCulloch’s seminal work in the early 1960’s, the stem cell field has been growing rapidly.
All large scientific fields plotted like this show a pattern of publication growth over time. The differences among scientific fields are in:
- how quickly the bar heights are growing in each field – steeper slopes mean a faster growing field,
- the height of the bars in each field – higher bars mean more research activity in the field.
On both these criteria, stem cell research has been far outpacing almost all other fields. Plotting Figure 1a on a log scale shows a near-linear trend. (Figure 1b). This is exponential growth, which is extraordinary when compared to the vast majority of fields.
To further illustrate the outsized growth of stem cell research, let’s compare it to the field of omega-3 fatty acid research. The omega-3 field is a suitable benchmark, because its commercial opportunities have been validated since the early 1990’s. That commercial market was detailed in an earlier post. Today, refined and purified omega-3 fatty acids is a market of over $2 billion dollars annually, with end product sales being over ten times higher. In 2010 and 2012, two omega-3 fatty acid companies were acquired for over $1.1 billion and $540 million, respectively.
Figure 2 compares the number of research papers in the fields of omega-3 fatty acids (blue bars) and stem cells (green bars) published each year. From my own experience, most fields show activity and growth similar to the levels seen by the blue bars.
Note that stem cell research dwarfs the research in the omega-3 field, and most other fields, by over 1.5 orders of magnitude. Stem cell research is very active, and it has not even yielded any commercial products yet.
A few investors, including governments who fund public sector research, have long been anticipating that this high level of research activity would yield some economic benefits soon.
The network stem cell researchers
New scientific networks grow over time as scientists in their early career go to learn from pioneering labs, and as different researchers collaborate to expand their work. This was happening in stem cells.
Though stem cell research is conducted by groups all around the world, in mid-2000, a large amount of this research was still concentrated in a network that originated from James Till and Ernest McCulloch, namely in Toronto and a few other Canadian research institutions.
From 2004 to 2011, multiple research institutions in this original network started to double down on this field by luring prominent stem cell scientists from the United States, and by increasing investment in their research facilities.
Multiple breakthroughs were accumulating during this period. The most important of those happened in 2006, when Professor Shinya Yamanaka in Kyoto University generated induced pluripotent stem cells from adult stem cells. For this breakthrough, Yamanka and another scientist, John Gurdon, were awarded the Nobel Prize for Physiology or Medicine in 2012. The significance of their work was showing that it was possible to reprogram adult cells to have pluripotent properties similar to those found in the more powerful embryonic stem cells. This opened the possibility for regenerative medicines without the use of controversial embryonic stem cells.
Using research networks to promote economic development
At that time, I was on a hiatus from private industry. I was working for a Toronto economic development agency to attract investment and economic activity in the life sciences.
The Ontario and Canadian governments took their cues from their research institutions. One of their economic priorities was to find a way to use these “assets” in stem cell research excellence to attract and produce economic activity.
The task of executing on this directive came to our group as well as to all other economic development groups and public sector technology incubators in Ontario.
Here is an interesting business case interview question: how do you make this happen?
Our group started by providing the content for the marketing and promotional message. The complex message of stem cell research expertise was distilled into an authoritative summary for non-scientific experts.
Figure 3 shows where the major public sector stem cell research labs in North America are located (circa 2008).
Figure 4 shows the impact of the research coming out of these labs circa 1998 to 2008. The quality of the research, measured by citations per research publication, coming from the Toronto network of labs was significantly higher than the North American average and the global average.
The commercial opportunities in stem cell research
Economic development groups are highly competitive. Each group stakes out their domains in seeking to attract investment. Each group wants the political credit for any win.
At that time (circa 2008), all of the other economic development groups as well as the technology incubators were focused on attracting investment from pharmaceutical companies, biotechnology companies, and venture capital.
Our group had to find a different strategy, so I chose to target economic opportunities presented by research supplies and instruments.
With all this high end research, these labs must be spending a lot. What were they buying, and how much?
I already suspected that cell culture media was probably a major expense.
Culture media is used for growing cells. Culture media is a solution containing nutrients and other biochemical components. Cells are very finicky. Their growth and behavior in one type of media is very different than in another type.
The recipes for these media are trade secrets. The manufacture of culture media is very stringent, because you want a highly reproducible formulation each time, to provide reproducible experimental results. The culture media must be sterile and absent of any other biological agents that may harm your sensitive cells.
These are all characteristics of a high value product. Indeed, there was already a case example in this product category.
Grand Island Biological Company (GIBCO) was founded in New York in 1960 to provide products for cellular biochemistry and molecular biology research. Its most important product line was cell growth media which, at the time, was predominately fetal bovine growth serum (FBS). Customers were university and government research labs, medical research centres, and pharmaceutical and biotechnology companies.
Through a merger in 1983, it became known as Life Technologies. By that time, it was the world’s leading supplier of sera and cell growth media, all marketed under the GIBCO brand. By 1995, the technology and composition of cell culture media was advancing. Cell culture media product sales grew to comprise 58% of Life Technologies’ sales, while FBS comprised only 16% of sales.
In 2000, Life Technologies was acquired by Invitrogen. Invitrogen was a scientific tools company, originally selling supplies for genetics research. Invitrogen grew dramatically through acquisitions, diversifying into many other biological research supplies, eventually selling over 5,500 products by the time it acquired Life Technologies. This consolidation path continued with Thermo Fisher Scientific acquiring Invitrogen in 2014 to be part of a global behemoth.
Back in 2008, GIBCO cell culture media was a popular brand in stem cell research labs.
The analysis and economic development strategy started with figuring out how much culture media is purchased by labs in Toronto and in other markets.
Performing an on-the-ground market size calculation
We had already identified the labs (Figure 3). We can obtain estimates of the size of these labs by looking at their websites. We can estimate their consumption of supplies by analyzing their research publications. We knew the list prices of culture media by looking at catalogs.
To verify the amount of culture media being used, I contracted with a recent PhD graduate who worked in one of these stem cell labs.
- Information on research lab websites are often out of date. This person was also to validate the size of these labs, because these research networks are tightly connected.
- This person was able to give authoritative estimates of the amount, and the actual procurement costs for culture media.
- This person was also able to provide information about what other equipment, consumables and disposables are used in stem cell research labs.
We found the annual spend for all supplies and equipment consumed by these stem cell research labs. The cost of cell culture media turned out to be the largest. The most astounding discovery was that the local market size alone was in the hundreds of millions of dollars. This became the premise and business case for our economic development strategy.
It was during this work that I came across STEMCELL Technologies, a small company in Vancouver Canada selling stem cell culture media. Growing stem cells and coaxing them to differentiate in the way you want is more nuanced than growing other types of cells. The types of culture media need to get more specialized for different types of stem cells and different types of applications. Creating these types of media would require R&D.
In the years after the GIBCO brand of cell culture media was absorbed into Invitrogen and then into Thermo Fisher Scientific, it became just another product line within a global behemoth comprised of hundreds of other product lines.
This dilution of resources by GIBCO’s parent companies allowed STEMCELL Technologies to grow competitively into the much bigger global company it is today by focusing in its market niche.
The hematologist who started a scientific tools company
Allen Eaves obtained a BSc in mathematics and biology from Acadia University in 1962 and an MSc in cell physiology from Dalhousie University in 1964. The death of a family friend due to cancer led him to complete an MD in 1968. He then went to the University of Toronto to complete a PhD under the supervision of a research hematologist who was one of the early collaborators with James Till and Ernest McCulloch. Allen’s PhD dissertation, completed in 1974, was in the study of bone marrow function. This is an illustration of the early growth of this scientific network.
Allen’s research specialty was leukemia and bone marrow transplantation for chronic myelogenous leukemia (CML).
He started his career as a professor at the University of British Columbia and as a physician at Vancouver General Hospital and the BC Cancer Agency, where he eventually became head of hematology and head of the leukemia and bone marrow transplant program for the province of British Columbia.
In 1981, he was the founding director of the Terry Fox Laboratory, a major research unit of the BC Cancer Agency, which he led for the next 25 years.
In this lab’s early days, they were not satisfied with the quality of commercially available cell culture media for growing hematopoietic stem cells. The Terry Fox Laboratory made its own cell culture media and reagents and also sold these to research colleagues around the world. The revenue helped to support its research operations.
By the early 1990’s, a clean room was required for large scale production of cell culture media. The expense was about $1 million, which was beyond the budget and operational mandate of the laboratory.
Allen mortgaged his house to buy the business from the Terry Fox Laboratory and also secured a loan from a regional economic development agency to build the required production facilities. This led to the founding of STEMCELL Technologies in 1993. In its first year of operations, the company had a staff of eight and revenue of $1 million.
In 2006, at the age of 65, Allen retired from his medical and academic positions, becoming full time President and CEO of STEMCELL Technologies.
When I came across STEMCELL Technologies in 2008, it had about C$15 million in revenue, compared with Invitrogen’s GIBCO brand of cell culture products that had revenues of US$440 million.
Since then, it has continued to grow at over 20% per year. Today, it employs a staff of over 1,000 with revenue of about C$185 million this year, selling products globally.
Allen’s stated goal is to continue on this 20% compound annual growth rate to reach C$1 billion in revenue within a decade.
The ability of STEMCELL Technologies to sustain this pace of growth was due to three factors.
First was the market size and the exponential rate of growth of this market. Figures 1 and 2 show these very clearly.
Second, Allen continues to be focused completely on this market, compared with its largest competitor which was becoming diversified across numerous unrelated product segments.
The company was able to concentrate resources on product development, and most importantly, also product support. Today, their research catalog comprises over 2,500 products that are all used in the stem cell field.
I have dealt with large and small companies selling advanced scientific instruments and supplies. While larger global companies have more resources, my experience has always been that smaller companies with a strong science focus have products that are superior and have technical support that is more knowledgeable. The only exception is Danaher, described in an earlier post. This is a large company that provides excellent products because its very business premise and culture are focused on kaizan, efficiency, and lean manufacturing principles.
Consolidating research products through acquisitions can offer a real business benefit: customers’ purchasing habits favor simplified all-in-one buying.
The growth strategy of a company is a choice of either growing by acquisition and diversification of product portfolios, or growing by focusing on their market niche. In the case of STEMCELL, it is the latter. Its company slogan is “scientists helping scientists.”
Third, Allen has been emphatic about keeping the company private.
Because Allen never took financing from equity investors, he has this choice to stay private. His own rationale may be inferred from a recent interview where he declared:
Vancouver is full of dead and dying biotech companies. Investors want an exit strategy of three to five years, and it’s too short a time frame. Success [for them] means selling the company to somebody else, ideally an American company, in which case everybody loses their job. I saw that with colleagues getting involved with investors. They kill companies.Source: The Science of Innovation, by Jessica Werb, Apr 4, 2018, BC Business.
His own personal passion includes “helping British Columbia become a more science-oriented culture and economy that is knowledge-based, high tech and environmentally friendly, as well as creating Canadian jobs for scientists and those who love science.”
Alluding to the promise of regenerative medicine, he emphasizes:
“I’m 77, and I plan on living forever. I have no exit strategy.”
Entrepreneurship and the future of global business
In April 2016, almost three months before the UK narrowly voted in favour of leaving the European Union, the Globe and Mail’s European Bureau Chief, Eric Reguly, wrote a piece that touched on people’s economic frustrations, not just in Britain, but in all developed economies around the world:
Manufacturing, or lack thereof, is back in the news because Britain, once the world’s workshop, seems on the verge of losing yet another industry. India’s Tata Group is looking for buyers for its ragged, money-losing fleet of British steel plants. Unless buyers can be found in a hurry, they may close, putting some 15,000 employees out of work. The probable closing signals that Britain lacks a viable industrial strategy. Britain’s deindustrialization process, which surged in the Maggie Thatcher era, continues apace, to the point that the country may evolve into little more than an offshore banking centre.
In Germany, manufacturing is worth 23 per cent of gross domestic product compared with 11 per cent in Britain. In Italy, the figure is 15 per cent and it’s 12 per cent in the United States (the World Bank had no recent figure for Canada).
How did Germany and, to a lesser extent, Italy, manage to keep manufacturing alive while alleged economic powerhouses such as France and Britain did not? Britain wants to know; so does Canada, which has also been experiencing a punching of gaping holes in its manufacturing base.A lesson in industrial ingenuity, by Eric Reguly, April 1, 2016 (Globe and Mail)
This article was pointing out that developed economies are deindustrializing.
Consider deindustrialization and its effect on those jobs.
Mainstream macroeconomic thinking about globalization is that as manufacturing goes offshore to places that can manufacture cheaper or more efficiently, the lost jobs will be replaced by service jobs that are higher value. This has not been happening.
Sociologically, there is anger when lost jobs cannot be replaced by better service jobs.
This anger is not just confined to those who lose jobs to deindustrialization.
Mainstream macroeconomic thinking about globalization also posits that technological advances will continue in developed economies, shifting lower tech jobs offshore, thereby advancing the entire global economy.
This does not consider that at the microeconomic level, technological advances are not spread out evenly across any country. They are concentrated in global companies and in industry hubs in select cities around the world. This concentration is driven by the business cluster effect described in an earlier post. As global companies “rationalize” their workforces, jobs concentrate in industry hubs in select cities and jobs are lost everywhere else.
Other times, global companies acquire companies with advanced technologies. When this happens, as Allen Eaves noted, “everybody loses their job.” If this does not happen right away, then it will happen eventually, because of the business cluster effect.
There is also anger in developed economies when good jobs concentrate to a small group—those who have specialized skills, are highly educated, and are able to work in these select industry hubs—the “elites.”
An alternative to this path that Eric Reguly illustrates in his article are
relatively small, private European companies that have used decades of innovation, small acquisitions, a conservative financial structure and sheer perseverance to take a commanding share of niche international markets.
Italy and Germany are full of [these] small and medium-sized family companies that cherish their independence, have strong regional ties, a global outlook and consider investment bankers useless. They are one of the main reasons why Germany and Italy still have a relatively big manufacturing base… and much of the rest of Europe does not.
German engineering and technology firms, among them Siemens, BMW, Daimler, Volkswagen, Bosch, BASF, Continental and ThyssenKrupp, are big-time global players. Many of the [family-owned companies] are global players, too, even if they might employ only a few hundred or a few thousand people. This group would include Miele, the maker of high-end kitchen appliances, and Herrenknecht, the world leader in tunnelling equipment.
Here is how significant these private companies are to the German and Italian economies.
The domestic stock market capitalization-to-GDP ratio or GNI ratio is a measure of the total value of all domestic publicly traded stocks in a market divided by that economy’s gross domestic product (GDP) or gross national income.
This is also known as the Buffett Indicator, after Warren Buffett, who popularized its use as a macro indicator for the overall stock market valuation level at a given time. Buffett was only talking about the US economy, using this as a metric to gauge expected future returns of U.S. stocks.
This ratio can be calculated for almost every other nation in the world (Table 1). Countries should not be compared, because different effects drive the market cap of each country’s domestic companies and their GNI. However, the G7 nations are close enough in market structure for comparison. The Total Domestic Market Cap to GNI Ratios for Germany and Italy are significantly smaller than that of USA, Canada, UK, and Japan. This difference is due to their domestic private companies that are not listed on their stock markets.
These private companies cannot be acquired and their staff laid off. They are often passed down generationally. Long term, this allows business clusters to form in regions across these countries.
When I attend certain industrial trade shows, I see lots of these family owned companies from Germany. Their employees often work for life in these companies and enjoy what they do. They have a company culture that instills loyalty and engagement.
This is not to say that every country should model their economy in the same way. Every country will have their own adapted industrial strategy.
Eric Reguly simply notes the elements:
Germany has no stated strategic vision, but there is no doubt it exists.
Part of the plan is a focus on vocational training, which is embedded in the industrial culture.
German industry also exploits the Fraunhofer Institutes, which are engaged in applied science and form public-private partnerships to help deliver innovations to the marketplace.
Finally, German companies, especially the [small to medium sized family owned companies], have formed tight relations with their banks, which provide most of their funding. Joining the stock market is rarely their first choice. The upshot is that these companies are not trapped by the cult of shareholder value, which places short-term profits ahead of long-term, sustainable growth.
Allen Eves and other family owned companies outside of Germany and Italy have followed these concepts.
First, financing of STEMCELL Technologies was through an economic development loan. Venture debt with a patient and long term strategic charter is the foundation for supporting this type of company.
Second, a common career path of staff in these companies is starting at the entry or junior level, which is similar to vocational training and the lifelong career path.
As with all family run companies, each company has its idiosyncrasies. In the case of Allen’s style: “I run the company sort of like a graduate school with lots of creative young scientists doing neat things; the idea is to have lots of people in the company who are really knowledgeable about what they’re doing and yet still remain in touch with research.”
Third, as I described in an earlier post, creating private sector jobs and stimulating industry growth is not easy to do. It requires a translational step into which governments must invest, through fiscal policy. Germany has their Fraunhofer Institutes. USA has the SBIR program. Canada has the Scientific Research and Experimental Development Tax Credit (SRED). The Canadian approach is taxation-driven, in contrast to the investment-driven approach of more successful countries. This shows how off base Canada’s industrial technology strategy is.
For an entrepreneur, there are options other than to exit through an acquisition. One of these options is a long term—even generational—commitment to the company, its staff, and the regional hub where it is based.
Brexit, populism, trade wars, and economic conflicts arising from “globalization” are all symptoms, in part, of a world that is losing sight of these commitments.