Pieter Halter : On the Lookout for Promising New Medical Enterprises

Pieter Halter, a prominent figure in Orange County’s biomedical industry, has been scouring Orange, Los Angeles and San Diego counties since January in search of promising new medical enterprises for Southern California Ventures, a venture capital fund based in Inglewood.

Halter, who works out of Southern California Ventures’ recently opened Irvine office, believes that Orange County has significant potential for generating new biomed businesses in which venture capital companies can invest.

Venture capital firms look for entrepreneurs and new technologies that they can help nurture with their expertise and with a fund of money raised mostly from institutional investors. In turn, the venture firms acquire a percentage ownership in the start-up company that they hope will greatly increase in value.

Halter said he has learned a lot in his career that will help him in his new endeavor. He was formerly director of international sales and marketing for American Hospital Supply’s Edwards division, now a unit of Baxter Healthcare Corp. And later he founded Biomedical Business International, a Tustin-based publisher of newsletters and reports written to keep medical industry executives around the world abreast of new technology.

In October, 1985, Halter sold Biomedical Business International to Macmillan Inc., the large publishing house, for $6 million. He said his research of emerging medical technology for the newsletters whetted his appetite for an opportunity to participate firsthand in the development of new biomed firms.

During an interview with Times staff writer Leslie Berkman, Halter identified the areas of new business growth in Orange County, which he said in recent years has attracted all the support services needed by fledgling firms. He also explained how he goes about choosing the most promising new firms to back.

Q: Why did you want to get into the venture capital business?

A: The charter of Biomedical Business International, a newsletter designed for decision makers in health care products and services companies, was to locate and review attractive, cost-effective technologies that would be the big winners of tomorrow and to identify the companies that are the carriers of those technology. So you really felt you were looking at a lot of opportunities in the marketplace that you could not take advantage of. You heard about new companies, you saw new companies being formed, and you wished you could be part of it as an investor.

Q: Why are you working out of Orange County?

A: The infrastructure in Orange County for new medical technology companies is very good.

Q: Could you describe the infrastructure?

A: To set up a company nowadays, you need to have access to capital, experienced employees and specialty services, such as injection molding companies and bio-materials engineers. The larger companies that are already established, such as Edwards, Shiley, Allergan, Kendall and Beckman, have attracted these services and people to the county. In addition, venture capital firms have begun to operate in Orange County during the past five years.

Q: Have the new cost-containment requirements of government and private insurance carriers influenced the development of new biomedical companies?

A: Large, long-established medical product companies are going through a very significant upheaval. They have taken an all-hands-on-deck attitude in their attempt to maintain profitability. Long-term research has suffered in those companies. So smaller research and development companies are playing a more significant role in creating new products. Smaller companies have every chance to be more innovative. There is more focus, fewer formalities. They can move faster and take greater risks. There is the question of liability. If you own a $3-billion company, all your assets are at stake. Although liability is a concern for everybody in the industry, it is less of a problem for the very small companies.

Q: How many new biomedical companies are founded in Orange County each year?

A: I would say 20 to 30.

Q: What are their origins?

A: Let me answer that by giving you two examples of Orange County companies that my firm, Southern California Ventures, has invested in within the last year.

A company called Advanced Surgical Intervention in San Clemente was founded by Robert Rosenbluth, who formerly was director of research and development at Shiley. The firm is developing instruments and products to make surgical procedures less invasive so in some cases they can be done on an outpatient basis. This is an example of a larger company spinning off the smaller organization, although there is not much of a relationship in terms of technology between the two.

Another very interesting young company is Oncotech in Irvine, which performs chemo-sensitivity testing to determine prior to cancer therapy what the effectiveness of certain drugs on a patient’s tumor will be. The two founders of the company were clinical researchers and professors in oncology and hemotology associated with UC Irvine and Long Beach Memorial Hospital.

Q: Has industry or the academic world generated the most new medical enterprises in the county?

A: I would say industry always has been dominant. But UCI College of Medicine is becoming more and more important. UC Irvine has shown more willingness to deal with industry and is now actively promoting the transfer of technology from campus into the local medical industry.

Q: Have you personally worked with UCI?

A: I’m on the board of their Medical Research and Education Society, which is one of the organizations supporting the interface between the community and the UCI College of Medicine. At this time the local industry could really benefit from the clinical developments and the research at UCI.

Q: How do you look for ideas that can be made commercial?

A: That’s a judgment call you have to make. If you see an idea come forward and you believe there is a market for it, and you believe that there’s a team that can really build a business, then you consider making investments in that company. Management is the most important factor in the success of any new firm. Technology comes second.

Another question you ask yourself in the biomedical field is if the product can be distributed in an effective manner. There are fewer and fewer buyers of medical products, in part because hospitals are organizing themselves into purchasing groups. These buyers have enormous purchasing power and typically deal with very large, cost-effective suppliers.

Small start-up companies often depend, at least initially, on such suppliers to bring their product to the marketplace. Due to consolidation in the health care industry, fewer of these large, well-positioned suppliers are available.

Q: If there are fewer buyers, aren’t they easier to identify? Aren’t they looking for new products?

A: Certainly, but it has to fit their niche and complement their overall product line. Also, in the past it was easier to sell a product with the sole argument that it provided better medicine even if it was more expensive. In today’s more cost-conscious environment, hospitals want a cost-effective product that provides quality care. The very best care isn’t the goal anymore. The picture is never black or white. For instance, if you come out with a superior diagnostic imaging device, you don’t expect the hospitals to throw out the systems they bought two years ago.

Q: How many other venture capital people like yourself specializing in biomed are in Orange County?

A: I’d say there are five today that truly specialize in biomedical companies. Two years ago there were none. Venture capital deals are very often syndicated, and venture firms outside the county may be investing with some of the five companies that have offices here.

Q: How much money does your fund, Southern California Ventures, have available to invest in new firms?

A: Southern California Ventures has two investment funds totaling $45 million. Today, approximately $20 million of that has been invested. The money comes mostly from institutions such as pension plans and insurance companies, which typically allocate a small percentage of their assets to venture capital. Venture capital historically has proven to be a superior investment vehicle. It has provided better returns than the stock market and long-term bonds. There are usually a few winners and many losers among the companies that you invest in. But the few winners have a tendency to make up for a lot of losers. Typically, a venture capital company expects to cash out its investment in about five years. At that time the company usually gets acquired by a conglomerate or goes public.

Q: How many funding proposals do you review.

A: My partner, Bob Johnson, and I see on the average of six to eight different proposals a week. I concentrate on biomedical deals while Bob has a preference for electronics, computers and other high-tech industries.

Q: How many biomed proposals do you expect to review?

A: I expect I will probably review somewhere around 150 to 200 business plans a year that are biomedical in nature. The business plans that are of interest usually are not the ones mailed to you. Usually they come from people you have had a dialogue with for some time, people you have heard of in the industry. Although I expect to receive 150 or 200 business plans annually, the ones I’ll seriously look at will probably number 30 to 40. Maybe one out of 10 of these do you really end up making an investment in. And maybe the fund will end up making an investment in one or two of these.

Q: What are the medical industries in Orange County that are spawning the most new companies?

A.: I would say there are three: cardiology, ophthalmology and clinical testing. There already is a base of major firms in these areas, such as Shiley and Edwards in cardiology, Allergan in ophthalmology and Beckman Instruments in clinical testing. They all have given birth to other firms.

Q: Are people who leave the relatively protected environment of a large firm prepared to take the risks inherent in starting a new enterprise?

A: Generally they are. It is risky, but it makes your adrenalin flow. There’s excitement there and it is a lot of fun to work in a start-up company. In a large company, you learn problem-solving very well. Big companies have a tremendous number of day-to-day problems. Coping with these problems is one of the strengths that the large company executive brings with him or her.

Q: What do these former big company executives do if their start-up company fails?

A: I think many of them will try again. You know, once you have set your mind on becoming an entrepreneur, you usually do not stop before you create a company that is successful--at least to a certain extent. And, even if the venture is not becoming a great success, it usually creates some value through new ideas and technology that can be sold to another company at a price that recovers most of the investment. Although the great successes are rare, the total failures are rare, too. There are a lot of shades of gray in this business.