Mar 25 2012 |
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Saudi health care can be a money-spinner for VC firms
By Dr. Hamad M. Al-Omar Venture capital funds and activities in the MENA region are gaining momentum. Realizing the recent interest and emphasis on venture capital, the Islamic International Foundation for Economics and Finance (IIFEF) organized its first Venture Capital Forum in Riyadh, Saudi Arabia, on February 21 and 22. The organizing committee requested me to give a presentation about VC activities and potential in health care in Saudi Arabia, and these are some points from my presentation.The Saudi Arabia health care market is the largest in the region. The Ministry of Health caters for about 75% of health care services, and its budget this year is about SAR 50 billion in addition to SAR 16 billion for the health cities projects, making a total of approximately SAR 66 billion. If you add 25% for other health care providers -- both governmental and private -- the total Saudi health care budget comes to about SAR 80 billion, or USD 21.3 billion, this year. McKinsey expects the GCC's expenditure on health care in 2025 to reach a total of USD 60 billion; this, however, seems a great underestimation, considering only the Saudi health care budget this year.
The health care market is not homogenous and should be divided into several segments that are distinct in terms of nature, operation, finance and investments. These include health care provision -- hospitals and clinics, laboratories, pharmacies, imaging centers and others -- pharmaceuticals, medical devices, medical education, consumables and supporting industries.
The second category comprises cutting-edge projects such as biotechnology and health information technology systems and other applications that have a high inherit investment risk.
In comparison, VC activity in Saudi Arabia in general is still in its infancy. This is particularly true for health care. There are some fragmented government programs, such as the Saudi Credit and Saving Bank Professional Loan Program for start-ups that has supported around 120 medical projects for a total of SAR 400 million. As a rule, however, this is limited to financial support and is not augmented by monitoring and coaching to enhance success.
King Abdulaziz City for Science and Technology's (KACST)'s Life Sciences Incubator Program supports innovations in life sciences, but hosts few start-ups. There are no private VC firms dedicated to health care activities in Saudi Arabia. There are a few private equity funds, mainly Dubai-based, dedicated to health care in the MENA region with a major interest in the Saudi market and targeting growth rather than start-ups and greenfield projects.
As survey by the recently established Private Equity Association of MENA region revealed a higher interest in VC activities, with a 19% preference for the GCC countries as a regional interest. When sectors of interest were examined, health care came in at number one with 18% favoring it over other sectors. However, the first major challenge for the private equity industry in 2011, as stated in the report, was the lack of quality deal flow.
The survey underlines a dramatic shift in private equity favoring the health care sector as compared to before the financial crises. This is logical, since the health care market has a steady annual growth of around 5% to 7% regardless of the economic and global financial status. Such an interest requires a substantial deal flow that should come from VC-supported projects.
Inventors and innovators in health care and life sciences usually are not entrepreneurs by nature; those who try to play both roles face a higher chance of failure since they are not trained to build firms and they mostly lack the entrepreneur's traits. The few who have both areas of expertise represent the exception rather than the norm, and they go on to build profitable and growing businesses.
If we go back to Genentech, we discover that the technology inventor, Dr. Herbert Boyer, did not see the potential of his invention; it was the entrepreneur Robert Swanson who initiated the dialogue with Dr. Boyer and convinced him to establish Genentech. The cycle was completed by an investment of USD 100,000 from the venture capitalist Tom Perkins, which eventually generated a return of more than USD 40 billion. The lack of health care entrepreneurs may explain the shortage of deal flow and successful start-ups in this field, and it illustrates the huge need for entrepreneurs.
In conclusion, there is a historical opportunity in Saudi Arabia's venture capital health care sector. On the one hand, the sector is growing at exponential rates; on the other, there are many buyers for such VC-backed companies when they mature. I encourage entrepreneurs in health care to initiate their projects now, and I assure them they will be handsomely rewarded.
Dr. Hamad M. Al-Omar holds a Medical Doctorate in Internal Medicine and Hematology from Canada and the USA with emphasis on Bone Marrow Transplantation. He also holds a Physician Executive Master of Business Administration (MBA) form University of Tennessee at Knoxville, TN. He has been active in the healthcare business since the year 2000 when he co-founded Jeddah BioCity, the first biotechnology company in Saudi Arabia, as a venture between King Faisal Specialist Hospital-Jeddah and leading businessmen from Jeddah. Since then he has founded and chaired companies in different sectors of health care. In addition to being a serial entrepreneur himself, he is active in healthcare venture capital and private equity and has closed several deals in the field. His international VC experience comes from being a venture partner for several years with a large European VC firm managing a USD 1.5 billion nutrition and life sciences portfolio. He is a founding member of the Gulf Venture Capital Association and the Arab Knowledge Economy Association.
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