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Venture capital and health care in Saudi Arabia

By DR. HAMAD AL-OAMR
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) is organizing its first Venture Capital Forum in Riyadh, Saudi Arabia on Feb. 21-22. The organizing committee requested me to give a presentation about VC activities and potentials in health care in Saudi Arabia, and this is an abstract of the presentation.

The Saudi Arabia health care market is the largest in the region. The Ministry of Health caters for about 75 percent of health care services, and its budget this year is about SR50 billion in addition to another SR16 billion for the health cities projects, making a total of approximately SR66 billion. If you add another 25 percent for other health care providers ­­-- both governmental and private -- the total Saudi health care budget comes to about SR80 billion ($21.3 billion) this year. McKinsey and Co. expected the GCC's expenditure on health care in 2025 to reach a total of $60 billion; this, however, seems a great underestimation looking at 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.

When we talk about investments in health care, they are divided into two categories. The first category is the well-established services that are in great demand, such as specialized medical centers and diagnostic facilities, non-existing services as home health care and long-term stay hospices. Similarly, well-established products and technologies that are almost completely imported and are associated with a much lower investment risk are a target. These may include consumables and medical devices. The second category is the cutting-edge projects, such as biotechnology and health information technology systems, and other applications that have a high inherit investment risk.

Historically, venture capital (VC) supports to life sciences in the US between 2002 and 2006 amounted to $29 billion and generated $132 billion in revenue in 2006 alone besides creating 500,000 jobs. 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 governmental 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 SR400 million ($106 million). Its rule, however, is limited to financial support only and is not augmented by monitoring and coaching to enhance success.

King Abdulaziz City for Science and Technology (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 green field projects.

The recently established Private Equity Association of MENA region has conducted a survey of private equity activities and interests; representatives of 25 private equity houses (including the top 10 houses based on funds under management) answered the survey. The result showed a higher interest in VC activities, with a 19 percent preference to the GCC countries as a regional interest. When sectors of interest were examined, the health care sector came number one with 18 percent 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.

So, this survey indicates a current 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 5-7 percent regardless of the economic and global financial status. Such an interest requires a substantial deal flow that should come from venture capital supported projects.

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 hand, 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.

© Arab News 2012

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