Cover Story: VC Rx –

The Pitch: A cover story for VCJ about how private investment is helping to shape the fight against diabetes, a disease estimated to directly affect 6.2% of the U.S. population.

The Editorial Reaction: Show us the money.

This is where The Pitch began to fall apart. Physicians have viewed diabetes as a burgeoning epidemic for several years, but most venture capitalists seemed either unaware or uninterested.

That was seven months, thousands of new diabetes diagnoses and one “MacDonald’s-made-me-fat” lawsuit ago. In the meantime, diabetes began generating investor interest, especially from those who had abandoned life sciences at the end of the e-decade. So The Pitch was resurrected, along with an assumption that there was an untapped medical market eager for venture capital.

But it turns out that this story is not ahead of the curve. It’s not a feel-good tale of how everyone will be able to simultaneously get wealthy and improve life for millions of diabetes sufferers. The Pitch, it seems, should have been about opportunity missed and the few quality plays left before this category becomes a commercialized reality.

To understand why the ship has largely sailed on private diabetes investing, it’s necessary to gather a bit of lay background on the condition itself.

Unlike more fragmented and popular venture targets like cancer and the central nervous system, diabetes is a dichotomous disease in that it usually takes the form of either Type I or Type II. Type I-often referred to as juvenile diabetes due to the average age of onset-is caused by the destruction of pancreatic beta cells (or islet cells) that produce insulin, a life-sustaining hormone that enables sugar to enter cells, where it is ultimately converted into energy. Type II, which affects around nine times more people than does Type I, usually involves cellular resistance to insulin.

In both cases, diabetic individuals usually are able to live with their disease by maintaining a proper diet, regularly monitoring blood glucose (i.e. blood sugar) levels and taking diabetes pills or insulin injections. But if poorly managed, or diagnosed too late, the disease can cause severe complications such as blindness, kidney failure, nerve damage and even death.

About 17 million Americans suffer from Type I or Type II diabetes, according to year 2000 data compiled by the American Diabetes Association. The Alexandria, Va.-based nonprofit also estimates that another 16 million Americans are regularly prone to pre-diabetes, a condition in which blood glucose is elevated but not enough to trigger a Type II diagnosis. No definitive cause has been found for either diabetes or pre-diabetes, but contributing factors are believed to include genetics (especially in Type I patients), obesity and lack of exercise.

“From an investor standpoint, the parameters of the diabetes market are very attractive,” says Stan Fleming, co-founder and managing member of San Diego-based Forward Ventures. “Type I is a lifelong chronic condition, and Type II is an increasing market because of the aging population and the country’s weight problem.”

Fleming adds that while diabetes itself may split neatly into two types, the universe of related investments is best divisible by three:

* Blood glucose monitoring. The most promising monitoring efforts are in noninvasive or implantable glucose monitoring, either one of which could eliminate the unpleasant task of pricking one’s fingers several times per day.
* Insulin delivery. The majority of insulin delivery still occurs via the traditional vial and syringe method, but there are a number of companies working on novel improvements.
* Biopharmaceuticals. This includes drug discovery and development projects that involve everything from human insulin production for Type I diabetes to nitric oxide blockers for Type II.

“Diabetes is one of those situations where you really have to break up the opportunities into market segments,” explains John Brooks, a co-founder and general partner of Westwood, Mass.-based Prism Venture Partners. “Some of them are going to be lucrative, but others may not. No matter what, all of these investments require both a requisite understanding of the disease and a fairly exhaustive due diligence.”

By most accounts, glucose monitoring is the segment closest to producing significant returns on venture capital dollars. It not only offers the broadest market potential short of an artificial pancreas, but also about a dozen venture-backed companies engaged in clinical trials. This is welcome news for those suffering from diabetes, but it ultimately offers little hope for early-stage investors eager to get a taste.

“A lot of these [glucose monitoring] device companies are going to be successful because they are meeting medical needs that currently are not being met,” says Paul Sekhri, a partner with New York-based Sprout Group and a former senior vice president with Novartis Pharma AG. “But there’s a timeline to investing in them, and the hurdles would be pretty damn high for a new company to get Series A financing.”

At the other end of the spectrum are private biopharmaceutical companies, which offer a relative cornucopia of opportunity. The problem here is that the segment has an inverse amount of investor interest thanks to the difficulties inherent in diabetes drug development. For example, companies developing Type I products often are forced to jump through extra Food & Drug Administration (FDA) hoops because the agency frowns on clinical trials involving children.

All of this leaves investors who are new to the space with few smart choices. They can buy into a 5-year-old medical device company, but only after acknowledging that mature diabetes startups are a rare breed-they have not seen a dramatic decline in their valuations, unlike most aging technology startups. The other option is investing in an early-stage drug company or academic spinout, but both require lots of money and time.

Perhaps the best solution is to pick over what’s left and look for the diamond chips left behind. To be successful at that, you need to know your target opportunity inside and out. With that in mind, we offer the following buyer’s guide.

Monitors: To Invade or Not To Invade

The Need: It is impossible to overstate the fundamental importance of blood glucose monitoring in the successful management of diabetes. Not only do readings serve as the beginning, middle and end of diabetes diagnostics, but they also are largely responsible for determining the appropriate type and extent of therapeutic response. For example, a pre-bedtime glucose level of over 120 mg/dl (translation: 120 milligrams per deciliter) might require a diabetic individual to drink an extra glass of water or increase an insulin dosage, depending on a physician’s recommendation. If monitoring is done too infrequently or is inaccurate, it undermines the efficacy of treatment.

The Now: The vast majority of Type I and Type II diabetes sufferers measure blood glucose by first washing their hands with soap and water and then puncturing the side of their finger with a small lancet called a finger-stick. Sometimes a bit of “milking” is required in order to secure a usable specimen, after which it is measured by either a testing strip (paper, similar to pH test strips) or a blood glucose meter (an electronic device, considered to be more accurate than strips). The frequency of finger-stick testing depends on the severity of an individual’s diabetes, but proper care requires repeated testing during waking hours. Don Lucas, managing general partner of Palo Alto, Calif.-based RWI Group, reports that his 11-year old daughter, who has diabetes, sometimes needs to prick herself 10 times in a single day. “What my daughter has to go through just sucks,” he says. (See