Silicon Valley Medical Technologies

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Silicon Valley Medical Technologies - SIVMED was found in San Jose, CA, in 1982 by Kelly’s O’Brien, David Roberts, and Barbara Smalley. O’Brien and Roberts, both MDs, were on the research faculty at the UCLA Medical School at the time; O’Brien specialized in biochemistry and molecular biology, and Roberts specialized in immunology and medical microbiology. Smalley, who has a PhD, served as department chair of the Microbiology Department at UC-Berkeley.

The company started as a research and development firm, which performed its own basic research, obtained patents on promising technologies, and then either sold or licensed the technologies to other firms which marketed the products. In recent years, however, the firm has also contracted to perform research and testing for larger genetic engineering and biotechnology firms, and the US government. Since its inception, the company has enjoyed enormous success – even its founders were surprised at the scientific breakthroughs made and the demand for its services. One event that contributed significantly to the firm’s rapid growth was the AIDS epidemic. Both the US government and the private foundations have spent billions of dollars in AIDS research, and SIVMED had the right combination of skills garner significant grant funds, as well as perform as a subcontractor to other firms receiving AIDS research grants.

The founders were relatively wealthy individuals when they started company, and they had enough confidence in the business to commit most of their own funds to the new venture. Still, the capital requirements brought on by extremely rapid growth soon exhausted their personal funds, so they were forced to raise capital from outside sources. First, in 1991, the firm borrowed heavily, and then in 1993, when it used up its conventional debt capacity, it issued $15 million of preferred stock. Finally, in 1996, the firm had an initial public offering (IPO) which raised $50 million of common equity. Currently, the stock trades in the over-the counter market, and it has been selling at about $25 per share.

SIVMED is widely recognized as the leader in an emerging growth industry, and it won an award in 1998 for being one of the 100 best-managed small companies in the US. The company is organized into 2 divisions: (1) the Clinical Research Division and (2) the Genetic Engineering Division. Although the two divisions are housed in the same buildings, the equipment they use and their personnel are quite different. Indeed, there are few synergies between the two divisions. The most important synergies lay in the general overhead and marketing areas. Personnel, payroll, and similar functions are all done at the corporate level, while technical operations at the divisions are completely separate.

The Clinical Research Division conducts most of the firm’s AIDS research. Since most of the grants and contracts associated with AIDS research are long-term in nature, and since billions of new dollars will likely be spent in this area, the business risk of this division is low. Conversely, the Genetic Engineering Division works mostly on in-house research and short-term, contracts where the funding, duration, and payoffs are very uncertain. A line of research may look good initially, but it is not unusual to hit some snag, which precludes further exploration. Because of the uncertainties inherent in genetic research, Genetic Engineering Division is judged to have high business risk.

The founders are still active in the business, but they no longer work 70-hours weeks. Increasingly, they are enjoying the fruits of their past labors, and they have let professional managers take over day-to-day operations. They are all on the board of directors, though, and David Roberts is chairman.

Although the firm’s growth has been phenomenal, it has been more random than planned. The founders would simply decide on new avenues of research, and then count on the...
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