Religion and science: value reversal

Anybody who ever believed that the religion will fade away with time and economic growth needs to seriously reconsider. Religion is very much alive, if anything it appears to be gaining ground globally. And I do not mean just the Islamic crescent countries. In the United States, the impact of religion in American on political and social life is stronger than ever. Even in Europe, the stronghold of agnosticism and atheism, the religion continues to play a major role in countries as various as UK, Denmark or Poland.

Yet, behind the apparent resilience of religion, there is a dramatic shift, which goes as far as a u-turn or a reversal in the arguments that justify the religious faith. In the modern western thought, religion was largely justified on moral grounds. The world had to have a purpose, a sense of direction. The search for the good and the virtuous provided such a purpose. The God made us simultaneously aware of the good and weak, therefore subject to temptation of evil. The life on earth was a struggle between good and evil, a struggle orchestrated by God. For in the absence of the evil, there would be no need for the ultimate guide.
On the other hand, science was seen as the implacable nemesis of religion. Its progress, by relentlessly reducing the scope of the unknown to sheer ignorance, made the faith less and less necessary. Moreover, the science appeared capable of supplying not just a sense of direction of the universe but an overriding and determining principle of world organisation. When Charles Darwin published his treatise On the Origin of Species by Means of Natural Selection in 1859, this was widely seen as a definitive challenge to the religion. Between physics of Newton and biology of Darwin, the science made the distinction between good and evil irrelevant.
Yet, in the early 21st century, the conceptual underpinning of religion is fundamentally changing. The incessant and widespread outpouring of evil acts all along the 20th century has fundamentally weakened the moral arguments in favour of religion. Occasional temptation of evil is one thing, wholesale slaughter of innocents is another. God not only allowed the Holocaust and Stalin crimes and ethnic cleansing and Rwandan genocide but his shepherds, who could not pretend  they did not know, were by and large passive in face of constant violation of God’s commandments.  
On the other hand, the science has evolved in a surprising way. First, quantum physics reintroduced notions of uncertainty and indeterminacy into the core of science. It was this aspect of quantum theory that bothered Einstein, who famously wrote to Max Born that God does not play dice.
However, it is the modern biology, in particular genetics, that raised essential even more fundamental questions about the nature and dynamics of life. As we begin to understand the critical role of genetic structures, such as DNA’s double helix, we are struck by their formal beauty and the intricacy of their interactions.  These interactions are largely random, yet in many critical aspects they are amazingly purposeful. Jacques Monod, Nobel Prize laureate, noted in his celebrated 1970 book that the evolution balances between chance and necessity. Moreover, the occurrence of some of the more critical interactions, procreation for instance, cannot be simply explained by the laws of normal distribution, as their probability is actually very low. Organised life is a statistically negligible phenomenon. Yet somehow, genetic interactions happen with sufficient frequency and sense of purpose to allow life in its various forms to occur and to evolve towards more intricate and more sophisticated structures and expressions.  Many attempts have been made to formally model these interactions, often with remarkable results and some scientists assert that the mystery of life is close to be uncovered. Yet, many others believe that more progress we make in exploring the origin of life, more we are confronted with the intangible notions of intelligent design which ultimately govern the critical interactions. And such intelligent is a sign of a superior being. It is not surprising that many leading biologists and geneticists are deeply religious.
After all, God may be playing dice but it is a multidimensional and complex one rather than a simple cube.

A good biotech business…out of Poland?*

If you think it’s hard to do a biotech start up, try doing it in Poland. You’ll face international condescension, local incredulity – and the mysteries of Polish law.
For the last 18 months, I have found myself on the frontiers of biotech investments. Not only I have been trying to set up a company in a pioneering area of cancer detection and prevention, but I have been doing this in a country which is not even on the map of biotech financiers, Poland. And to make things even harder, my project was not even in Warsaw but in an outlaying city, with a name impossible to pronounce by a non-Polish speaker, Szczecin, where I went to high school.
In July 2003, my schoolmates organised a reunion of international alumni in Szczecin. During that reunion I discovered that one of my closest friends from the old days, who had remained in Poland, had become a senior scientist in a genetic research unit, the International Hereditary Cancer Center (IHCC), at the local medical university. As I am always on the look-out for new interesting projects, I asked him about the unit. He introduced to his boss and IHCC founder, Jan Lubinski.
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The IHCC’s founder, Jan Lubinski
Initial contact was very good and we began to discuss possible joint business, which would consist in international marketing of the intellectual property developed by the IHCC. As a result of our discussions, we created a new company, Read-Gene SA, signed an exclusive IP agreement with the medical university and have begun serious discussions with potential international partners in Baltic countries, UK and North America.
We are also in the process of raising funds to enable the company to function. We may actually succeed and bring together to the table foreign investors as well as local business angels.
Altogether, this has been a fascinating, gratifying and instructive experience. What was fascinating was a mutual learning curve, where scientists learned about business and I learnt about their science. The experience was gratifying as the IHCC continued to make ground-breaking discoveries and its scientific achievements were validated by highly reputable international scientists.
On the instructive side, there were two eye openers. The first was how incipient the entire area of cancer detection still is. The second was the narrowness of thinking among risk capital institutions, both in Poland and abroad.
Limited knowledge
Despite the billions that have been spent on research into cancer, our knowledge about it is actually quite limited. Particularly striking is the lack of knowledge about the genetic determinants of some of the most common forms of cancer.
For example, carriers of the gene BRCA1 have a very high (about 80 per cent) risk of contracting either breast or ovarian cancer. The isolation of this gene in 1994 was hailed as major breakthrough and led to the first genetic cancer testing company, Myriad Genetics, which patented the gene. Yet BRCA1 accounts for less than 10 per cent of breast cancer cases, so a negative BRCA1 test result offers only a limited predictive capability of an actual risk of cancer.
Between 1994 and 2004, little progress was made in identifying additional genes that would make genetic testing for breast cancer more reliable. But in 2004 Professor Lubinski and his team identified a gene set that allows the identification of 70 per cent of potential cancer cases for the Polish population. The applicability of this set and the underlying scientific applicability to non-Polish populations is a key research priority for IHCC.
R&D efforts in cancer – and public attention – are biased towards later stages of the disease and treatment rather than towards prevention. A good example is Avastin, a blockbuster colon cancer drug developed by Genentech, the biotech giant controlled by Roche.
According to a study by the US National Cancer Institute, published in March 2005, Avastin, when combined with chemotherapy, extends the average life expectancy of colon cancer patients by two months, from ten (chemotherapy alone) to twelve months. Avastin does not cure colon cancer, just slows down its metastasis – at a cost of between €65,000 and €90,000 a year.
By the time colon cancer is diagnosed, it is often incurable. Early detection is crucial, but the traditional test method – colonoscopy, a detailed analysis of the entire colon–is intrusive and expensive. On the other hand, the genetics of colon cancer is among the are best documented. Yet the existing genetic tests offer an identification probability of only 15 per cent. Professor Lubinski has discovered genetic sets that increase the probability to about 50 per cent; yet this discovery is considerably less known than Avastin.
Within the vast army of cancer research professionals, specialists in detection and testing are few and widely dispersed. Not surprisingly, biotech investment professionals have not focused on cancer detection, and few public or private companies specialise in genetic cancer testing.
Delicate contacts
All this explains why my contacts with investment community would have been delicate even if the genetic cancer project had not been Poland-based. The IHCC location compounded the difficulty. I anticipated a rough ride.
Sure enough, established biotech investors I approached in France or in the UK showed no real interest. But what I did not anticipate was the degree of condescension.
When one potential business partner, a (very) senior academic official in a leading UK university, could not find an e-mail from Lubinski, he blamed it on “Central European habits” rather than on his own administration.
The same official explained to Lubinski in their second face-to-face meeting that he (Lubinski) could not possibly be the CEO of the new business and then proceeded to introduce a CEO candidate – who just happened to be passing in the corridor during the visit. Lubinski showed his lack of sophistication by turning down this generous proposal.
Among potential Polish investors from established financial institutions, condescension was further compounded by incredulity. People I met in Warsaw, many of whom I knew well, found it to hard to believe that there could be a real high-tech intellectual property opportunity in Szczecin, of all places.
Quite simply, I never managed to convince any of my Warsaw “friends” and relations to make the trip to Szczecin (500 kilometres from Warsaw, four hours by train and one hour by a scheduled airline) to visit the IHCC and to see first hand how it works. And despite the fact that the genetic tests developed by Lubinski were offered by a Warsaw-based clinic, they never took the trouble to visit the clinic and meet its principals.
Bridging the gap
In order to overcome the credulity gap, we convinced a potential foreign investor to fund a scientific due diligence visit by a well-respected UK genetic cancer expert. The visit (in Szczecin!) took place in December 2004 and resulted in a highly positive written report. The expert himself was interested enough to join the Scientific Advisory Board of the company we created.
And we focused our fund raising effort on high-net worth private investors in the UK, Belgium and France who would be interested enough in the project to visit the Szczecin site.
As result, we made considerable progress in developing a viable business plan and structuring the business. However, we were not out of the woods. We needed to overcome two serious obstacles: mutual misunderstanding and mistrust between scientists and financiers, and Polish law.
The scientists felt that they did all the substantive work and the only contribution, in addition to cash, that financiers could make was to sell their science – which, given the quality of the science, was no big deal. The financiers thought that the scientists knew nothing about business and that the hardest part of the project was to make a viable, cash generating business. Thus each side was unwilling to give the other a large shareholding.
Then came the problems with Polish law. Our initial thought was to create a company outside Poland, as the main goal of the business was to market the IHCC’s IP internationally. But we needed the support of the medical university, which held a large chunk of the IP. And the university’s legal adviser, whose opinion would be decisive, did not speak English.
Napoleonic code meets German formalism
So we had no alternative. We had to set up a Polish company, which would be the business partner of the university. Now, Polish commercial law is justly notorious and it is not for its simplicity. It is based on pre-World War II legal framework and combines the worst aspects of French Napoleonic code with German formalism. Thus, my power of attorney document, enabling Lubinski to sign Polish legal documents on my behalf had to be (a) validated by a local (French or UK) notary (b) translated into Polish by an approved translator and (c) certified by Polish consulate.
Yet, despite all these obstacles, we managed to create a company, Read-Gene SA (in September 2005), sign an exclusive IP agreement with the university (in December 2005), set up a prestigious Scientific Board (every person invited to join the Board accepted) and launch an initial fund-raising round.
The money is not in the bank yet (feel free to call me if you want our account number) but we feel, as investment bankers would say, reasonably confident to be able to close the round within the next few weeks. One reason for our confidence is that there is now a group of local angels in Szczecin, private entrepreneurs who made their money in traditional businesses such as car dealership, real estate and retail distribution and are willing to support Professor Lubinski and this team. Among foreign investors, a number of those we approached visited Szczecin and continue to express interest.
However, the most important confidence factor is that, while our business structuring efforts continue, IHCC is making impressive progress both in its research, with another batch of discoveries to be published internationally in reputable publications), and in actual test deployment in Poland (about 1,000 people a day are being tested at present). Discussions about licensing the test outside people are seriously engaged in two countries and may lead to pilot test launches within next 18 months.
Our adventure is only beginning.

* published in Science & Business, February 16, 2006

Arcelor arrosé

Dans le torrent des controverses autour de la globalisation, quelques rares sujets toutefois font l’objet d'un consensus. Jusqu'à il y a quelques jours, cela semblait être le cas de l’industrie de l’acier. Acquis à travers une expérience de grandes et douloureuses restructurations et partagé par les syndicats, les financiers, les dirigeants et les médias, ce consensus postulait que l’acier est un secteur qui opère à l’échelle globale, dont les implantations d’extraction et de production doivent être étudiées en fonction de l’offre et de la demande mondiales. Les entreprises du secteur sont soumises aux impératifs d’une concurrence de plus en plus forte et la seule parade effective en est la consolidation et la création des entreprises de grande taille. C’est cette logique qui a guidé les grandes restructurations et a abouti à la création, suite à une série de fusions, d’Arcelor. Regroupant les unités les plus performantes des entreprises nationales, ancrées dans la tradition plus que centenaire des bastions sidérurgiques de la Lorraine, de la Wallonie et du Luxemburg, géré par une équipe expérimentée, formé dans les meilleurs écoles, Arcelor ne pouvait avoir qu’une destinée, celle du leader mondial, le maitre incontesté du nouveau géo-paysage de l’acier.
Quand Arcelor est parti à l’assaut de Dofasco, la principale entreprise sidérurgique du Canada et qu’il semblait sortir gagnant d’un duel acharné avec l’éternel rival allemand au nom lourdement chargé des symboles, ThyssenKrupp, pour le contrôle Dofasco, la consécration apparaissait toute proche.

Il n’est donc guère surprenant que quand Mittal Steel, entreprise familiale, de création récente, a eu le culot de lancer fin janvier une offre d’achat hostile sur Arcelor, les réactions des parties prenantes (stakeholders) furent presque touchantes par leur unanimité. Rejet unanime de l’offre par le Conseil d’Administration, discours enflammés des hommes politiques de tout bord, déclarations musclées des syndicats, la gamme fut plutôt étroite allant de l’étonnement indigné à l’indignation étonnée.

Mais, dans le monde froid et impitoyable des marchés financiers, une réaction par trop émotionnelle soulève des doutes et des interrogations. La violence du rejet n’avait-elle pas un petit relent de xénophobie voire même de racisme ? La réaction aurait-elle été la même si le raider était européen ou anglo-saxon ? N’est-il pas ironique que parmi les chevaliers blancs hypothétiques, Nippon Steel figure en bonne place ? Où est passé l’esprit de Poitiers et les craintes de l’invasion japonaise qui agitaient les politiciens français il n’y a pas si longtemps ? Sont-ils en train de céder le pas au spectre de la menace indienne ?
Il semble bien que dans le feu de l’action initiale des propos malencontreux à l’encontre de Mittal et de l’origine ethnique de ses dirigeants ont été prononcés par les responsables d’Arcelor, qui depuis ont dû formuler des clarifications embarrassées. Déjà confronté au défi d’un assaut boursier audacieux, Arcelor doit maintenant faire face aux soupçons d’amateurisme. Ceci d’autant plus, qu’en face la préparation fut minutieuse et la campagne est menée d’une manière très professionnelle. Non seulement Mittal est conseillé par les grandes banques anglo-saxonnes mais il s’est assuré l’appui de ThyssenKrupp.
Ce qui est encore plus gênant est que la logique économique et industrielle de la proposition de Mittal apparaît de plus en plus imparable. Non seulement, les deux entreprises sont très complémentaires sur le plan géographique mais de deux c’est Mittal qui plus dynamique et plus profitable. Une combinaison entre les deux entreprises aboutirait à la création d’un leader mondial incontesté. Et dans cet ensemble, ne serait-il pas cohérent que les dirigeants de Mittal, du moins au départ, jouent un rôle prépondérant (sans pour autant provoquer des bouleversements intempestifs dans les structures opérationnels d’Arcelor) ?

Tout indique que la saga tumultueuse d’Arcelor et de Mittal est loin d’être terminée. Les marchés financiers le signalent à leur manière : alors que d’habitude dans une situation d’offre d’achat le prix des actions du prédateur baisse, dans le cas présent les prix des deux sociétés sont en hausse! Par ailleurs, la rhétorique des politiciens est en train d’évoluer, de l’hostilité déclarée à la neutralité vigilante. Messieurs de l’Arcelor, encore un effort !

Super Bowl: Shock of civilisations

This year’s Super Bowl has a symbolic dimension. The two teams which will be playing for supreme prize incarnate two contrasting visions of the US:

• Pittsburgh is a traditional industrial city, built on steel. It is a tough blue-collar town where people drink beer and play rough
• Seattle is a quintessential new age place. This is where Microsoft has its headquarters and Paul Allen, the owner of Seahawks, is a Microsoft co-founder (and second largest shareholder after Bill Gates). The new economy is so dominant that the old mainstay of Seattle, Boeing, packed up and moved its headquarters to a more congenial environment of Chicago. And people in Seatlle drink cappuccinos and lattes: Starbucks is another well-know brand, which was created there.

For people like me, this shock creates a dilemma. I always liked Steelers, precisely because of their brand consistency: they are what they are supposed to be: physical, with dominant defense and occasional daring. They are also consistent and loyal: the same family still owns the franchise and in their history there were only two coaches.

But how can a new economy zealot root for Pittsburgh? After a second thought, it is not too difficult: I am not a great fan of Microsoft (I still have not figures out where the billions of R&D the company supposedly spends every year is going). And right now, Microsoft appears more and more like a dinosaur from a prehistorical (read pre-Internet) era of the New Economy.

So, while the economic logic and the strength of numbers may be in favour of Seattle, I am sticking with Pittsburgh.

Skype’s business model

Last October, I discussed the acquisition of Skype by E-Bay. My main conclusion was that this acquisition made economic sense for E-Bay. Since then, I gained a much better understanding of how Skype’s business model works. It came not from a heavy number crunching but from a direct personal experience. An intangible but major consequence of the acquisition was to put a stamp of legitimacy on Skype. Many people who had considered it as not ready for the prime-time upstart, now decided that if it was good enough for Ebay, it was worth a try. This was my case and I installed Skype on my computer. Of course, the idea was to use it for long free chats with buddies. But as my use increased, I got tempted to try the Skype-out, a paying service, which allows users to call any number on either fixed or mobile network. The temptation was further exacerbated by my mobile telephone bills, which, despite all the discounts by the phone companies, just kept expanding every month.

So I bought some credit and started dialling. The service worked like a charm: straightforward dialling, rapid connection and good quality communication. And the price was right. Although it was not as cheap as advertised (a cent a minute), on the average my per minute cost was about 10 (euro) cents. This was maybe due to my call mix, heavily skewed toward mobile phones, and the choice of countries (Poland and Luxembourg in particular). But in any case, it was 80 to 90% cheaper than mobile-to-mobile or fixed-to-mobile calls. So Skype-out gained a satisfied customer, to the tune of about 20 euros a month.

Now, consider that

(a) As unique as I am, mine is not an isolated case. It looks like since the the transaction closed the number of actual users (as opposed to people who just download the software) has increased by 60% from about 3 million a day in October 2005 to about 5 million a day in January 2006. Assume that some 10% of the users become paying Skype-out customers like me. This means a gross revenue stream of 10 million euros a month.

(b) This may not sound like much (less than 2% of overall EBay revenues at present) but it is not a static data. Using this back-of-the-envelope calculation and the current rate of growth of Skype usage (350% per annum), one arrives at 2006 annual revenues of 200 million euros. And, guess what, this is a number forecast in official press releases on Skype acquisition in October 2005. Things are getting more interesting if one looks into the future. Should Skype usage continue to grow at current rate for the next three years, its revenues would swell to over 2 billion euros by the end of 2008. This rate of growth may sound over-optimistic, as it would imply close to 90 million paying customers. This compares with 170 million registered users of Ebay. On the other hand, using the same basic numbers, Skype needs slightly over 40 million customers to reach 1 billion in revenues. Is this a really unachievable target within next two to three years?

(c) While revenues look enticing, in the end it is the profitability that matters. Here, the outlook is not bad, to put it mildly. The main cost factor for Skype-out are the access charges paid to telcos for call delivery. These are variable costs, only incurred when a call is made. Furthermore, they are likely to decline under a combined impact of regulatory and competitive pressures on telcos. In particular, access charges exacted (that is the word for what they do unless one prefers “extorted”) by mobile operators should drop dramatically. Also, as its traffic volume grows, Skype should be able to obtain better terms from telcos (including fixed cost deals). Thus, the operating margin objective of 20 to 25% appears, if anything, rather conservative: I would expect at least 40%. Skype profitability should be higher than that of other Ebay segments, not only because operating infrastructure and customer services requirements are considerably lower but also because Skype operations are inherently less risky: Skype-out operates on a pre-paid basis and incomplete telephone calls are considerably less contentious than bad payments or fraudulent transactions.

(d) This analysis may appear based on over-optimistic paid use assumptions but on the other hand, I have not considered any other potential sources of Skype revenues, such as transaction support for both E-Bay and PayPal (through an Instant Messaging system for instance), content acquisition, etc.

All this reinforces my earlier assessment that Skype acquisition does make sense for E-Bay. Market remains sceptical and E-Bay stock has underperformed the broad indices since the acquisition. A buying opportunity?