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by Stephen Cervieri, Managing Director 
 
Upcoming events
 
A reminder that next week we will run the first of a 2-part interview with Edwards Lifescience’s Chairman and CEO Mike Mussallem.  Mike gives his thoughts on a wide range of topics including med tech innovation, M&A strategies, the direction of healthcare, and global trends.  It will inform LifeLine readers of all stripes.
 
Market Commentary – Crying “Uncle”
 
Enough readers have asked us to begin a section on the capital markets, tying such activity to our day-to-day efforts in Cardiology (and healthcare). 
 
With the second most powerful man in the most powerful country on its side, the bear returned with a vengeance.   And we’re not sure what measures that have been deployed by the government during the past year will continue to be useful in reducing pain in the future. 
 
For starters, Fed Chairman Ben Bernanke had made comments prior to last week’s 400 point collapse indicating that rates would be flat at best, and perhaps even increase during the next Fed-meetings.  On top of that, the Senate’s most liberal member is now 1-election away from the most powerful position in the most powerful country, having secured the Democratic nomination last week.  Perhaps the bear was further emboldened by the prospects of a Democratic White House based on utterings on the stump: best case scenario - taxes are going up; worst case scenario - our potential President has a novel view of the economy and economics.
 
Meanwhile, the havoc around our estimable peers on Wall Street (remember, we are far from the financial world’s Sodom and Gomorrah in pristine Chicago) continues to threaten the well being of sectors far beyond banking.  Rumors swirled around Wall Street bulwark Lehman Brothers regarding their liquidity.  Sure enough, they announced (another) capital raise over the weekend, this time in the amount of $6 billion.
 
And now summer begins.  We know it can get awfully hot in a hurry out here in the Midwest.  With Masters of the Universe lolling at their vacation homes, summer has historically been a very difficult time to maintain a sustained market rally for the simple reason that  no one is at their trading desk to buy.
 
The silver lining?  In times of stress, healthcare is one of a few sectors – food and cigarettes being 2 other examples – that benefit.   Defensive sectors.  Sectors where people (patients) need you every day.  Furthermore, companies that have surplus capital – and the leverage ratio on healthcare stocks is by and large low – are in clover.  If you need to borrow money - ahem.  It will be a volatile run.  Companies that use oil and need it to go down (plastics…), will have margin issues.
 
As we said, a long hot summer.
 
Strategy - Entrepreneurs
 
Is founder involvement integral to a company’s long term success, or is his/her primary contribution found in the company’s birth? It’s the old horse vs. jockey argument, and has been taken in a new direction by Hans Hyde of the University of Aberdeen Business School.
 
Hyde examined a sample of 6,800 companies formed in Norway between 1996 and 2003, which led to a set of approximately 12,500 unique founders. He then broke the founder sample into two sets: Founders alive at the end of 2005, and those who were dead.
 
For starters, Hyde found that 181 such founders fell into the expired category. Apparently one morbid takeaway is that entrepreneurs have a 1.7% chance of dying less than a decade into their company’s formation. That might sound high to twenty-somethings in Silicon Valley, but the majority of Hyde’s Norwegian entrepreneurs was well over 40 as are most healthcare entrepreneurs.
 
Moving on, Hyde found that companies with deceased founders underperformed those with living founders – but just barely. The former was five percentage points less likely to be in business four years after formation, while the results are even six years out. There also was no statistically significant difference in annual OROA (operating returns on assets). Hyde suggests that such minor differentiation could mean that a founder’s death is more likely to cause an “adjustment cost” than a cataclysm.
 
He also considers that his initial study was unduly influenced by the existence of absentee founders, or minority holders. So he also did a sub-study of majority shareholder founders. The upside is that majority shareholders are slightly less likely to die (1.2%). The downside (for founders) is that majority shareholding founders are still operationally disposable. The six-year survival rate for living majority shareholders is 61%, compared to 60% for dead ones. The OROA was the same as in the larger sample (8% compared to 6%).
 
Hyde concludes: “Founder death has only a slight average negative effect on firm performance.”
 
Here’s the study for your downloading pleasure. - Social Science Research Network