Where Tech and Medicine Meet

In an east Pasadena building where Sears, Roebuck & Co. once trained auto mechanics, Stephen O’Connor’s team of 60 is working with valves and filters on a significantly smaller scale.

O’Connor’s 4-year-old company, Nanostream Inc., is developing ways for pharmaceutical companies to quicken the drug discovery process by automating and miniaturizing chemical and biological reactions in the lab.

Using Nanostream’s tiny plumbing of channels, valves and filters, a scientist might be able to test 1,200 chemical samples a day. That compares with 50 using traditional devices, O’Connor said.

Entrepreneurs and the well-heeled venture capital investors who bankroll risky start-ups see vast opportunities in medical technology such as Nanostream’s. They envision a world of robotic surgical tools; biometric devices that scan retinas for identification; and personalized drugs tailored for an individual’s DNA.

Indeed, what Nanostream represents is a blurring of the lines between technology and health care. It’s a new niche that has attracted a number of Southern California entrepreneurs.

“This is cross-disciplinary work -- biologists, engineers and mathematicians working with hardware and software people,� said the 34-year-old O’Connor. “We have 50 full-time employees and 10 part-timers, and I don’t think we have three with the same background.�

The Nanostream system costs about $250,000, and a customer might spend an additional $100,000 a year on the disposable cartridges that go with it, O’Connor said. But with pharmaceutical companies plunking down an average of $500 million to $800 million -- and 13 years to 15 years -- on the typical drug research process, he believes that they will find it a bargain.

And that’s key to Nanostream’s mission, said O’Connor, a Caltech grad who founded the company in 1999. “When scientists run companies,� he said, “they often forget that you have to make a product that can be marketed -- not just a cool science experiment.�

Venture capitalists apparently like the sound of that: Nanostream raised $22 million in its latest round of venture financing, which was completed in June. Its backers include Lilly BioVentures, an arm of drug giant Eli Lilly & Co.

Venture investors typically finance young companies in exchange for a private equity stake, hoping to cash in if the start-up is later acquired or taken public through an initial stock offering. Most start-ups fail, but a few, such as Intel Corp. and EBay Inc., go on to become huge successes.

Other Southland medical technology companies that have raised venture money in the first half of the year include Orqis Medical Corp. of Lake Forest, a maker of minimally invasive devices aimed at treating congestive heart failure, which received $25 million; GenVault Corp. of Carlsbad, a developer of automated DNA storage and retrieval technology, which garnered $10 million; and NuVasive Inc. of San Diego, a maker of spinal surgery tools, which secured $9.8 million.

“When it comes to biotech and life sciences, venture investors are focusing more than ever on the bottom-line question: How do you take the technology and make a product that someone wants to buy?� said Don Williams, head of Ernst & Young’s Southern California venture advisory group.

GenVault, for example, provides an archiving service that will be used in a study by the Centers for Disease Control and Prevention for storing and retrieving blood samples. But Williams said the technology must still prove to be a worthwhile and cost-effective advance for government agencies, hospitals and other potential customers.

Despite the medical advances of the last few decades, many aspects of the health-care industry seem technologically antiquated, entrepreneurs and investors say, leaving it ripe for innovation.

“When you go to the doctor, how many times do you have to fill out the same form?� said Eve Kurtin, managing director at Pacific Venture Group in Encino, which is busy making investments with money from its second health-care-oriented fund.

“Anybody can easily access your financial information,� Kurtin said, “but when you go to the emergency room, they may have trouble finding your medical history. There are privacy issues, of course, but better technology would allow for better and more efficient health care.�

Kurtin’s firm has invested in companies such as Irvine-based LifeMasters Supported SelfCare Inc., which believes its “disease management� technology can help heal the nation’s ailing health-care system. LifeMasters’ nurses monitor and interact with chronically ill patients from afar, emphasizing lifestyle changes.

Doctors set parameters for each patient, which become part of the LifeMasters database. Patients monitor themselves daily, using a touch-tone phone or the Internet to input data such as blood pressure, glucose level, weight and breathing patterns.

When flagged by a dangerous reading from the system -- or when patients fail to check in -- LifeMasters’ nurses call patients to check on them.

Nurses try to coach patients, such as the diabetes patient who binges on cherry pie and elevates his glucose count, said Chief Executive Christobel Selecky. “Rather than simply telling him to stop eating cherry pie, they can say, ‘Here is what happens when you do that,’ � Selecky said. “You now have some evidence that the patient can understand.�

The program is designed to help health plans and employer groups that contract with LifeMasters save money by reducing the number of costly hospital admissions, Selecky said. Customers include Aetna Inc. and the State Teachers Retirement System of Ohio.

“We’re able to lower health-care costs in a way that doesn’t make anybody, doctors or patients, angry,� Selecky said.

LifeMasters, founded in 1994, has been profitable since the third quarter of 2002, a company spokesman said. The company last raised venture money in November, a $6.7-million financing round.

Nanostream’s O’Connor is a serial tech entrepreneur who co-founded his first company, an optical sensor maker, in 1992 while pursuing a doctorate degree. He then sold his interest two years later. In 1995, he co-founded his second company, Clinical Micro Sensors, then left in 1998, a year and half before the business was bought by Motorola Inc.

After leaving Clinical Micro Sensors, O’Connor launched a small biotechnology incubator that provides space and equipment to other start-ups in the region. That’s also when he started Nanostream.

At Clinical Micro Sensors, a maker of DNA detection systems, O’Connor worked on a military research project aimed at biological weapons defense. He was exposed to microfluidics technology, which colleagues on the project were using, and saw a market opportunity in the area of drug discovery.

Nanostream’s microfluidics technology could have many uses, but the company for now is focused on liquid chromatography -- an analytic process that separates different components in a mixture. It’s a $4-billion-a-year market that includes established competitors such as Waters Corp. and Agilent Technologies Inc.

Nanostream, which began shipping its first products in June, could become profitable by 2005 if it continues to hit its milestones and gains traction with customers next year, O’Connor said. As for an initial public stock offering, O’Connor is, appropriately enough, reluctant to think too big.

“We just want to keep our customers happy,� he said. “The IPO and everything else will take care of itself.�