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Building Biotechnology But Not Via Biotech Companies
By Cynthia Robbins-Roth BioWorld Today Columnist Driven by concerns over the funding abyss blocking early stage research projects, I have been exploring new ways to support biotech innovation from its earliest stages into that Promised Land of "proof of concept" (somewhere outside of Hoboken). I quickly realized: 1. There is a plethora (I just love that word!) of methods being tested across the globe, forced by a funding drought. 2. Nobody has found the perfect solution. But everyone is pretty sure that major structural change is required. Michael Milken was right. Back in 1991 at the Oxford Partners/E&Y Biotech Venture Conference, we heard Milken lambaste biotech for failing to pay attention to lessons to be learned from the rise and fall of the telecom and hard drive sectors. He emphasized that while our science is way cool, sooner or later market forces come to bear on all of us. As biotech itself becomes a mature sector after 30 years, it still follows the same pattern - build a company around new technology, raise lots of capital, build management and facilities, try to go public, then try to survive being public. We needed lots of companies in the early days because there was no existing corporate infrastructure willing to take a chance on developing products from our new science. That certainly is not the case today - for most new technologies, there are plenty of corporate homes for in-licensing and development. Many folks still really want to start companies for many reasons, both personal and financial. But the broader marketplace is resisting the classic model based on funding unproven science. The industry continues to believe that biotech deserves a special place in the sun, demanding that other sectors (like the venture industry) change their business model or change government regulations to keep that protected status. But that just isn't true. Time to get over it. We don't have an inherent value that overcomes market forces and reality. So, what to do? How do we keep tapping the innovation and generating important products without using the old model? Challenges Of Academic Spinouts Major academic institutions in the U.S., Canada, the UK, Europe, and the Pacific Rim all chimed in with the same basic dilemma: Our professors all want their own companies, our universities want financial return from patents, and governments want a fast route to economic development via local company formation. It is impossible to give them what they want - formation of lots of sustainable operating businesses. Most of the tech transfer folks I interviewed agreed that it is a big mistake to keep forming companies out of university labs. Let's face it, an overwhelming percentage of life science inventions from academic labs tend to be individual projects rather than a critical mass that could support a company. Political pressures from inventors, universities, and governments keep pushing the system toward company formation, and often around a single lab. Those inventions reach the tech transfer office early in the development process - if you're lucky, there is an actual molecule that can be synthesized and has been tested at least once in animals. Some inventions are even earlier, such as a concept based on in vitro systems, or an interesting target without much information on how it works in a living organism. The early stage of gestation drives the concern about the venture community's risk reduction via investment in clinical-stage compounds. Everyone understands that someone has to fund the proof of concept work to reach an IND filing, but few have volunteered to be that someone. You Build It, They Don't Come Most universities outside of the West Coast and East Coast biotech corridors have great science but lack the other two critical ingredients to support biotech company growth past the seed stage: smart money and experienced management. Many university groups internationally have access to some level of seed funding, via government grants, angel investors or in-house seed funds. The catch is getting beyond that early money, which often maxes out at around $1 million. Many regions, even those in the U.S. outside the two corridors, just don't have local funds and can't easily attract top-tier funds with industry experience. That lack of deep pockets is behind the phenomenon of $7 million initial public offerings and public companies with market caps below $50 million. Most of the tech transfer folks I spoke with faced a big challenge in the "people" issues of spinouts. The personality that is successful in an academic science career can make grown investors cry. Most academic scientists live in a world where the other top researchers in their field - those people investors would want to see on a scientific advisory board - are seen as competition, not collaborators. Sharing the glory is a tough concept. Even harder to accept is the idea that the brainpower already put into play might be worth significantly less than 90 percent of a company built to commercialize the invention. A dangerous ailment suffered by early stage companies is "Founderitis," when scientific founders are in serious conflict with the business management and early investors. Everyone in the industry has stories about the demise of companies with great science - we could keep a miniseries going for an entire season based on these alone! To be fair, many founders find themselves saddled with sub-standard boards of directors loaded with investors who are not able to help and support the company sufficiently. Conflict of interest at the board level is common, and doesn't lend itself to great management. The lack of management with relevant experience makes it tough to convince investors that the company will be able to fully exploit its technical edge. There are few examples of successfully importing experienced management into backwater, technology-rich regions. Everyone got very excited when Spiro Rombotis took his years of big pharma and biotech expertise to Dundee, Scotland, to head up Cyclacel. The steady movement of product candidates through Cyclacel's pipeline and the invigorated entrepreneurial activity in Dundee is encouraging. Sadly, there aren't many "Spiros" showing up in Australia, Canada, or even Texas. That might change - one positive side effect of the mega-mergers in big pharma is the availability of lots of folks with years of industry experience around the globe. A bigger problem - getting research-based deals funded. The current down market for early stage biotech funding is different. Even startups in the golden corridors of the U.S. are having a tough time getting VCs to pony up. Nobody can figure out how to generate clinical data with the $1 million pre-money valuation placed on most early stage deals. BioWorld reports that dollars invested to date in 2005 show an increasing abandonment of research-stage deals for deals with in-licensed drug candidates in clinical testing. Two of the 12 Series A deals funded in first-half 2005 had ongoing Phase I trials, three of the 13 Series B had Phase II trials. Of the 28 higher-round deals, 12 had Phase I/II trials and two were in Phase III. Darwinism has caught up with us all. It's time to stop trying to build that classic California model start-up and to think in a more creative way about how to move that early technology into a form ready for commercial development - maybe without ever forming a stand-alone company. The Next Evolutionary Stage: Virtual, Global Okay, so we have agreement that universities and local governments should stop trying to emulate the old California biotech start-up model. Heck, California can't even do that anymore! So what can we do? I found a range of approaches bringing promising preclinical research into an environment in which experienced drug development folks could take a crack at testing its potential to become an IND candidate. The most interesting: tough-minded seed funds, innovative service providers with a venture component, and global networks to build virtual development teams. These teams all had years of industry experience in drug development and regulatory affairs - the bulk of the activity needed to prod a promising compound to show its commercial value (or lack thereof). Setting rigorous milestones and re-evaluating projects on those milestones is a recurring theme. The need to kill projects in a timely fashion is as crucial as recognizing success. All stressed the need to understand the difference between projects and companies - and saw potential valuable return in both scenarios. Their extensive international networks were positioned to support the development and eventual commercialization of successful candidate compounds, without the need to build expensive infrastructure in advance. While the bulk of the biotech community is beating its head on the wall, bemoaning the "current" bad financing environment, a subpopulation of innovators is creating new models for the new world. Wednesday, I'll list some of my favorite firms and detail their biotech business models in a special section of BioWorld Today.
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