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Monday, April 2, 2012

Biotechnology and the Dot-Com Era

Earlier this month, I attended the CalBio2012 conference in San Francisco. Among the attendees were venture capitalists and executives from biotech and pharma companies around the world. The two days of panel discussions and keynote addresses focused on all aspects of these industries from financing strategies to reimbursement issues. As a networking event and major local conference, I found the topics highly relevant. However, of all the sessions, I found the lunch keynote speeches to be the most inspiring.

The keynote address on day one of the conference was particularly noteworthy. The speaker was John Crowley. To those of you who don't know, this is the man who risked his career to head up a company focused on finding a treatment for Pompe Disease – a terminal illness affecting his two children.

Pompe disease is a condition where glycogen is not cleared from cells. This leads to cell death, organ failure, paralysis and death. While the story of how the treatment was ultimately found and developed is truly an inspiring example of the hope and promise that biotechnology brings to this world, this story is not the focus of this post. For an excellent interpretation of the Pompe disease story, I highly recommend the Harrison Ford movie "Extraordinary Measure" which focuses on the Crowley family and their journey.

Instead of focusing on Pompe Disease, I thought it would be relevant, especially in today's economy, to comment on a small part of Crowley's speech describing previous attitudes towards investments in biotechnology. As you all know, investments in early stage biotechnology companies are considered highly risky. This is largely due to the roughly 15 year timeline from concept to market coupled with the 6% success rate for small molecule drug candidates completing clinical trials and becoming marketed therapeutic agents.

In the 1980s, VC financing and IPO interest in biotechnology companies were abundant. It seemed that any company incorporating the letters G, E and N in its name was likely to obtain needed funds. Examples include Genentech, Biogen, Genencor, Gensia, Amgen and many more. It will also be no surprise that all of these companies were running operating losses during their initial financing periods. Relevant to the Crowley keynote speech is his description of interactions he had with a venture capitalist while serving as CEO for a biotech company. Paraphrasing Crowley's narrative, the dialog went something like this:

VC: So, how are your sales?
Crowley: Well, we currently don't have any sales.
VC: I see. How strong are your revenues?
Crowley: Actually, we presently don't have any source of income.
VC: Interesting. When will your product be ready for market?
Crowley: Uncertain. There can be no guarantee that our product will ever be ready for market.

The above dialog summarizes the reality of the biotechnology industry from its inception to the present. The only driving force behind the ability to finance companies with long term operating losses and no guarantee of success was the hope and promise of a better future. For a long time, this was enough. Investors were interested and biotechnology was the only industry that could justifiably operate under this business model.

Let's now move ahead to the 1990s. In this period, a new industry emerged - the internet. With the evolution of the internet came may entrepreneurs eager to capitalize on the promise of e-commerce. Whether selling products or focusing on business-to-business services, investors were jumping into this new sector with hopes of making large profits and quick exits. While some of these dot-com companies had solid business models, most eventually came and went. That did not stop the massive ballooning of the IPO market. While some people did, in fact, realize significant returns on their investments, most did not. So, when the investing community had had enough, the dot-com bubble burst and the NASDAQ plummeted from its "irrationally exuberant" highs. Ultimately, much of this downturn rests on the dot-com companies attempting to adopt the biotechnology model of selling shares while operating at a loss.

Recognizing that the dot-com bubble had collapsed, investors next turned to the smaller "biotech bubble". While the dot-com IPO boom did have an impact on biotech, the size of this bubble was far less significant than that related to the internet. After all, it is the internet-based industries that are better understood by the investing public. Nevertheless, following the dot-com bust, biotech stocks fell. The investment community had had enough of high-risk markets and money dried up.

When I hear people tell me that the biotechnology business model is broken, I point out that the model never changed. It is today, what it was in the 80s - highly speculative and full of promise. What has changed, however, is the risk-tolerance of investors. Where biotech companies used to be able to obtain financing at research stages, they now find themselves lucky if they can attract financing when achieving positive results in phase II clinical trials.

While the biotechnology business model is not broken, it is obsolete. Clearly, investors want less risk and the future of innovative drug-discovery efforts depends upon the industry's ability to adapt during these challenging times. Unfortunately, no amount of adapting can fully bridge the divide from identification of development candidates to entry into clinical trials. The expenses are simply too high.

The interplay between innovation and venture financing has always been a partnership. Extending partnerships requires effort and compromise on both sides. While I routinely work with early stage companies to find cost-effective ways to advance their programs, the investment community must also come to the plate. This country was built on taking risks. Continuing our leadership in innovation requires continually taking risks. Ask the Crowley family. I am sure they would agree.


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