The climate for biotechnology companies in Massachusetts today is 33 percent worse than it was this time last year—rating a ‘4’ on a scale of 10, in contrast to the ‘6’ last fall.
This was the definitive, near-unanimous view—four out of five—from panelists at a Massachusetts Biotechnology Council finance committee event I moderated recently on the subject of “The Evolution of the Biotech Business Model.” The fifth member hardly saw things differently—giving 2008 a ‘5’ and 2007 a ‘7.’
The poor economic score was the bad news. The good news is that there is a lot of innovation in biotechnology today—and, judging from the panelists anyway, three of whom are investors, there is still plenty of opportunity for companies and entrepreneurs who are flexible and able to pursue new financing and operating models, as well as new types of collaboration. We’ve explored some of the financing models in our How to Build a Biotech Company conference last month, which Ryan wrote up here. But at the MBC panel, we dived more into such questions as, “Will Pharma companies continue to move into biotech’s turf? What do firms have to do differently in various stages of operations in the current climate? What about outsourcing—should companies be more virtual, or should they build in-house capabilities that could improve their valuations? Can another Genyzme or Biogen Idec be built in the current climate, or, with the IPO market dead, is selling to Big Pharma the only exit option?”
A warning—not all these questions were answered to any degree of certainty, of course. And I won’t even try to capture all that was said, just some takeaways I found most interesting. But first, let me introduce the panelists: Mark Kessel, co-founder and managing director of New York-based private equity firm Symphony Capital; Eric Elenko, a principal with PureTech Ventures; Gautam Jaggi, managing editor of Ernst & Young’s Beyond Borders global biotechnology report; Kevin J. Bitterman, a principal with Polaris Venture Partners; and John Edwards (not that John Edwards, and he’s tired of the jokes), president of Adnexus Therapeutics.
Edwards was the lone company executive on the panel–and he had a great story. After all, Waltham, MA-based Adnexus filed for an $86 million IPO in August 2007, then pulled it back and sold the company a month later to Bristol-Myers Squibb (NYSE:BMY) for $415 million in cash, and potentially another $75 million in milestone payments. “In the current environment we certainly wouldn’t have raised $415 million for an IPO,” he told the audience.
Here’s some of the other highlights I jotted down, which include some details from follow-ups I made to panelists:
—Find non-traditional forms of financing. Polaris’s Bitterman noted that his company and other VCs are asking biotech CEOs to focus on novel methods of raising capital as one way to get through the downturn with their equity intact. This would include grants from the Bill & Melinda Gates Foundation and other organizations, corporate partnerships, and federal Small Business Innovation Research (SBIR) funding, for instance. Noted Kessel, “A strong case can be made that it will enable a company to preserve greater value for its shareholders as compared to an immediately permanent dilutive equity deal or a deal with Big Pharma [at] too early a stage, which is very dilutive.”
—Innovate in other aspects of business operations as well. Edwards was probably the most vocal on this front, pointing out that new models are needed across all stages of biotech operations—manufacturing, trial design, R&D, and so on.
—Outsourcing, outsource, outsource (well, the panel didn’t put it quite so emphatically, but that was the impression I got). Outsourcing doesn’t necessarily mean moving jobs offshore, but most of the talk was about foreign contractors. That drew heat from one audience member, who asked why firms couldn’t do more outsourcing to U.S. firms. Panel members emphasized that while lower costs, coupled to rising quality abroad, made foreign contractors ever-more compelling, there was more to the story. It is often harder to recruit patients for trials in the U.S., for instance, and there are typically more barriers to overcome before trials can take place.
—Well, outsource to a point. Bitterman told how Sirtris was undecided early on, with some executives advocating holding down costs by staying highly virtual and outsourcing more, and others advocating for building chemistry infrastructure internally. In the end, the board chose the middle ground, which resulted in Sirtris having substantial assets when GlaxoSmithKline came courting. Glaxo would not have paid three quarters of a billion dollars for the company if Sirtris didn’t have substantial in-house assets and capabilities, Bitterman said.
—Focus, focus, focus. Jaggi foresaw more specialization among biotechs and more networking alliances. Edwards recommended that early-stage companies concentrate on developing one core technology rather than trying to attract venture funding with multiple novel technologies. Venture firms seek diversity from the breadth of their portfolios, not inside each firm, he said.
—Venture capitalists and others will increasingly look overseas for investments. PureTech, which already does deals in Israel, is “agnostic about geography” and is now looking to Europe and elsewhere, Elenko said. Kessel said his private equity firm was doing the same and noted also that “investment banks and others in Europe have been increasingly approaching us about doing investments with their clients.” Polaris, meanwhile, is already active in Europe. “There’s huge opportunity in Europe right now because there is no early-stage capital,” Bitterman said.
—Biotech’s innovative culture will be increasingly valued by Big Pharma. Large drugmakers will focus more on preserving culture when a biotech company is acquired, as witnessed by Adnexus, Millenium, and Sirtris being left largely on their own rather than being assimilated into their new parents (Bristol-Myers Squibb, Takeda Pharmaceuticals, and Glaxo, respectively) “They aren’t just acquiring pipeline, they’re trying to acquire culture,” said one panelist, whose name I failed to note.
—Bitterman went a bit against the grain of common thought by forecasting that Big Pharma and biotech—which many have observed are increasingly moving into each other’s turfs—would retreat to focus on their areas of specialty as both sides more fully realize they aren’t that good at the other’s niche. This would mean fewer small molecule drugs coming out of biotechs and fewer large molecule drugs emerging inside the big drugmakers. But, Bitterman said, this also means pharma companies will focus on their “expertise in the ‘D’ and biotech’s innovation and efficiency on the ‘R’ half of R&D.”
Edwards and Elenko also stressed this point, predicting that the trend will likely mean that large drugmakers will cut back more on internal research. “Entering into multiple early-stage licensing deals as well as acquiring smaller companies could be more cost effective than reliance on internal research programs,” Elenko said.
Such a trend, of course, is another reason for Big Pharma’s leaving its biotech acquisitions more on their own. “I do believe this is why acquirers are trying to keep biotech acquisitions as independent operating entities,” said Bitterman.
—Think carefully about your initial target market. One strategy that might gain in favor in today’s ultra cost-conscious climate is for biotechs to initially target drug approvals in small markets, and then focus on moving into bigger markets—as opposed to going after the big market from the start. Explained Elenko, “For instance, if a therapeutic has use for both an orphan indication and a larger indication, it may pay to first gain approval for the orphan indication, which requires a less burdensome trial.” However, he cautioned, the appropriate strategy should be determined on a case-by-case basis.
Kessel added, “getting a product into an orphan indication may be a huge validation for proof of mechanism so that investors will be more confident that other indications using the same drug are likely to get into the clinic. Another example is to get an approval for an indication in a smaller market with a better regulatory pathway, [which] might be a better value proposition than going into, say, the FDA with a less clear pathway, which can take longer and be riskier.”
All of the discussion seemed to relate to another question I asked: could another Biogen or Genzyme be created in this climate, or would a biotech just sell out to Big Pharma at the first good opportunity? After all, I wondered, to the degree that big drugmakers and biotechs stay out of each other’s turf, it would seem to at least increase the odds for another big biotech being created. But I have to tell you, this question pretty much went unanswered.