21 Red Flags to Watch for in a Biotech Company

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it has a “revolutionary new cancer cure” or even glib talk like it has “a tiger by the tail” with some new drug candidate, then I know it’s not a serious company. Sometimes you’ll hear a company say it wants to be the next Genentech or the new flavor of the moment, without any solid data to back up such a grandiose assertion. Or maybe they’ll set unrealistically aggressive timelines for reaching milestones, and then hope nobody notices when they miss the goal by a year. Some will always brag that a Big Pharma partnership is right around the corner, but they never get around the corner.  The biotech scrap heap is littered with companies that overpromised and underdelivered. The best ones are humble, and do what they say they’re going to do. When they nail a Phase II, placebo-controlled, randomized clinical trial they will describe it, appropriately, as an encouraging development that they must confirm in a Phase III. Sadly, some companies prefer to take shortcuts, and indulge in excessive hype. Smart investors see through this fog pretty easily. “It is an incredibly bad sign if there are multiple YouTube videos of a CEO participating in paid, mock interviews. Things like that are disingenuous and reek of desperation, so it is impossible to consider companies that resort to them for any type of serious investment money,” says Brad Loncar, an individual biotech investor in Lenexa, KS.

Too much yakking about the problem, not enough about the solution: If a company spends a lot of time talking in its presentations about what a big problem breast cancer is, and not much time talking about hard data to support its allegedly important new treatment, then they are wasting everyone’s time.

Insider selling: If a CEO is selling large blocks of shares in his or her own company, particularly after a big run-up in price, it’s usually a good indicator that investors should do the same. Remember, management knows a lot more about the company’s operations and prospects than outsiders do.

Family members in key management roles: There are companies out there led by siblings, or husband-and-wife teams, or with boards packed with relatives or cronies. Are we really supposed to believe these people are the best in the world for tackling the hardest challenges in biomedicine?  “These aren’t family businesses,” Henney said in his 2009 talk. “If you see a board dominated by siblings, or a couple of siblings in key management roles, I’d run, not walk.”

Does the company have enough money to create value? Many biotech companies are undercapitalized. They don’t have enough money to achieve their goals. If a company only has $10 million to run a single Phase II trial, then no one should be surprised when it cuts corners in trial design with a study that doesn’t have enough patients, or an adequate control group to provide a definitive answer on whether its drug works. Often, you’ll see a company run one of these shoestring trials, make unsupportable, desperate claims about positive results, and use that to try to raise more money. It’s better to raise enough money from the start to run a well-designed trial that yields a clear answer. Essentially, each experiment needs to help build a strong body of evidence that creates value, and reduces risk. Anything less is a waste that will come back to haunt a company. “If a venture syndicate advances a clinical program through Phase II but can’t credibly fund the Phase III, strategics [Big Pharma companies] will use that against the company in partnering or M&A negotiations,” said Ashley Dombkowski, a managing director with San Francisco-based Bay City Capital.

Can this crew demonstrate real value to payers, or are they living in the ‘90s? I’m amazed by how many biotech executives seem to cling to strategies of the past. They seem to think all they need to do is win FDA approval of a new drug, set the price wherever they want, and count the money. These companies ignore that the Affordable Care Act is established law in the U.S., and skyrocketing healthcare costs are putting tremendous pressure on insurers to save money wherever they can. Biotech companies need to figure out how to prove their products are not just effective, but cost-effective. The healthcare world has changed, and biotech companies need to change with it. “Insured patients were once largely shielded from health care costs,” Dombkowski says. “But health insurance re-design is leading to higher co-payments and more patients with higher deductibles.  In an increasingly consumer-driven system, price transparency for patients and caregivers will be ubiquitous, outcomes will be measured with unforgiving precision, and comparative assessments of value will be the rule not the exception. The company’s product better be able to stand up to that kind of scrutiny. Better yet, it should benefit from that kind of scrutiny by so obviously outperforming legacy interventions.”

Companies that can’t explain how they’ll make money for investors: Sometimes people get so wrapped up in the science and clinical trial plans, that they lose sight of an ability to explain how this will provide a tangible return on investment. “If a timeline to commercialization is not evident, you might as well be donating your money to an expensive science project,” says Loncar. “While there isn’t necessarily anything wrong with that, you shouldn’t confuse a good cause with a good investment.”

Lack of focus: Biotech companies, especially in their early days, often get drunk on their own hype, thinking anything is possible, and they can cure just about every disease under the sun with their new technology. They can’t. Is this a company with eight new drug candidates in Phase II? That’s OK if you’re Amgen or Genentech, but does a little company really think they can execute on that many programs? There’s only so much time and money, and by the way, biology is still incredibly mysterious. No company can do everything. Focus is a must. “While there are times when multiple programs are a sign of strength—I think of great companies like Moderna, Adimab, etc.—there are also plenty of sad stories about companies that parallel processed so many activities or programs that they blew through capital without advancing anything well,” Dombkowski says.

Focus on the wrong thing: If a company is concentrating on some new innovation for pancreatic cancer or Duchenne Muscular Dystrophy, that’s one thing. Those are deadly and debilitating diseases crying out for innovative new therapies. If the company is … Next Page »

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8 responses to “21 Red Flags to Watch for in a Biotech Company”

  1. Argo says:

    Very very few companies have these right. Only a hand-full have some of these right. Moreover, there are no more mentors in the industry. There are no more people looking at best practices, no more people wanting to do the right thing. Everyone is looking for the next big thing. Even recruiters and managers who hire into these companies are looking for hires who fit the “culture” – well what they don’t tell you is that the culture is about hype and not about doing the right thing. Thanks Luke- always a pleasure reading your articles very sobering.

  2. guest1 says:

    When senior leadership has similar profile / background as the CEO. e.g., CEO a chemist, head of clinical operations a chemist, clinical scientists past chemists.

  3. Plain says:

    Gilead Sciences
    CEO = organic chemist
    President = biochemist
    CSO/EVP = organic chemist

  4. Biotech investor David Sable offered up a few more red flags of his own in a blog post. Worth a read.


  5. Satchmo says:

    Luke, I’m playing the devil’s advocate here. You know how it’s said that past performance is not a guarantee for future results. I understand that approval rates for drugs that enter FIH is 0.1, but what’s to say that it won’t change over the next twenty years. We are picking up more specialized targets over the last few years, and my hope is that it will bear fruit to the industry as a whole and approval rates could be higher with each drug catering to a smaller population.

    And to Argo, that is a pretty bold statement. ‘No more people doing the right thing’. Do you have insight into every company, every department, every team that develops drugs? Certainly, I can vouch that my heart is in the right place, and my highest goal is to get top quality products approved. I feel the same way about my department where folks also know a thing or two about getting a product out. We have changed lives and we are inspired by it. Please refrain from making such egregious remarks.

  6. Victoria Romney says:

    I would add the state of a company’s IP protection to the list. Does it have issued patents, filed applications, or just provisional applications? Patent pending is a start, but only an issued patent can be enforced against an infringer. And does the company have a realistic war chest of enforcing its patents? What about freedom to operate? Is the company’s technology free of the prior art or do they have the necessary licenses?

  7. Bob says:

    I know a company in Miramar, Florida called Altor Biosence, both the CEO and his wife who is the head of clinical had major in zoology from Taiwan and computer in US, had formed a biotech company to cheat investor’s money and government grants for last 10 years. They claimed that they had more than 10 anti-cancer drugs in phase I or phase II clinical trials where the CEO’s wife with few fellows from Taiwan cook fake data to cheat government grants each every year.

  8. itc says:

    Definitely a great and sobering read. Don’t agree with some of these, but they are valuable points to keep in mind. Coming from a scientific background, what’s hard to explain to VCs and journalists alike, is that you may have a great clinical trial design but if you’re only going to get $10 million dollars to run the trial and you have to let some things slide, what are your other options? On the one hand, you don’t have enough money to do “the trial” and on the other, further funding somewhat depends on the success of your first trial… soo….