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Five Questions for the Future of Biotech in San Diego, Part 1

Xconomy San Diego — 

Biotech watchers were in a grim mood last week at the JP Morgan Healthcare Conference in San Francisco, but it didn’t strike me as quite as apocalyptic as advertised. I’ve come to that conclusion after doing some unscientific polling of San Diego biotech leaders (and a few in Boston) last week at the industry’s biggest investor event. I asked a series of five standard questions to get a feel for their thinking on how their companies will persevere.

Today, I’ve edited down recorded conversations with Optimer Pharmaceuticals CEO Michael Chang, and Phenomix CEO Laura Shawver. Tomorrow, I’ll have another installment with comments from Life Technologies’ president Mark Stevenson, and from Bryan Roberts of Venrock Associates, an investor in San Diego-based Fate Therapeutics and Apoptos. Here are the highlights:

Xconomy: What was the single most valuable lesson you learned from the last big biotech bust (the genomics-driven crash of 2001 and 2002), and how will having those battle wounds help you carry on today?

Michael Chang: We raised our main VC fund at the tail end of that. We could have raised a lot more at that time, and we elected to raise just enough. So in that round, we raised about $33 million, instead of taking about $48 million. If I could go back and do that again, I would. I didn’t realize the bust would last so long. It makes a subsequent financing event more difficult. So looking back, I’d say, if you can take the cash, do it. Even if it means more dilution. The second part is on our decision to focus on products, which was a stroke of luck. We could have done parallel development tracks of multiple compounds. We decided instead to focus on OPT-80, and it turned out to be a good strategy, because we have something to show for it in the late stage.

X: Every year, bankers like to say acquisitions and partnerships between biotech and pharma companies are going to pick up because pharma needs innovative new drugs, and biotechs need cash to develop them. Do you really see this trend truly accelerating this year, and if so, why?

MC: It will increase because of pharma’s willingness to do deals, but more out of desperation. A lot of companies will end up just being sold. Pharma will be much more selective. They’ll be more demanding. You’ll have to demonstrate market potential at a later stage, and show that risk has been mitigated.

X: What kind of companies, technologies, and people will be resilient enough to survive this downturn?

MC: It’s a combination of factors. Companies with really solid technology platforms, like RNAi. Areas where people are still willing to take risks, that’s one. Then, companies that are run by a team with a good track record, and have credibility. Companies that have a pipeline or product that has demonstrated the risk is small or the profit potential is high, they’ll make it.

X: Who would make a good FDA commissioner, and why?

MC: That’s a question I should probably steer clear of (laughs). FDA is traditionally always very political. It’s very difficult for anyone to come in and really please everyone. There’s no ideal candidate. FDA is under tremendous pressure these days to demonstrate they look out for safety and consumers’ welfare. It’s a difficult job.

X: What’s the most surprising impact of the past year’s economic turmoil on your plans for this year?

MC: You’ve got to be more conservative, No. 1, in terms of spending. You need to be more focused. And you need to look at all options. For a lot of companies, including us, even though we have a good situation, it’s about survival. It’s about unknowns. You just don’t know, it could be more difficult than last year.

Laura Shawver, CEO of San Diego-based Phenomix

Xconomy: What was the single most valuable lesson you learned from the last big biotech bust (the genomics-driven crash of 2001 and 2002), and how will having those battle wounds help you carry on today?

Laura Shawver: The biggest thing I learned about is the importance of being flexible and adaptable as early on as one can. You have to recognize that changes have taken place and adapt to a new environment, and don’t try to hold on to what is in the past. I’ll just add that it doesn’t stay like this forever. It gets better. Attitude, keeping positive, and trying to focus on building value for the shareholders. Really, what that involves is making good drugs for areas of unmet medical need.

X: Every year, bankers like to say acquisitions and partnerships between biotech and pharma companies are going to pick up because pharma needs innovative new drugs, and biotechs need cash to develop them. Do you really see this trend truly accelerating this year, and if so, why?

LS: I don’t see it accelerating in 2009. I see that there may be fewer acquisitions. Everybody’s price is depressed, so investors may not accept that. There is still quite a bit of money out there. If you have a valuable company, they will want to continue to build value and basically work through this difficult time until values go back up. We’re in a depression now for our valuations. Our valuations are not what they were a year ago. If we can hold out for another year, they’ll probably be back to where they were. The thing about that is that one needs to have supportive investors who believe in your products. We’re fortunate to have two very valuable assets, one in Phase III and Phase I. We’re very well supported by our investors, and feel we can ride it out if necessary.

X: What kind of companies, technologies, and people will be resilient enough to survive this downturn?

LS: Certainly companies with revenue (laughs) are best suited to make it through. Companies that have the ability to bring in non-dilutive cash, those are the companies that are best suited to make it through.

The character trait that I believe is very important is persistence. One needs to be very persistent. I spoke already about being flexible and adaptable. But at the same time, you have to keep putting one foot in front of the other, and figure out what value creation looks like in the new world. So I’ll use Phenomix as an example. We started out being a genetics company. That was the foundation of the company. It was really good science. It still is really good science. But it’s not something investors were interested in. It belonged more in an academic setting than in a business. And we were able to make a business out of it in the early days.

But a few years ago, in 2002, things took a downturn in terms of the “-omics” business or genetics business, and we decided if we couldn’t find someone to pay for it, we weren’t going to use our investors’ money for that any longer. We had to make a very difficult decision to not do that part of the company any more, and focus on drug discovery and development. Fortunately for us, we had utilized that technology to build the foundation of our drug discovery and development work. While we as a company would have liked to continue that part, because it was fantastic science, it just wasn’t possible anymore. We had to make that change and be persistent through that. We had to persist through a strong competitive landscape for our lead programs.

X: Who would make a good FDA commissioner, and why?

LS: I think Janet Woodcock would make a good FDA commissioner. I doubt she’ll be chosen. She’s been at the agency, and has a philosophy of being open and accepting input from pharma and from biotech. I thought she would be good. The other thing that is needed from an FDA commissioner is recognizing risk/benefit balance. Sometimes drugs that have a higher risk—as long as it’s communicated to patients so they can make an informed decision—I’ve certainly seen in my career that those drugs can save people’s lives. They should be out there and on the market.

The problem is that in our political environment, people are putting more emphasis on the risk than on the potential benefit. We need someone who can bring balance back to that. Yes, some drugs that have risks that outweigh the benefit should not be on the market. But all drugs have side effects. They need to be considered in the context of the patient benefit, that’s all.

X: What’s the most surprising impact of the past year’s economic turmoil on your plans for this year?

LS: It forces us to be more creative with our resources, but there’s a fine line where it becomes almost impossible to execute on a business plan. Biotech was one of the first to outsource. We’ve always outsourced. We were among the first to outsource chemistry to China and India to get a lower price, but there comes a point where you really do have to have a certain amount of expertise in-house. Once you go below a certain critical mass, it’s much more difficult to execute on your plan. It’s a fine line now that we’re walking to do more with less, and still having critical mass to be successful.