San Diego serial entrepreneur John Dobak got the best quip off right out of the starting gate yesterday when Biocom, the local life sciences trade association, held a panel discussion on the “virtual company” as a new model business model for startups. Dobak, a featured speaker who was late for the breakfast meeting, told the crowd, “We have three kids under the age of 8 at home, and my wife went virtual on me this week. So we outsourced and my babysitter didn’t meet my timeline.”
Such pitfalls of outsourcing seemed to be a common theme as Dobak and three other biotech CEOS talked about the pros and cons of operating “virtually” with only a small staff overseeing the development of new drugs and biomedical technologies. With the economy still languishing and venture deals few and far between, the concept is compelling and the panel discussion attracted drew well over 100 people to the event.
The CEOs who participated all represented San Diego biotech startups at different points along the continuum of business development. Lithera, a two year-old startup headed by Dobak with backing from Domain Associates and Alta Partners, represented the earliest stage venture. At the other end of the spectrum is Ambrx, which was founded in 2003 to develop new amino acid building blocks for new types of protein drugs.
Jeff Stein, a Sofinnova Ventures partner who also serves as chief executive at Trius Therapeutics, told the audience he represents a counterpoint to the case for creating a virtual biotech company. Stein emphasized that Trius has gained key insights by conducting its own research and drug development internally. “There are incredible synergies at a full-fledged company that makes things happen so much faster,” Stein said.
Nevertheless, Stein conceded, “A lot of VCs are looking very hard now—and they have been for a while—at the virtual model. It’s very attractive to get an asset that’s at a later stage with a minimal staff around it, and with the downsizing in Big Pharma, there are some incredible CROs (Contract Research Organizations) available.”
Among the recommendations and warnings the panel provided:
—Maintaining close control over a contract research organization “is absolutely critical,” said Charles Theuer, CEO of Tracon Pharma. He emphasized the importance of selecting a CRO “really carefully.” He later said, “You’ve got to know your provider well, and it’s better if you know your provider from a previous life.” Theuer described Tracon as more of a classic virtual biotech that licenses drug candidates from academic laboratories. “The real strength of our team is in clinical and regulatory development,” he said.
—Maintaining tight controls over intellectual property also is important, said CEO Steve Kaldor of Ambrx, a six-year-old biotech creating a new class of longer-lasting protein drugs through partnerships with pharmaceutical companies. Because Ambrx is “creating new compositions of matter for every drug we develop,” Kaldor says the company keeps the research internal and retains key aspects of drug development internally.
—On outsourcing production tasks known as CMC, or chemistry, manufacturing and controls, Kaldor said, “We look to relationships where there is scalability. Once we build trust, then we can back off a little. But to state the obvious here, some of these companies are really close to going belly up, so it’s important to do your due diligence.”
—Keep in mind that many contract research organizations “over promise and under deliver,” said Dobak. “When they have a lot of contracts to manage, it’s hard to ensure that they’re going to maintain a laser focus on your project.”
—When asked if it’s important to oursource with local providers, Dobak said, “I think it’s so important to be able to sit down with someone and see what they’re doing, and important to be able to do that locally.”
—Hiring internally can be tricky with a small staff, said Tracon’s Theuer. “It only makes sense to hire someone when that person is cost effective,” Theuer said. “You have to make sure that person doesn’t break the highly functional nature of a small team.”
—When asked what’s important in choosing a contract manufacturer, Theuer said, “Their track record of success, and the ability to support a small company is the single most important factor.”
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