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Discovery: The Soul of Biotech, the Place For True Believers, and a Retro Way to Bring it Back


Xconomy Seattle — 

Not so long ago, there was a day when biotechnology companies were built to last. They were founded and directed by pioneering scientists who were courageous, true-believers in their respective technologies. Their drive, creative spirit, and dedication to discovery positioned their companies in ways that could create multiple opportunities for success in therapeutic discovery and development. Here in Seattle, companies like Immunex, Icos and Seattle Genetics represented some of the last companies in our area formed with such intentions. Years after the founding of these companies, our industry changed dramatically after the “contraction” of 2001 where virtually all biotechs cut or eliminated discovery in favor of pushing forward late and later stage drugs (a market-induced effect as cash sources mysteriously dried up). The mantra at the time was, “we can always buy the drugs later when we need them.”

There was a also a day when your board of directors was “in it for the long haul.” I can recall George Rathmann, the co-founder of Icos, describing this attribute to a reporter, stressing its importance and necessity for success. The board of directors in those days set the example of investing and growing their companies to profitability – a painful process that can take an average of 10 to 12 years. Upon founding Spaltudaq, this is what I expected because it was all that I knew. I was confused when someone early on in the days of Spaltudaq asked me, “What’s your exit strategy?” I thought it was a trick question. “I’m still working on my entrance,” I responded. My startup carrots were given in the form of milestone achievement. Like the founders of old, my intentions were to spend the time to expand and take advantage of a versatile technology designed to create endless opportunities for creating LONG term value.

But in this decade, the way companies are started is much different. Instead of building the next Amgen, Genentech, or any other company with a long-term minded board of directors, the investors of today want the exact opposite. They want in and out at clearly defined exit points—going public or getting bought out. This is understandable given the number of investors that got burned in the 10 to 12-year plans of the past where about 1 in 10 companies succeeded. But the reflexive overreaction to those days has created a system of growing companies that today is inversely related to the spirit of discovery that got our industry here in the first place. And as a result, this plan is diametrically opposed to the intentions of most scientific founders whose vision is vectorial – and not with an “exit” in mind.

How has this happened?

Just like systems biology, perturbations in the market give rise to new emerging properties and investors react. For the most part in this decade, it has become obvious that biotech companies will give the greatest return for their investors if the company is purchased rather than the prior exit point, “going public”. Antibody companies are a classic example as they have been rapidly taken out for an average price of $500 million, whereas going public would only bring about one-third of that value.

The war on discovery:

Why are companies rapidly getting bought out and how does this affect drug discovery and growth in our industry locally?

It’s the market. Because of diminishing capital for biotechs, the contraction of 2001 saw companies eliminating or dramatically cutting budgets for discovery. Moving forward what was already in the pipeline took top priority. Since this was apparently an industry-wide decision, very few new drugs or targets were being discovered. And thus today, the mantra of “buy drugs when we need them” has come back to haunt our industry because the new way of doing “discovery” is vastly more expensive than that of the past. It consists of big pharmas and large biotechs discovering what therapeutics exist in smaller biotech companies founded in the ’90s followed by purchasing the company for the product for about $500 million apiece. This form of contract discovery isn’t sustainable. There are only a handful of companies remaining that can fill the needs of this current pipeline drought. And the larger companies admit they are not capable of efficiently renewing the pipelines themselves. (That’s another Xconomy Forum piece).

Secondly, back to the “burned investors” of old. As the industry was contracting, new start-up seed-stage investments that often go to discovery-based companies came to a halt. Because of our horrid past, the impatient investors of today are playing it ultra-conservative. They are investing in late or later stage drugs (which only gives them about 3-5X on their return), they are investing in companies that already have a drug aimed at a known, market-validated biological target (i.e. another drug that hits the same target on cells as Genentech’s Rituxan, ImClone Systems’ Erbitux, or Amgen’s Enbrel), or they are investing in new technologies that ultimately are going to be used to target known, safe validated targets. My question was always “why do you want to invest in something that’s going to be 7th to market?”

So the unintended consequences of both of these forces have converged today to create a black hole of discovery and development for new and/or better therapeutics for multiple disease indications.

Unfortunately, this is also the formula for the demise of many other facets of our industry:
First, in the case of antibody companies – the buy-out sweepstakes means your board of directors grooms your company just for that. As a result, there is a rush to select your therapeutic candidates – today’s impatient investor demands these in the first 1.5 to 2 years of growth of the company (from the time you purchase your first piece of equipment). Because you’re being groomed as a buy out, you have to remain small and efficient. The bad part? Companies of this small size can only develop two, perhaps three, antibody therapeutics on their own; therefore, once you’ve selected your leads, all resources go to the development stage to rapidly attain the $500M price tag, and discovery becomes a thing of the past or is given a token amount of attention. The founders? They are typically not amused by the latter and are either removed or rendered insignificant, not necessarily in that order.

The effects:

This new model eats at the pioneering spirit of founders of any antibody-based company targeting cancer, infectious disease and autoimmunity. There are well over 400 scientifically validated targets for antibodies in human disease and countless others waiting to be discovered. And you, the founder, are supposed to be happy with just being able to knock off two or three of these targets and stopping…..even though you know you have a technology that is orders of magnitude better than the standard practice?

And what does this model do for Seattle’s supposed initiative to become a biotech hub like Boston, San Diego, and the San Francisco Bay Area? This approach is no way to create a biotech hub, it’s the exact recipe for how to destroy one. Even when our success stories were purchased (Immunex by Amgen, Icos by Eli Lilly) layoffs occurred. When our local companies get bought out, the jobs are either trimmed down or, most of the time, they are eliminated entirely, like with Corixa, Celltech. When layoffs occur via takeover or failure, there aren’t enough new companies around to absorb those jobs – so these people leave the market all together. And what is the fate of newly-formed Fate Therapeutics? Apparently, it lies in San Diego. Even when I was raising the Series B for Spaltudaq, potential investors suggested that we move our operations to the Bay Area to effectively support our business plan. If Seattle wants to be in the big leagues, it cannot sustain itself in that direction by being a farm team for the big leagues. We seem to have adopted the same business model of our local professional sports teams, acting like a farm team by developing talent and shipping it off to the highest bidder. It was great watching my favorite Mariners playing in the World Series…only they were wearing Red Sox jerseys among others (thanks Boston).

On the upside, Accelerator-formed companies are beginning to make a dent in the 500+ layoffs/job losses since 2002 as the first three graduates have almost created 100 jobs. But despite the copycats, there really is only ONE Accelerator. Carl Weissman has put together the best syndicate of investors for getting seed-stage ideas into the next stage of funding. This is an extremely heroic task given the risk-averse attitude investors of today. In order to achieve this feat, the selection process was stringent and the founders were not only on a shorter leash, but a shock collar was added (thanks to our predecessor companies of the ’80s and ’90s). And given the state of the market in the last five years—ie. virtually no funding for seed stage ideas nationally—the money was expensive and served as a sign that the days of old where the scientific founders controlled their destiny were long gone. Despite all of the pressures, Accelerator is a success. But given the rate of Accelerator investments in new companies, the market-induced limited bandwidth of these new companies once they graduate, and an enormous amount of clinical targets that people are pursuing with antiquated technology; it is obvious that we either need more Accelerators or we need another mechanism of de-risking seed stage ideas/clinical targets where they are fit for Accelerator or other investment models. If there is a real desire to make Seattle a biotech hub that sustains itself, perhaps there’s a way to create a model that patiently supports growth in jobs, de-risks ideas for the investors, and caters to the pioneering spirit of the scientific founders.

A solution: Change the model

Markets are fluid beasts and they change and even cycle, but currently the demand for new or better therapeutics remains high. Antibody companies continue to be purchased for their current lot of validated or potential therapeutics, and there continues to be an unfilled void in discovery and how we do it. With this in mind, waiting for a market-induced change is not the answer.

But what if there was a way that you could create or discover high-value, billion-dollar therapeutic antibodies without having to raise expensive venture capital to do this? This would give you immunity to the pitfalls of the current model discussed above and would also begin to create an environment where the passionate scientific founders, the true believers, can pursue their ideas to exhaust all of its applications for creating therapeutic value. Scientists aren’t always the greatest businessmen, but if you’ve been in this line of work over the last 15 years and you can read, you’d have to be brain dead to not know how to create value.

And what if you could develop a discovery approach that was so efficient, rapid and cheap to run that you could immediately generate revenue by meeting the demands of the day by big pharma and others – and at the same time create your own internal value? This would fill the void created by the forces discussed and would begin the creation of a “contract discovery” role for pharma that are currently purchasing whole companies just to obtain therapeutic leads. What if the antibody aimed at CCR4 that Amgen just purchased for $520M including milestones and royalties could be purchased for $10M with a ‘stone here and there and no royalties? This could never happen with today’s directors and management, but it can happen if you lower the cost and time to obtain such validated antibodies.

And what if your technology was capable of rapidly “de-risking” targets or therapeutics to the degree that they would either create Accelerator-funded companies or would create new spin-off opportunities where founders have the opportunity to raise venture capital with pre-clinical proof-of-concept data in hand? Depending on the level of proof of concept, the latter empowers the founder, because the intrinsic value is dramatically increased. Given the unlimited number of targets, several lead antibodies or suites of antibodies could be spun off to form multiple companies for founders who wish to develop these. This would create an enormous amount of jobs since these antibodies would fit within the comfort zone of the current conservative investment models by VC’s for product development.

And what if you had the means of turning back the clock to the days of 1976 where two guys in a leaky warehouse in South San Francisco had the courage to basically start the industry that most of us love so well? What if you didn’t need the brass fittings and marble counter tops and expensive art work to add to your burn rate? I love Alexandria lab spaces as much as anyone, but I’ll look to re-unite with my old landlords after I make my first $10M deal (after taxes). And what if you could get lab space and equipment at 1976 pricing using unconventional means such as Ebay and Craigslist?

What if all of the above “what-if’s” were possible? Then you would have a company like North Coast Biologics. Nothing fancy – just filling a need both financially and spiritually in such a way that everybody wins.

My goal is to start this paradigm shift that satisfies my need to discover, creates value for everyone involved, creates jobs for our lagging Seattle biotech hub, and brings back a little idealism that we had in the very beginning – from the guys in the leaky warehouse to the enthusiasm of George Rathmann, the Zen of former Icos scientist Patrick Gray, to the determination of Carl Weissman.

In an Xconomy Forum piece a responder quoted Robert Noyce, the founder of Intel, as saying “Look around who the heroes are. They aren’t lawyers, nor are they even so much the financiers. They’re the guys who start companies.” I believe this now because in the last few months, I’ve met many former founders in our biotech community and I’ve met others who can and want to be founders. And these people are heroes in my view. They are my heroes and I’m flattered and grateful to share the founder title with them. Because of our collective passion and willingness to take on new approaches to solving problems, I have a strong sense that tells me I won’t be alone in this new, unconventional approach.

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One response to “Discovery: The Soul of Biotech, the Place For True Believers, and a Retro Way to Bring it Back”

  1. It seems every biotech these days wants to be the next Immunex, Amgen, or Genentech, but they run from the very thought of following the same path as these successful enterprises! You are exactly right that the current model for big pharma and biotech is unsustainable, and that new solutions are needed. I’m always amazed when I meet someone at a new biotech company, ask them about their research program, and find out that they don’t have one! Instead, they have licensed some protein or target from a University and are moving into the clinic with only the foggiest understanding of the biology involved. Their mission: get clinical data ASAP. It’s no wonder that these companies are flaming out at such a rapid rate! The VC model at present seems to have been modeled at the casinos in Vegas. I consulted once for a biotech that was a one-trick pony. The whole company was riding on a single molecule, but the biological basis for the action of this molecule had been completely misinterpreted. When I pointed this out to them, they decided to move ahead anyway,since they had no substitute at hand and had been funded to put THAT molecule into the clinic. Their subsequent demise was completely predictable. While it would be nice if your technology is as cheap and powerful as you believe, not all biological problems can be solved with monoclonal antibodies, so additional paradigm shifters will be needed as well. Finally, I wish we had only lost 500 jobs in the local biotech arena since 2002. I’ve actually kept track of the numbers, and the real total is over 2200! That’s a lot of critical mass that has left town due to a lack of replacement jobs. We still have a long way to go to get ourselves back to where we were even six years ago.