Six Tips on How to Spot a Winning Biotech, From Dendreon Co-Founder Chris Henney

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company, according to Henney:

—Solid Patents. All good biotech companies must have terrific science, and they must have patents to protect it, Henney says. In the industry’s early days, there weren’t many patent attorneys that knew what they were doing, but now there are plenty, he says. An investor ought to ask “how does the science stack up” at a company versus its competitors.

—The science should be focused on an important disease, with potential for breakthroughs. Lots of scientists will argue about what’s important and what’s not, but what an investor needs to know is that a biotech company is at the front of the pack. Immunex focused on an important disease, rheumatoid arthritis, and clearly made a breakthough. “You don’t want to be in fourth or fifth place” with a new drug, he says.

—Great management. This is a must in all industries, but it can’t be overstated in biotech. Interestingly, Henney has noticed some unusual character traits about biotech managers that he says shouldn’t scare off investors. “Like you see in software, these are managers who don’t walk into a room and dominate it. They are often fairly nerdy. But we’re talking about people who are smart, efficient managers,” Henney said.

—Access to capital. A company has to be able to prove it can raise money. Again, and again, and again. “Not many biotech companies go out of business because they lack ideas,” Henney said.

—Luck. “You need it. I’m fortunate to say Lady Luck visited me on many occasions,” Henney said. (I’m not sure how investors are supposed to be able to gauge whether a company has luck on its side, though.)

—Flexible attitudes toward human resources. This might sound nutty to straight-laced business school types, but biotech companies need to give breathing room to some brilliant, creative people who aren’t closely directed by management, Henney said. This can work for a small percentage of the top performers, like some of the brightest people at the National Institutes of Health. The most famous case of this in biotech, which Henney didn’t mention, came from Genentech scientist Napoleone Ferrara, who made discoveries in 1989 on his undirected time that gave birth to the breakthrough cancer drug bevacizumab (Avastin).

“You’ve got to let people follow their curiosity,” Henney said. “For some in the business community, that might sound like a sketchy proposition, but you have to.”

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