BioProcess International

by Ronald Peterson

The decline in venture capital available to the biotechnology industry gives little heart to anyone thinking about forming a new biotech company, but being scared off by horror stories is a major mistake. Venture capital was behind early biotech successes such as Genentech, Amgen, and Biogen, but many more biotech companies have prospered with no venture money at all. Only a small proportion of new companies ever receive venture funding.

MAKING THEIR OWN WAY

Gene-Prot, a Swiss proteomics firm spun out from the University of Geneva, deliberately bypassed the venture capital community and went directly to institutions for the $100 million it needed. CellGate Inc., in Sunnyvale, California, received $5 million in early-stage funding from an angel group headed by a cardiac surgeon who had started a company and then sold it for several billion dollars. Many angels are motivated as much by a desire to see promising technologies successfully introduced to enhance public health as by the chance to make money.

GeneDx was started in late 1999 by two researchers from the US National Institutes of Health (NIH): Sherri Gale with 16 years of experience and John Compton with 10. Neither partner had any business experience, and they were both happy with their work in seeking genetic markers for orphan diseases (diseases that affect fewer than 200,000 patients). They wanted their program to grow, so they approached the NIH about expansion. The answer was “no.” They next thought about setting up a nonprofit to do the same thing on the side, but the NIH said they would have to forfeit their jobs. They decided to quit and start their own company.

They each put up $14,000 from savings and never looked back. Revenues come from individual tests and research contracts, which started with $512 in sales on the first day. They found space in a Maryland incubator and nine months later received a $141,000 award from MD BioTech, a public entity that receives royalties from the company. Gale and Compton felt they won the award because they were showing revenues. They paid themselves no effective salaries at the outset, gradually changing that as they grew. Nine months after the MD BioTech award, Sequoia Bank extended them a $100,000 line of credit they have never used. In its second full year of operations GeneDx revenues are close to $1.2 million, with margins of about 35%. They receive calls from venture capitalists all the time asking whether they want any money, and the answer is “no, our revenues are all that we need for our growth.” As of early 2003 they employ nine people, can barely handle the business coming in, and need to hire more. Sherri Gale suggests that the incubator (which she first thought was some kind of babysitting space) has been a godsend. An incubator gave them affordable space, certain types of help right down the hall, a succession of classes on business topics, and incalculable emotional and technical support.

The modern pharmaceutical industry is dominated by companies that started 100 years ago or more, often with little more than a pharmacist preparing something for a ready market. Although modern drugs bear little resemblance to the elixirs of the past, it is still true that growing a company does not necessarily mean funding a long lead time with large amounts of patient venture capital money. (How long will venture capital be patient, anyway?) The key is to avoid long lead times with highly uncertain pay-offs and concentrate instead on producing something that can be sold today. An adage popular in business notes that most miners in California’s gold rush went broke, but the people who sold wheelbarrows and denims profited. It’s fine to think of finding a world-class drug, but the long lead time suggests that it may be best to leave that pursuit to others or at least wait until your company has a solid revenue base from other products or services.

LOOK AROUND FOR MONEY

Many universities, states, and local organizations sponsor or work with funding groups to help biotech start-ups. Below are just a few examples of places to look for start-up funds.

University Sources: The University of Rochester in New York and Trillium Group jointly operate an $8 million University Technology Seed Fund to Commercialize Technologies. Rochester targets funding between $100,000 and $250,000, but when the research has already been conducted and products are close to market, the need for huge investments rapidly dwindles. Harvard Medical School created a Medical Science Partners fund, and ARCH is a combination funding approach of Argonne National Laboratory and the University of Chicago. Babson College in Boston and Duke University’s Fuqua School in North Carolina are actively seeking to spin-off companies based on the research being done at their schools. A new dean at the Johns Hopkins Medical School pleaded with industry to help commercialize the wonderful technology that spills out from that university’s laboratories. Venture Economics reported that more than 100 schools in the United States had or were creating similar funds, usually in association with their technology transfer offices. The Wall Street Journal noted that more than two-thirds of American universities hold stock in startup companies that were begun within their walls.

Varied Approaches: Most companies use a mix of financing as a function of their progress, what they learn, and the opportunities that open for them. Collateral Therapeutics, Inc., a San Diego based cardiac gene therapy company, was formed by a scientist/investor, Fred Reich, in concert with a research scientist, Rich Hammond. Hammond developed a potential alternative treatment for cardiac problems while working at the University of California (UCSD) and a Veteran’s Administration hospital. Reich persuaded the big German pharmaceutical company Schering AG to lend the new company $500,000 for startup costs and agree to millions of dollars in investments, milestone payments, royalties, and other resources over a five-year term, depending upon progress. The young company later raised an additional $3 million from the Wellcome Trust in the United Kingdom, garnered over $25 million in an IPO led by Bear, Sterns & Co., Inc., and raised another $10 million in a private placement. It was eventually bought out by Schering for over $100 million. Working with Schering provided much more than capital. The larger company was a partner in research and stood ready to provide help in regulatory matters, manufacturing, and distribution and sales for any products that came out of the work. Collateral Therapeutics itself greatly expanded its research capabilities by licensing technologies at universities and other organizations and paying for research to be conducted in related cardiac gene therapy fields.

CREATIVE THINKING AND PLANNING

The principal problems in funding technology are the long lead-times, uncertainties, and size of the expense associated with bringing a product to market. In the biotechnology industry, the decade-long lead-time and many hundreds of millions of dollars involved in drug development prove daunting. The job of the entrepreneur is to alter these dimensions by creative thinking and planning. The first task is to segment the development chain and delegate major hurdles to other organizations — perhaps government, university, and corporate labs that are able to finance the work. Another is to segment the chain further by specializing in a sector such as project management, consulting, manufacturing, or marketing. Arranging partnerships and creating true virtual organizations are also ways to reduce the overall effort to more manageable tasks.

“Whereas in the 1970s and 1980s, 80–90% of all healthcare-relevant discoveries were made in pharmaceutical companies, in the 1990s and after the year 2000, 75% of all relevant scientific discoveries in health care would be made in academic institutions, government institutions, and private or biotechnology companies,” said Wallace Steinberg, founder of HealthCare Investment Corp in a GenomeWeb news article.

Consequently, in biotechnology, commercial success depends on an intimate and continuing relationship between company-based researchers and academic scientists. Biotechnology’s close link with the pharmaceutical industry provides a setting for growth and profitability that isn’t wasted on far-sighted entrepreneurs. Big pharma is a natural customer, a partner for the outputs of biotech companies, and an investor.

In a 17 October 2002 GenomeWeb news article, Gunnar Weikert of the Swiss-based life sciences venture capital fund Inventages suggested that public institutions should perform basic technology development and that investors should come into the act only when the business model is ready for commercialization. He thinks that genomic companies should play an intermediate role in drug development by providing model compounds to large pharmaceutical companies instead of becoming integrated drug companies. Under his scenario, biotechnology groups would become more akin to parts manufacturers for automobiles — part of the supply chain.

Most American entrepreneurs are familiar with the US federal government’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Several venture capitalists have suggested that start-ups should begin with that type of funding. The credibility and vetting involved with obtaining those funds and the very real possibility that the company will have a first customer in the government itself make for a potent beginning.

ECONOMIC DEVELOPMENT INITIATIVES

New biotech companies are still looked at as the most desirable form of economic development for communities both in the United States and elsewhere. If you can convince local and regional business development agencies that you could become a decent-sized high-tech employer, they are going to do everything in their power to find you money, space, personnel, markets, and the like. Below is just a small sampling of the resources available.

Colorado: The Colorado Biotechnology Association accesses resources nationwide to help new companies in that state at its website, www.cobioscience.com/

Florida: The University of South Florida is at the heart of Tampa’s efforts to incubate companies through its Center for Entrepreneurship, and it can draw upon its acclaimed Center for Ocean Technology in Saint Petersburg as a biotech base. That center is joined by the Moffitt Cancer & Research Center, which is actively seeking joint ventures and partnerships with all forms of pharmaceutical businesses in the Tampa Bay area. Moffitt runs 50 labs that need biotech start-ups to convert their anticancer research into viable drugs. Biotechs in the area have also joined together to support each other and raise their profile. A biotech coalition called the Gulf Coast Life Sciences Initiative has many service providers, such as accountants and lawyers, available to help entrepreneurs, and to look for money for them.

Georgia: The Georgia BioBusiness Center develops biotech companies in defined niches. They know they aren’t going to be the next Silicon Valley, but by combining their assets — a half-dozen research universities, the headquarters of the US federal Centers for Disease Control and Prevention (CDC), and lots of bioscience companies — they have a cluster that attracts new companies, investment, and workers. The Georgia Research Alliance has invested $350 million of state funds to develop the biotech industry — including the recruitment of top scientists into endowed positions — and has helped spin off 75 companies from research done at its cluster of universities and laboratories. Animal and plant genomics have been a top priority in Georgia (www.ads.uga.edu), but the possibility of bioterrorism and the proximity of the CDC have opened a niche there as well. The state is also putting $400 million from the tobacco settlement into oncology research and establishing a state clinical trials network.

Indiana: A life-sciences incubator in Indianapolis will be run by Indiana University to turn promising research projects developed at area institutions into businesses. The incubator draws upon the Indiana Genomics Initiative, Indiana University Medical School, Indiana Proteomics Consortium (including Lilly and Purdue), the Regenstrief Institute, and the School of Informatics.

Maryland: The University of Maryland runs a well-developed biotech incubator, draws upon life-sciences professionals at NIH, operates a new $20 million pot of money, and works with state agencies that will bend over backwards to help a new biotech.

Michigan: The University of Michigan teamed with Michigan State University and Wayne State University to support emerging biotech businesses in a new life-sciences corridor in the Upper Midwest.

Minnesota: Medical Alley aids emerging medical device companies by offering clinical, technical, and management expertise. The organization complements other investment groups, including the Alley Institute, a unit designed to obtain grants for large projects. Medical Alley has been spurred on by a realization expressed by venture capital principal Carol Winslow at Channel Medical Partners: “Big companies don’t want R&D; they want a product.”

Missouri: The State of Missouri promotes itself as the “BioBelt” and has been building biotech clusters around the genomics work of Washington University. A new$60 million life-science research center is being constructed at the University of Missouri, and the state has an initiative to raise $800 million in cigarette taxes for life-sciences support.

New York: The New York City Partnership and Chamber of Commerce hope to form a major biomedical center around city resources including New York University (NYU) and Memorial Sloan-Kettering Cancer Center. Columbia University in New York City is one of the three largest recipients of technical transfer licensing fees, and terrific management and financial help pervades the whole New York area. Columbia’s Audubon Biomedical Science and Technology Park is a form of incubator that has been packed with companies ever since it opened in 1993. NYU, the State University of New York’s Downstate Medical Center, and Memorial Sloan-Kettering are all planning separate forms of life-science incubators.

North Carolina is already home to a well-established biotech cluster able to draw on both extensive university connections and several large pharmaceutical companies in the state.

Ohio: The services available in Cincinnati are listed at www.biostart.org and include laboratory facilities, incubation, and economic development.

Pennsylvania started a $20 million life-sciences fund for new biotechs in the southern part of the state with up to $500,000 in preseed or seed capital financing. Pittsburgh has a life sciences greenhouse (www.pittsburghlifesciences.com) to provide financing for area companies through a University Development Fund to commercialize technologies; a PreSeed/Seed Fund for promising startups; an Industry/University Research Partnership Fund; and SBIR assistance. LaunchCyte in Pittsburgh makes seed money investments from private/public sources and helps investigators begin start-up life-sciences companies in the state. The Limbach Entrepreneurial Center was organized in 2000 to commercialize research from the University of Pittsburgh Cancer Institute.

Tennessee: Biomed Venture Partners in Memphis helped turn out nearly 50 institutional investors who were in the crowd of 300 at a recent Tennessee Venture Forum. Genome Explorations in Memphis is spinning out new biotech companies to focus on specific diseases.

Texas: Dallas is establishing a biotechnology incubator at the University of Texas Southwestern Medical Center under the Biotechnology Dallas Coalition.

Virginia: The Virginia Biosciences Development Center delivers support to seed and preseed startups in the Virginia Biotech Park’s biomedical incubator in Richmond (www.vabiotech.com). A coalition of Carilion Health System, the University of Virginia, and Virginia Tech pairs technology and products with a $20 million commitment as a business catalyst in Roanoke.

Regional Initiatives: The International Northeast Biotechnology Corridor (INBC) is a consortium of more than 750 companies from Connecticut to Quebec that supports biotechs in the region. Operating out of Fairfield, Maine, the INBC hopes to emulate Silicon Valley and put capital together with the outpourings of area research laboratories and entrepreneurs.

Some other communities for biotech include Bio NC, BioCapital, BioCorridor, Biotech Bay, Biotech Beach, Genetown, Pharm Country, BioCanada, BioForest, BioMidwest, BioTechxus, and BioUK. You can find links to these organizations and a glossary on biotech and a good deal more at www.biospace.com. The Biotechnology Industry Organization (BIO) organizes investor and partnering meetings with biotech companies all over the world. An e-network for bio-investing that provides access to various forms of business intelligence can be found at www.biopartnering.com.

A description of 30 state initiatives in biotechnology can be downloaded from BIO at www.bio.org/govt/survey.html. A consortium of eight Midwestern states formed Bio Mid-America to help fund startup biotechs, http://bio.org/midamerica. The Washington Biotechnology & Biomedical Association promotes companies at www.mightydreams.com. A set of funding sources is at British Columbia-based BC Biotech, www.biotech.bc.ca. And www. canbiotech.com has an excellent search for funding.

The list of potential help and investment grows much longer when you look in other countries and find governments there just as eager to begin new companies as the states and provinces are in the United States and Canada. (See “Economic Development Initiatives in Australia and New Zealand” box.)

I’m not suggesting that finding money is easy, and competition is intense for the extensive resources that do exist. But many forms of help and strategies for funding exist besides venture capital for an entrepreneur who thinks imaginatively.

ACKNOWLEDGMENT

This article was abstracted from Peterson, R. When Venture Capitalists Say “No”— Creative Financing Strategies & Resources ; Comanche Press: Bethesda MD, 2003; www.threearrowscapital.com

Ronald Peterson is president of Three Arrows Capital Corp., a US investment banking firm that has helped fund hundreds of emerging high-growth companies. He has over 30 years of experience on Wall Street as either a vice-president or registered representative with companies such as Merrill Lynch and Paine Webber. He can be reached at Three Arrows Capital, 7517 Westfield Drive, Suite A, Bethesda, MD 20817; 301-229-6240; fax 301- 229-5462; tarrows@comcast.net.

ECONOMIC DEVELOPMENT INITIATIVES IN AUSTRALIA AND NEW ZEALAND

Australia’s biotechnology industry continues to grow rapidly as it gains support from state governments such as Victoria and South Australia. Here’s what’s going on in the lands down under. Victoria supports the development and commercialization of biotechnology research as part of its drive to establish itself as one of the leaders in the new global knowledge economy. In May 1999, the government announced a five-year, Aus$310 million commitment to science, technology, and innovation aimed at renewing and extending technology skills and infrastructure. Over the five years to 2004–2005, the government has committed more than Aus$320 million to biotechnology to underpin this important sector. The South Australian government is also dedicated to developing a strong biotechnology industry. BioInnovation SA, incorporated by the South Australian government in June 2001, is a dedicated public corporation driving the growth of South Australia’s bioscience industry. It aims to enable the creation of 50 new bioscience companies in the state by 2010. The Institute for Molecular Bioscience (IMB) is committed to contributing to world knowledge in the fields of human and animal biology and health and medicine through basic research, research applications, and graduate education. IMB was established in 2000 and incorporates the Centre for Molecular and Cellular Biology, Centre for Drug Design and Development, ARC Special Research Centre for Functional and Applied Genomics, the headquarters and Brisbane division of the Australian Genome Research Facility, components of the Centre for Microscopy and Microanalysis, and the Advanced Computational Modeling Centre. As an innovative joint research and development initiative of the University of Queensland, the Queensland and Commonwealth governments, IMB integrates the full spectrum of molecular bioscience research from gene discovery to molecular applications.

IMB also links leading-edge genomic discovery and bioinformatic facilities with state-of-the-art research in genomics and bioinformatics, cellular and developmental biology, structural biology and chemistry, public policy, and ethics to better understand human and animal biology and to develop new pharmaceuticals, diagnostics, nanotechnologies, and disease therapies. New Zealand’s Biotechnology Taskforce released a “blueprint” in early May outlining a 28-point action plan for the commercialization of biotechnology within the country and the development of “critical mass” for the sector, hoping to create a $10 billion industry within 10 years. The Taskforce, headed by Chairman Bill Falconer, believes that New Zealand, with its excellent history in biological science, is well placed to participate in the biotechnology revolution. The Taskforce’s report, Growing the Biotechnology Sector in New Zealand, includes four set targets for the next decade: increasing the number employed in the sector from 3,900 to 18,000, boosting the number of biotech companies from 40 to 200, lifting its export earnings from $250 million to $1 billion a year, and tripling the number of biotech organizations to more than 1,000. Recommendations to achieve these targets include developing a program to annually recruit and repatriate key scientists and entrepreneurs with the skills and experience to establish new and innovative research labs; establishing a US$200 million horizontal biotechnology investment fund to support the commercialization of biotechnology through the long lead times between proof of concept and the generation of revenues; implementing an infrastructure to consolidate industry networks into one body that will facilitate the development of biotechnology clusters in the major research centers; ensuring that New Zealand’s regulatory environment is efficiently administered and internationally competitive; and developing a dedicated program to establish international biotechnology partnerships. — Molly A. Pumper

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