(Illustration by Curtis Parker)
Fighting in the Face of Distress
Along the Mediterranean coast of France, people are concerned with more than films. Just 20 minutes to the north of Cannes lies Sophia Antipolis—a technology park with clients ranging from Agilent Technologies to W3C, the World Wide Web Consortium. This is also home to NicOx, a company focused on producing drugs from compounds that release the well-known signaling molecule nitric oxide. NicOx is alive today only because of its failures in the past.
In short, NicOx once focused on ideas more than products. “That was almost killing us,” says Michele Garufi, chairman and chief executive officer of NicOx. Like many small companies in biotech, NicOx once operated as if it existed in an academic environment rather than a commercial one. “In 2003, we said: ‘It’s time to be concrete, because we have no money, and we must invest every penny in a product that becomes a reality, rather than merely a hope.’” That transition turned NicOx toward pushing ahead naproxcinod, its anti-inflammatory compound under development for treating the signs and symptoms of osteoarthritis.
By concentrating on producing a product it took just five years for NicOx to get naproxcinod through Phase III trials, which showed that this drug is effective and safe. Consequently NicOx expects to file a new drug application in 2009. As Garufi points out: “It’s very important for a biotech company to get something on the market even if it is a niche indication in a small market.” If naproxcinod does get to market, though, it will be far beyond a niche. It will be gigantic. Garufi estimates the market as a “possible billion dollars a year in the U.S.”
So it is possible to face failure and then fight back toward success. While today’s economic environment makes many biotechnology companies around the world struggle, a range of experts envision success even during a down economy.
Assessing the Environment
"Our companies take 10 to 15 years to take a product from bench to bedside,” notes Alan Eisenberg, executive vice president for the Biotechnology Industry Organization’s emerging company section. “During that time there is preclinical testing and testing that goes on in humans—first for safety, then efficacy and finally larger-scale population testing. That length of time and complexity represents high levels of risk from a financial standpoint." That risk, though, is not entirely new. In fact, biotechnology in the United States started feeling the crunch in 2007. “We entered a credit crisis beginning in August 2007,” Eisenberg says, “and that became a capital crisis.” As a result, investors started looking for lower-risk opportunities in 2008. That creates problems for companies developing new therapeutics, a high-cost enterprise. As Eisenberg explains: “Projects get delayed, and some get shelved, because companies can’t raise capital.”
A similar divide exists in Europe. “Most companies in Europe with products on the market are selling medical products that are not immediately affected by the economic downturn,” says Willy De Greef, secretary general for EuropaBio, “but start-ups or companies working on their pipeline that don’t have a current cash flow are in for some very difficult times.” (See sidebar “Europe’s No Silicon Valley.”)
For a brand new start-up in Europe, De Greef declares, “I wouldn’t want to be the manager looking for money this year.” On the other hand, if a company finished a round of raising capital in 2008, De Greef thinks that it should survive, as long as the company has enough money for a couple of years. “CFOs who have turned down all of the unneccessaries and use their money sparingly will probably do okay-ish,” De Greef says.
Beyond the challenges faced by start-ups, some experts see today’s financial trouble crippling mid-stage companies. “A company that is just getting back Phase II data or starting a Phase III trial often need tens of millions of dollars,” according to Spencer Feldman, an attorney with Greenberg Traurig in New York city and an expert on providing counsel to emerging biotechnology companies. “That is difficult to get right now.” Feldman adds that large pharmaceutical companies often use this situation to their advantage. He continues: “These mid-size companies are left abandoned, giving big pharma the opportunity to come in and buy the valuable IP in bankruptcy or in a distressed selling situation.”
Financial issues also extend beyond the size or stage of a company. For instance, the health of biotechnology in one country often depends on the industry’s wellbeing in other countries. As an example, about 80 percent of Canadian biotechs are privately owned and always searching for investors, according to Peter Brenders, president and chief executive officer of BIOTECanada. “Since we have a small investor market,” Brenders explains, “our companies pursue multinational connections for licensing or cash or even co-investors.”
By "Silicon Valley" people do not always mean the home of chip makers south of San Francisco Bay. "The idea of 'Silicon Valley' has become a model," explains Steven Casper, associate professor and director of the Master of Bioscience program at the Keck Graduate Institute in Claremont, Calif. That model is: Start a company with venture capital in exchange for equity and then grow the company until it is ready to go public or be sold. But that's not how things usually go for European biotechs. "Financing in Germany, France and many other European countries is not geared toward VC," Casper says. "It's more credit based, depending on secure collateral, like land or a factory." Moreover European biotech companies are much less likely to aim at going public. Among all of the European countries, Casper says that the United Kingdom is the most like the United States in terms of its approach to creating and funding biotechs. If European countries want to emulate the U.S. model, Casper points out, "they have a lot of work to do."
In addition, many biotechnology companies across Europe depend on scientists for management. "Looking at senior management in German biotechs in 2003 to 2004, only 11 out of 300 had any industry experience," Casper says. "By comparison, 85 percent of senior managers in San Diego had a background in industry." He adds, "You need to match scientists with people who know what to do next." So success in biotechnology requires more than good science.
Brenders says the real investor crisis for Canadian companies came as a “massive meltdown late in 2008.” The last big deal that he saw was when Oncolytics Biotech in Calgary closed on a $4 million investment late in December 2008. In describing investments in the first quarter of 2009, Brenders merely says, “Very quiet.” Nonetheless, he adds that half of the Canadian biotech companies have enough money to get through 2009 and into 2010. That also means that half of them don’t, and the half that do have enough money for another dozen months must be worried about what they’ll do after burning that capital.
In fact, no one knows just how the current financial challenges will affect the future of biotechnology. (See sidebar “Uncertainty in India.”) As Eisenberg explains: “People that I’ve talked to say that they haven’t seen anything like this in the entire 30 years of the biotechnology industry.”
Reaching Out for Repairs
Money can push biotechnology back into a moving-ahead strategy. “We need policies that reignite a functioning capital market,” Eisenberg says.
In addition, Eisenberg points out that government policies in the United States could stimulate biotechnology. Nonetheless biotech companies might need a different sort of government assistance than is usually required for other industries to regain their footing. “Things that might help ordinary small businesses may not necessarily be helpful for us,” reveals Eisenberg. “BIO’s companies are in long-term research-and-development projects, and one of the key ways to help these companies is to monetize net operating losses that only become useful when cash flow is positive. For example, the government could accelerate the use of these deferred tax assets.”
There's a mixed opinion about how the Indian biotech industry will do ahead," says Viren Konde, biotechnology analyst, consultant and writer from Pune, India. "Some say biotech will grow despite the global meltdown, and some say it won't." The answer probably depends on the kind of company under consideration. For contract manufacturers in India, an economic turndown in other countries could enhance India's business. "Clinical research and manufacturing companies will find it easier to get funding, because of the low-cost ways in India," Konde says. Still if large pharmaceutical companies in other countries slow down their clinical trials, contract companies in India would slow down, too.
In Europe De Greef also sees a need for more money. As an example, he points to Europe’s less-developed venture-capital (VC) community—in comparison to VC in the United States—and he adds, “Therefore, support from governments is essential, but 90 percent of the money to continue to fund biotechnology innovation in the European Union must come from the member states, not from the European institutions.”
On the other hand De Greef thinks that some of the costs of biotechnology should be reduced. “Why is biotech innovation so expensive?” he asks. His answer: Regulatory costs. “At least half of the cost is regulatory, whether in medicines or genetically modified crops,” he says. “European regulatory systems are out of control.”
And it’s not that De Greef wants to bypass safety. In fact, he comes from the biosafety field. “In terms of regulating clinical trials,” he explains, “only a minority of the cost is really biosafety, the rest is procedural—paperwork.” De Greef thinks that the money that does not improve biosafety must somehow get funneled back into creating new life-saving drugs. He suggests that some of the regulatory rules should be tuned in case-by-case ways. For example an entirely new compound could be regulated more strictly at first and less so over time, if it is not causing any problems. He adds, “There’s nothing like a crisis to really shake the foundation of our beliefs.”
The Power of Products
If anyone knows the value of getting a product to market, it’s Stan Yakatan, chairman and chief executive officer at Katan Associates in Hermosa Beach, Calif. Yakatan played a founding or co-founding role in nine companies and was a top administrator in seven. From 2003 to 2005, for example, Yakatan was the chairman and chief executive officer at Grant Life Sciences, which focuses on diagnostic kits. To get ahead, Yakatan believes that companies must focus on products.
There are people who believed that the biotech business was driven by innovation,” Yakatan explains. “That meant that it consisted of people thinking all day and coming up with new ideas.” This current economy, though, leaves little room for innovation without results. “The business is now moving from innovation to commercialization,” Yakatan says. “We can’t afford geniuses thinking all day. We need people really developing products.”
As a result, the industry—biotech and pharma—has let go of some people, and more cuts could continue. Those cuts, though, could make companies stronger. “I would absolutely think that a decreased head count is not bad,” adds Yakatan.
Beyond cuts, where should biotech look for stability? Yakatan’s immediate answer: “Chronic disease.” As examples of success there, he points out Lipitor and Crestor—two lipid-lowering blockbusters. “If I’m developing something and I want to have long-term sustainability, chronic disease is where I’d go,” Yakatan says.
Experience Counts
Despite the troubles around the world, many experts see today as a good for biotech. “Now is a great time to start a biotech company that has an early stage product and is at least partly founder-financed,” according to Feldman. So if the founders can take on some of the financial risk, venture capital can be found.
Beyond the founders paying some of their own way, Feldman finds that it takes an experienced management team to get today’s VC dollars. “You need the science and technology,” Feldman says, “but venture capitalists are looking for management that understands business.” In fact, today’s economic hurdles could force everyone in biotech to get back to the basics of business. The results could improve the world’s biofuels, foods, pharmaceuticals and more.
