A Review of Cambridge Healthtech Institute’s Inaugural ‘Biotech Start-Up – Funding and Management A-Z’ Convention

Gwilym Williams, General Manager, BioResearch Ireland at University College Dublin, Belfield, Dublin 4, IRELAND.

Introduction

The EU has long been preoccupied with benchmarking its biotech performance against that of the US, with the number of new start-up companies representing a crucial metric (for example, see Anonymous, 2001). A perceived deficiency in this area has naturally led to a Europe-wide drive to identify new ways of encouraging start-up formation, with the availability of a plethora of biobusiness publications and Web resources (reviewed by Williams, 2000) increasingly being complemented by the staging of dedicated conferences and workshops (see Williams, 1999, 2001).  Networking events, at which expert speakers can share their experience and insights with emerging entrepreneurs, have become an invaluable part of the biotech landscape, acting as a platform for dialogue on such topics as technology valuation-transfer, venture financing and the protection of intellectual property. 

By logical extension, it is of interest to gain a comparative insight into the content and scope of equivalent networking events that are staged in the US.   For example, do US bioentrepreneurs in start-up mode perceive the same challenges as their European counterparts?  Are there issues being discussed in this more mature biotech economy that may be productively integrated into current European thinking? Is an emphasis on particular aspects of the US discussion reflective of specific weaknesses in this system?

To investigate some of these issues further, I took the opportunity late last year to attend a representative US event, entitled ‘Biotech Start-Up – Funding and Management A-Z’ (Tremont House Hotel, Boston, US, 29^th  - 30^th October 2001), organised by Cambridge Healthtech Institute (www.healthtech.com). This conference-workshop was attended by about 130 delegates drawn from the entire US, with actual/potential bioentrepreneurs joining a variety of personnel from the venture capital (VC), biotech, pharma and academic communities.

'Getting started' panel discussion - Ed Masciola, Dennis Schafer, Stanley Abramowitz, Judith Schneider

The Current Industry State-of-Play

Steven Burrill (Burrill & Company)

A timely 'state-of-the-union' address was delivered by Steven Burrill (Burrill & Company), who aimed to provide “a dose of reality of where this industry is today”.  His score sheet for the global biotech sector was impressive, highlighting more than 80 new marketing approvals for biotech drugs and vaccines within the last 5 years, and with a further 350 such products in late stage clinical development.  Indeed, having raised about US$40 billion in financing over the past 18 months, the bioindustry is undoubtedly at the strongest point of its brief 25 year history.

However, he cautioned that US industry optimism must now be tempered by the realities of the current economic downswing: biotech company valuations have recently decreased dramatically, with some public companies now having lower market capitalizations than private concerns. He cited existing regulatory hurdles as exacerbating this market volatility, opining that the FDA remains largely negative to biotech, and highlighting that there have been more product recalls than approvals in the US during 2001 (a trend which he felt could eventually “grind the industry to a halt").  Warming to this theme, Burrill outlined additional challenges to industry growth, chiefly in the form of unpredictable public attitudes to cloning, stem cell technology, gene therapy and genetically modified (GM) foods: "the public continues to be interested, uninformed, confused and volatile".

Indeed, Burrill expressed strong concern at the negative impact of the anti-GMO lobby, and felt that this was “an issue that could sink our ship”.  Elaborating on the situation for the agri-biotech sector, Burrill recounted that companies focused on plant biotechnology have spent over US$18 billion to date in mergers and acquisitions activity, in order to reposition themselves more favourably in the marketplace. His overall prediction was that the agri-biotech market will remain depressed for the foreseeable future, with continuing tough capital markets having a negative impact on growth.

Conversely, strong opportunities are still being afforded by so-called lifestyle medicines, nutraceuticals and cosmeceuticals, with examples spanning baldness remedies, cholesterol-reducing drugs, wrinkle-removing agents, and treatments for incontinence and male impotence. Meanwhile, there continues to be a significant promise associated with the aging population of the US and Europe, and additional opportunities are also springing forth from the current war on terrorism, with Burrill opining that increased defence spending would help the industry (“the war will be fought in labs").

Singling out some longer-term market trends, he reviewed opportunities arising from the ongoing managed care revolution in the US, where customers are continuing to consolidate.  A critical aspect of this is projected to be the emergence of personalized medicines (based on pharmacogenomics and information technology).  The involvement of computer companies, such as IBM, in life sciences will drive this change, heralding in effect the ‘digitization’ of biotech, and the full development of in silico biology.  Somewhat controversially, Burrill postulated that this phenomenon might eventually result in the diagnostic sector commanding more value than its traditionally higher value therapeutics counterpart.  

Burrill predicted that the productive integration of genomics and computing into healthcare will progress through several distinct phases, beginning with the identification of discrete molecular pathologies for major diseases over the next 5 years, and enabling the start of a “right disease, right prescription” approach to medicine. By the end of the decade, the identification of genetic markers to predict patient’ response to prescriptions is expected to become a reality, and this will be followed by the emergence of prophylactic treatments for disease predisposition and gene replacement therapy/therapeutic control of selective gene expression by 2020.  Consequently, for bioentrepreneurs, there will be a need to be aware of how their start-up model fits into the future market structure.    

Noubar Afeyan (NewcoGen Group)

Analyzing commercial opportunities specifically arising from applied genomics, Noubar Afeyan (NewcoGen Group) affirmed that the US biotech outlook is being negatively modulated by the global economic slow-down, but also pointed out that the ‘dot.com’ collapse has had an unforeseen beneficial effect in highlighting the relative strength of biotech stocks. Notwithstanding this, Afeyan downplayed the prevalent hype associated with the genomics industry, cautioning that the present stage of development represented merely an "age of enlightened serendipity” (with as yet only an elementary capability to tie genome structure to function and relevance). Lingering societal concerns about biotechnology, commoditization of the ‘tools business’ and an inability of some enterprises to clearly demonstrate a route to profitability, have all contributed to poor company valuations in many instances, while Wall Street continues to question the general validity of the genomics information business model.    

Identifying positive trends, Afeyan identified nanobiotechnology as an area for strong future growth, with applications spanning molecular manufacturing, sensing-scanning, materials, locomotion, navigation and information processing. 

Academia as a Start-Up Generator

Thomas Ittelson (Technology Licensing Officer, Massachusetts Institute of Technology)

One of the most vexing questions for European academic institutions is how best to capture maximum value from their technologies through encouraging biotech start-up company activities. Thomas Ittelson (Technology Licensing Officer, Massachusetts Institute of Technology) reviewed the MIT approach to this challenge, with a model that revolves around the early interaction with VC organisations. The metrics on MIT’s research commercialisation approach provide a good insight into the performance of a top tier US university, and are also illustrative of the sheer scale of investment in such activities.  For instance, MIT records an average of 1 start-up company being generated per $28 million of research funding (or per 357 researchers);  the annual research budget of the university is in the region of $850 million.  Additionally, about 1 out of every 5 patents is found to result in company start-up activities, and 30% of all the university’s technology licenses are now issued to these companies.  In turn, about 50% of MIT revenues come from start-ups, while technology licensing activities generate a royalty stream of US$20 million per annum.

Of undoubted dismay to many European technology transfer offices that are now waving the bioincubator banner, Ittelson remarked that he had never seen such incubators work properly, citing problems with mission and style differences between academia and industry. The major issues of contention revolve around deciding on which start-ups to include, while attracting expert staff to advise incubator start-ups is also difficult due to current  inadequate salary structures. Much of Ittelson’s talk revolved around the political constraints of operating at the industry – academic interface.  The relative lack of power of the industry liaison office versus a university-tenured professor was highlighted.  As a consequence of this, he amusingly pointed out the danger of filling the bioincubator with what he described as “the living dead” – low potential enterprises that gain incubator tenure on the basis of either good timing or political patronage.  Ittelson traced this dilemma back to the conflicting objectives that exist between academia and industry:   universities develop technology for the benefit of mankind, but start-ups have a fiduciary responsibility to maximise the return for shareholders.  

MIT has reconciled these aims by pursuing a ‘virtual incubator’ philosophy – using a biochemical analogy, Ittelson described it succinctly as “catalysis, but no energy is added”.  For example, MIT does not provide money, space, management, business plan preparation or formal guidance to its start-ups.  However, the university does provide the start-up technology (via patent filing and license), and also gives the time-input of its technology transfer staff, encouragement, informal advice, introductions and role models. The university will also facilitate entrepreneurial post doctoral researchers to transfer the technology, and permit a professor to sit on a Scientific Advisory Board of a start-up company.

The process is viewed very much as a partnership with VC organisations, with the best ideas being filtered-funded through this avenue. The university usually takes about a 5% equity stake in the company, which is partially in lieu of a less-than-market 3% license royalty also imposed on such deals. 

James Finkle (Long Island High Technology Incubator, Inc., Stony Brook State University)

Contrasting with this approach, James Finkle (Long Island High Technology Incubator, Inc., Stony Brook State University) recounted their success with the more conventional ‘bricks-and-mortar’ bioincubator concept. They currently house 45 companies in a bespoke facility, and in total have accommodated about 100 companies over their 10 year history. A strict 36-month tenure policy is implemented, with admission criteria requiring that the technology be proprietary, with less than 36 months to market, while the venture must also possess a “global outreach perspective”.

The incubator’s mission statement is dedicated to the creation of an environment where new and technologically innovative businesses can develop and grow through interaction with the Long Island research community, thereby fostering economic development and technology transfer, as well as enhancing the educational mission of the University at Stony Brook and other institutions of higher education and research.  In Finkle's words, they want to “grow companies that can generate wealth, create jobs, strengthen Long Island’s global reach and add value to university programmes ”.

In contrast to MIT, Stony Brook University invests about US$100 million per annum in start-up activities.  The university does not take an equity stake, as it is felt that the bioincubator manager might be tempted to work harder for companies in which the incubator had a greater share.  Their aim is to try to stabilize early stage, high risk, high technology companies by assisting them in a variety of areas, such as solidifying management teams, securing adequate financing, getting their products to market and protecting their IP.  Echoing Ittelson's fears, Finkle stressed that they do not want to be the repository of bad ideas emanating from the university, and this is overcome by sourcing only about 25% of their companies from this pool - others have come from such quarters as the defence industry and Cold Spring Harbour Laboratory.

Recounting the lessons learned from the technology incubator, Finkle emphasised that above all, the calibre of the CEO is key, while Non-Executive Board members are useful for making introductions, and the university affiliation adds value.  Of relevance to the overall academic rationale in generating such ventures, Finkle offered a word of caution, saying that while the university likes to think of the incubator as a place where graduates can obtain a job, they have not found this to be the case (it mainly benefits post-doctorate researchers). 

Alternative Start-Up Avenues

Dennis Schafer (Somatocor Pharmaceuticals)

Outside the academic realm, a number of alternative biobusiness models and growth strategies were also debated.  Dennis Schafer (Somatocor Pharmaceuticals) reviewed the in-licensing model for venture-backed start-ups, with the acquisition of products already in development permitting shorter timelines to validation milestones. Such companies tend to concentrate on in-house clinical development skills, or may have a specific product development focus.  The rationale for this strategy was projected very much in terms of recent pharma consolidation trends. Based on an analysis of 22 industry mergers, Schafer presented compelling evidence for the inevitable project rationalisation that follows such deals.  However, a product that does not seem cost-effective for Big Pharma (often defined as one which does not cross the US$500 million per annum sales threshold), may be viable for a VC-backed company. Schafer opined that preferred acquisition candidates are those in Phase II (PII) clinical trial development, making it possible thereby to avoid technical risk, but with clinical development hurdles remaining a factor. Typical figures for acquiring such a drug candidate were cited as an upfront payment of about US$20 million, with accompanying sales royalties in excess of 10%.

Ed Masciola (MPM Group)

Ed Masciola (MPM Group) provided the perspective of a VC organization concerned with spin-outs that emanate from established pharma companies. Factors such as earnings growth pressure, mergers and a desire to focus on core competencies have made pharma spin-outs more common in recent times. In some cases, the drug markets have forced a change in strategic direction, while he echoed Schafer’s comments on inadequate revenue projections continuing to be an important metric. The attraction to investors of this type of vehicle is also useful to review from the perspective of the emerging bioentrepreneur: an experienced management and development team can rapidly put together a well-developed portfolio of products/technology, and cab often avail of parent company support - all of which (in theory) reduces risk and leads to a shorter time to an Initial Public Offering (IPO) and VC exit route.  On the negative side, Masciola highlighted that such companies tend to adopt an instant Big Pharma cash burn rate, and are subject to a complex deal structure, while the required culture change for personnel now operating in a much smaller company can also be difficult to attain.

Basic Business Planning Challenges

Judith Schneider (BPI Group Ltd.)

In any workshop dealing with biotech start-ups, a discussion of the business plan is traditionally to the fore.  In the words of Judith Schneider (BPI Group Ltd.) in reviewing the business planning process, “if you have to do the missionary work and create a market, you probably won’t succeed”.  The message from this presentation was clear:  be evolutionary rather than revolutionary. She warned against ignoring the competition ("if there's no competition maybe there's no market") or mistaking an exciting technology/concept for a business. Schneider also indicated that the biggest weakness currently present in US bioentrepreneurs is an inability to predict resource requirements - manpower, facilities, equipment, technology. 

Jeffrey Kiplinger (Research Operations Group)

In discussing the “nuts and bolts” of biotech start-ups, Jeffrey Kiplinger (Research Operations Group) covered such issues as acquiring facilities and choosing corporate headquarters. While it is dangerous to infer too much significance from the pronouncements of the small sample of experts that were on show at this event, certain recommendations on the importance of business location went against some of the ‘orthodoxy’ currently prevailing in the EU.  For example, the majority of session speakers felt that it was not necessary to be based in a so-called biovalley in order to build a successful company, but all acknowledged a need to be close to their technological roots.  Citing an A.T. Kearney survey, Kiplinger recounted that the top locations for a technology related start-up in the US are San Jose (for talent pool and specialized support services), Boston (for universities), Austin (for local government support) and New York (for access to capital) - a broad range of important issues that very few locations can fulfil on all counts. Echoing the experience of many in Europe, Kiplinger indicated that "everyone will say that they can lease you office space, but biotechnology has certain criteria". 

Start-Up Funding Routes

David Stone (AGTC Funds)

David Stone (AGTC Funds) provided a comprehensive overview of start-up finance mechanisms open to US bioentrepreneurs. While funds from individual investors (family, friends and business angels: www.angelinvestoronline.com) were acknowledged as being essential and very beneficial, Stone felt that this was often offset by the usually limited amounts of funding available (US$50,000 - $250,000), and also the complex capital structure of the business that can result (which can subsequently complicate obtaining institutional money).

A variety of US government agencies also provide start-up support, with Stone specifically outlining the variety of programmes available from the National Institutes of Health (grants.nih.gov), and particular attention being given to the ‘SBIR’ scheme (‘Small Business Innovation Research’ programme).  Larger amounts of funding are available from other federal agencies, such as the Defence Advanced Research Projects Agency (DARPA) and the National Aeronautics and Space Administration agency (NASA).

Providing advice on how best to make an approach to a VC organization, Stone indicated that one of the most critical aspects was to understand the "personality" of the fund before contact is made (www.avca.com and www.vfinance.com). Prior research will reveal the specific focus of the VC house, which can range from seed-stage finance, specific business sectors, or early/late stage-focused funds, to those with a particular platform or product bias; he cautioned against “hawking around” the business plan in an indiscriminate manner.  Substantial amounts of funding are possible,  generally in the region of US$1 - 20 million at a time in the US. Stone felt that VC organizations can also provide good advice about technical development, strategies and networking, but admitted that genomics and bioinformatics are still regarded as highly technical and difficult to grasp.  Indeed, the latter opinion was echoed by Kenneth King (IBM Life Science Solutions) in a separate presentation,

On the topic of corporate deal structures, Stone advocated pursuing joint venture strategies in preference to licensing or collaborative R&D, opining that it was possible to retain a significant stake in the course of drug development using this mechanism.  The latter would also be likely to impact positively on the company’s valuation, while added benefits were cited, in the form of in-house support from the pharma major, and the technology validation factor that comes from working with such an organization.  Stone specifically cautioned against doing "cheap deals" with Big Pharma, as he felt that developing such an industry reputation may preclude the achievement of higher values in subsequent negotiations. Typical royalty rates from licensing were outlined as 1 - 3%, considered by Stone to be of “symbolic” value only, while he expressed that the upfront cash support from deals were of better value to a start-up. 

Stanley Abramowitz (Advanced Technology Group)

Expanding the discussion on US government support for start-ups, Stanley Abramowitz (Advanced Technology Group, and formerly Head of Advanced Technology programme, US National Institute of Standards and Technology) reviewed the tenets of the federal ATP programme, which is aimed at accelerating the development of innovative technology for broad national benefit, achieved through partnerships with the private sector.  The programme has 2 major criteria for funding: scientific and technical merit (50%), and also the delivery of broad economic benefits.  ATP support is on the basis that many of the current technologies are generally too risky for VC support, and/or the pay-off would be too far into the future for such organizations.

Over the past decade, in the region of 522 project grants have been awarded to 1,162 participants and an equal number of subcontractors. In total, about $3.3 billion of high risk research has been funded, with the ATP share ($1,640 billion) effectively being matched by industry ($1,629 billion).  An important factor in the success of the scheme is the assignment of all resulting IP to the partnering company;  additionally, ATP funding is viewed as an accreditation by many in the VC market.

Richard Oedel (Brookwood Partners)

Venture capitalist Richard Oedel (Brookwood Partners) emphasised the importance of the people behind a venture - "VCs don't fund businesses, they fund people who have good ideas". Therefore, in his view, a seasoned management team was the most important element of success.  Relating typical statistics for the US, he indicated that only about 30% - 40% of all start-ups will survive past 5 years, but increased planning before launch can positively influence such statistics:  on average, there is found to be an 80% five-year failure rate if the business planning process was less than 6 months long, but this changes to a 70%-plus five-year survival rate if the planning process was in excess of this.

For those contemplating forwarding a business plan to a VC company, the statistics related by Oedel were both instructive and dismaying.  In what he referred to as the "business plan funnel", Brookwood Partners typically receive about 600 plans per annum.  About 120 of these will go as far as the company presentation stage, but only 40 organizations will subsequently be visited.  In the final analysis, due diligence/negotiation will be conducted with 20 companies, and only 4 will actually receive investment.

Intellectual Property Issues

John Chory (Hale and Dorr LLP)

John Chory (Hale and Dorr LLP) provided a comprehensive review of IP matters, spanning the idea inception stage to down-stream development.  He highlighted that brainstorming sessions typical of universities and hospitals can have serious implications for idea ownership, with subsequent disputes often arising (for example, between a professor and PhD student). Chory advocated placing an all-encompassing Non-Disclosure Agreement at the heart of the ideas protection strategy, highlighting that the position of Company consultants is sometimes inadvertently overlooked in this regard.  On the topic of employee contracts, the importance of including non-competition and non-solicitation clauses was also stressed.    

Steven Meltzer (Shaw Pittman LLP)

In a talk entitled 'survival of the fittest: entrepreneur odyssey', Steven Meltzer and Michelle Marks (Shaw Pittman LLP) emphasised the importance of a building a far-sighted and defensible IP position, expressing the preference for a technology platform over single product approaches.  This theme was continued by Bruce Rubinger and Gerald Sewack (Global Prior Art, Inc.), who reviewed strategies for creating a strong proprietary 

Michelle Marks (Shaw Pittman LLP)

IP position in a crowded, rapidly changing arena.  Pointing out that not every patent is valuable, they advocated a more discriminatory and market intelligence-driven approach to developing an IP portfolio. In their past experience, many companies have a tendency to “go in blind” when it comes to patents;  indeed, Rubinger postulated that R&D is so inefficient because of a failure to adequately research what has already been accomplished, especially in foreign language countries (such as Japan, China and Russia). A consequence of this is that experienced companies recognise that the vast majority of filed patents have the potential to be invalidated, either on grounds of pre-existing world-wide prior art, or on a technicality basis.

Donald Mc Farlin (Williams, Mullen, Clark & Dobbins)

Donald McFarlin (Williams, Mullen, Clark & Dobbins) highlighted a key dilemma for start-ups, who must try to develop a strong IP position at an early stage when they have only limited funds.  His proffered solution was to plan for a detailed IP budget in the business plan, also indicating that many costs can be either deferred or minimized. For example, the options of providing equity in lieu of payment of patent attorney fees, and/or strategies based on deferral of fees, may all be pursued.  Regarding the choice of patent agent, he cautioned the need to ensure that the firm has sufficient relevant experience ("your business is a bad place for somebody to learn the ropes"), and to recognise that small firms may not have a great breadth of experience.  Additionally, McFarlin advocated spreading the work around several companies to gain a comparative insight into performance and value.

Conclusions

Unsurprisingly, as one might expect from the universality of the challenges involved in starting a new business, the major themes explored at this workshop appeared to closely reflect the European experience.  Indeed, the 'basic' flavour of the session dealing with writing the business plan, and the nature of the questions that issued from the audience, implied that such tasks are approached with equal trepidation by entrepreneurs on both sides of the Atlantic!  Additional commonalities were also evident in the extensive treatments of fiscal and IP fundamentals, and also the key issue of the best biobusiness model to pursue in order to secure maximum growth and value creation. 

It is generally accepted that start-up company formation in the US is conducted against the background of a business-friendly socioeconomic climate, with accompanying ease-of-access to major finance, and a less encumbered regulatory system compared to the EU.  The much greater level of funding of basic research was also apparent from this conference, while the higher numbers of seed stage 'angel' investors in the US is a further key differentiating factor.

Killu Tougu Sanborn (Inglewood Ventures)

Notwithstanding this, the US debate regarding major socio-scientific issues, such as GM foods, stem cell technology and cloning, is beginning to reflect the dialogue that has been conducted in Europe over the past few years. Contrary to popular European perceptions, the US bioindustry appears to be acutely aware of the potential for negative fall-out from these issues, and of course business proposals based on such technologies are at a much more advanced stage in the US. For example, venture capitalist Killu Tougu Sanborn (Inglewood Ventures) indicated that her company has reviewed (but thus far not yet funded) business plans targeted at such areas as stem cell technologies, human reproductive cloning and the sex selection of human offspring.  While some US commentators, such as Steve Burrill, were significantly worried about this, others such as David Stone thought that technologies like GM foods were "too well entrenched in the US to go backwards".  Therefore, the US public attitude appears to be an ongoing concern, but remains secondary to more mainstream market factors.  Clearly, this situation does not pertain currently within the EU.

Finally, while there was a distinct consensus among the session speakers on most topics, disagreement was also apparent on a small number of important issues.  The influence of the economic downswing on biotech financing was a good example of this. Michael Perisho (Merrill Lynch PCG) predicted that IPOs would get smaller (with a disappearance of the “get rich quick overnight syndrome”), but David Stone felt that with a recovery of the market they would actually become bigger.  Differences of opinion were also apparent on the question of the best company model to pursue.  Steven Meltzer (Shaw Pittman LLP) opined that the outsourcing of company functions would continue to become an increasing component of the pharma landscape, and therefore there was no need for young companies to try to replicate the fully vertically integrated model.  However, Steve Burrill maintained that the latter strategy remained the desired biotech business model for maximum value creation. 

Fiscal Fundamentals Panel Session

References

• Anonymous (2001).  European biotechnology in the year 2000:  The Ernst & Young report. Biotech International 13(3), pp. 10 – 11. 

• Williams, G.A (2001).  Biotech formula explored.  Helix 3(2), p. 5.

• Williams, G.A. (2000). A bioentrepreneur's guide to navigating the biotechnology information maze. The Biochemist 22(1), pp. 27 - 31 (Web: http://www.portlandpress.com/biochemist/022/bio0220027adm.htm)

• Williams, G.A. (1999).  Oiling the wheels of biocommerce: the role of biotechnology business conferences in bridging the university – industry divide.  The Biochemist 21(2), pp. 19 – 21.