With a PhD in chemistry and "a general passion" for the work, J. David Rozzell started making enzymes for drug companies seven years ago with a handful of employees in his Pasadena lab. Today, he is president and CEO of BioCatalytics, a private company that has 25 employees and generates enough cash to pay for itself. "From the first year, we were break-even or better," says Rozzell. "we were funded by our operations – by the revenue we could generate. Then our funding came from sponsored research agreements with big drug companies, product sales, and federal SBIR [Small Business Innovation Research] grants."
In a business that can be a minefield, Rozzell's story stands out as a modest success. The attrition rate for biotechnology companies is high, especially in the early stages. Estimates of the chances of commercial success in the biotech world range from one in 10 to...
THE FLIP SIDE OF SUCCESS
Most people consider Genentech or Amgen successes because they have products approved and on the market, strong intellectual property, growing operations, and are operating in the black. But hundreds of companies don't meet those criteria. While success stories are helpful, failed companies can also provide a cautionary tale. The problem is that failures tend to disappear, says Jerker Denrell, assistant professor of organizational behavior at the Stanford Graduate School of Business. "After all, companies that pursue unsuccessful strategies either go out of business or change their approach. Either way, information about the unsuccessful strategies becomes scarce, especially in comparison with the wealth of data from successful organizations."
The most obvious reason for failure is an over-reliance on a single product or "shot on goal," according to Joe Panetta, president and CEO of BIOCOM, the Greater San Diego and Southern California life sciences trade organization. For example, a company working on a single drug for a difficult disease, such as metastatic melanoma, can have a hard time proving a drug is safe and effective. "It is really difficult to produce the significant double-blinded results the Food and Drug Administration wants when patients might be taking an entire regimen of drugs, any of which might cause severe adverse reactions," Panetta says.
There are lots of failures in biotech, "but we do not see them as such," says A. Stephen Dahms, executive director of the California State University Program for Education and Research in Biotechnology. Biotech CEOs tend to consider a lack of success of a company or venture as a stepping-stone into a new venture rather than "a personal permanent derailing of one's career," he points out.
Some failures make a company's second-generation drugs more likely to be successful, says Panetta. A new Phase 3 trial design that builds on knowledge from a failed Phase 3 trial might prove that a new therapeutic can help people. "Unfortunately, that Phase 3 trial might cost $100 million and the company might be out of money by then," he warns.
A SLIPPERY DEFINITION
Morrie Ruffin, vice president for business development at Biotechnology Industry Organization, says that while bankruptcy is an obvious failure, success can be harder to pin down. "Does success mean a company has a drug on the market or more than a billion in market capitalization?" he asks. "Outright failures, where a company goes bankrupt, liquidates, and sells its [intellectual property] – that's obviously not a success story. Others kind of muddle along, and eventually get a success later on."
A company can successfully develop a new technology, but the market may change. Panetta notes that Carlsbad, Calif.-based Isis Pharmaceuticals launched the antisense drug Vitravene for HIV-related cytomegalovirus infection in 1998, but the success of protease inhibitors meant the market for the drug was smaller than anticipated.
Isis licensed the worldwide commercial rights to Novartis Ophthalmics. Despite the apparent setback for Isis, spokeswoman Navjot Rai says Vitravene still marked a "major victory for the company." It showed that antisense drugs really work, "and now we have 11 products in clinical trials focused on metabolic, cardiovascular, inflammatory diseases, and cancer," she adds.
Ruffin defines success for a public company as "appreciation of the stock, and building the company for investors." But some large public companies do not have an approved product on the market. And others may have several products on the market, but have suffered a few setbacks. "Are they successful? I don't know," he says.
Ruffin notes that Idun Pharmaceuticals, a San Diego-based company focused on therapies to control apoptosis, had a number of fairly early-stage products but none on the market. In February, they were bought by Pfizer for $300 million. "If you're an investor in that company, I'd define that as success," says Ruffin.
BEATING THE ODDS
In 2003, there were 150 companies in nine countries that disappeared from the landscape due to mergers or acquisitions, according to a recent study by Critical I for EuropaBio, while still others survive because they are operated as subsidiaries. In the United States, 87 companies disappeared, with 17 merged and 70 acquired.
"It started on the American west coast in 2001–2002 and... has gone from west to east," says Mike Ward, codirector of Critical I, a think tank based in Oxford, England. "We saw it in the United States first, then the United Kingdom. So in 2003, we saw a lot of [merger and acquisition] activity, pruning, cutting, and some companies going under. And now in 2004, we've seen that activity stepping up in Germany and other parts of Europe. The more mature the industry, the more likely it is to happen," he says.
Only about one-third of companies are able to raise more than $500,000, says Ward. "It means they become what I call the living dead. They end up being parcels of IP," he says. "If you can't get more than 2 million, you can't survive for long." In all, just one in 10 companies is able to attract a decent amount of money, according to Ward. "The rest of these guys fund research projects. They never get beyond two guys and a dog in a lab."
Many companies don't get bought out because they've got nothing worth buying, says Stewart Lyman, a Seattle biotech consultant. He notes that the Web site
However, some companies do beat the odds. Tanox, a Houston, Texas-based company, was cofounded in 1986 by two Baylor College of Medicine professors: Nancy Chang and her then-husband, Tse Wen Chang. They used family savings to launch the company, which went public in 2000, raising $244 million. Some financial analysts see the potential market for its subcutaneous asthma drug Xolair, which it developed with partners Genentech and Novartis (and brought to market in 2003), as a $1 billion seller, according to spokesperson Steve Sievert. "This truly is rags to riches. You're talking about a woman who came over from Taiwan at the age of 22 with a limited grasp of the English language, and now she's the CEO of a biotechnology company that has been successful with its partners at bringing a drug to market."
Richard T. Schumacher beat the odds, too. He launched a small medical diagnostics company from his Easton, Mass., garage with $2,300. Boston Biomedica grew to be a successful public company with $30 million in sales and a major player in the international infectious disease quality control field. But Schumacher acknowledges that he is an anomaly: "Ninety to 95% of start-ups fail," he says.
Schumacher says he grew his company slowly, on its own profits. "Other companies funded by venture capitalists to the tune of millions went out of business. What's the moral of the story? Just because you have a lot of money doesn't mean you're going to be successful, and just because you start in a garage with a small amount of funds doesn't mean you can't succeed."