Biotech Startups' Business And Science Missions Must Be Crystal Clear From Day One, Experts Say

Smarter consumership and rigid demands from investors leave little room for fuzzy thinking in entrepreneurial plans Despite recent setbacks in drug approvals, the mounting campaign for cost-cutting in the health care industry, and ongoing tribulations in the United States and global financial markets, the domestic biotechnology startup world is apparently holding its own. As the industry at large matures, analysts say, new entrants are learning from the highly publicized mistakes of their predecessors, with an outlook on the future that requires their being more versatile, yet more goal-oriented, than were startups in the past. This means that a company can't afford to focus on one project, they say, but must support several research projects, which ideally will follow a trajectory toward development of a product or device that a scientist or clinician can use--and pay for. These and other qualities are not only desirable, but also necessary now, analysts and entrepreneurs say, because competition is stiff. William Timberlake, vice president for research at Myco Pharmaceuticals Inc. in Cambridge, Mass., sums up the requirements for today's successful biotech startup: "a high level of creativity, novel ideas, solid initial investment, and careful organization and planning for the long term." Biotech companies have come and gone with a considerable amount of clangor in the decade since Genentech Inc.'s highly successful product debut. When the South San Francisco, Calif., firm's human insulin came on the market in 1982, the startup floodgates opened--with a second wave of more than 30 companies forming in 1982-83. And despite research and product-approval setbacks, net growth has been impressive over the years. Currently, firms basing their product plans on recombinant DNA technology alone number 1,231, according to the New York-based accounting firm of Ernst & Young Inc., with the biotech industry overall employing 79,000 scientists at all levels. The pharmaceutical market tops $4 billion in the U.S., with 13 therapeutic products approved to date, but with hundreds of others in development. The number of agricultural biotech companies more than doubled in 1992 to 140, according to Ernst & Young. It's upon this foundation that the latest startups are building. Among the factors having considerable impact on new firms, some entrepreneurs contend, is that investors are much better informed than in times past. Telling a potential backer that Project A targets Disease B isn't good enough--now, the investor is likely to know all about existing therapies for Disease B, and how a new entrant will compete. "It used to be that a good idea and a name scientist were all that was needed to start a company," says Mimi Hancock, one of four cofounders of Avigen Inc. in Alameda, Calif. Today, she says, an idea has to be closer to the "D" of R&D than previously, and scientists have to convince potential investors that their invention or insight will translate into a saleable product or process. "Investors and venture capitalists are now commonly hiring people with scientific backgrounds who are better able to evaluate potential technology and ask a lot more questions," adds Hancock. A new biotech firm needs to have its science and business bases covered right from the beginning, according to Keith Brownlie, regional director of life sciences industry services in Ernst & Young's Princeton, N.J., office. "You have to have a great management team, so people with the funding know they're not dealing with a scientist who has no experience in getting a product to market," he says. "In addition to investors and scientists, having business personnel who have done this before is almost a prerequisite these days." Biotech startups are conceived and gestated in several ways now, involving different alliances of academic and industrial scientists, says William Sharp, vice president of ESCAgenetics Corp. of San Carlos, Calif. A generation ago, a group of university biologists getting together to turn their research into a commercial enterprise was most unusual; today it is commonplace, he says. "Or, a new biotech company can be sloughed off of an existing company," adds Sharp, who has extensive experience with the evolution of biotech companies. From a position as director of pioneer research at the Campbell Soup Co. in Camden, N.J., from 1979 to 1981, he cofounded the spin-off cell culture company DNA Plant Technologies Corp. of Cinnaminson, N.J., in 1981, and was executive vice president at Branford, Conn.-based DNA Pharmaceuticals Inc. He moved to ESCAgenetics in 1992. Today there are many firms spun from established ones. For example, Genentech gave rise to Genencor Inc. of Rochester, N.Y., which targets industrial applications of biotechnology. Genencor then spawned Mountain View, Calif.-based Gen-Pharm Inc., to develop transgenic animals for the health care industry, and GlycoGen Inc., which was recently bought by Cytel Inc. of San Diego. Spinning out new companies helps the parent company focus, and gives the new venture a jump start. Another trend proliferating in the biotech arena is the creation of new business entities through mergers. The one between Perkin- Elmer Corp. of Norwalk, Conn., and Applied Biosystems Inc. of Foster City, Calif., put the polymerase chain reaction (PCR) and the ligase chain reaction (LCR), the two most popular gene amplification systems, under one roof, although Hoffmann-La Roche Inc. in Nutley, N.J., retains PCR rights in health care applications. Similarly, Genzyme Corp. of Cambridge, Mass., is absorbing many of its smaller competitors in genetic testing, such as Vivigen Inc. of Albuquerque, N.Mex. Whatever its origin, according to Avigen's Hancock, a biotech startup "must look for a niche and show that what they plan to do is well thoughtout." A perusal of classified advertisements from bio-tech startups recruiting staff in scientific newspapers and journals reveals that companies now tend to advertise and focus on areas that are currently hot in biological research, rather than describe their interests in such broad terms as "cancer," "infection," or "autoimmunity." The acronym in Durham, N.C.-based ICAgen Inc., for example, stands for ion channel advances, an important area of cell biology, but not necessarily directed toward a particular disorder--yet. Other new biotech companies are targeting the blood-brain barrier, the extracellular matrix, and inherited disorders whose genes have recently been identified. For example, at least four companies are developing treatments for amyotropic lateral sclerosis, an estimated $450 million market. There is often plenty of room to diversify, biotech officials say, even if a company's stated goal is one type of illness. This is the case at OsteoArthritis Sciences Inc., also of Cambridge. "We are focusing on a particular pathology, as opposed to having anti-inflammatory mediators," or monoclonal antibodies whose targets are unknown, says Nelson Campbell, vice president for business development. "We are working on understanding how cartilage breaks down in osteoarthritis. That is the core idea that is the foundation of our research. Yet at the same time, we are thinking of every which way to attack the problem of cartilage damage. Do we repair it, lessen the damage, or slow the degradation?" Campbell says there are many ways to approach a single pathology. "This is where the diversity comes in," he says. "Is it a biochemical process? That is our hypothesis. But you can take an opposite focus--that is, that [osteoarthritis] is a mechanical process. Then you take the cartilage, grow it in the lab, and implant it"--and, indeed, some companies are doing this. Maintaining this diversity is a must for biotech startups, many industry experts agree. They note, for example, that although Centocor Inc. of Malvern, Pa., has been pummeled with setbacks in approval of its highly touted Centoxin, an anti-septic shock drug, the company earns $50 million a year in infectious disease diagnostics, and has active research projects in the treatment of cancer, Alzheimer's disease, and cardiovascular disease. "Some people say that if your focus is too narrow, and the product is not approved, which we have seen happen, then $100 million is invested and you go nowhere if there are no backups," says Ernst & Young's Brownlie. "Or, some people feel that if a company takes too wide a focus, they won't get anything through the pipeline. It seems that the most successful approach is to have flagship research plus several alternatives, such as applications of that technology, or other products." A general formula for a biotech company is to apply a process-- such as gene targeting or transgenic technology--to obtaining a product that will solve a problem. But with 10 to 12 companies attacking the same disease with basically the same set of tools, a new approach to an old problem can put a company out in front, biotech officials say. "Startups need an enabling technology where the founders feel they have a leadership position," says ESCAgenetics' Sharp. Avigen, for example, is using an adenovirus vector for its gene therapy for sickle cell disease, hoping it will prove safer than a bone marrow transplant, another route of gene therapy for this disorder that carries a 15 percent mortality risk. Almost as important as what a company does is where it does it, say both startup entrepreneurs and scientists at more established facilities. It is hardly coincidence, they note, that biotech companies have sprung up around academic hubs. "Academic centers provide one of the best sources for creativity and novelty," says Myco Pharmaceuticals' Timberlake. Myco's location at One Kendall Square in Cambridge, Mass., puts it in easy reach of Boston's finest institutions. Adds neighboring OsteoArthritis Sciences' Campbell, "There is a lot of basic research in a variety of institutions in Boston. Cambridge is one stop [on the mass transit system] to Massachusetts General Hospital, and one stop in the other direction to Harvard Medical School." Osteo- Arthritis Sciences currently collaborates with eight universities in the area. On the West Coast, Avigen's Hancock also extols the advantages of locating near academic centers. Avigen's San Francisco Bay area locale is near, for example, the University of California, Berkeley, and dozens of other biotech companies. "The applicant pool, particularly for technical help at the entry level, offers more to choose from, and the company doesn't have to pay exorbitant fees for the employees to relocate," she says. "Also, we have access to university seminars and discussions with scientists. A startup has to be very conscious, and very conscientious, about how they spend funds. We're much more inclined to take a trip across the bay than across the country," she says. Traditionally, a biotech startup often begins simply with a couple of researchers and an exciting idea. In 1983, for example, Rutgers University biochemists Frank Davis and Abraham Abuchowski founded Enzon Inc., South Plainfield, N.J., to commercialize their "pegnology" technique of hooking therapeutic enzymes to polyethylene glycol, which keeps them in a patient's circulation long enough to correct a deficiency (Leah Beth Ward, The Scientist, Oct. 1, 1990, page 1). At the beginning, the founders often wear many hats, says OsteoArthritis' Campbell, answering phones, talking to attorneys, doing secretarial and janitorial chores, and, maybe, some science, as the facilities are built. Additional staff tends to come from word-of-mouth hires in which a cofounder scouts a university with which he or she has been associated for talent. Jobs fairs at national meetings also match biotechnologists to companies. Also, Hancock says, many academic scientists are lured to biotech startups by a combination of frustration with university life and the seeming freedom of the corporate environment. "The forces drawing academic scientists into industry haven't changed much over the past few years. The competition for funding, the amount of time they have to spend doing that and administrative tasks is very high. In this time, they feel, they could be doing science at a company," she says. Eventually, when the time nears for a potential drug to begin clinical or field testing, and permission from the appropriate regulatory agency is needed, newer biotech companies need to hire staff who can handle regulatory affairs and submissions for approval to government agencies, says Sharp of ESCAgenetics. "A small company has a difficult time at this. There have been a lot of failures because small companies do not have all the talents," Sharp says. When a small or start-up biotech company is absorbed into a large pharmaceutical firm, it is sometimes because of a lack of regulatory expertise, he adds. The modern biotech industry dawned in sunnier economic times. Today's product-minded startups, entrepreneurs say, must keep in mind the current health care cost-cutting trend, which is likely to continue. "Companies will be forced to look at whether or not they can make a drug cost-effective," says Hancock. "In those cases where a company makes a new drug where treatment exists, they must analyze how to be competitive with what the patient population already spends." Unfortunately, say industry officials, the few biotech-derived drugs that are costly because of their methods of manufacture-- such as Genzyme Corp.'s Ceredase to treat Gaucher's disease at $100,000 per year per patient--make more headlines than the 60- plus DNA probe-based diagnostic tests and the hundreds of monoclonal antibody-based diagnostics approved by the Food and Drug Administration. Experts agree that the rapid and expanded diagnoses possible with these tests will ultimately lower health care costs by providing earlier, and therefore more treatable, detection of infections, cancer, and degenerative and inherited illness. Compared to their predecessors, today's biotech startups have far more starting materials, as well as methodologies, to choose from. The biotech companies of a decade ago were based on just a trio of technologies--recombinant DNA, monoclonal antibodies, and cell culture. Today that repertoire also includes gene targeting, transgenic technology, antisense technology, and the polymerase chain reaction. New research directions are being revealed by the Human Genome Project, and from ecosystems being preserved because of a renewed interest in biodiversity. Plus, rational drug design based on gene discoveries and natural products uses ever more sophisticated computer modeling capabilities, enhancing further the potential for new discoveries in biotech. Ricki Lewis is a freelance writer based in Scotia, N.Y. She is the author of a biology textbook and has just completed a human genetics text.

Biotech Startups' Business And Science Missions Must Be Crystal Clear From Day One, Experts Say

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