Biotechs Change to Stay Alive

Anne Macnamara Like the life systems it studies, the biotechnology industry evolves to survive. Today, companies founded and generously funded in the 1990s are scrambling to transform themselves from suppliers of technology, data, or discovery targets into full-fledged drug development firms that make products for patients. Those that fail to make the transformation face the future as low-profit providers of biotech building blocks, or as acquisitions in the business world's equivalent of extinction. For those that do evolve, the reward can be robust profits like those enjoyed by large pharmaceutical companies, as well as freedom from the up-and-down investment cycles that rule the industry. For scientists, such evolution could mean a new era of industrialized biology that creates opportunities to do highly paid work in the private sector. "I believe we are seeing the commercialization of biology which ultimately will translate into new career opportunities ... for people in biomedical research," says Arthur Sands, chief executive of Lexicon Genetics, The Woodlands, Texas. SYSTEMIC OVERHAUL Sands says the transformation of biotech firms into full-scale product companies could affect biological scientists just as the developing pharmaceutical industry created new opportunities 50 years ago for chemists who had worked mostly in government and academic labs. A few big industry players have already made it, including Amgen, Genentech, and Millennium Pharmaceuticals. Hundreds of other public and private companies are striving to join the list. In the meantime, however, a major industry shakeout is underway and analysts predict only those that can grow beyond providing technical services will remain standing. But making the move is not so simple. "Some companies will be successful and some won't," says Michael Lytton, a partner in the venture capital firm Oxford Bioscience Partners. "It's a difficult transition for a technology platform company to become a product company. Unfortunately, it is an absolutely essential transition since long-term this has to be done to build a major company." HOW TO EVALUATE A BIOTECH IN TRANSITION Does the biotech remain true to its core technology? Do collaborations or licensing deals with other biotechs provide adequate revenues to finance the transition? Has the company built adequate safeguards for its intellectual property? Is the biotech aggressive in hiring staff with strategic capabilities? Has the company identified its strengths in therapeutic specialties and focused on them? Has the biotech done all of the above, before its competitors could do so? While many biotech executives promote their companies as discovery and development firms, most are still deeply rooted in a technology platform with a business model that relies on selling data or services to others, not on manufacturing and marketing products to patients. Of 300 publicly traded biotech firms in the United States, fewer than 50 have been able to grow into fully integrated companies with both discovery and development capability, says Pierre Jacquet, a consultant at L.E.K. Consulting's Boston office, who advises biotech clients on their evolution to drug discovery companies. BUILDING FOR CHANGE Technology is nice, but products are where the money is, says Jacquet. With capital markets now effectively closed to technology ventures, investors and collaborators are funding only those ideas ready for preclinical work, not those that envision potential targets. The roots of the current glut of technology-based companies lie in the great biotech capital explosion of the late 1990s, fueled in large part by enthusiasm about the potential to unravel the human genome. Venture capitalists, enamored with all forms of technology, funded an oversupply of firms pumping out possible drug targets. Prices for the technology began to plummet, and in a few years cutting-edge technologies became low-profit commodities. "In this kind of capital market condition you cannot sustain a business on a technology platform, unless you are smart enough to generate revenue year after year with licensing or collaborations, and frankly we have not seen that," says Jacquet. "It is difficult to stick to the technology platform unless you want to become a lab supply company." Companies hoping to morph from technology platforms to product development should consider three broad strategies or a mix of all three, according to Jacquet. They need to find a way to quickly capitalize on their own technologies to focus on potential products. To stay afloat financially during the development period, companies should look for outside licensing deals or collaborations. Companies can also speed the transformation process by acquiring firms with scientific capabilities that they lack. Jacquet also suggested that companies decide early on whether they want to focus on small-molecule or protein-based products. If the decision is to develop small-molecule drugs, the biotech will need to build capability in chemistry either internally or through an acquisition. Firms that choose to focus on therapeutic proteins need to be able to work with monoclonal antibodies, says Jacquet. "Some companies have enough cash to hedge their bets and develop both, but I would advise a small company to pick one and stick to it rather than burn more cash on both," he says. Biotechs should be bold about bringing in the people they need to move forward, Jacquet says. "Recruiting employees one by one is going to take too long." He recommends that companies acquire small biotechs with the needed specialties, or hire a big-name scientist in the field who will be able to attract others. Courtesy of Michael Lytton Michael Lytton Whichever strategies they choose, companies should stay true to their initial technological strengths, Lytton says. "The ones that will make it will be ones who move to product development in a way that harnesses the valuable attributes of their technology platform," he says. "The ones that won't will look for the serendipitous licensing deal which bears no relation to the attributes of their technology platform." EVOLUTIONARY LESSONS Sands says his company's early success with its gene knockout technology forced it to evolve faster than management had planned. Founded in 1995, Lexicon now has 14 preclinical programs underway in five therapeutic areas, along with partnership arrangements with Genentech and other biotech firms. In April 2000 the company went public with a $200 million (US) offering. "If one knows how to work with the genes and discover the truly high-value drug targets within the genome, intellectual property can be built around those grounded in medical use, preventing the commoditization of the genes," says Sands. "We build a strong intellectual property foundation around every drug discovery program which preserves the high value potential that we have for our investors." In addition to the traditional biotech focus on therapeutic proteins and antibodies, Sands says Lexicon's 2001 acquisition of Coelacanth, a Princeton chemistry firm, gave it the ability to develop small-molecule drugs. More than 80% of all drug sales are of small molecules, he says. Sands speculates that the biotechnology industry is about half-way through a realignment that will separate full-scale drug firms from those that will either wither away or merely assist the large players. "I think we will witness a fairly severe natural selection take place," he says. A PHYSIOLOGICAL SOLUTION Survivors will have a strong grasp not only of biology and chemistry, but also of physiology according to Sands. He says biopharmaceutical partners are coming to Lexicon with targets, looking for help finding a medical indication to match. "That's an increasing trend and that's because people need to know the medical utility of their new genomic targets." Lytton says companies should try to develop therapeutic expertise from their technology base. He points to GPC Biotech in Germany, which used the strategy to gain a specialty in oncology after it partnered with Altana, a large German pharmaceutical and chemical firm. "Management of the company saw that, due to the variety of solutions offered for target identification and validation in the biotech space, the number of continuing high-value corporate partnerships it could hope to do would diminish over time," says Lytton. "At the same time, through the corporate partnership, it had developed an internal expertise in the oncology area." GPC began focusing on oncology and, with the cash from Altana, acquired a biotech with an oncology product, as well as licensing oncology products from universities and other biotech companies. GPC also used its revenues from the Altana partnership to finance clinical development of compounds. "They were able to accomplish this without significant financial issues and were relatively unaffected by the decline of the financial markets in Europe, which has been considerably more severe than that in the United States," says Lytton. At Millennium Pharmaceuticals, which has moved beyond the clinic into manufacturing and marketing products, production was a goal from the start, says Vaughn Kailian, vice chairman of the Cambridge, Mass.-based biotech. That decision was not without risk. Many technology companies, he says, take a short-term approach and look to reap licensing deals early for a fast payoff on their technology, rather than risk failure during the long but potentially more rewarding process of developing their own drugs. "The technology play has a shorter feedback mechanism built into it," he says. "You know pretty quickly if your technology is going to work, and that can be used to help other companies develop therapeutics. But at the end of the day, most of those companies wind up being acquired, whereas the product-oriented companies have a different path to walk." That path can be harrowing, but the payoff--including long-term independence--is sweet, he says. Courtesy of Vaughn Kailian Vaughn Kailian Kailian says companies choosing to follow Millennium's path should load up on highly qualified people and aggressively acquire any scientific capabilities they lack. "That allowed us to move aggressively down the road, so we had the capability to get over the next mountain range," he says. Kailian adds that successful companies need to look out on the horizon far enough to see what hurdles will come next. Kailian is wary of government price controls that eliminate the incentive to develop new cures. Millennium's progression was not without bumps in the road, he says. Most of them were caused when executives let down their guard and failed to plan for the unexpected. "When everything is going great you don't tend to look over the next mountain and see the storm clouds brewing," says Kailian, who compared Millennium's development to a wagon train moving across the country. Today's financial environment is like a patch of bad weather, he says. Despite the bear market, Millennium Pharmaceuticals has $1.3 billion in reserve because executives adopted a conservative spending approach from inception of the business. They also collaborated with other companies. "The good news is that, heading into it, we were big enough that even if we lose part of the wagon train, we have the wherewithal to continue on." For companies that have yet to make the transition from a technology platform to drug development, the clock is ticking. Not only are they burning cash and losing time to market, but other companies moving along the same path may be out there sewing up what little there is left in new financing or licensing deals. "This process has been under way for some time now," says Lytton. "But it is only now that the volume of these activities has increased to the point where it makes it even more challenging for the remaining companies who haven't embarked on the transformation to do so." Susan Warner (swarner@comcast.net) is a freelance writer in Philadelphia. TRANSFORMING FROM PLATFORM TO DISCOVERY Why Change? More attractive economics Less exposure to technology commoditization Higher return for investors and shareholders Easier access to capital markets To Make a Successful Change Do not compromise the financial situation of the company through the integration Focus on specific therapeutic areas Bring in-house capabilities for only few product types Leverage collaborations with more mature companies

Biotechs Change to Stay Alive

Interested in reading more?

Become a Member of