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Analysts warn that good marketing and sound financing are as key to survival for new ventures as top-notch science ST. LOUIS--After 20 years of vigorous scientific growth, neuroscience has vacated the biotechnology umbrella to emerge as a promising industry of its own. With an annual United States market of $4.4 billion in sales, neuropharmaceuticals is one area of biotechnology in which investors are always looking for a great deal. About two dozen startups are pursuing new technologies for diagnosing and treating the nervous system. But each needs substantial backing from either venture capitalists or corporate partners to survive on the long road to bringing products to market. Some of these companies may have a hard time landing that funding; the others probably won't. This tenuous position was illustrated here last fall in the space of a few hours and about a city block. When biologist J. Leslie Glick described his company's development of a test for Alzheimer's disease to about 50 interested business executives and scientists at a seminar, he faltered on a key question about how well the preliminary test worked. His company, Bionix Inc. of Potomac, Md., then lost its luster for these potential financial partners, who want proof as well as promise. J. Leslie Glick, president and chief executive officer of Bionix Inc. of Potomac, Md., insists that he never really intended to start a neurospecialty company. "I essentially had decided to retire," recalls the 68-year-old biologist and biotech executive. "But there are only so many museums in Washington, and I wanted to do something that would benefit the elderly." Although a molecular and cellular biologist by training, Glick had spent the past 21 years on the business side of genetic engineering. He cofounded Genex Corp. in Gaithersburg, Md., and was its CEO from 1977 to 1987. Before that he helped set up Associated Biomedic Systems, in Buffalo, a biologicals manufacturing company. And in 1981 he helped start, and guided for a time, the Industrial Biotechnology Association, a trade association with a membership of about 100 biotech firms. After retirement, Glick first considered becoming an ombudsman for a nursing home. But then his brother, Stanley Glick, a pharmacologist at Albany (N.Y.) Medical College, convinced him to form a company to produce and market devices that Stanley and another scientist had invented to treat the problems of the elderly. After six months of working with his brother, however, Leslie Glick began to look around for new challenges. His first step was to file for patents for Bionix's diagnostic tests using luminescence spectroscopy and for the use of magnesium to treat dementias and memory loss. The Alzheimer's test is still in its infancy, he says, explaining why he couldn't answer a question posed to him at last fall's neuroscience seminar in St. Louis. "We haven't focused on that because it's just a case of a matter of priorities relative to our resources and manpower," he says. "If I had a lot more capital, we'd go a lot faster." Glick has spent about $500,000 on Bionix. But his chances of obtaining more capital are hurt by the lack of data. Says John McCall, executive director for discovery research at Upjohn Co. in Kalamazoo, Mich., "I am not optimistic [about his prospects]." But Glick is unconcerned, even though Bionix exists mostly on paper--there's no lab, no employees, few notables on the advisory board, no other investors or partners, not even a published telephone number. He contracts out the research. Yet he feels that time is on his side. "I'm not under that same kind of pressure that others are," he says, referring to his larger competitors, who need to satisfy investors. "In some ways I have more lasting power." A few hours later, at the Society for Neuroscience meeting taking place down the block, Roger Lindsay received a much warmer reception when he discussed his company's promising data about nerve growth factors to treat a variety of neurological ills. His firm, Regeneron Pharmaceuticals Inc. of Tarrytown, N.Y., already has strong backing from financial partners. Both companies share an awareness that the boom of the late 1970s and early 1980s, when new companies touting the latest genetic engineering techniques found money easy to get even if they had very little to sell, is gone. By contrast, today's investors in the neuroscience industry are less willing and less able to take chances. Slower Progress In addition, clinical trials for such treatments take longer and are harder to evaluate, because of the way the diseases develop and the nature of the symptoms, than those involving drugs for other diseases. As a result of the high cost of overcoming such difficulties, says E. Stephen Burrill, a biotechnology analyst and partner at Ernst & Young in San Francisco, "today's world is a world of strategic alliances." Bionix so far has no such alliances. On the other hand, Regeneron, with a star-studded cast of scientific advisers, has already won the support of two major drug companies in its quest to use nerve growth factors. It has a flourishing 40,000-square-foot laboratory and money in the bank. Those differences make Bionix a long shot and Regeneron look like a winner (see accompanying stories). Since 1982, more than 25 neurospecialty companies have been started. They have raised about $250 million, primarily from 75 venture funds, according to Sheri Lesser Samotin, director of neuroscience market research at the Wilkerson Group Inc., a management consulting firm in New York. As second-generation biotechnology companies, neuroscience specialty firms use advances in genetic engineering techniques to probe the brain and to pinpoint new strategies for treating a nervous system gone awry. Investigators use molecular biology to understand the brain in greater detail as well as to identify and clone molecules that play important roles in the disease process. "Molecular biology is making neuroscience incredibly more powerful," says Leonard Schliefer, president and CEO of Regeneron. "It's all coming together at once." But scientific breakthroughs aren't enough, say analysts. "Success will rest on their ability to raise capital and the ability to recruit and retain talented individuals," says Samotin about these new businesses. "There's no way there will be 25 to 30 neurospecialty companies five years from now. There's just not enough money to go around." Financing began to tighten noticeably after the stock market tumbled in the fall of 1987. The subsequent downward spiral has left today's venture capital companies with about one-fifth the resources they had 30 months ago. A survey by Ernst & Young of midsized biotechnology companies revealed that the downturn in the financial markets has forced more than a third of them to alter their plans and sometimes slow drug development. "It's probably going to get worse before it gets better," predicts Burrill. "Throughout the seventies and the first half of the eighties, it was a different story," says Glick, who has started two other biotech companies. "[Investment] people took a lot more chances. Today, given the state of the economy, it's been more difficult to get [investors'] interest." A cross-country phone call to a colleague has put 38-year-old neurologist Leonard Schliefer at the forefront of a growing effort to combat neurological diseases. Although he had built a thriving career as a research clinician at the Cornell Medical Center in New York, Schliefer was frustrated by the inability of neurologists to do much more than diagnose neurological problems. "So often, we are caretakers," he says. But he thought a class of substances called nerve growth factors offered some potential as treatments for these intractable neurological diseases. And he decided that "academia was not the place to develop them." He wasn't the only one with that vision. Both Eric Shooter, a neurobiologist at Stanford University, and Sumitomo Pharmaceuticals Co. Ltd., in Japan, thought the time was right to push nerve growth factors out of the academic laboratory. Schliefer's phone call to Shooter in 1985 set in motion a chain of events that led, in 1988, to the founding of Regeneron Pharmaceuticals Inc. of Tarrytown, N.Y., and the creation of a blue-ribbon advisory board. Then officials at Sumitomo, realizing the two Americans had corralled most of the scientists they had wanted for a new venture into nerve growth factors, decided to put $10 million, representing about a 10 percent share, into the nascent company. "It was pretty exciting," recalls Schliefer, the company's president and CEO. "We didn't have any molecules or companies in hand; they were just betting on the people." But the company soon identified and cloned key substances that it hopes to produce in sufficient quantity to evaluate as therapies. Last year, as large corporations looked for good investments in neurosciences, Regeneron was courted by six potential corporate partners. The result was a $53 million deal with Amgen Inc. of Thousand Oaks, Calif., that gives Amgen a 7 percent stake in the company and provides Regeneron with long-term support for its work on two nerve growth factors targeted against peripheral neuropathies, Parkinson's disease, and even Alzheimer's disease. Despite having made considerable progress, Schliefer knows that the company's future is far from secure. "We're the No. 1 financial success in this field," he says. "But we still have a long way to go." Other forces that are reshaping biotechnology, including the neuroscience industry, involve patent disputes, government regulatory policies, and issues of cost containment. "The rules for the nineties will be dramatically different," says Burrill. "It's less relevant what your technologies are and more relevant what your markets are doing. The question is not `Can we do something for Alzheimer's?' but rather, `Will we [as a society] pay for it?'" Even demonstrating the effectiveness of these new neuropharmaceuticals will be difficult because of the nature of the diseases to be treated. "The clinical trials will be awfully hard to design," says neuroscientist John McCall, executive director of discovery research for Upjohn Co. in Kalamazoo, Mich. And the tests will take longer and be more costly than for other types of drugs. With Alzheimer's disease, for example, the medical community has yet to decide on the best way to diagnose the disorder or to measure recovery rates. "Without common ground we're essentially walking in a quagmire," says Elkan Gamzu, president of Cambridge Neuroscience Research in Boston. "What we need to have are approved standards and protocols." Clinical trials for new drugs in stroke victims, for example, require that patients be enrolled in a study in a matter of hours after the stroke. That timeliness may be hard to achieve in treating neurological disorders. "It's not the case that many neurologists are willing to get up in the middle of the night to do an assessment," explains Gamzu. Also, since many of these patients will not be evaluated thoroughly before becoming part of the study, it may be more difficult to sort out side effects or to screen patients with other diseases or those who are already on medication. "This means [a study] will have more variability and will need larger numbers [of patients]," he says. The government's process for approving new medications is another potential roadblock. Strapped for the resources to deal with the new types of products that biotechnology has created, the Food and Drug Administration has "a bias toward nonaction," says Burrill. For now, the agency has set up outside advisory committees to work with regulators within the agency. But Burrill says that "these advisory committees have an agenda that can get in the way of a company being able to anticipate how the FDA will react to the data presented. That increased uncertainty can translate into financial difficulties." The quest for money has spurred more than 100 firms in this industry to team up with large pharmaceutical, chemical, and food companies. "We expect the partnering we've seen the last year or two to get extremely intense in the next 18 months," says Samotin, citing 21 companies that last fall were seeking joint ventures of one sort or another. Three notable joint ventures and equity investments are a $20 million deal between Cephalon Inc. in West Chester, Pa., and Schering-Plough Corp., a pharmaceutical giant in Kenilworth, N.J.; a $53 million agreement between Regeneron and Amgen Inc. of Thousand Oaks, Calif.; and a three-year contract in 1988 for an undisclosed amount between Eli Lilly and Co. of Indianapolis and Athena Neurosciences Inc. in South San Francisco, Calif. But industry experts warn the entrepreneur that it's a buyer's market. "All of the big companies are not going to bail out this industry," says Burrill. He expects to see consolidation throughout the biotechnology industry, including those firms that specialize in neuroscience. Upjohn's McCall says that there are more neurospecialty companies than are needed. And Glick notes that many of the larger companies have biotechnology expertise and are therefore less dependent on these smaller companies. Despite these predictions, several analysts are enthusiastic about the future of neuroscience companies. For one thing, demand for medications to treat stroke or Alzheimer's patients will grow as society ages. And current therapies for psychiatric and other nervous system disorders are still rather primitive. "The kinds of drugs we have now are like sledgehammers," says Julius Axelrod, Nobel laureate and neuroscientist at the National Institute of Mental Health. Antidepressants, for instance, make up a $600 million-a-year market. But those now in use have varying side effects and take so long to start working that many patients give up taking them, according to Samotin. In addition, one in 10 epileptic patients--200,000 individuals in the United States alone--still has seizures despite treatments for that disorder, says Roger Porter, deputy director of the National Institute of Neurological Disorders and Stroke. Herbert Meltzer, a psychiatry professor at Case Western Reserve University in Cleveland, predicts that "none of the drugs that we have is likely to endure as soon as the promise of some of these new compounds is achieved."

Strategic Alliances Deemed Crucial To Neuroscience Firms' Success

Jan 20, 1991

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