With A Little Bit Of Luck, Synergen Advances

A Rocky Mountain biotech firm proves that success requires something more than strong management and top-notch research For 10-year-old biotech company Synergen, 1991 was a banner year indeed. The Boulder, Colo.-based firm raised $52.5 million in an R&D limited partnership and $95 million in a stock offering. Stock zoomed from $12 per share in January to $69 in November, and seven of its protein-based pharmaceuticals entered or advanced further in clinical testing. Moreover, the company broke ground last year on a 20-acre manufacturing facility in Boulder, which, company officials claim, when completed this year, will be the largest pharmaceutical protein manufacturing plant in the world. Last year was not without its pitfalls, however. Most notable among them was a setback in Food and Drug Administration phase III trials for the company's most advanced compound, Trofak, which resulted in a 25 percent plummet in stock price over a three-day period in mid-autumn. Nonetheless, industry watchers, financial and scientific alike, are bullish on Synergen's future as the new year dawns. Certainly, Synergen does not have a corner on good science, good management, or even luck within the biotechnology sector. But it does have all three, and looking at the firm's successful formula may give a hint as to why Synergen now is widely recognized by industry analysts as being among the top-tier biotechnology firms. Unlike most biotechs launched during the early 1980s, Synergen was founded on the reputation of a team of scientists, rather than a potential product or process. University of Colorado scientists Larry Soll, David Hirsh, Larry Gold, and Michael Yarus were approached by venture capitalists wanting to set up a company. "We decided to let the company evolve," recalls Soll, who is now chairman of Synergen. "This meant building on what we knew, which was science, and then incrementally adding other functions, but not to land on Day 1 as a fully integrated company." The team of four, all molecular biologists, already had a 12-year history of successful collaborations. Soll, the only one with experience in business, assumed the role of president, while the other three used sabbatical leave to take turns as director of research. Together they decided on the strategy of incremental building. Indeed, the firm had no PR department until this year. And today, as Synergen's Antril and SLPI (secretory leukocyte protease inhibitor) near the end of clinical trials, the company is in the process of building its first manufacturing and marketing resources. Such a strategy, while cutting risk, also saves money: Soll points out that from 1981 to 1988, total operating losses for the company were only $5 million. But with no proprietary compounds or processes in the beginning, the founding scientists set about applying their biotechnological know-how to others' problems. "My job during the first four years," Soll recalls, "was to go to large pharmaceutical, agricultural, and chemical firms and find out what problems they had or what opportunities they thought could be addressed by the application of biotechnology. Then we would draw up a proposal to do the early-stage research, and they would fund it." This work was not quite contract research, however, and here the founders invoked another principle that has stood the company in good stead: Retain as much control as possible over everything that comes out of the lab. Though Synergen did not own any of the results of this early work, it did retain royalty interest. "None of the stuff we worked on then is the focus of the company at the present time," says Soll. "But it did give us experience and exposure and allowed us to build the team." In 1983, the founders decided to focus on pharmaceuticals, specifically in the area of inflammation. But rather than look for a pharmaceutical partner (the traditional strategy taken by many biotechs before them) the decision was made to fund the effort through an R&D partnership: Private investors would have royalty interests in the products that resulted, but Synergen retained full control and ownership. The firm's quest for complete control, proprietary rights, and, whenever possible, an exclusive market, is unusual--and ambitious--for a small company. "We had the opportunity to be the third company to do TPA [the anticoagulant, put on the market in 1987, that has made millions for developer Genentech Inc.]," recalls Soll. "But we didn't believe that that was of tremendous value to the company or to society, so we decided against it. It meant for a long time that we labored without any recognition because the investment community was focusing on a very small group of proteins, and ours were not among them. But on the other hand, what it means is that we have a very strong proprietary position on all the compounds that we have developed." Likewise, although a 1990 survey of 422 biotechs conducted by the accounting firm Ernst & Young revealed that two-thirds of all companies planned to merge or be acquired within the next five years, Synergen intends to remain independent. And while the company occasionally takes part in strategic alliances--as with a current joint venture with Palo Alto, Calif.-based Syntex Inc., investigating the efficacy of human nerve growth factor in treating Alz-heimer's disease--its number of joint efforts is far below the average of nine that Ernst & Young found top-tier biotechs to be involved in. Rich Purcell, a senior analyst with the Fairfield, N.J.-based investment firm Kline & Co., is one fan of this strategy. Says Purcell: "By choosing a market where your product is alone and one to which you can sell directly, you are going to rule out competition and leave out the need for alliances. Therefore, all the revenues will come back to your company. That's what is so attractive about Synergen." But a successful, broad-based company cannot be built on one product alone, and keeping the research pipeline full of potential products is perhaps the most difficult aspect of running a pharmaceutical company of any size, including a startup like Synergen. Industry watchers attribute SmithKline Beckman Inc.'s inability to follow up on Tagamet, its best-selling ulcer drug, and Genentech's lack of products to follow TPA as the cause of their inability to carry on as independent companies (they were purchased by Beecham AG and Hoffmann-La Roche, respectively). "Staying in the top tier is a dynamic process," says William Mills, general partner with the Venture Capital Fund of New England in Boston. "You don't necessarily need a blockbuster, you need a whole portfolio of successful products." Synergen is in the enviable position of having the potential for both, says Mills. Antril (IL-1ra) is a natural human protein that counteracts the painful and damaging inflammatory response caused by the cytokine interleukin-1 (IL-1). Its efficacy in the treatment of sepsis and septic shock, currently being demonstrated in FDA phase II trials, alone puts this product in the range of $2 billion in sales, industry analysts say. Further use in the treatment of rheumatoid arthritis, inflammatory bowel disease, chronic myelogenous leukemia, and asthma, analysts say, pushes the estimated total potential market for Antril--by 1997 or 1998, if clinical trials proceed as planned--close to $3 billion. Behind this potential blockbuster are other products currently in preclinical or clinical testing (see accompanying table). This rich a product line can be attributed not just to good, solid science, but also to savvy management, analysts say. Antril and SLPI were two of the earliest compounds developed at Synergen, in the days when the company was licensing out rights to some of its research. But Synergen kept an eye on the projects. In the late 1980s, when Hoffmann-La Roche, an Antril licensee, decided to limit its biotech activity to the acquisition of Genentech, and Ciba-Geigy AG lost interest in SLPI, which it had licensed, Synergen was able to reacquire both. According to Skip Klein, an investment analyst with the T. Rowe Price investment fund in Baltimore, a whole history of such sound decisions is responsible for Synergen's reputation in the industry: It has hired the right people, created the right environment for good and productive science, stayed focused, been able to raise money at critical times, and known when to turn a project up or down, he says. It's a combination of factors that Klein says he rarely finds in a single investment opportunity. "In other arenas I will usually opt [to advise clients to invest in companies that do] great business, rather than super management, because if the business is good enough, it can run itself," he says. "But biotech is very different, because you really don't have a business, you have a creative discovery process. That's a very tough thing to manage, so you need good people." Another key factor Synergen management has a feel for, according to Purcell, is the direction of the company's clinical trials. Trofak, he points out, has been far from the only wound healer in clinical trials. All the other manufacturers are attempting to prove efficacy against bedsores, whereas Synergen opted to tackle diabetic ulcers first. Although the Trofak trials have been suspended because efficacy is in doubt, Purcell still applauds the company's strategy. The bedsore market is much larger than that for diabetic ulcers, but because the diabetic wounds are fresher, the healing process should go faster, and therefore a product would get approved for market faster, Purcell and Synergen officials say. A different, but equally purposeful, strategy was used in planning the clinical trials for Antril: There is currently no effective treatment for sepsis--systemic infection--or the often- fatal advanced state of septic shock, and the potential market is huge. It might have been easier to get approval for the product in asthma first, but Soll points out that a company has to be careful not to put itself out of business. "You don't want to do something for, say, ingrown toenails, price it at $3, and then get approval for the same compound for sepsis, which should be priced significantly higher," he says. Purcell concurs: "The FDA will give faster consideration to treatments for life-threatening diseases. Therefore, you go for the [indication] that causes the most fatality." But Synergen does not have a corner on any of these strengths or strategies. Even Soll acknowledges that the company would not be where it is today had it not had a good dose of luck at critical points over the past decade. "We could have not imagined that Roche would buy Genentech or decide not to go forward with Antril," he notes. Neither is the company's bright future assured. With none of its potential products yet on the market, the greatest pitfall for Synergen lies in clinical testing. Just as Trofak failed to show statistical significance in the treatment of diabetic ulcers, any one of Synergen's compounds could fail to pass FDA scrutiny. While the Trofak setback is a serious one, Mills says that such a problem for Antril, whose potential market is estimated to be much larger, would be "catastrophic" for the company. Marketing and manufacturing will be new businesses for Synergen, and it is unlikely that a young company could navigate these uncharted waters without some problems. But the biggest, and most likely, problem that Synergen will encounter, Mills says, is regulatory review. "The FDA could decide that it wants to see more data for the application--a larger test sample, for example," he says. Such requirements could significantly delay a product's reaching market and give advantage to a competitor's compound. "It's a fact of life that not all drugs in clinical trials go on to be marketed," notes Mills. "And it's extremely unlikely that [Synergen] would collapse on the basis of one clinical failure. Whether or not they will be able to meet the expectation of the investment community is another question. This industry is underanalyzed and un-understood. It isn't at all clear that quality or safety and large market capitalization are synonymous." Soll also worries that investors and the press will get carried away--positively or negatively. Says Soll, "The fact that the stock goes down 25 percent because of the Trofak clinical results is unwarranted. The fact that it goes up by a factor of 10 in a year may be unwarranted, too. I myself sold some stock a year ago at $12, so it is obvious that I have no knowledge" of the extent to which perceptions affect stock price. But Soll emphasizes that whatever the financial situation and however long it takes him and his Synergen colleagues to realize their current goals, Synergen is in the race for the duration. "Our job," he says, "is to develop drugs: to manufacture them, market them, and determine what indications they should be used for. If we do that successfully, the stock will take care of itself." Susan L-J Dickinson is a freelance writer based in Philadelphia.

With A Little Bit Of Luck, Synergen Advances

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