BioScience Biz

Angel-backed companies more likely to succeed, says Harvard study

A new study published by professors at the Harvard Business School shows that angel-backed companies are more likely to succeed and show more growth than those funded by venture firms alone. Researched and written by William Kerr and Josh Lerner, the report found that companies with angel funding see between 30% and 50% higher growth figures in terms of website traffic, are more likely to survive for four years, and are also in a better position to receive further rounds of funding.
Steven Clark

Angel investing itself has seen large growth over the last several months with the creation of various organizations, events, firms and legislation to spur it on. We've discussed the Open Angel Forum series of events, the creation of "Super Angel" firms, the curated Venture Hacks AngelList, as well as current legislation both helping and hurting angel investments. Steven Clark

Read the full article.  Steven Clark

Cashing in on grant opportunities

Maybe you are a small business, or perhaps a health care company, a state agency or even a university researcher and would like to glean some of the largess from the federal recovery act. Or, perhaps you have a timely project that could use funding from a state agency or a private foundation. If so, what would you give for a 55% success rate in securing these highly competitive dollars? Over the last six years, an Ohio and Washington, DC-based company has been providing this grant success rate for a wide range of national clients. grants, federal grants, foundation grants, grant success rate, Gwen Mathews, Strategic Health Care,

The evolution of SHC's grant writing division

Stick with me here as I explain how this company got into the grant writing business. The company, Strategic Health Care, actually has been around for 16 years, specializing in congressional, state and regulatory affairs, public policy analysis, and association management within the health care industry. However, after many of SHC’s clients requested help in finding and securing federal funds, the company established a Federal Grant and Fundraising Division, hiring Gwen Mathews as Senior Vice-President to run the endeavor.

In the beginning, after Mathews was hired away from her own consulting business, there was just Mathews and two part-time grant writers. Six years later, the division boasts three full time employees and a stable of 35 professional contract grant writers and editors as well as some 11 account managers scattered across the US.

While the initial focus of SHC's new grant writing division was to help existing health care clients secure federal grants, the division’s success soon resulted in an expanded role including finding and securing grants from state governments and private sources such as the Avon, Kellogg, Krestge, William Randolph Hearst, Bill and Melinda Gates and Robert Wood Johnson foundations. Furthermore, as word of SHC grant-writing success spread, clients outside the health care industry also began seeking their services. While SHC still emphasizes health care fundraising, the company also has successfully obtained grants for clients from a wide range of federal departments and agencies, including NIH, DoD, DoL, DoE and the USDA. Since this summer, SHC has written and submitted grants for a Houston-based energy company, for a systems biology research project and for the Universities of Tennessee and Cincinnati, among several others.

“Business has mushroomed each year since (setting up the division)…We’re seeing a lot of non-healthcare people taking an interest (in what we have to offer),” explained Mathews. As an example, she said that SHC is in the final stage of negotiations with the state of Delaware to help all of that state’s agencies identify and secure federal grant dollars, most of which would not be healthcare related.

Mathews, who splits her time between SHC’s Columbus and Washington, DC offices, went on to say that SHC has worked on “hundreds” of grant applications over the last six years and that the grant writing division currently has 25 active clients for which about 50 grant applications have recently been submitted and are awaiting funding decisions.

What is the secret for SHC’s success?

“We can help (clients) determine if a project is a good match for the funding opportunity they want to pursue. In terms of return on investment, the average grant is about $500-$600K, with a range of $250K-$3M. So the investment they make (in SHC) enhances the chances of being successful. We bring to the table a group of folks who are very, very skilled in what they do and understand, not just federal grants, but the grant world in general and (who) have a great depth of knowledge (in the grant application process) that the average client doesn’t have.” Mathews said. “In the long run, we really save (our clients) money. We have had many clients come to us who have put in multiple applications that have not been successful and we helped them develop successful applications, so we do save them money.”

Michael Stein, Executive Director of Government Affairs for Bassett Healthcare in New York, used SHC to successfully secure a federal Health Resources and Services Administration grant for a tele-health network system. He pointed out that it was a very complex project involving several partner organizations and had a very short lead time of less than three weeks. Stein searched online for a grant writing service, interviewing several and “…was impressed with the ‘grant game’ at SHC.” SHC put a team of grant writers on the project and made the deadline—normally SHC assigns one account manager and one grant writer to a project, but this illustrates the company’s flexibility in dealing with granting tribulations that many businesses could not tackle.

Stein added that although the grant received the highest score of the many grants that were submitted, it was not funded since they were not in a healthcare shortage area, one of the preferred, but not necessary, requisites in the RFP. Mathews, who was acquainted with the HSRA program officer, called and inquired about the grant’s status, which eventually led to it being funded. In fact, Mathews added that she was close to calling in the government relations team at SHC to see if Bassett’s congressional representatives could influence the agency’s decision. This exemplifies the value of not only having professional grant writers, but also of being familiar with the federal grant system and being able to bring other useful resources to bear in order to address the all-too-frequent exigencies of applying for federal grant funding.

In another example of a satisfied client, Rick Giecek, Chief Development Officer for the University of Tennessee Medical Center said that they have used SHC to apply for 6 grants from the federal and state governments and the Avon foundation, three of which were awarded. Their latest awards totaled almost $1 million for diabetes education and for digital mammography equipment. Giecek opined that “…Strategic does good work, they have a lot of depth and breadth.”

As this article was in preparation, SHC founder and President, Paul Lee, announced in an email that SHC had landed its largest grant for a client--$45 million dollars from the USDA.

That probably would be another satisfied client.

To contact the SHC grants division, email Gwen Mathews at: Gwen.Mathews@shcare.net

For the purpose of fairness, the author discloses that he is a part-time contractor for SHC. grants, federal grants, foundation grants, grant success rate, Gwen Mathews, Strategic Health Care,
© 2009 Steven S. Clark, PhD, some rights reserved.  Articles contained herein, are meant to be distributed freely to interested parties. However, any use, including excerpts from any article, must credit Steven S. Clark and provide a link to the original article published in BioScience Biz.

Disclaimer: The authors used their best efforts in collecting and preparing the information published herein. However, neither Steven S. Clark, nor other authors, assume, and hereby disclaim, any and all liability for any loss or damage caused by errors or omissions, whether such errors or omissions resulted from negligence, accident, or other causes.

Is there an advantage to Angel vs VC backing during an IPO?

For companies that go public, how do those that were backed primarily by angel investors fare against those primarily backed by venture capitalists? That was one of the questions addressed in a working paper recently published by two professors from the University of New Hampshire. They examined data related to the pre-initial public offering (IPO) shareholders of companies that subsequently went public. The conclusions from the study provide interesting information that should be considered for companies looking to go public as part of their long term capitalization plan.

Read more from the article by Matt Storms that was recently published by the Wisconsin Technology Network News.

Making the transition from academia into the world of bioentrepreneurship

It's the first day of class on a postgraduate program in engineering management, and the students, mainly engineers and life scientists, are looking anxious—mostly because the class has started with a metaphor: Alice's Adventures in Wonderland. Alice is an appropriate role model because her journey is similar to that experienced by scientists moving from the safe waters of the laboratory to the uncharted waters of the business world. Alice left a safe and familiar environment and set off down a rabbit hole on a journey full of ambiguities, complexities, and only later, realization. She survived her ordeal because she was willing to change perspectives when faced with new ideas or situations. In other words, she adapted—just what budding bioentrepreneurs must do.

How can an academic scientst make this transition into the world of entrepreneurship? Rochelle Young, a professor of management engineering at the University of Colorado give advice in her article, "Adventures in Wonderland," published recently in Bioentrepreneur.

SBIR (non)Authorization Redux?

The latest word from Washington is that getting the SBIR reauthorization passed before it expires on March 20 is about as unlikely as the Cubs winning the World Series without a shortstop.  In order to keep the program alive until Congress can get around to the reauthorization, a continuing resolution (CR) is needed to temporarily extend its life. In fact, the SBIR program currently lives on via CR life-support since the last Congress did not complete the reauthorization bill.

The SBIR Program, created by the Small Business Innovation Development Act of 1982, periodically comes up for reauthorization every few years.  It was reauthorized in 1986, 1992, and 2000 and was slated again for September 2008; but, instead, congress failed to act and the program was temporarily extended by CR to March 20, 2009.

"You are encouraged to contact your congressional representatives..."

In 2008, Nancy Pelosi’s (D-CA) House made a heavy-handed attempt at the reauthorization, and under pressure from the biotech lobby, a bill (H.R.5819) was strong-armed through the House Small Business Committee. A major point of contention was whether to allow companies that are majority-owned by VCs to be eligible for SBIR funding—currently they are not. In other words, the debate centered on whether to emphasize the “S” vs the “B” in the reauthorization act.  To the consternation of the small business community, which was not allowed any input by the Committee, the bill passed and SBIR eligibility was extended to companies mostly owned by VCs.

Over on Harry Reid’s (D-NV) side of the Capitol, and under the leadership of Senators John Kerry (D-MA) and Olympia Snowe (R-ME), the Senate Small Business and Entrepreneurship Committee recommended a compromise bill (S.3362) that was supported by both the biotech and the small business lobbies.  Despite this broad and bipartisan support, Reid never scheduled a vote on it and the 110th Congress adjourned without completing the SBIR reauthorization.

Both bills are now moribund and the SBIR program is on its last legs unless another CR is passed.  The 111th Congress will have to start from the beginning on a new reauthorization bill, but efforts to reconsider the reauthorization bill have not yet begun.  Even if Congress began work on the bill today, it is unlikely that it would make it to Obama’s desk before the end of this year, several months after the program is scheduled to expire. Hence, another CR is urgently needed in order to avoid interruption in the SBIR program.

You are encouraged to contact your congressional representatives to urge them to take action to ensure that the SBIR program does not die from neglect.  Here is a template of a letter you can send to your Representative and Senators. And If you are worried about that SBIR grant application you plan to soon submit, you might consider sending a letter to those who held up the reauthorization last year, including every member of the House Small Business Committee as well as to Senate Majority Leader Reid.

Tell them what an important “stimulus” the SBIR program is for business development, job creation and the economy.  That ought to get their attention.

Whoa! Innovation at the USPTO?

Backlogs at the USPTO are being dealt with using a creative strategy, the Peer-to-Patent project, that allows inventors to publish patent applications on the Web for comment by experts with relevant expertise. This is a creative way to uncover "prior art" and, thereby, assist patent examiners in assessing applications.  In other words, this is a triage system to help reduce the number of patents that are not novel.  This peer review also may reduce the number of infringement law suits currently clogging the courts.

Now, if only we can get the FDA to think outside the box in order to accelerate NDAs while maintaining high standards of safety.

Read the story about the Peer-to-Patent project in the Chicago Tribune.

Entrepreneurial wisdom for would-be startups

InfoWorld recently interviewed a number of successful tech entrepreneurs, venture capitalists and angel investors to create a basic how-to article filled with advice and cautionary tales for those seeking to launch a viable startup. A key theme of the article was selecting the right time and way to transition from your full-time job to your full-time startup. Many of those interviewed, relayed their experiences of actually using the basis of their day jobs to help “bootstrap” their companies. 

 

The article includes a variety of insights covering the pros and cons of quitting your day job, the fine print that may be part of an employment agreement pertaining to intellectual property, positioning your company to attract financing and the very critical importance of networking to help you avoid reinventing the wheel.  Read the story here.

For the inventor--mind your intellectual property

To disclose your idea or not to disclose it can be a critical question. The currency of success in science, especially academic science, is the almighty publication--invited talks also are highly valued.  The more we do of both, the more respect we generate among our colleagues and promotion committees. But, a scientist with an idea that might have commercial value needs to weigh the benefits against the risks of disclosing that idea, especially in published form. There can be a right and wrong time to do this.

A recent article in bioentrepreneur discusses the pros and cons of publishing as it relates to intellectual property. The insightful article talks about the use of “defensive” publication as a way to solidify patent claims. But the article also talks about the timing of disclosing a marketable idea and a researcher would be wise to consider these points.

“In the United States, when an inventor publishes his or her invention, a one-year grace period ensures that the inventor's patent rights are not immediately extinguished. Publication immediately extinguishes most non-US patent rights, however, even those of the inventor. A decision to publish is thus a decision to irreversibly surrender potential patent rights. Such an important decision should only be made in the context of a comprehensive IP strategy.”

Experts talk about how to make the most of biotech clusters

Many cities and countries view the foundation of a biotech sector as desirable for a high-tech, intellectually driven economy. But a discussion by seasoned, international biotech management and investors suggests that attaining an environment with the right mix of money, management and innovation remains a difficult and long-term challenge.

Location is interwoven with the ability of biotech startups to prosper. Regions with nascent biotech sectors often find attracting the necessary financial and human resources to their area an uphill struggle, which can mean the difference between success or failure for a fledgling life science business. In the following article, a group of experienced biotech executives and investors from around the world discuss the pros and cons of building a business inside or outside a cluster. The article is an abridged transcript of a Bioentrepreneur roundtable discussion held at the Marriott Boston Copley Place.  The article was edited to address the major themes of that discussion and was originally published online in Bioentrepreneur.

The panelists included the following:

Fritz Bühler is Director of the European Center of Pharmaceutical Medicine, University Hospital, Basel, Switzerland, and a partner in Bear Stearns Health Innoventure;

C. Mark Tang is Managing Director and Chairman of World Technology Ventures, LLC, New York, New York;

Pratik Shah is a partner at Thomas, McNerney & Partners, San Francisco, California ;

Mark Leuchtenberger is President and CEO of Targanta Therapeutics, Cambridge, Massachusetts;

Ko-Chung Lin is Chairman and CEO PharmaEssentia, Taipei, Taiwan;

Pedro de Noronha Pissarra is CEO of Biotecnol SA, Oeiras, Portugal;

                                                                    +++

How important is location in the success or failure of a biotech enterprise?

Pratik Shah: If I had any advice for an entrepreneur who's looking to start up a biotech not located in a cluster, it would be: "Move to the nearest biotech cluster." There has to be a really compelling reason not to do so. And it has to have something to do with a core competitive advantage that staying in the current location is giving them.

And for governments that are trying to create a nascent biotech sector in their region, the question I have for them is: What are you shooting for? Is the goal to draw sustainable research funding from the US National Institutes of Health [NIH] or the like? Or is it to build companies that are going to create products? If the answer is the former, then there are models that have recently emerged in the United States. For example, Florida has set up the Scripps Research Institute with a significant allocation of government funding to get it up and running, and I presume the goal there is to create sustainable research that will attract NIH dollars. But that's a little bit of a zero-sum game. If the objective is to create products, then there is a fundamental gap, because allocation of dollars is not enough. Without involvement of experienced, professional investors who know exactly what kind of things will get funded down the road, it's hard to create an organization that's really ready for that next level of funding without having an active collaboration or dialog or, in the ultimate sense, a very close partnership with the professional investors who are going to take those companies to the next level.

Pedro de Noronha Pissarra: With clusters, at Biotecnol we personally have a geographical problem. Nobody would invest in Portugal, where we are based. So for that reason, we set up a unit in Maryland, and we started doing our deal-making through the Maryland company, Biotecnol Inc., and the whole thing developed very nicely.

But we're still not quite in the cluster, and attracting top-tier management is a problem. It's not qualified people, because there are many qualified people around that went to Ivy League universities, or went to Oxford and Cambridge in the UK. But it's really hard to find the top-notch manager that will see us to the next stage. So I would say one thing: Don't start the company in a place that is not a cluster!

Portugal is a great place. I love it. I lived, worked, and studied abroad for many years and then went back because of the fantastic lifestyle. But, at the end of the day, you've got to be on a plane every month, going to biotech clusters, delivering your talks, convincing people that while we've got great wines and great food in Portugal, we also do great things in biotech. It was initially a very hard sell, but since we have grown and have created a recognized and successful buisness, perception about us has definitely changed. But we need more examples of success.

Mark Leuchtenberger: When I was recruited to Targanta [in the summer of 2006], they said they had a great drug with two positive phase 3 trials, and said the company is located in Indianapolis. I said, "Well, my geography is here, I've spent twenty years here, and I'm not moving." And they said, No, we're not expecting the CEO to move to Indianapolis. Essentially they were doing this search while acknowledging that Indianapolis might not be like Pedro's description of Portugal. It was going to be a place where you could do R&D, but you might set up a commercial or investment headquarters somewhere else—either San Francisco, or La Jolla, or Baltimore, or Boston, but not Indianapolis. You don't think biotech is regional, but, because of the companies and investors, it's intensely regional. People don't want to have to fly if they don't have to.

Fritz Bühler: I'd like to come back to this two-site company setting. We have never actually been able to work out a company in development with two sites. At some point, you have to move everything to one place. So I think that you may have a problem with Marylan and with Portugal and you'll have to make up your mind.

PNP: We've been asking this question to ourselves for awhile now. What are we going to do now? Are we going to spin-off the products completely to the Maryland subsidiary and Biotecnol Portugal is a shareholder, are we going to raise funds and hire local teams so it actually ends up being a spin-off of the company? I see your point; it's very valid. And it's already creating a lot of questions, so people are saying, "We are investing where? Where are the shareholders, where is the management?"

                                                                    +++

Beyond easy access to venture capital and infrastructure, why are clusters so important?

ML: Take the Boston area. I think in the past five or six years or so, Novartis [Basel], Pfizer [New York], Merck [Whitehouse Station, New Jersey], Wyeth [Madison, New Jersey] and Bristol-Myers [Princeton, New Jersey], most recently, have all voted with their feet to come here. I think of it sort of as a casino: the house always wins. By that I mean the house is the resident group of knowledgeable, able managers and scientists. Projects come and go, and sometimes you are out of work for months, but usually you just keep participating and don't have to uproot your family. A lot of people switch jobs in Cambridge and don't even change their commute except for the last 200 feet. There are 50 companies over there!

I think that this is what people are betting their careers on now: serial entrepreneurship, over and over again. I've been doing that for the past five years—some of it works out pretty well and some of it works out pretty badly, but here's the bottom line: you're probably staying in the same location, you're accruing a group of people you trust who you can work with, and hopefully you're accruing the trust of the venture capitalists so that when another good idea comes up, they think of you and hopefully you can participate.

PS: I need you to talk to the CEOs of my companies that have only one product. They're always trying to in-license something for job security, and I say, "Hey you're in a cluster. You're going to be fine."

C. Mark Tang: One thing I would like to mention is the strength and existence of academic institutions that are always related to bioentrepreneurship, because the intellectual property and intellectuals are coming from this area. So I think that's a large part of the reason why big pharma and biotech are here in Boston—because of Harvard, the Massachusetts Institute of Technology, etc.

                                                                    +++

In what ways are countries with nascent sectors attempting to foster biotech?

CMT: I'll just explain China as an example of Asia. Typically what China has is the government funding. For example, Ministry of Science and Technology, among other agencies, has grants it can fund research and development of startups with, and the city usually has some fund, and then certain banks do too. The government-owned high tech parks at times provide biotech the incubator space perhaps for free or at a discount for a couple of years and perhaps some seed/grant money for free as well. But there are not many, if any, Western style venture capital [VC] firms or groups for biotech. I once invited a well-known VC firm from the US to China to speak at a conference I organized. The VCs were very excited about the prospect of the industry after seeing a high tech park and want to open an office perhaps in five years. But still, biotech is very new.

PS: I'm curious, are there more examples of countries like Singapore who've said that they're taking a very long-term view and allocating a billion-plus dollars in capital toward biotech? And fundamentally from an infrastructure standpoint, is there really a logical reason that biotech should be there as opposed to some other Asian region? That is a positive example of a government making a long-term financial commitment to try to create a cluster.

CMT: I've been to Singapore a few times and I know a couple of managers of the biomedical fund as well. I think the strategy of Singapore is good. They want to form a biotech cluster. Mainly the money they invested in the beginning had a few strings attached, such as giving them first rights of refusal in Asia. So essentially what they were doing was investing money in technology and products overseas and buying Asian rights, and, in turn they're going to sell those products to the Malaysians, to the Indians and to China.

What's happening in Asia, I believe, is that Singapore is a role model because they have managed to set this up in very powerful way, put the right funds behind it and attract, even buy, top people even a Nobel Prize Laureate, from around the world to work and live there. But in China, as well as other Asian nations, I'm worried whether there are funds available now to do this similar (approach) to Singapore? Of the main Chinese biotech centers, Beijing, Shanghai are very good. The next group is TianJing and Shenzhen. One should not forget that the Western Hemisphere, led by the United State, has an enormous advantage and is ahead by 20 years compared with Asia. I don't think one has to reinvent the wheel. Just take the best from what we have learned in developing biotech regions in the United States and Europe, and then insert that in an orchestrated way in Asia, taking advantages of lost-cost, high quality human resources and emerging large local market there.

Ko-Chung Lin: When I deal with Asian companies, I tell them, "You know, if you want to get money from the US you've got to register yourself in the US." I work with people who are actually registered here, but in reality it's virtual—no one is really based here, everyone is in China. But it appears to be a global company, and this makes US investors feel comfortable. Especially in New York, where there are large funds and they have a percentage that they have to invest internationally, so they're very active in looking overseas. Of course, the key part is you've got to have a good story. You know biotech: you don't have to be making money.

PS: I guess the real question is how many venture dollars are flowing into those regions, and if the answer is not a lot, then I think the writing is on the wall. Because although many countries are vying for life science-oriented venture funds, is biotech really for every region? Is there really a fundamental reason why biotech should be in a particular geography where it already isn't? I would take a really cold, hard look at what the facts are.

                                                                    +++

What types of business models and exits can biotechs around the world offer investors?

CMT: Like the US, there are four or five business models in China: reagent, equipment and services; generic drugs; technology platform; R & D products and hybrid of technology and products. Right now, service companies, such as contract research organizations, and generic companies are hot in China. Several of them have raised money through IPOs in US stock exchanges.

FB: Valuations have changed enormously over the past ten years. Obviously once you have an asset you want to let it grow as much as possible, so probably the best point at which to sell or partner is after a proof of concept, and it seems possible to develop any compound up to proof of concept. So I think the time is over for any garden-variety investor; it's now smart money. I believe that the funds have changed greatly in the sense that they are now run by people from the pharmaceutical industry who bring not only the dollars, but smart dollars to the table.

The initial public offering [IPO] situation is another major problem, but one well solved in the United States with the NASDAQ exchange, and poorly solved in Europe or in other parts of the world. There are plenty of stock exchanges, but none really have the right flow or a big enough float, and the situation is so scattered in Europe that it's really difficult to go through a successful IPO. It does still happen, despite this scattering, and one wishes that there would be more concentrated IPOs, but nationalism is a huge problem. Why should you, as a Viennese, invest in Zurich? Or a UK person invest in someplace besides London?

PS: I recently looked at the number of companies that were venture backed that had liquidity events driven by IPOs versus mergers and acquisitions [M&A] in the past three years, with a cut-off of $300 million exit value or greater in biotech, pharmaceuticals and medical devices. The numbers suggested that the two paths led to roughly equal numbers of exit opportunities. So, yes there has been a lot of buzz about M&A because of the recent flurry of activity, but I still think that the other path exists; it's certainly nowhere near the valuations that it used to be and therefore has really created a situation in which the amount of the capital and the pre-money valuations that private investors have to make work is much more constrained. I think the two paths still exist.

FB: I'm not sure that the IPO window is totally closed. There's still some happening, particularly in Europe, although the M&A pathway is the one that is now favored. There again, one should caution the biotech/pharma small companies not to merge or be acquired too early, but really grow their value. Unfortunately, that doesn't always happen because of the enormous pressure being exerted by the pharma world, which is short of good ideas and compounds. There's also an innovation gap and a development gap—so pharma really gets its arms around everything it can find.

PNP: The hybrid model should help with valuations, but it's a very hard sell. To say, Okay, we have excellent development capabilities, we may have worked with Schering-Plough [Kenilworth, New Jersey], with Sanofi-Aventis [Paris] or whomever, but still it doesn't sell because the model is capped. The service company will always be the less attractive thing for the investor. I know Pratik has a service company in his portfolio, but he's one of the very few venture capitalists that I know that has that. So you've got to separate the businesses completely. And this puzzles me because it's a perfect meeting of the two worlds; you can mitigate the risk, you even have nice revenues, you've got granted patents on valuable products and technologies, among great know-how, but when you put the two models together, people don't generally like to invest in such structure. Why? I am not certain, but I am convinced that since we favored a product development oriented strategy we certainly have created a great deal of interest in the investment community.

KCL: I can explain this to you. The problem has two parts. The service guy says, I don't want to do drug development because I'm always losing money; the drug development guy says, I want a high-risk return, and I don't like service. So, when you put them together, very few people want to do it. Another problem is working with partners. Because you are working with big pharma, they give you projects to do services on, and they're scared that you're passing these things on to your idea unit or going around them. So pharma says, Listen, if you want to do drug development, you're not going to get our contract. If you shut down your drug development, then we'll give it to you. Because this product is so important to us, you know we've spent hundreds of millions of dollars, we're not going to give it to you if you have an idea unit.

ML: I've got a Biogen [Cambridge, Massachusetts] analogy from the early nineties. We were going along, scraping by, but we signed this deal, got a little bit of money in, and then all of a sudden the hepatitis B and alpha interferon royalties started to kick in and our royalty revenue went from $60 million to $70 million in 1991 to $135 million in 1992. Suddenly we had money to fund all our own development. Did the investment stock market like it? No, they hated it! It was like it was a service business. It was pure royalty; it was pure profit, but they looked and they said, What are you doing with it? You have boring royalties that are only going to increase a certain amount, and until then you're nothing more than a royalty trust and a boutique and a bunch of airheads walking around talking about things.

PS: But that's actually not as irrational a financial decision as it sounds. Look at Biogen versus Amgen [Thousand Oaks, California]; they were started at roughly the same time, and, if you look at those companies' market caps from when they were started or when they went public to today, you see that there's a long period when Biogen's market cap is basically flat, whereas Amgen was favored by Wall Street. Why is that? Well you could call it brilliance or you could call it just luck. But if you have a specialty product where you can develop a sales force, you're going to make a lot higher margin on a lot lower sales line than a royalty model. That's why the market caps diverged. I think that the fundamental issue of market appreciation comes down to, how much are you really going to be able to derive from the pipeline?

---

Biotechs and pharma companies need to embrace a new model

In new drug development, the “valley of death” is the period when the research funding is running out and venture funding has yet to materialize.  Both small biotech and large pharma companies increasingly are turning to a business outsource model that G. Steven Burrill labels the "virtually integrated company".  Big pharma has found it easier to spin off pieces of their operations to small biotechs that are eager to find an income stream to get them through this lean period.  Small biotechs that are already set up for a particular technology that the big pharma needs can respond more quickly and the big pharma does not have to divert resources from one profitable project to another.  This win-win model seems to be an emerging trend.  Read the full article here.