Biotech's new landscape

Biotech investors consider the recent boom as well as the unpredictability of their market during a panel discussion at Harvard Business School.

7 min read
Biotech investors considered the recent boom as well as the unpredictability of their market during a panel discussion at Harvard Business School titled "The New Gold Mine: Investing in Biotechnology and Life Sciences." Led by moderator Peter Wirth, executive vice president of Genzyme, the group reviewed the past year in biotech and debated the role of new toolkit companies. They also discussed the management and ethical issues arising in this unique investment arena.

2000: A big year for biotech
Wirth started the discussion with a simple question aimed at the $30 billion influx of funds into biotech last year. "Why was the year 2000 such a big year for biotechnology?" he asked the group.

"What comes to mind is how we entered 2000 and how we left it," answered Noubar B. Afeyan, CEO of NewcoGen Group. The year began with many venture firms abandoning biotech for Internet and other technology companies, he explained. Then, during the course of the year, many companies succeeded in going public while significant breakthroughs were being made in genomics. "So," Afeyan said, "you had this incredible divergence of attention and opportunity."

The main biotechnology event every year, according to panelists, is the Hambrecht & Quist conference held in January. Terrance G. McGuire, managing general partner at Polaris Venture Partners, thought it useful to comment on how the tenor at H&Q reflected on the past year. "The only way I can describe it is as a satiated feeling," he observed. "Somehow, people felt vindicated that they had stayed in the trade. They saw many companies go public and their company coffers had been refreshed. It has become a little more crowded but, for the most part, it is not an unhealthy return on overall investment."

Bryan Roberts, general partner of Venrock Associates, added that the abandonment of the market before 2000 created a critical mass of private companies. "There were companies growing and maturing on the private side for those two or three years," he said, citing "pent-up back pressure by mature private companies that were ready to go public" as a major driver of 2000's boom.

Dr. David J. Collier, managing director of Burrill & Co., raised the specter of industry cycles in discussing the past year. "When new investors come into biotech," Collier said, "what they don't realize is the really long timeline that health care has for developing new products. What we've seen over the course of 2000 was a huge explosion--the biggest yet--of interest in biotechnology fueled by genomics.

"It reached its peak in March, and at that point it started to decline. If you look from the beginning of the year to the end of the year, bio high-tech had very good returns in comparison to most industries. But if you compare it from the peak to the present, it is down 60 percent or so."

With a strong case made for the industry's perilous cycles, Collier went on to suggest the possibility of an industrywide transformation. "The real question going into 2001 is, Where are we in the cycle? Are we on a traditional downswing, where companies are going to have difficulties finding financing and where there will be very few IPOs? Or is the biotech industry now fundamentally transformed by the technologies that have come out in the past years, and by the new class of investors that have gotten involved in sustainable equity?"

Toolkits vs. drugs
The most hotly debated topic of the panel was the role of the so-called toolkit companies.

Wirth extended the gold-mining metaphor used to title the panel. "We all know the story of the guys who sold the picks and shovels, and the guys who panned for the gold--and who made the money," Wirth said.

"There is a parallel in biotechnology," he explained, "between what we call the toolkit businesses--the people who are providing the breakthrough technologies--and the product companies: the people who try to use these approaches to discover therapeutics." Wirth asked the panel for their comments on the dynamics between the two.

"Genomics is not just another technology in this sector," Afeyan said. "I think that there are opportunities for shorter-return technology information companies to come out of this sector that don't have the $500 million development cycle and 12-year time frame. And those are the companies that we're interested in at my company. They won't look like typical biotech companies; they'll look more like typical high-tech companies."

Collier was less sure of this trend. "That is a story that is changing by the day," he said. "The early part of the year 2000 was sort of the era of the toolkit companies. But then, toward the end of the year, the product companies survived much better than the toolkit companies." One of the things he learned at the H&Q conference was "the strong return of product-oriented companies."

A participant in the audience, Lita Nelson, director of the Massachusetts Institute of Technology's Technology Licensing Office, added comments regarding publicly funded toolkit development. "I think there is a trend that no one is watching," she said, "and I think the VCs need to get involved in it. The National Institutes of Health might make it illegal to do proprietary toolkits under their research tool guidelines. This is sneaking up on you and no one's come to bat for the university."

Instead of building separate companies out of proprietary toolkits, Nelson suggested it might be more valuable for early-stage drug companies to keep the toolkits to themselves for their own discoveries.

Roberts proved to be another proponent of keeping the toolkits within the drug companies. "If you step back, as Lita says, and come back to the very early stage of a company, what is the goal? The goal is to build a big company, a big sustainable enterprise. If you look at history, those have primarily been product companies."

Roberts ended up supporting something in between: a toolkit company within a developing drug company. "What you often find is people utilizing this technology to develop and build infrastructure and revenue streams to then go on and provide you with the ability to evolve your products business," Roberts said. "It lightens the load from the investors' perspective if they have something that can provide some interim return revenue."

Afeyan returned to the relationship between toolkits and the drug development process. "Biology is changing completely," he said. "It is becoming a systems biology, instead of a serial biology where things are looked at one at a time.

"What you'll find in the pharmaceutical industry is that people don't know what experiments to do, let alone what tools to use. So if you are a tool developer, you could make a tool and try to sell it, but the customer won't know what to do with it. Or you could say, 'Tell me what your issues are and let me use whatever tool I can develop or acquire or integrate to solve the problem for you. If I get good at it, I'll commercialize it and you can buy it yourself.'

"I think that when the story is written," Afeyan concluded, "you're going to find that the transformation of biology is being done in collaboration between pharmaceutical companies and technology developers. So the technology developers are forced to become a service industry."

Clearly, the toolkit vs. drugs debate is still playing itself out.

Traditional challenges
Wirth then turned the conversation toward what he called the more "traditional considerations" within the unique world of biotech. He wanted to know what the red flags were, what made biotech work, and what got the panelists excited.

Lisa Skeete Tatum, a partner at Cardinal Partners, concurred with McGuire that it is the team that makes the difference to any company. She added that a well-defined, customer-oriented business model is important as well.

Venture capitalists gain prominence by creating an aura of stability in an unstable arena, panelists agreed. Afeyan added: "Really good venture capitalists are all closet entrepreneurs. They all get absolute excitement from seeing these companies develop with their active involvement; but if they said they were entrepreneurs, the check and balance would be lost."

Tatum stressed the hands-on nature of her firm. "All of our partners have started at least two companies," she said. "We like to get in in the early stage. That is where our thrill is."

Collier felt it important to acknowledge that the panel participants represented the more active kind of investor. "There are lots of very large, later-stage funds that are not represented on this panel," Collier said, "who basically will invest in later-stage companies that have strong teams and (for which the) investors don't play a very active role."

From the perspective of the general public, the word biotechnology is linked to ethical dilemmas and fears regarding the power of science to alter nature. Wirth asked the panel to discuss how, as investors, they deal with ethical dilemmas.

Roberts, allowing that "every one of us comes from a different background," presented a clear, investor-focused approach to addressing ethical dilemmas. "I don't want us to get involved in something that will reflect badly on the investors," he said, "or if I feel that, because of ethical questions, public relations issues will crop up."

McGuire discussed his involvement with two companies that have encountered very different sorts of ethical issues. Decode Genetics, an Iceland-based company that conducts detailed tracing of genetic histories in Iceland, has spurred debate over privacy issues. And Paradigm Genetics, a company developing agricultural applications for genomes to increase crop production in developing regions, has spurred environmental debate. In both cases, McGuire said, they strike a balance between risks and attempted benefits. In the case of Decode Genetics, the high degree of regulation provides added security and serves to lower the risks.

"There will always be ideas on the fringe," McGuire added. "One has to weigh the benefits. And we never hide what we're doing." ?

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