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Biotech trends: Global partnering, mergers, acquisitions

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Stakeholders across the biotech industry have varied viewpoints about funding and industry trends, but all agree on two aspects -- the economic crisis will only have a marginal impact on the industry, and change is imminent across the board, from the approach to funding to strategic partnerships.

"The model that got us through the last 25 years is not enough to get us through the next 25 years," said Duane Roth, CEO of CONNECT.

CONNECT works with entrepreneurs, helping them transform their ideas into a viable business model. The organization has fostered a collaborative environment between research, investors and industry in San Diego's biotech, wireless and cleantech industries.

Roth acknowledged that early-stage companies face an enormous challenge in obtaining funding, since venture capitalists have gone from being exuberant during biotech's early years to becoming very risk averse, opting to stay away from emerging companies.

Roth proposed a distributed partnering model as a solution to the funding gap and to gear up for the future. "The old model had you building a company around every idea," he explained. "The new model will be to pass an idea on to the next group to take it to the next stage."

Four "cultures" need to be encouraged, he said. First in line will be a culture of innovation and discovery, with support from federal funds to explore new ideas. Secondly, outsourcing the proof of concept to vendors, who then gain expertise in the new technology. Thirdly, a culture of development, when it is transferred to big pharma, which in turn can rely on these now-experienced vendors for manufacturing. Fourth would be distribution and marketing, under the behest of big pharma, with deep pockets.

"My premise is very simple -- it would be very hard to house all four cultures under one roof. In the new model, we will each do what we are experts in," Roth said.

The industry association BIOCOM is organizing a CalAsia Conference in February 2009, with the aim of encouraging global partnerships, mergers and acquisitions, financing, outsourcing, lab testing and licensing between stakeholders.

"We are hoping for companies big and small, from across California to connect with Asian players in all of these areas," said Ian Wisenberg, CFO and senior vice president of BIOCOM. "Partnering is clearly a big part of what the industry has evolved to -- big pharma is doing this in a big way in India and China, but small companies are moving towards this, too."

Speaking about funding trends, Wisenberg foresees increased merger and acquisition activity, since big pharma companies have more liquid capital.

He cited the examples of GlaxoSmithKline (NYSE: GSK), which has been active in Southern California, and Eli Lilly (NYSE: LLY), which recently announced it had chosen San Diego as its West Coast headquarters.

Wisenberg said there would be ripple effects because of the economic crisis, but that the biotech industry is well positioned to raise capital when needed, even though there has been a reduction in the number of deals.

"We are somewhat inflated than other industries, because by necessity, we need to keep a treasure trove of cash as long-term capital. Secondly, the companies are not leveraged with debt, so they will not be affected by the credit crisis, except that stock prices will be lower," Wisenberg said.

From the other side of the spectrum, Dr. Juan Lama, founder and CEO of Retrovirox, which presented its case at the recently concluded Quick Pitch competition, offered a different perspective.

Retrovirox, an early stage clinical development company, was founded in November 2007 and focuses on a novel approach to block HIV entry. It secured seed money from a group of investors, four who are from San Diego and the other two from Spain.

"It is very tough for early-stage companies since investors have no tolerance for risk and they prefer to link with companies that have a clear map of where they are going," Lama said. "We have approached funding in several ways."

It is relatively easier to obtain government grants, he said. Once this is achieved, the company gets validation by scientists at the National Institute of Health (NIH) who evaluate the concept, so there is a dual benefit.

Another method he has found success with has been to approach European venture capitalists, who are willing and able to invest from $500,000 up to $2 million.

"This is the avenue we are relying on right now. The situation is so tough that you cannot overlook any opportunity for funding. In the U.S., the NIH has an excellent program, but there are more opportunities in Europe, because they have government incentives to match the funding," Lama said.

Wisenberg demurs. "I don't subscribe to (the idea that there is) access to cash in Europe. You may be able to raise $1 (million) to $2 million, but you won't be able to raise $15 (million) to $20 million, because Europe is in a worse position than the U.S. If you know people, there is money to be raised, but I don't expect new entrepreneurs to have these connections," he said.

The school of thought from the investment community in terms of funding trends leans toward the "survival of the fittest" theory, according to Jack Florio, the lead life sciences investor with the Tech Coast Angels.

The nation's largest network of investors and Southern California's leading source of startup funding, Tech Coast Angels hosts the annual Quick Pitch competition, where 15 finalists with startup ideas present two-minute pitches to a panel of expert judges consisting of experienced angels, venture capitalists and industry leaders.

"The companies we are seeing are those that get to market with very little capital infusion. This trend is due to the limited amount of capital out there, so the companies coming to us are tougher and they burn less capital," Florio said.

Investors, he said, are leaning toward funding medical device companies, which are attractive because their time to market is quicker.

Raising smaller amounts of capital that enable companies to get to the point where they can be acquired by big pharma is another trend, according to Florio.

"We are looking for better, more efficient ways for public companies to raise capital. I am talking with a boutique securities firm to bring a new type of capital-raising vehicle to biotech companies in San Diego that are public," revealed Florio, who expects this to happen soon.

As for where the industry is headed, Florio suggested there would be more developments in personalized medicine -- products that are extremely valuable to small pockets of the market. "Niche markets are always very attractive for investors, because you go in knowing it will very likely be effective within that small population," Florio said.

Florio also advocates partnering as a strategy to combat the funding gap and gain traction. The Tech Coast Angels recently invested in Amplyx, a drug development company focused on small molecule drugs. The company has partnered with other labs to develop the technology and with other pharmaceutical firms to test it, thereby sharing both the risks and rewards.

Consulting firm Deloitte recently published a report on directions for the future within the life science industry. The major trends it predicted concurred with the opinions discussed here.

The trends: Emerging markets will play a major role and companies would significantly expand investments in these markets across a range of activities; the industry will continue to converge; major revenue growth can not be achieved organically, so mergers and acquisitions will continue; and traditional commercial strategies will not be as effective, and companies will have to develop novel approaches to engage both end users and the industry regulators.

Nagappan is a San Diego-based freelance business writer.

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