Over the past week or so, I have been asked by a number of people, both privately and in the media, what I think about the acquisition of Seattle-based ZymoGenetics (NASDAQ: ZGEN) by Bristol-Myers Squibb. As is usually true in Seattle, the prevailing reaction following the announcement was some moaning and gnashing of teeth, with “woe is me” pessimism about the inability of Seattle to build an independent “anchor tenant” biotechnology company. I completely disagree with that sentiment.

I have lived in Seattle and worked in biotech for 15-plus years, and I hear this tired refrain repeated each time Big Pharma or Big Biotech comes to town to acquire a company. In the beginning, I bought into the pessimistic view of what is required to sustain the biotech industry in Seattle. However, after watching the aftermath of a number of these transactions, I no longer buy that these acquisitions are harbingers of doom, or even that they are bad things at all. In fact, I have become convinced that events of this sort drive new rounds of innovation and company-formation, and are tremendous positive indicators of the vibrancy and health of the biotech industry in Seattle.

Generally (and grossly oversimplified), there seem to be two types of Big Pharma acquisitions of smaller biotech companies: (1) the strategic operational acquisition; and (2) the asset acquisition. In the strategic operational acquisition, the acquirer is looking to strategically add capabilities and expertise. In the asset acquisition, the acquirer has little interest in the capabilities and expertise and instead is acquiring key product(s). Seattle biotech has experienced a number of each, and I would argue that both are potentially significant “wins” for the local industry.

In a strategic operational acquisition, the acquirer will normally “rationalize” the local operation, trimming redundant functions (or functions in which they are not interested), but retaining key capabilities, teams, and individuals. For all of the disdain heaped upon the Big Company acquirer for subsequently beating innovative and entrepreneurial spirit out of the acquired target company, the injection of capital, stability, resources, etc. into those operations generally enables sustainable and productive operations to remain in Seattle. The acquisitions also generally provide liquidity to the investors in the acquired company, enabling a recycling of investor capital within the Seattle biotech industry and creating wealth for investors and entrepreneurs alike. I would suggest that Corus Pharma, Rosetta Inpharmatics, and Immunex are examples of this type of acquisition.

Yes, I know, things change over time as the realities of the industry catch up with the large acquirers, and occasionally large operations such as Rosetta are later shuttered. For the consequences of this, see the description of asset acquisitions below. In an asset acquisition, the Big Pharma acquirer shuts down the target company, releasing (or offering relocation to) virtually all employees. While this sort of acquisition does not leave in place the sustainable and productive operation as in a strategic operational acquisition, it does provide investor liquidity and the positive effects on innovation that this recyclable capital can (and does, in Seattle) produce. The Lilly acquisition of ICOS is a good example of an asset acquisition. The effect on employees is more abrupt and dramatic, and leads to some talented scientists and entrepreneurs leaving the Seattle area.

However, in both types of acquisition, whether the displacement of talented, innovative entrepreneurs and highly productive and competent individuals is abrupt and dramatic, or more gradual over time, the result historically in Seattle is the same. Those talented folks gather together around new ideas, and they pursue and secure investment in those ideas, and they build great new companies. And most assuredly that will be the result with ZymoGenetics.

I am not unsympathetic to the negative impact (usually short lived) on individuals who lose their employment in these transactions. Being out of work, particularly in this economy, is frightening. However, a certain amount of that comes with the territory. Working in small, innovative, exciting companies that grow to be successfully acquired (or unsuccessfully shut down) is risky. Anyone who cannot live with that level of risk should look for work in a different type of organization/industry. But for those with the stomach for the risk, the emotional, intellectual, and economic rewards can be great. It is those people who can survive and thrive in a cyclical industry of growth, acquisition, reinvention, growth, etc. The fact that Seattle as a biotech community is capable of staying in this cycle and repetitively developing and selling technologies and products is proof that there exists the critical mass for a sustainable and flourishing industry.

So, applaud the successes and marvel at the resilience and depth of biotech in Seattle.

[Editor's Note: This post can also be found over at the OVP Blog.]

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Seattle has, from my point of view, carved out its position as the No. 3 biotech market in the U.S. behind Boston and the San Francisco Bay Area. Michigan is currently an outsider looking in. Where does Michigan want to be in this hierarchy, and what will they need to do to get there?

Michigan will not supplant either Boston or the San Francisco Bay Area in spots #1 and #2. (Neither will Seattle, San Diego, Washington DC, North Carolina’s Research Triangle, or anyplace else for that matter…) So what can Michigan do to get into the echelon of the above mentioned geographies?

First, create a business tax structure which is friendly to startup, R&D oriented, money-losing businesses. I personally know nothing about the tax code in Michigan, but it will have a significant head up on Seattle at least if companies which are high tech/biotech and are losing money and spending R&D dollars to completely offset their tax burden with the R&D dollars spent in Michigan. Venture capital investors hate cash burned in their companies for things like taxes that yield no productive technology or product development. This is small potatoes in the grand scheme of the budget of a state. The taxes collected from such companies in the state of Washington do not make a dent in the state budget, but they do make an appreciable and negatively noticed dent in the budgets of Washington startups.

Second, set up a state-backed mechanism to support venture capital investment in biotech startups in Michigan. The State of Wisconsin Investment Board, which manages public employee retirement funds, has done something like this. Michigan’s program can be equity based, as in investments by state pension funds into companies that locate in Michigan, or it can be grant funding that matches venture investment dollars at some rate. It could even take the form of investment in top tier venture funds, but not into their main funds. Instead, the state could approach top tier venture firms with the idea of investing in a “side fund” that would strictly invest in companies that would locate in Michigan. However, the state would need to avoid the pitfall of having any say in the investment decisions or limiting the scope to only technologies generated in Michigan. Both create money-losing situations that do not yield sustainable successful companies.

Third, invest heavily in the state’s research institutions. In the case of Michigan, this means the University of Michigan (at the exclusion of Michigan State) if the expectation is that viable biotechnology is going to be developed based upon those investments. Those investments should focus on attracting “rockstar” researchers to Go Blue land. Ann Arbor is a fantastic place—once you attract more of those world-renowned scientists, if the environment of entrepreneurship at a state and university level stays positive, they will stay, and they will create technologies and startups, and their students and post-docs will go on to extend the same.

Finally, create a personal tax structure and state infrastructure that is attractive to anyone thinking about relocating to Michigan. The taxes on individuals need to be on the low side of reasonable. The K-12 public education system (the one thing that most biotech employees think about most in considering whether to move somewhere) needs to be top-notch—among the elite nationally. Highly educated scientists are very interested in making sure their children get access to the very best education possible.

If Michigan succeeds in the four areas above, they have the possibility of creating a biotech utopia. Michigan could even aspire to unseat Seattle in the No. 3 position.

[Editor's note: To help launch Xconomy Detroit, we've queried our network of Xconomists and other innovation leaders around the country for their list of the most important things that entrepreneurs and innovators in Michigan can do to reinvigorate their regional economy.]

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I am quite often asked, in some form or another, “What can [STATE][LOCAL] government do to spur on an innovation-based economy in [SEATTLE][WASHINGTON]?”

Well, as I said on a panel at the Technology Alliance meeting in Leavenworth yesterday, the single biggest correlate to the strength of an innovative biotechnology industry in any geography is the quality of the major research institutions. The two heavyweight biotech hubs are Boston and the San Francisco Bay Area. No surprise there:

—in Boston, there are Harvard, MIT, Tufts, Boston University, and various smaller but world-renowned research institutes such as the Whitehead and the Broad; and,

—in the Bay Area, there are Stanford, UC Berkeley, and UC San Francisco.

Seattle and San Diego probably represent the next tier, with UW, the Hutch, Institute for Systems Biology, and others in Seattle, and UC San Diego, The Scripps Research Institute, Salk Institute, and others in San Diego.

If the quality of the major research institutions is the critical correlate, then anything that can be done to bolster the quality of that research would represent at least one highly fruitful way in which to improve Seattle’s competitiveness as a biotechnology center. One way to bolster research is to create additional funds for researchers already in place, and the state of Washington has already done that with the creation of the Life Sciences Discovery Fund. However, I would argue that an even better use of these or any funds brought to bear in this effort should be utilized instead to attract and endow chairs for “rockstar” researchers who have made their names elsewhere. Doing this is a highly-focused, high-profile activity that will have the ripple effect of bringing with them:

—already established quivers filled with grant funding;

—high-profile reputations, raising the profile and reputation of our research institutions (with many additional ripple effects like future recruitment of faculty and top students); and,

—top-notch students and post-docs.

Done right, this focused approach will do far more, with its continued “ripple-on-a-ripple” effect in the long term to solidify and bolster the productivity and profile of our research institutions than almost anything I have seen that is currently being done here or elsewhere.

One fantastic, if not polarizing, example of this involves Lee Hood’s recruitment to the University of Washington. Without saying much about the who’s and where’s of the people and money behind recruiting a superstar of Lee’s stature from Caltech to start a new department of Molecular Biotechnology at the University of Washington in 1992, nobody can dispute the huge positive effect Lee’s presence has had on biotech in Seattle, reaching well beyond the entrepreneurs and scientists who trained under Lee at UW, the faculty that he played a part in recruiting, and the companies that he and those students and faculty have gone on to start.

If we the people of Washington want Seattle to be a sustainable and robust world center of biotechnology, then we need to let our state and local governments know that they should consider committing long-term funding (endowment) of prestigious chairs and professorships at our research institutions which those institutions can use to attract true impact-making superstars of basic life science research. A handful or two of such hires will go far further to cement and grow the innovation-based biotechnology industry here for decades to come.

[Editor's note: this editorial is also running on the OVP blog.]

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Tell me if this makes sense to you:

—If I buy a diamond, I can own it for as long as I like;

—If I produce a brand name for a product, provided that I trademark it, I can own it for as long as I would like, until and unless it becomes “generic” (like the term “escalator”, which actually started as a brand name);

—If I write a novel, provided that I copyright protect it, I can own it until I die, and my heirs can maintain those rights for 70 years longer; but,

—If I invent a drug, even if I protect that intellectual property to the full extent of U.S. patent law, I can only own it for 20 years from the date I file for a patent on it.

I can own a tangible good forever, I can own a trademark virtually forever, I can own a copyright for my entire life plus 70 years. But property which is more intrinsically a part of me – my idea, my invention, the product of my intellect – I am only allowed to own that for 20 years after I reveal it to the patent office.

Rationally, it seems obvious that all property – whether tangible or intellectual – should be subject to the same rules and laws of ownership. If you can own a gemstone forever, you should be able to own an invention forever. In fact, if a society wishes to impose differential standards for ownership rights to different types of property, wouldn’t it make more sense that preferential treatment be given to those items which are the product of your talent, your creativity, your self, over those things which you earn or purchase based upon that product of your efforts? The logical extension of this argument, in any free society, is that you should be able to own all property, whether purchased or invented, physical or ethereal, for as long as you wish. Patents, trademarks, copyrights, title – all should be perpetual.

And yet, even in the United States, the country most devoted to free markets and property rights, we live with these irrational, illogical, and even unethical limitations upon intellectual property ownership. In fact, when you hear lawmakers, lobbyists, and pundits talk about patent reform, particularly in regards to drugs, the direction that is most often espoused is to further tighten and shorten the patent protection available to inventors. How did we get here? What would cause a free society like ours … Next Page »

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(Editor’s Note: Carl Weissman submitted this in response to a feature story about entrepreneur Johnny Stine, who clearly relishes building a biotech startup without venture capital.)

Stickin’ it to the VC Man? I am not so sure. Different businesses require different business plans. Some of those business plans support venture capital backing, others are more appropriate for angel investors, and some work best when they are bootstrapped by the founders.

In addition, those different business types also require different characteristics of the folks that found, run, and work in them.

Few people may know or remember this, but the company currently called Life Technologies was bootstrapped out of a garage, largely by a guy named Joe Fernandez who long ago left the company. They were profitable early and stayed that way, scaling their business as they went along.

Johnny Stine has found a business that he can bootstrap. Johnny has the guts, determination, and personality to roll up his sleeves, dig in, and not only be the guy isolating antibodies but also the guy who is hanging sheetrock, mudding, and painting.

His is not a business that would work well for traditional venture capital. And he knows it (and maybe revels in it…). Google Ger van den Engh and his company Cytopeia that he built in basically a “garage” in north Seattle. His company got purchased by Becton-Dickinson for what I promise you was a significant amount of money (I know Ger, and I know he would never give up his independence unless it was an offer he could not refuse). Cytopeia was also a business not easily suited to traditional venture capital, although I am sure his angel investors did very well.

Who knows if Johnny’s company North Coast Biologics can become the next Life Technologies. Or the next Cytopeia. But as I said months ago, I would not bet against Johnny.

But stickin’ it to the VC man? I don’t think so. Johnny has found a business model where VC’s should not get involved. And it suits him well. Good for him. We should all be so lucky.

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I guess when you are Sequoia, you can hold a big public media-attended meeting where you display a faux tombstone ominously announcing the death of the Good Times. My approach has to be a little bit different. The investments that I am making, both at Accelerator and OVP Venture Partners, are generally years from accessing public markets or being acquired, so current market conditions are not high on my list of considerations. Great technologies emerge in both bull and bear markets, and if I am sitting on the sidelines now that leaves a hole in my portfolio 3-5 years from now. What if that is the midst of the decade’s greatest bull market? Or not? I have no way to forecast that. So from an investment side, I have to treat this as pretty much business as usual.

On the cash conservation side, we preach that gospel in any market. To say that we would pay more attention to it now is to say that we are more careless with cash at other times. That is not the case – cash is king in any market, and my investors expect me to behave that way at all times.

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Ever since I came back to Seattle in 2003 to help get Accelerator up and running, I have been barraged with rhetoric about something euphemistically referred to as the “Funding Gap.” Everywhere I went seeking interesting emerging biotechnologies, or to tell the Accelerator story, people I met constantly lamented the Funding Gap. So I started asking, “What do you think the Funding Gap is? What do you think caused it?”

Venture Capitalists (VCs) seem to think the Funding Gap is the funding it would take to move technologies far beyond the level of development they normally encounter in academia. VCs are demanding that these technologies be “de-risked” before they warrant venture investment, and of course they think this should be accomplished using other people’s money. (On another day I will tackle the term “de-risk” which is yet another word completely made up by VCs in order to have a credible sounding excuse to tell an entrepreneur that their idea is not ready for investment; or, to justify to their Limited Partners (LPs) why they should put money in their next fund even though all of their previous funds are smoking holes…) VCs are happy to blame the Funding Gap on everything and everyone (but themselves), from recalcitrant academic ivory tower scientists to bureaucratic technology transfer offices to the NIH to the public markets…

Too easy.

VCs that spew this propaganda either need to admit that they are no longer in the “venture” business, where there is—by the very nature of the activity—risk; or, they need to find mechanisms and models that will enable them to invest earlier and pull some interesting emerging technologies forward.

Talking to academics (including tech transfer officers) about the Funding Gap is no more satisfying. For them it is the great chasm between their hair-brained schemes and the easy folding money that their colleagues/rivals made back in 1999 for founding any “company” whose name ended in “omix.”

“What do you mean that my thought-experiment describing an as yet undiscovered target isn’t sufficient proof-of-concept to warrant venture capital investment? If you would just give me a few million dollars, we could go back to the lab, discover the target, make a great drug to inhibit it, and solve everything from constipation to hair loss to toenail fungus!”

Academics are just as scattershot in their assignment of blame for the funding gap, including cuts in NIH budgets, jealous unimaginative grant reviewers, the economy, and other things (anything but their own lack of focus or commercializable development). But most of all, they attribute it to myopic, greedy, cowardly, sheep-like VCs. (That last one may be right…)

Again, too easy.

Academic investigators need to face facts. If you have a great technology, with reasonable and lucid proof-of-concept, addressing a significant unmet need, and that can be protected as proprietary; and, if—and this is the big IF—you have reasonable expectations in terms of valuation and risk-sharing, then you will be able to attract venture funding. Plenty of it. Even in Seattle.

And I can prove it.

Accelerator has been in operation since 2003. In the five years we have been operating, we have invested in seven companies. Between day one and the day we closed the seventh investment, we have never been capital constrained. That is to say that we have … Next Page »

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