How to Survive the Downturn: Five Questions With Boston Biotech Leaders, Part 2

1/16/09Follow @xconomy

Yesterday, we ran highlights from interviews with Alnylam CEO John Maraganore and Vertex Pharmaceuticals CEO Josh Boger, who were asked the same five standard questions about the future of the industry. Today, I’m sharing a second installment from conversations with Sirtris CEO Christoph Westphal, who responded via email, and Alkermes chairman Richard Pops and Jim Frates, whom I interviewed over breakfast at the JP Morgan Healthcare Conference in San Francisco. Here are the highlights:

Christoph Westphal, CEO of Cambridge, MA-based Sirtris, a unit of GlaxoSmithKline (via email)

Xconomy: What was the single most valuable lesson you learned from the last big biotech bust (the genomics-driven crash of 2001 and 2002), and how will having those battle wounds help you carry on today?

Christoph Westphal: The most valuable lesson from the last big bust is that biotech will rebound. The strongest companies will continue to thrive, and in the long term this will be good for the biotech industry. The biotech sector is on a cycle, and will be poised to become an even more important sector in our economy. One thing to keep in mind is how quickly economic circumstances can change, not only with downturns, but with unexpected upswings as well.

X: Every year, bankers like to say acquisitions and partnerships between biotech and pharma companies are going to pick up because pharma needs innovative new drugs, and biotechs need cash to develop them. Do you see this trend truly accelerating this year, and if so, why?

CW: In this economic climate, the trend of acquisitions and partnerships between biotech and pharma companies will indeed pick up. Big pharma is in an exciting position—they have the resources to help biotechs expedite their platforms and they need to bring innovation into their pipeline. It’s truly a win-win for both parties. At Sirtris, which now operates as an autonomous business unit of GSK, our budget is significantly more than what it would have been as an independent company.

I believe that collaborative initiatives that leverage expertise of biotech and pharma companies will grow in importance and impact. In addition to being the CEO of Sirtris, I just accepted a new role as head of GSK’s Centre of Excellence for External Drug Discovery (CEEDD), where we’re specifically working to build a network of alliances between GSK and biotech companies. We’re looking for new, world-class science to bolster GSK’s pipeline.

X: What kind of companies, technologies, and people will be resilient enough to survive this downturn?

CW: In tight economic times, it’s more challenging to raise capital because there’s less cash to go around so competition is even greater. Companies with only good ideas will probably dissipate. Companies that couple truly remarkable science with smart, experienced leadership will be the ones to survive.

X: Who would make a good FDA commissioner, and why?

CW: I have full confidence that whomever President Elect Barack Obama selects will be well equipped to make the revolutionary changes that are needed at the FDA.

X: What’s the most surprising impact of the past year’s economic turmoil on your plans for this year?

CW: What strikes me now is how fortuitous the timing of the GSK acquisition of Sirtris in June of last year was, in light of the current financing environment. The biggest challenge for any biotech or pharma company in R&D is one of resources. As an independent discovery unit of GSK, we’re fortunate at Sirtris to have extensive, additional resources to accelerate our current and planned discovery programs and clinical trials of our proprietary sirtuin activators.

Alkermes CFO Jim Frates, and chairman Richard Pops

Xconomy: What was the single most valuable lesson you learned from the last big biotech bust (the genomics-driven crash of 2001 and 2002), and how will having those battle wounds help you carry on today?

Jim Frates: Alkermes has been through a lot of ups and downs. One of the things important about our business model is that it’s diversified. We’ve been using our technologies and development expertise to develop a number of products. What we like is that we have a base business that’s profitable, driven by a product called Risperdal Consta, a commercial opportunity with Vivitrol, and a Phase III opportunity with exenatide once-weekly. If you have a diversified business, and you have capital as we’re in a position to have, those ups and downs provide opportunities to stand out as a more diversified company. You can’t avoid the storm, but you want to be positioned to survive it. You need resources to get through the other side.

X: Every year, bankers like to say acquisitions and partnerships between biotech and pharma companies are going to pick up because pharma needs innovative new drugs, and biotechs need cash to develop them. Do you see this trend truly accelerating this year, and if so, why?

JF: People do say that every year, and this year will be different. The capital markets over the years have always bailed out a lot of companies. Most companies look to where they can get the best financing. They look at the public markets, or the deals available from bigger companies. Right now, the public markets are closed, and it’s our view they will be closed for some time to small biotech because of the risk associated with it. You may not see deals accelerate in the near term, but more people in biotech companies are going to look for deals. The people on the other side who have resources are going to be more discriminating in the deals they do. So the pressure from below to do deals will accelerate, and that will make it a buyer’s market.

X: What kind of companies, technologies, and people will be resilient enough to survive this downturn?

JF: Decision-making will be paramount to survival. If you’re on the edge, the faster you act, the better deal you’ll be able to make.

X: Who would make a good FDA commissioner and why?

JF: It’s someone who understands innovation and new drug development. We often don’t know where they’re going to come from. Five or 10 years ago, I don’t think anyone would have known how important this GLP-1 antagonist class would be so important to treatment of diabetes. One never knows where that innovation is going to come. We need an FDA that supports innovation. Anything new is risky, but the upside of new science is so important. Not only for the health of everyone, but for the economy. The U.S. is a leader in biotechnology, and if we don’t nurture that and grow it, it would be a mistake.

Richard Pops: That job has a couple responsibilities to it. One is to protect the safety of consumers. The other is to advance innovation. The pendulum tends to swing between those two extremes. If you remember back to the days of AIDS activism, the mandate was to get new drugs into the hands of dying patients. Today, the pendulum has shifted back to protecting the safety of patients. To me, we need to have a commissioner who understands both of these mandates.

X: What’s the most surprising impact of the past year’s economic turmoil on your plans for this year?

JF: We’re in a very good position, given we’re cash-flow positive and have accumulated a fair amount of cash over the years. The surprising thing for me is how slow people in this industry are to realize this market will be different. I think this market is different financially, and something we haven’t seen in a long time. I’m not sure everyone in the biotech industry understands what I believe is going to be a difficult financing environment. People are optimistic it will come back, and I’m not optimistic it will come back.

RP: The surprising thing to me is how quickly investor sentiment shifted from ‘What’s the next blockbuster product?’ to ‘Where’s a safe company to invest in?’ The other thing that’s surprising to me is how fast Wall Street has remodeled. This is an industry that depends on capital. So it has to have a close relationship with Wall Street by necessity. And Wall Street in the last quarter has completely remodeled. So we have had to ask ‘Who covers biotech?’ on the buy side. When the dust settles, we’ll see who remains. The whole capital infrastructure of the industry is in flux now. The dust hasn’t settled yet. Nobody’s hiring now. I just spoke to someone last night on the buy side who lost his job. He said there aren’t jobs on the buy side, and there aren’t jobs on the sell side. He’s looking for a job in the biotech industry.

This remodeling of Wall Street is remarkable. Citigroup, Goldman Sachs, Morgan Stanley, Merrill Lynch, they’ve all restructured. Then you go to the next tier down, and those firms are all gone. We are in an industry that originally was financed by firms that don’t exist anymore. Hambrecht & Quist, Montgomery Securities, Robertson Stephens, those mid-size firms, focused only on innovation companies, with direct access to investors who want to invest in these things. That whole layer of banks is gone, with sell-side analysts who write about the companies. The dilemma for a small company isn’t just getting drugs developed, and registered with FDA, it’s finding people who will write about the company and getting access to investors. The great fear now is to release great Phase IIb data and see that nobody cares.

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