How to Raise $50M in a Recession: Highlights from the Xconomy Life Sciences Forum
Some of biotech’s most innovative drugs emerged under the worst financial conditions. Two big breakthroughs in the 1990s, Enbrel for rheumatoid arthritis and Rituxan for lymphoma, came from small biotech companies that toiled for years, and survived brushes with extinction, before they made it.
This history lesson came up in conversations I had with entrepreneurs after the Xconomy Forum: Tomorrow’s Biotech—Innovators and Innovations, which we held yesterday at Biogen Idec in Cambridge, MA. The people who enter this business need a rare combination of intellect and tenacity to survive in a business where 9 out of 10 drugs that enter clinical trials fail, and where it takes more than a decade and hundreds of millions of dollars to develop a drug, even in good times. So it was fascinating to hear people describe the grim realities of the economy as simply another obstacle they need to overcome—and not an insurmountable one.
Startup founders and CEOs participating in the forum covered a lot of ground about creative ways biotech companies are seeking to clear these hurdles by raising money, improving the odds in drug development, and lowering costs. Of course there’s no one simple way to build and sustain a new company, and indeed the forum highlighted some completely opposite strategies.
Meanwhile, the heads of some of the most innovative programs at public biotechs—Biogen Idec’s Gilmore N. O’Neill, Genzyme’s Sam Wadsworth, and Vertex Pharmaceuticals’ Eric Olson, moderated by GlaxoSmithKline’s Michelle Dipp—shared their perspectives on what it takes to foster new ideas and treatments in the public-company context. (FYI, none of them officially condone submarine projects, wink wink nudge nudge.) We also heard from some pioneers of the biotech industry—Walter Gilbert and George Church—during a keynote chat, although I’m saving up highlights from an interview with Church for next week, so watch this space.
Thanks to all who joined the conversation yesterday. And if you missed it, here are some of the highlights from the entrepreneurs at the Forum:
—Peter Hecht, CEO of Cambridge, MA-based Ironwood Pharmaceuticals, talked about his secret for being able to raise $281 million over the past 11 years to build his company, which now has 160 employees. “We’re crazy-passionate about building a great company and doing it over the long haul,” he said, with a sense of purpose that made it sound like more than a platitude.
This guiding principle has enabled Hecht to pull together investors like Polaris Venture Partners and Venrock Associates to support the company—without agitating for a quick acquisition to get fast returns. By sticking with this consistent company-building vision, and building relationships over years, Ironwood was still able to raise $50 million more from a syndicate of Morgan Stanley and other investors last September, even as Lehman Brothers and AIG were imploding.
Of course, investors were betting on more than just a team and a vision. Ironwood has a novel drug called linaclotide in the final phase of clinical trials as a treatment for chronic constipation and constipation from irritable bowel syndrome. The drug has rare potential, since there are fewer than 10 “substantial” drugs in the pharmaceutical industry at this stage of development, outside of cancer and rare orphan diseases, Hecht said. When you whittle the list down to novel, first-in-class medicines in large markets, “there are really only two or three.” That kind of potential is what made the investors willing to take on the two big risks that Ironwood has left—that it might fail its Phase III trial, or get stalled by regulators.
—Tillman Gerngross, CEO of Lebanon, NH-based Adimab, noted that he had a completely different way of building a company. He told the story of GlycoFi, a company he co-founded in 2000 to make protein drugs in yeast—a process that could be much faster and cheaper than existing approaches. Raising money was difficult, since this came in the wake of the genomics bust, when companies like Celera Genomics built up a peak market value of $18 billion with no marketable products.
So Gerngross built his company in a capital-efficient way, raising only $28 million in venture capital to prove his yeast-drugmaking process worked, before selling the company to Merck for $400 million in 2005. Merck recently showed confidence in what it bought, making GlycoFi the centerpiece of its $1.5 billion effort to develop generic biotech drugs.
Now Gerngross noted that history is repeating itself. He co-founded Adimab in 2007, and it wasn’t long before the market crashed again. He’s working to follow the GlycoFi roadmap, by raising as little money as possible to prove the company’s concept—yeast-based antibody discovery—has value.
—Tom Hughes, the CEO of Zafgen, and Maria Rupnick, a researcher at Children’s Hospital Boston who co-founded the company, told the story of Zafgen. The company, based on Rupnick’s research, aims to choke off formation of new blood vessels to fat tissue, as a way to help people lose weight. This is based on insights scientists have gained from drugs that treat cancer by doing the same thing to tumors.
Zafgen is doing this in a “virtual” business model. It has just 4.5 employees, and relies on contract research firms to do a lot of the work. The company is working on two main priorities—testing a compound originally designed as a cancer drug for its weight loss effect in people, starting later this year, and working to discover next-generation compounds that might be more even more effective. To make sure the small team can manage all this work, Zafgen sought integrated teams at partners like Argenta Discovery, rather than trying to coordinate among individual contractors for each piece of the project, Hughes says.
Based on the mouse testing, Zafgen may have the potential to help obese people lose 20 to 50 percent of their body weight, Hughes says. Shedding those pounds ought to help improve conditions associated with obesity like diabetes, heart disease, and arthritis.
The company is looking at creative ways to bring in “non-dilutive” financing, i.e., to find someone to support the work other than VCs. One idea raised by an audience member is to seek potential partners in animal health (think slim-down pills for the family dog). When I asked Hughes about it afterward, he kept the door open to the possibility, but cautioned that it’s still an idea in the early phases.
—Forma Therapeutics. This Cambridge, MA-based company offered a striking contrast with Zafgen’s virtual model. “We have more founders than Tom has employees,” joked Steven Tregay, Forma’s co-founder and CEO.
With its roots in the Cancer Genome Project and its people with expertise from the Broad Institute, Forma in the very early stages of making drugs to hit some of cancer’s hard targets, like p53 and K-ras. Forma has already found $37 million of that precious “non-dilutive” financing, from partners like Novartis, Cubist Pharmaceuticals, and the Experimental Therapeutics Center of Singapore. Tregay said his belief is that value at Forma will come from its technology with broad potential applications, not just one hit drug. “We think pharma will want to acquire the goose that’s laying the golden egg, rather than the golden egg,” he said.