In-Person Insights on Virtual Biotechs at Xconomy Dinner

2/1/10

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companies, up the innovation ladder,” Roth said.

His concept quickly stirred debate. A venture capitalist at the dinner said that the fatal flaw in “product definition company” concept is that it wouldn’t work for certain fields such as RNA-interference, a method of gene silencing, which is too complex to be fully understood and developed by a network of contractors and consultants. In such cases, the VC said, you need to build a company with a team of scientists who can perform the research and develop an expertise in a bold new field. “RNAi and recombinant technology couldn’t be figured out in the cloud,” the VC said. However, he acknowledged that virtual business models such as the product definition company model are effective when the underlying science of an experimental product is well understood, and contractors can be hired to perform specific experiments to prove or disprove whether the product has a shot at gaining FDA approval.

We had several biotech CEOs at the dinner who are actively following virtual business models, and two of them were focused on developing specific molecules for an illness rather than trying to advance a platform technology with many applications in medicine. All these virtual firms have the potential to generate high returns for their investors, without requiring nearly as many employees or as much capital as some platform companies.

In the interest of protecting their identities, I’ll pull out a solid example from our recent beat coverage of a biotech with what could be called a virtual business model: AesRx. Stephen Seiler, a veteran biotech executive, formed AesRx in 2008 with a molecule he had licensed for treating sickle cell disease. When I spoke to Seiler late last year, he and his vice president of drug development were the only full-time employees, and the rest of their labor consisted of a group of advisors and consultants. Though Seiler didn’t describe his firm to me as virtual, the company could be called a virtual biotech based on the definition that evolved during Xconomy’s dinner.

At the other end of the spectrum is Cambridge, MA-based Alnylam Pharmaceuticals (NASDAQ:ALNY), which has built a substantial R&D organization to develop RNA-interference drugs. Alnylam, which had 175 employees as of September 2009, is doing research to advance the field, or platform, of small interfering RNA treatments that can turn off disease-causing genes. While the company works with outside researchers to help develop aspects of RNAi therapies, the firm likely needs lots of its own scientists to build internal expertise to help drive development of its drugs.

Still, it’s clear from the dinner that there are many degrees of virtual business models in biotech. And that’s probably the way it should be for an industry in which there is a high degree of variability in the products and science under development at different firms.

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