U.S. Biotech Clusters Are Losing Their Anchor Tenants, and It Hurts

8/6/12Follow @xconomy

Every industry needs its anchors, the companies that everyone looks up to as models of success. Think Apple, GE, Boeing. Biotech is no different, as it has been defined by trailblazers like Genentech, Genzyme, and more.

But if you look around, biotech is clearly losing its anchors. And this worrisome trend isn’t just happening in one or two places—it is playing out in most every regional cluster where the industry has grown up in the past 30 years.

Think about the headlines you’ve seen the past few weeks. In San Diego, the biggest independent biopharma company, Amylin Pharmaceuticals (NASDAQ: AMLN), just got bought. Same story in Washington D.C., where Human Genome Sciences (NASDAQ: HGSI) got acquired. Seattle, which I call home, essentially watched Dendreon (NASDAQ: DNDN) fritter away its last real chance to grow into our region’s biotech anchor.

You might ask why this matters, since you could chalk this up to a few anecdotes in each place. The health of regional biotech clusters in the U.S. is usually measured by empirical metrics like federal grant funding, patents, venture capital investments, number of companies, revenues, and stock market valuations. All of those things matter. But I’m also a believer that there are intangibles to regional success, the kinds of things those measurements can’t capture. One of these intangibles is that every thriving U.S. biotech hub needs an “anchor tenant.”

An anchor tenant is like one of those companies mentioned above—the former Genentech, the former Genzyme. A true biotech anchor tenant employs a lot of talented people. It provides good wages and benefits. It’s independent, with local executive management. It’s profitable. It’s diversified with a number of kick-ass healthcare products, so one stumble with one product can’t kill the whole company. It has inspirational leadership, and a stimulating work environment that draws future entrepreneurs, executives, and venture capitalists who learn things you can’t learn in any graduate school. It provides a success template for little companies to follow. It has the money to support a regional network of skilled service providers that all companies in the region depend on—lawyers, accountants, real estate pros. It generously donates money to worthy causes in the local community, especially research and education.

Maybe just as important, a biotech anchor tenant provides public visibility and becomes a source of regional pride and support. It says to the community ‘we have a world-beating company in our backyard.’ You can’t expect the broader public to get excited, or support an industry in any way, when the local area only has 100 little bootstrapped companies no one has ever heard of.

If you look around at the major biotech hubs in the U.S., a few true anchors still exist. Boston has seen Biogen Idec (NASDAQ: BIIB) get its mojo back. Vertex Pharmaceuticals (NASDAQ: VRTX) is clearly emerging as an anchor. The San Francisco Bay Area has Gilead Sciences (NASDAQ: GILD). The New York/New Jersey area has Celgene (NASDAQ: CELG), and an up-and-comer in Regeneron Pharmaceuticals (NASDAQ: REGN).

But the story of the past few years has been more about regions losing anchor tenants than it has been about building up new ones. Genentech, the longtime bellwether of Bay Area biotech, is now part of Roche. Genzyme, the pillar of Boston biotech, is part of Sanofi. MedImmune, the onetime standout in Washington D.C., is now part of AstraZeneca. The Big Pharma parent companies may say all the right things, but the culture of those organizations after the takeovers isn’t the same.

When you look at the next layer down, at the companies with potential to serve as longstanding anchors for their regions, the list is short. In the San Francisco Bay Area, there’s BioMarin Pharmaceuticals (NASDAQ: BMRN) and Onyx Pharmaceuticals (NASDAQ: ONXX). San Diego has Illumina (NASDAQ: ILMN), but that’s a little different as a toolmaker, not a drugmaker. Seattle has Seattle Genetics (NASDAQ: SGEN).

But Washington D.C. has no obvious contender to step up and fill Human Genome Sciences’ shoes. Neither does Research Triangle Park, NC. The New Jersey and Philadelphia areas have been shedding jobs left and right, suffering wave upon wave of Big Pharma layoffs.

The new biotech companies of today don’t aspire to grow up to become Genentechs or Genzymes, because investors have learned it involves too much time, money, and risk. Entrepreneurs have to think lean and mean, relying on sprawling networks of contractors, if they want to scrape together a few million bucks, for a few years, to pursue a big idea for healthcare. But when you lack anchor biotech tenants in all of these regions, you’re losing the essential training grounds where people get the experience they need to be successful in new companies.

Venture capitalists have long sought people with names like Genentech or Genzyme on their resumes because they knew those companies were magnets for bright, ambitious young people. Once there, these bright young people could learn the whole mosaic of biotech: How R&D, sales and marketing, manufacturing, and every other function needs to coalesce at a successful company.

While there are still quite a few alumni from companies like that whom VCs can confidently back, you have to wonder where the investment-grade management talent will come from in the future if they aren’t learning the ropes at a real anchor company.

Bijan Salehizadeh of NaviMed Capital

“Most people who work at big companies aren’t right for startups,” says Bijan Salehizadeh, a San Francisco-based managing director with NaviMed Capital. “But there are some companies—I’d put Genzyme, Genentech, and Intuitive Surgical on the device side—into the category of flagship companies. As a VC, you know the people who work there and thrive there and grow their career there are probably going to be good startup people. That kind of pedigree is really important.”

Salehizadeh has seen the importance of anchors during his time in the Bay Area, and also earlier in his career when he worked in Boston for Highland Capital. Like most VCs, he subscribes to the idea that management talent is the most important factor in determining whether a company will succeed—even more important than the technology a company starts with. People of that caliber don’t grow on trees—they need to learn somewhere. And great people want to work alongside other great people.

“You don’t really learn biopharma at Harvard Business School or Stanford Business School. You probably don’t learn it at Pfizer either,” Salehizadeh says.

Chris Rivera, the president of the Washington Biotechnology & Biomedical Association, built his biotech career learning from Henri Termeer at Genzyme. It paved the way for him to become CEO of a Bay Area biotech company, Hyperion Therapeutics, and now the regional biotech trade association leader in Seattle. One thing he picked up in his years working in all three regions is that a great biotech hub needs an anchor.

“Having a good, stable recognizable brand name company is very, very important to a region,” he says.

While Rivera contends that regional clusters do need an anchor, he also says that stability, training, and human capital can come from branch operations of Big Pharma companies. Seattle, for instance, gets some strength and stability now from having regional R&D operations for Amgen, Bristol-Myers Squibb, Novo Nordisk, and Gilead Sciences.

Chris Rivera, president of the Washington Biotechnology & Biomedical Association

“It’s important to have multinationals set up shop in your backyard,” Rivera says. “They’ll import talent directly into your region, and some of them may spin out and decide to start their own companies later on.” He adds that these stable players help provide a diversified employment base, which is important when a local biotech company recruits someone to the region, and needs to find a place where a trailing spouse can advance his or her career as well.

Fair enough. But as I said to Rivera, it’s easy for some revolving-door Big Pharma CEO a continent away to whack a regional branch as part of some global cost-cutting move. Merck has done that with various West Coast operations in all three major biotech hubs—San Francisco, Seattle, and San Diego—over the last 10 years. I don’t believe these regions should count on Big Pharma, with all its myriad R&D problems and shifting priorities, to be the pillars of local biotech prosperity and innovation.

When you look at what’s happening globally, I get even more worried about the prospects for the regional biotech clusters. The Big Pharma companies are losing billions of dollars in revenues every year as they lose patent protection on their aging blockbusters, and the only way they can come up with enough innovative new products is to acquire more.

As Salehizadeh tallied up recently, Big Pharma is sitting on $350 billion in cash, and it needs to use some of that to buy smaller companies. That might be good for investors, and it can be good at times for a region when it frees up a few talented entrepreneurs to pursue the next exciting thing.

But when you look at these transactions through a regional lens, the story is a lot more grim. Jobs are usually lost when these deals happen. The best emerging biotech companies with growth potential—companies like Onyx, BioMarin, Seattle Genetics, Vertex, Regeneron—these are the next companies in the Big Pharma crosshairs. Will they stay independent and grow into regional anchor tenants? Or will they feel pressure from shareholders to take the Big Pharma money and run?

I hope they all stay independent, even though I know there’s little chance of that happening. As someone who lives in Seattle, I hope Seattle Genetics grows up into a profitable anchor, rewards its shareholders with consistent growth, employs 1,000 people or more, and becomes like our region’s Genzyme.

But I have to admit, one of my nightmares is that I wake up on a Monday morning with a press release in my inbox that says something like “Seattle Genetics has been acquired for $6 billion, a 95 percent premium over its previous day’s closing stock price.” If that happens, all would not be lost for Seattle. We would still have great research. But we’d no longer have an anchor biotech company. It would be a deep and profound loss to the place I live. I hope that day never comes.

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  • Kevin

    Nice article. Ideally, I agree with your desire for more anchor tenants to help build our biotech regions, but the biotech media (including Xconomy) has also been buzzing with excitement about the “new biobusiness model” in play — bioentrepreneurs funded by relatively short-term VCs looking to build incremental value then sell to big pharma. It is difficult to have it both ways in today’s business environment. The Boston/Cambridge region seems to be benefitingin a big way from large pharma setting up research operations there, even if the HQ’s are in other places. I agree with Chris Rivera — sometimes when large(r) pharma closes or downsizes its satellite research operations, opportunities arise. In Seattle for example, Alder is an example of what arose when Celltech closed its regional presence. While not a huge operation, Alder is now employing close to 100 people in the Seattle area – many folks with experience at companies like Zymogenetics, Immunex, Icos and others (as well as some of the Celltech crew).

  • luketimmerman

    Kevin—fair point, but I don’t think I’m trying to have it both ways. I recognize that the VC model has changed, entrepreneurs need to be more creative and resourceful to get the financing they can, and it’s extremely difficult to build new companies today that have ‘anchor’ potential. Given those circumstances, I’m more interested in regions doing what they can to hold onto the existing companies they have with potential to be anchors, like SeaGen. Alder is another one that has made a lot of smart moves, and has potential, but is still earlier in development.

    • Kevin

      Understood, Luke. Not sure what regions can do to hold on to current anchors in the face of free-market M&A, but interested if anyone has any thoughts on that topic.

  • Carl Weissman

    Luke and I have gone around and around about this, but I think the reality is far simpler today than maybe ever before: there is currently almost no IPO market for emerging biotech companies. That creates a pressure that is almost insurmountable. Biotech startups have, in reality, only one real place to turn for the incredible capital needed in this industry to move forward into clinical trials, let alone to generate a human proof of concept (usually in phase II). That is venture capital. But venture capital survives on investment from limited partners like endowments and pension funds. Those investors only have so much patience. The average biotech company now takes 8+ years from inception to exit. That is very near the limit that any venture investor can justify, let alone withstand. Without the public markets, acquisition is the only place for these companies to turn. That does not generate new candidates to be anchor tenants. But it does, in my opinion, represent the returns that can provide critical mass to a biotech cluster and enable that cluster, in a very agile way, to develop and import talent, technology, and capital.

    Genentech, Amgen, nor even Seattle Genetics ever faced anything like what is being faced in the public markets for emerging biotech companies today. Unless that dynamic changes, and the IPO market re-emerges as a viable exit option for venture investors, there simply is nowhere else to turn. We are in an era of extreme selection pressure where adaptability will define successful biotech clusters. We had better adapt if we want to survive.

  • steve

    Hi Luke – I don’t agree. I’m in the DC area and there are a number of companies that were started by ex-MedImmune employees after it was bought by AZ. Similarly, there will be a number of startups from HGS employees who leave after the GSK purchase. Having large pharma come to the area increases the stability of these companies, allows for easier partnering with local biotech and spurs development of new companies by execs that leave with enough money and security to begin startups. All together I think it’s a big plus for the region.

  • luketimmerman

    Steve makes a good point here about some of the regional benefits that can come from a Big Pharma acquisition. It tends to free up the entrepreneurial talent to start the next big thing, repeating a virtuous cycle. The problem, though, is what Carl describes. Today’s VCs can’t realistically expect good returns from an IPO, which makes it much tougher for new startups to get a decent return in a reasonable amount of time. There are some great new companies being started today, but they only make up part of a regional biotech cluster., They can’t really replace all the intangibles that an anchor provides. I hope the boards of the few remaining biotech anchors consider the community fallout of their actions when Big Pharma and its investment banker friends come calling.

  • http://abdallahalhakim.tumblr.com/ Abdallah Al-Hakim

    interesting article and great discussion below. The concept of anchor business is also true to fields outside of biotech. One can think of RIM in Waterloo or Nokia in Finland as example of an anchor technology companies. I share the optimism of some of the commenters such as @985bf84785f8f28f90a5020d27177d91:disqus about the new class of entreprenerus and founders that arise after M&A of an anchor. However, it will become a worry if no anchor biotech is waiting to emerge. Obviously, this will hit smaller regions harder than bigger ones. For example, the Boston area is so rich with biotech and talent that they don’t necessary need an anchor talent to continue developing biotech companies.

  • http://twitter.com/flabiotechnews Florida Biotech

    Bottom line: The demand for investor ROI exceeds the speed at which new technologies, devices and drugs can be discovered, tested and approved.

  • steve

    Luke, I’m not sure I understand your response. The anchor isn’t gone, it’s just under new ownership. MedImmune is still MedImmune only they are directed by AZ. People in the area still interact with them, still do deals with them and they still support the local economy. MedImmune had 1,700 employees on its payroll at the time of the 2007 acquisition and today it has 2,600. David Mott is now a partner at NEA so that gives local biotech a possible entre into those VC’s. Other execs started Amplimmune and Zyngenia. Zyngenia got $10MM in its Series A in part from NEA; they also got large grants from the state of MD, undoubtedly because of their executive team. So from where I sit as an observer of the MedImmune purchase, it’s been an overall win for Maryland biotech. We’ll see if the same follows from HGS but our experience here runs counter to the thesis of your article.

  • Smoke

    The new anchor tenants in the next ten years may not be that big. In fact it sounds like they may just be names on paper with assets and can reside anywhere. The LLC revolution, obviously it could be just a fad, but with the margins these companies are pulling in for milestones, it’s hard to see them disappear. http://www.fiercebiotech.com/story/biotechs-reinvent-ground-build-value/2012-08-13 I think there will always be anchor tenants, but it seems without the need to house 2600 employees, the definition of anchor tenants should be defined differently. And is it really the big drug dev companies or is it the funds, which are the only ones that can currently keep up with the investor ROI expectations. My only problem with a true anchor tenant is that they become too large to adapt to the new marketplace.