21 Red Flags to Watch for in a Biotech Company

10/21/13Follow @xconomy

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focused on enlarged prostate, and thinks it can help old men go to the bathroom a couple fewer times per day, don’t we already have drugs for that? Is that really how you want to spend your resources? Who cares? Even more importantly, who’s going to pay for these non-essential medications in a world of limited resources?

Exaggerated communications around the FDA: Investors should beware of any company that tries to imply they are in like Flynn with their pals at the FDA. Some companies try to play up things about FDA actions that don’t mean anything. The FDA may in fact give a company an “Orphan Drug” a “Special Protocol Assessment” or a “Fast Track” designation. None of those designations mean the FDA is likely to approve a company’s drug. That will come down in the end to the data, the data, the data. “Buyer beware of any company that throws around the often-used phrase, ‘We are excited to report that we now have a clear path to approval.’ FYI, there is no such thing,’” Loncar said.

Too many VCs: The famous venture capitalist Vinod Khosla recently said that 70-80 percent of venture capitalists add negative value to startups. Whether it’s from meddling, boardroom in-fighting, high-handed arrogance, or whatever, these are negatives that small companies can’t afford. Look for boards with people who have experience operating successful companies, or at least a few independent people with specific domain expertise.

Hey, look at the Nobel laureate on my scientific advisory board!: Some companies think they can impress people by pointing to a few smart scientists on their scientific advisory board. But investors should know that this is mostly about marketing, and these bigwigs of science often have little to do with the company. “If you need to make an appointment to meet the guy who’s bringing you your science, then you don’t have much of a business,” Henney said.

Geographic remoteness: It’s true that great science can come out of most any university or research institute around the world, but it’s extremely hard for a biotech company to emerge from a place with no community around it. A successful biotech company needs connections to skilled lawyers, accountants, regulatory consultants, and on and on. It needs to be able to recruit superb employees. Most of that action happens in top industry clusters like San Francisco, Boston, San Diego, and New York/New Jersey.

Who’s backing this company anyway? Has this company attracted a smart group of investors, or a bunch of people you’ve never heard of? Does it have a reputable law firm? Does it have a major accounting firm auditing its books, or some firm owned by the CEO’s brother-in-law? Have any of the major pharma companies supported the company in any way with a partnership? Getting backing from these actors is no guarantee of success, but you have to wonder about companies that can’t attract any credible backing.

No worries: Investors should find out what the management team worries about, what keeps them up at night. The answers can be revealing about the world this company lives in, and also can serve as a credibility test. “If they say, ‘I sleep like a baby,’ that’s a big red flag,” Henney said in his 2009 talk. All companies have their problems, and top management had better know them inside out, he said.

Thou dost protest too much: When I was getting started on the biotech beat, I remember a company that insisted it was “focused on commercialization” in every public communication. It wasn’t. It was more like a loose grab bag of science projects, an operation with multiple “shots on goal,” in the hopes that one might stick. If a company is trying too hard to make you believe something, chances are good that they’re just trying to cover up a great weakness.

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  • Argo

    Very very few companies have these right. Only a hand-full have some of these right. Moreover, there are no more mentors in the industry. There are no more people looking at best practices, no more people wanting to do the right thing. Everyone is looking for the next big thing. Even recruiters and managers who hire into these companies are looking for hires who fit the “culture” – well what they don’t tell you is that the culture is about hype and not about doing the right thing. Thanks Luke- always a pleasure reading your articles very sobering.

  • guest1

    When senior leadership has similar profile / background as the CEO. e.g., CEO a chemist, head of clinical operations a chemist, clinical scientists past chemists.

  • Plain

    Gilead Sciences
    CEO = organic chemist
    President = biochemist
    CSO/EVP = organic chemist

  • http://www.xconomy.com/ Luke Timmerman

    Biotech investor David Sable offered up a few more red flags of his own in a blog post. Worth a read.

    http://www.dbsable.com/1/post/2013/10/a-few-more-biotech-red-flags-ht-luke-timmerman.html

  • Satchmo

    Luke, I’m playing the devil’s advocate here. You know how it’s said that past performance is not a guarantee for future results. I understand that approval rates for drugs that enter FIH is 0.1, but what’s to say that it won’t change over the next twenty years. We are picking up more specialized targets over the last few years, and my hope is that it will bear fruit to the industry as a whole and approval rates could be higher with each drug catering to a smaller population.

    And to Argo, that is a pretty bold statement. ‘No more people doing the right thing’. Do you have insight into every company, every department, every team that develops drugs? Certainly, I can vouch that my heart is in the right place, and my highest goal is to get top quality products approved. I feel the same way about my department where folks also know a thing or two about getting a product out. We have changed lives and we are inspired by it. Please refrain from making such egregious remarks.

  • Victoria Romney

    I would add the state of a company’s IP protection to the list. Does it have issued patents, filed applications, or just provisional applications? Patent pending is a start, but only an issued patent can be enforced against an infringer. And does the company have a realistic war chest of enforcing its patents? What about freedom to operate? Is the company’s technology free of the prior art or do they have the necessary licenses?

  • Bob

    I know a company in Miramar, Florida called Altor Biosence, both the CEO and his wife who is the head of clinical had major in zoology from Taiwan and computer in US, had formed a biotech company to cheat investor’s money and government grants for last 10 years. They claimed that they had more than 10 anti-cancer drugs in phase I or phase II clinical trials where the CEO’s wife with few fellows from Taiwan cook fake data to cheat government grants each every year.

  • itc

    Definitely a great and sobering read. Don’t agree with some of these, but they are valuable points to keep in mind. Coming from a scientific background, what’s hard to explain to VCs and journalists alike, is that you may have a great clinical trial design but if you’re only going to get $10 million dollars to run the trial and you have to let some things slide, what are your other options? On the one hand, you don’t have enough money to do “the trial” and on the other, further funding somewhat depends on the success of your first trial… soo….