This post was co-authored by Sultan Meghji.
In biotech’s early days, telling a story to a wide audience used to be part of the path to success. Founders would share a compelling early narrative to potential investors, reporters, and just about anyone else who would listen. Nature papers were the coin of the realm.
But far from shouting to the rooftops, lately it seems that more and more biotechs are pursuing a different approach. Instead of keeping their technology under wraps until a first financing happens, these companies go into what we call “permanent stealth mode.” The principle here seems to be, “say no more publicly than necessary, and even then, keep it vague.” Meantime, let your actions speak for you: Raise money. Sign partnerships with pharmaceutical companies. And then, seemingly out of nowhere, hand consumers and investors a finished product or service.
In this post, we’ll share some examples of three “deep stealth” life sciences companies that chose to stay on the stealthy side well beyond the timeframe of a typical startup: Moderna Therapeutics, Kadmon, and Theranos. The first two are developing novel therapeutics, and the third is a consumer diagnostics company. We will share what little we can find out about them; offer some analysis about what has motivated the companies to stay stealthy; and ask whether they represent the beginning of a trend and, if so, what that implies for the industry.
In less than four years, Moderna has raised over $400 million. It has built a platform around RNA to trigger the production of protein drugs inside the bodies of patients, thus turning the body into a protein factory. We noted back in 2012 that Moderna’s approach turns the traditional dogma of biotech on its head: instead of manipulating the DNA in the lab and then producing proteins in cells or bacteria, then selling these proteins to the patient, Moderna instead takes messenger RNA, does some fancy chemical tricks to it, and puts it into the body as RNA, letting the body’s own protein production machinery do the rest. We also noted that the company had chosen not to publish anything, even in scientific journals, leaving open the question of how the RNA would be stabilized and delivered (RNA in its native form is notoriously unstable and subject to destruction by ubiquitous enzymes), and leaving the rest of us to wonder what the platform could really do and how it does it.
Then came a news bulletin: In 2013, Moderna struck a validating deal with AstraZeneca that included an unusually rich up-front payment: $240 million plus an additional $180 million in potential milestone payments. Yet even as of today, the company has put out just a single publication.
Kadmon, founded by Sam Waksal in 2009, has grown much larger than a typical privately-held company ever does. Waksal is known both for founding ImClone Systems in 1984 and for being convicted of securities fraud in 2003. Waksal’s work with ImClone eventually led to the approval and marketing of cetuximab (Erbitux), an early and influential targeted oncology therapy. ImClone was acquired by Eli Lilly in 2008 for $6.5 billion.
Kadmon, which has been built mostly around acquisitions of later-stage technologies, is not completely in stealth mode. It does have a website that lists its clinical pipeline in some detail. Initially focused on oncology, liver disease, and metabolic and cardiovascular disease, it now sells the hepatitis C drug ribavirin. All of these pipeline products have been brought in by acquisition, beginning with the buyout of Three Rivers Pharmaceuticals for more than $100 million in 2010, according to the Wall Street Journal. That company had products on the market at the time of acquisition, especially in hepatitis C. Bloomberg reported that Kadmon had reached $25 million in annual revenue by 2012 and was targeting $40 million to $60 million in 2013. Interviewed by Maria Bartiromo on CNBC in January 2011, Waksal described a new paradigm for building a biotech company with a commercial arm that could serve as a “cash generating machine” so that “we don’t have to go to the [financial] markets to constantly raise money for drug development.”
The corollary to that is that, if it is funded by revenues, the company’s very exciting research does not have to be disclosed, even to venture capitalists and especially not to the public, in the context of fund-raising. At investor conferences, the company has described some fascinating RNA-targeting technology that could represent a new generation for gene therapy. Waksal told Bloomberg in 2013 that Kadmon was considering spinning out both a gene therapy company and an oncology company focused on the Chinese market.
Theranos has recently begun to emerge from stealth mode, although its technology is still secret. This June Fortune cover story reported that the 11-year-old company is valued at $9 billion and that, due to her share ownership, company founder Elizabeth Holmes, a Stanford University dropout, is worth $4.5 billion on paper.
Theranos’ blood draw technology replaces traditional, slow, overpriced blood testing with pinprick-style, small-volume blood tests. By working efficiently on tiny volumes, Theranos is both cutting prices by half or more as well as increasing efficiency by allowing for follow-up tests to be done right away, according to the Fortune article.
How Theranos does all this remains a secret. But this “black box” has not prevented the company from raising what Fortune reports to be more than $400 million nor from striking a distribution partnership with Walgreens. In parallel, the company is working with hospitals to offer its tests in what the CEO of University of California, San Francisco Medical Center told Fortune is “the true transformation of healthcare.”
Theranos’ vast ambition, coupled with its lack of publications subjecting its methods to scientific scrutiny, has not gone unnoticed, especially by competitors. Fortune wrote:
“The most frequent criticism is that Theranos is using purportedly breakthrough technology to perform tests that are relied on for life-and-death decisions without having first published any validation studies in peer-review journals. ‘I don’t know what they’re measuring, how they’re measuring it, and why they think they’re measuring it,’ says Richard Bender, an oncologist who is also a medical affairs consultant for Quest Diagnostics, the largest independent diagnostic lab.”
The clearest unifying attribute of Moderna, Kadmon and Theranos is “high confidence,” followed closely by “high ambition.” There is no other way to raise the billion-plus dollars these three have raised. There has to be some technical know-how to go along with the bravado. Otherwise multi-hundred-million-dollar partnerships with national pharmacy chains or Big Pharma companies just do not materialize. Activating a direct commercial channel (Walgreens) or a high-credibility development partner (AstraZeneca) is at least a temporary substitute for a look under the hood.
A clue to understanding the trend is the presence, or absence, of venture capital (VC) money. Of the three companies we chose to examine, only Moderna has disclosed an investment by a traditional VC, Flagship Ventures. It’s fine to stay in stealth if you want to raise money from a single VC, or for that matter from a single VC syndicate, and so you never need new VC investors. As long as you don’t need “buzz” in the form of news articles and conference hall chatter, you can just go achieve your objectives without sharing much. Next stop, hedge funds, who couldn’t care less about buzz and whose analysts may in some cases be confident enough to make big-ticket investment decisions based on unpublished data.
But there is something else going on as well. Let’s call it “stealth as a business model.” All three of these companies seem to share the belief that they will be better off if no one knows what they really do or how they do it. Most notably, they depart significantly from the status quo of publishing and presenting the technologies in an open forum as the gold standard for credibility. This is so unusual in the history of biotech that it made us think about the question the other way around: why would you want to disclose anything about your new biotech company? Just raise the money, sign a partnership, and get on with it!
We just want to mention one tiny nagging doubt: much of the research that underpins these companies comes about under the auspices of U.S. government funding, typically from the National Institutes of Health. But in the guidelines we found, there is no formal mechanism requiring disclosure once research is funded. It is not even required to be published. Nevertheless, it strikes us that sooner or later there may be a backlash to all this stealthiness.
And of course the longer-term question remains: does having strong financing and a strong commercial channel replace independent peer review of the underlying technology?
In the meantime, we sincerely hope that all of these companies are successful. It would be an amazing day in healthcare if they were. And should that day come, we are imagining a moment when Hollywood decides to make the movie, akin to the way screenwriter Aaron Sorkin imagined the beginnings of Facebook in “The Social Network.” The big difference here is that the scriptwriter will have an awful lot of liberty in shaping a story that no one has ever heard.
Sultan Meghji is an entrepreneur and advisor in life sciences, financial services and high tech. He is based in St. Louis, MO.
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