How to Stimulate Biotech? Gillis, Chhabra, Williams Sound Off

3/18/09Follow @xconomy

No one would have been surprised if there was a lot of self-pity going around at this year’s Invest Northwest conference. After all, biotech investors have been clobbered like every other sector in the market, and one-third of public biotech companies are said to be running on their last six months of cash or less.

So it might surprise some people to hear the mood at yesterday’s Invest Northwest conference was neither depressed nor delusionally upbeat, but what I would call sober, and even steely. The two-day event, which continues today, drew a record 740 registered attendees to the Bell Harbor International Conference Center in Seattle to continue their hunt for investors, partners, or help of other kinds to keep their innovative life sciences ideas alive.

My notebook is spilling over with too many story ideas to cover in today’s wrap-up, but I thought I’d pass along some intriguing insights I jotted down from the lunchtime panel discussion. This was moderated by George Milstein, the investment banker at Wedbush Pacific Growth Life Sciences who I profiled earlier this week. The panel included Michael Emery of Rainier Funds, Allozyne CEO Meenu Chhabra, Arch Venture Partners’ Steve Gillis, and ZymoGenetics CEO Doug Williams. Here are the highlights broken out by speaker.

Steve Gillis, Managing Director, Arch Venture Partners

On why anyone should still invest in biotech: “Big Pharma, and to an extent, Big Biotech, has capitulated, and understands innovation is not their game,” Gillis said. “They’ll continue to buy assets, and buy companies.” He added that, “At Arch, our platform is to invest through human proof of concept without burning through gazillions of dollars, and if you can do that, you can get good returns and create value.”

On reacting to the downturn: Arch is doing its usual scrutiny of the technology and management teams at companies, but is now worrying more about a third variable—whether it is part of an investing syndicate with staying power to help a company reach its potential. “Will the other investors be there when a company misses a milestone? It’s another serious stare in the mirror you have to do before you write the check.”

On the impact of the mega-mergers like Pfizer-Wyeth, Merck-Schering Plough, and Roche-Genentech: “A lot of our companies depend on larger species in the food chain,” Gillis says. To mix the metaphor a bit, he added that when these deals get consummated, it distracts top management so they take their eyes off smaller company partners. “It can take two partners off the dance card” at the same time, Gillis says. That has encouraged VCs to nudge their portfolio companies to call up “some of the smaller fish” to talk about partnerships.

On what the government can do to help stimulate biotech: “If somehow you could influence regulators to think more about efficacy and less about overwhelming safety, that would help.” He added that in today’s regulatory environment, Seattle-based Immunex never would have been able to develop etanercept (Enbrel), the world’s best-selling biotech drug with more than $5 billion in worldwide sales. That drug failed in its original clinical trial of patients with sepsis, before Immunex pushed ahead with a second idea that was a winner—treating rheumatoid arthritis.

Meenu Chhabra, CEO, Allozyne

On sticking to the game plan: “Our goal is to work independent of the economic environment,” Chhabra says. “In the world of private biotechs, the economy is always tough. It’s really about getting the greatest amount of value in the shortest period of time.”

On whether it’s better to build a company, or a project: “You build a company by starting with a project.” Allozyne is starting with its project, a longer-lasting interferon drug for multiple sclerosis, and then it hopes to pump out more products from its platform technology that enables it to modify protein drugs in many different ways. “Ten years down the road, we hope to look more like ZymoGenetics, an actual company.”

On the difference between Canadian and American biotech (she’s from Toronto): Access to venture capital in the U.S. sets it apart from Canada and the other G-8 industrialized nations. “VC’s hunger and ambition fuels management teams. That’s not necessarily there when the money comes from the government,” she said.

Doug Williams, CEO, ZymoGenetics

On why anyone should still invest in biotech: “Certainly the expectation of being able to do another Immunex, in which it takes 18 years to get to sustained profitability, I mean, the payoff was extraordinary, but let’s be honest, that’s pretty rare in this business. The old model of waiting 20 years for a company” to succeed like that, Williams said, “it’s not going to happen.” This puts extra pressure on step-by-step milestones, showing progress points that create value along the way, he said.

On what to do with that cash: “I’ve yet to see a company make it big by hoarding their cash,” Williams said. “I’m pathologically optimistic that things will turn around, because you have to be.”

On what the government can do to stimulate biotech: Williams offered some support for the idea of what’s been called the biotech bailout, in which companies get tax credits for the operating losses they’ve accumulated through the long years of R&D. The reason to do it is to maintain U.S. leadership in the biotech industry. “Biotech is a shining example of what we can do,” Williams said.

Michael Emery, Senior Equity Portfolio Manager, Rainier Funds

On what he looks for in a biotech investment: Emery said he looks primarily at the company’s management team, market opportunity, and its business model and cash flow. Notice, he didn’t mention deep due diligence on the technology. “I’m upfront with management teams, a lot of us are financial types, and a lot of us don’t understand the technology.” He added that at a $15 billion fund like his, it’s not worth his time and money to hire expert technology consultants every time his firm makes an investment, at least until after the fund has more “skin in the game,” he said.

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