Six Tips on How to Spot a Winning Biotech, From Dendreon Co-Founder Chris Henney
Investing in biotech can be scary. Only one out of 10 new drug candidates ever makes it through the gauntlet of clinical trials to become an FDA approved product, and it usually takes hundreds of millions of dollars and a decade or more of research to separate the winners from the losers. Investors usually can’t bother asking serious questions about profit-and-loss statements, or price-to-earnings ratios, until a company is 15 years old or more. And the hype—from gene therapy, to stem cells, to you fill in the blank—can be quite distracting.
So Christopher Henney, 68, who has seen it all in a 30-year career in biotech as co-founder of Immunex, Icos, and Dendreon, knew he had his work cut out yesterday. He was trying to convince a crowd of 100 financial pros at the CFA Society meeting in Seattle that biotech, the classic boom-or-bust industry, is really a good place to invest.
“I want to de-mythologize the scariness,” Henney said at the outset.
Henney started off his talk by reminding the audience how he and Steve Gillis, a pair of immunologists at the Fred Hutchinson Cancer Research Center, went on to start Seattle-based Immunex, one of the members of what he called “the class of 1983.” These were the second-generation companies, following industry pioneer Genentech, that all went public back in a great wave of enthusiasm for biotechnology. The class included Amgen, Biogen, Cetus, Chiron, Genzyme, and Immunex. Seven of the 10 to 12 biotech companies (Henney didn’t name the losers) that went public in that early wave went on to create market valuations that exceeded $1 billion, Henney said.
But even during that great wave of optimism about the power of new genetic engineering technologies for creating new drugs, there were prominent skeptics. Henney told the story of how he and Gillis had a meeting in the early days of Immunex with “one of the doyennes” of the Seattle investment community, whom he didn’t name. Henney and Gillis told their story with great enthusiasm, and got a rude awakening.
“At the end, I remember him saying, ‘I don’t think it’s a scam, but I won’t introduce you to anybody, either,’” Henney recalled.
Both of them were academic scientists who “had a fair amount of hubris about our self-worth. To be told that what we’re doing was a scam, it wasn’t something I wanted to tell my Mom about,” Henney said.
He added, “It was our welcome-to-the-NFL moment.”
Still, the investor taking that position would have been right for the first 15 years or so. It took 17 years from Immunex’s founding before it struck gold with etanercept (Enbrel), a drug for autoimmune diseases that now generates more than $7 billion a year in worldwide sales for Amgen and Wyeth. It took much longer, and hundreds of millions of dollars more than industry pioneers like Henney thought it would, to create blockbuster drugs like that. “If you had thought about that beforehand, nobody would have given us any money at all,” Henney said.
But they got the money, and learned a lot of lessons along the way. In his talk last week, Henney distilled them into six hallmarks of a successful biotech that investors should look for, along with five red flags to watch out for as well (which I’m going to save for another story).
So, here are the six hallmarks to look for in a successful biotech company, according to Henney:
—Solid Patents. All good biotech companies must have terrific science, and they must have patents to protect it, Henney says. In the industry’s early days, there weren’t many patent attorneys that knew what they were doing, but now there are plenty, he says. An investor ought to ask “how does the science stack up” at a company versus its competitors.
—The science should be focused on an important disease, with potential for breakthroughs. Lots of scientists will argue about what’s important and what’s not, but what an investor needs to know is that a biotech company is at the front of the pack. Immunex focused on an important disease, rheumatoid arthritis, and clearly made a breakthough. “You don’t want to be in fourth or fifth place” with a new drug, he says.
—Great management. This is a must in all industries, but it can’t be overstated in biotech. Interestingly, Henney has noticed some unusual character traits about biotech managers that he says shouldn’t scare off investors. “Like you see in software, these are managers who don’t walk into a room and dominate it. They are often fairly nerdy. But we’re talking about people who are smart, efficient managers,” Henney said.
—Access to capital. A company has to be able to prove it can raise money. Again, and again, and again. “Not many biotech companies go out of business because they lack ideas,” Henney said.
—Luck. “You need it. I’m fortunate to say Lady Luck visited me on many occasions,” Henney said. (I’m not sure how investors are supposed to be able to gauge whether a company has luck on its side, though.)
—Flexible attitudes toward human resources. This might sound nutty to straight-laced business school types, but biotech companies need to give breathing room to some brilliant, creative people who aren’t closely directed by management, Henney said. This can work for a small percentage of the top performers, like some of the brightest people at the National Institutes of Health. The most famous case of this in biotech, which Henney didn’t mention, came from Genentech scientist Napoleone Ferrara, who made discoveries in 1989 on his undirected time that gave birth to the breakthrough cancer drug bevacizumab (Avastin).
“You’ve got to let people follow their curiosity,” Henney said. “For some in the business community, that might sound like a sketchy proposition, but you have to.”