Six Red Flags to Watch Out For in a Biotech, From Dendreon Co-Founder Chris Henney

10/15/09Follow @xconomy

Yesterday, we provided a rundown of the six hallmarks of a successful biotech company, according to Christopher Henney, the biotech pioneer who co-founded three of Seattle’s top biotechs—Immunex, Icos, and Dendreon. He made his remarks to an audience of about 100 investing professionals at the CFA Society meeting on Oct. 8 in Seattle.

Today, we follow up with the six red flags Henney advised investors to watch for when they evaluate biotech investments. Here’s what he singled out as warning signs:

Top management without a scientific background. It’s not impossible for a biotech to succeed with a non-scientist at the helm, Henney said, but a smart investor must ask this non-scientific manager where the science comes from at the company. “The good answer would be, ‘It comes from my team of wonderful scientists who I recruited.’” A bad answer would be something like, “It comes from my scientific advisory board, which has two Nobel Laureates.” Henney added, “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 wanted to make sure he wasn’t making a broadside attack against all non-scientific managers. One of his favorite biotech CEOs isn’t a scientist, but he adds, “You wouldn’t know it from talking to him.”

No worries. An investor should ask what the management loses sleep over. “If they say, ‘I sleep like a baby,’ that’s a big red flag,” Henney said. All companies have their problems, and top management had better know them inside out.

Hard-to-understand science. Ask the management to explain the science of their product in detail. “If they say something like the science is hard to explain, they can’t really explain it to you, that’s a big red flag.”

Geographic remoteness. This provides some insight into Henney’s thinking on why two of the companies for whom he serves as chairman—Oncothyreon and AVI Biopharma—recently moved their headquarters from Edmonton, Canada, and Portland, OR, respectively, to the Seattle area. “You need a quorum of players,” Henney said. “You need access to talent, you need to be able to recruit people.” Seattle has more talent than the other places, and an ability to recruit more people, he said.

Too many VCs. The board should be loaded with people that have experience running companies. “You shouldn’t have a board full of venture capitalists,” Henney said.

Family members in key roles. “These aren’t family businesses. If you see a board dominated by siblings, or a couple of siblings in key management roles, I’d run, not walk.”

While those things might scare people away, Henney was hoping to drive home the message that investing in biotech actually isn’t that dangerous—if people know the right questions to ask. Despite the industry’s tough odds, he says he knows of people who make money in biotech year in and year out. He may have already been preaching to quite a few of the converted—I saw more than a few familiar biotech investors in the room—but Henney was hoping to light a spark for at least a few money managers to try their hand at something new.

“It’s a space that I wish more people would look at as an investment opportunity,” Henney said. “It can be really rewarding, and a lot of fun.”

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  • http://www.spreadingscience.com/ Richard Gayle

    Several of these actually indicate the inability to effectively communicate the nature of the science behind the company. No scientific background, no worries and incomprehensible science all indicate a real lack of scientific understanding.

    If you do not fundamentally understand the science, you can not communicate the science.

    When dealing with technology, especially disruptive technology such as most biotech, ineffectively telling the story of the technology so that others, especially investors, get it should be a large red flag.

    Having worked with both Henney and Gillis, I can say that they are extremely good at telling the story of the science in accessible ways.

    This is not about being good at hype. This is about understanding the fundamental aspects of the technological reasons for the existence of the company and presenting them to others in ways that resonate strongly enough to shake some capital loose.

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  • CMCguy

    While in general agreement with these Flags and do echo Richard Gayle’s point about communication would suggest “too much” focus only on science can also be a negative. A good many Biotech failures have not been due to the science or lack of scientific management but because reach a stage where can not (continue to) fund or transition from the bench level to development. A problem often is the science can actually be hard, or at least difficult to present in simple explanations, and although may be able to convey well to other scientists there has to be effective translators to get the message across.

    There has to be broad balanced expertise and leadership to turn ideas from more than knowledge and into practice. Beyond good business connections and organizational flexibility mentioned in previous article need people who know development, manufacturing, regulatory, marketing and other areas.

  • AJB

    There are _6_ flags listed, not 5.

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  • http://invivoblog.blogspot.com/ JHThree

    AJB, I’m guessing Henney considered “top management without a scientific background” and “hard to understand science” as one category and the author split them up.

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

    JHThree is right. The “top management without a scientific background” and “hard to understand science” were closely related in Henney’s talk. I split them because I thought he actually was making a distinction between the two. Some non-scientific managers are very good at explaining complicated science. Sometimes the scientists themselves have a harder time explaining it, and if they do, that’s a red flag that Henney was calling attention to.

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