Alder Rises From Ashes of Layoffs to Become Seattle Biotech Force

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Nobody would have guessed the seeds for one of Seattle’s most promising biotech companies were being planted just before Thanksgiving in 2003. That’s when Randy Schatzman had the depressing task of firing all 90 people who worked for him, and closing the doors at Celltech R&D in Bothell, WA.

Celltech’s headquarters back in the U.K. had decreed that research to discover new drugs was getting too expensive. Investors favored safer bets on treatments already in late stages of development.

But during those dark days, Schatzman and three other senior managers who worked together at Celltech had a different idea. None had ever started a biotech company. They didn’t have a lot of money or connections to venture capitalists. But they saw an opportunity to make antibody drugs that were more effective against disease, faster to develop, and cheaper to manufacture than anything on the market. And they knew they worked well together as a team. So they sketched out ideas out a few cocktail napkins at McMenamin’s bar and restaurant in Mill Creek, WA for a new company they called Alder Biopharmaceuticals.

Alder, as regular readers of this site know, burst onto the national biotech scene two months ago. The company, which is developing an antibody for rheumatoid arthritis and cancer, struck a deal with Bristol-Myers Squibb that brought in $85 million in upfront cash, as well as milestone payments that could be worth more than $1 billion over time. Alder’s lead antibody drug has completed a clinical trial of 120 patients with rheumatoid arthritis. While it hasn’t yet presented the results in a peer-reviewed scientific paper, they were compelling enough to clinch the Bristol deal, and set up a final-stage development plan designed to give Amgen’s breakthrough arthritis drug, etanercept, a “run for its money,” Schatzman has said.

Randy Schatzman

Randy Schatzman

That’s impressive for any startup biotech, but it’s astonishing for a company that had zero support from venture capitalists in its first 20 months, and was essentially bootstrapped by the founders. Altogether, Alder’s four co-founders ran up $1 million of expenses from their personal savings, time, and credit cards to launch their company on its current trajectory. None of those four guys took a dime in salary for those initial 20 months, until the first big venture round arrived in August 2005.

To hear Schatzman and another co-founder, Mark Litton, tell the story, they were only able to overcome those long odds against them because a village of people in Seattle biotech offered helping hands.

“This is a small biotech community, and everybody knows everybody. I really don’t think we could have done this anywhere but Seattle,” Schatzman says.

For those new to the Alder story, here’s some background. The company is developing what it hopes will be a disruptive technology for making antibody drugs. These are the genetically engineered Y-shaped proteins that can be made to target diseased cells and spare healthy ones. The technology has been proven over the past decade with hit products like Roche’s trastuzumab (Herceptin) that have created an estimated $30 billion annual market.

But these drugs are expensive and hard to make. They are different from the usual chemical-based pill in a bottle, because they need to be nurtured in living cells. Most antibodies are made in stainless steel vats that provide a controlled environment for nurturing mammalian cells, like those of Chinese Hamster Ovaries (CHO).

“Genentech investigated a number of approaches years ago, and CHO seemed to be the most facile system,” Schatzman says. “Everybody graduated to CHO, and microbial systems were really left behind and not fully explored.”

Alder’s big idea was to see if it could replace the mammalian cells with those from yeast. These microorganisms, after all, are a cheap source of raw material. And the yeast cells divide much faster than hamster cells, meaning that companies could operate their stainless steel vats far more efficiently than they do now, offering potential to lower manufacturing costs and widen profits margins.

All of the founders at Alder were scientists by training, and were able to grasp early on how much demand there could be for such an innovation. Schatzman, a molecular pharmacologist, got his postdoc training in the lab of Nobel laureate J. Michael Bishop. Litton, the chief business officer, got his doctorate in immunology at Stockholm University. John Latham, the chief scientific officer, was one of the early employees in the mid-’90s at Bothell, WA-based Darwin Molecular, the forerunner company for what became Celltech. And Jeffrey Smith, the chief medical officer, built a career as a medical doctor who developed a number of hit drugs, including the heartburn treatment ranitidine (Zantac).

They all knew this would be hard to do technically, and from a business standpoint. For starters, they didn’t have a license to any intellectual property from their days at Celltech. So they hunted around for a promising technique from an academic lab. They found it at the lab of Jim Cregg, a professor at the Keck Graduate Institute in Claremont, CA.

The idea was interesting, but raw. Biotech companies had basically given up on yeast as a mode for most drug manufacturing years ago. Some smaller, simpler molecules like insulin for diabetics had traditionally been manufactured in yeast, but as I pointed out in a Seattle Times feature in July 2006, antibodies are about 15 times the size of insulin and have complex 3-D folding patterns that must be consistent for the FDA and physicians to accept as pharmaceutical-grade.

So while making antibodies in yeast sounded good, drug companies had only been able to consistently make smaller antibody fragments. The big drug makers had also used conventional baker’s yeast in the early days of biotech, but scrapped that idea when they saw it ferments and produces ethanol, ruining the drug, Cregg has said.

So Cregg’s lab conceived of using a second-generation strain of yeast called Pichia pastoris which was genetically modified so it wouldn’t ferment. Alder wanted a system in which yeast would produce a full antibody, not just fragments. The plan was for Alder to support some experiments at Keck, and in exchange, it would get a worldwide license to develop the technology as a platform for a whole new mode of antibody drug production.

“Jim (Cregg) understood the yeast, and we understood the antibodies,” Schatzman says.

One of the big hurdles that Alder needed to clear early on was to demonstrate that if you took the same gene sequence for an antibody, and plugged it into a yeast host, that it would come out with the same consistent properties of an antibody that came from standard mammalian cells.

This was all going to take time, money, and support. And the Alder guys were first-time entrepreneurs, without any support from investors. So Schatzman sought some advice from an experienced friend—Clay Siegall, the co-founder and CEO of Bothell, WA-based Seattle Genetics (NASDAQ: SGEN).

The two had known each other from when Schatzman ran the Celltech R&D operation, and the two companies had collaborated. Siegall was impressed with the caliber of the science at Celltech, and agreed to hear Schatzman describe the idea. “I can remember Randy saying, ‘You’ve started and built a company, can you talk me through the things I need to consider?’” Siegall says.

Over a series of lunch and breakfast meetings, Siegall offered some advice. Things like how to get legally incorporated, and who to call in the venture capital world.

Even though Alder was just a little more than a concept, Schatzman marvels at the help he got. Siegall personally offered some of Seattle Genetics’ office space to incubate the company for only a “modest” amount of equity shares on a monthly basis. Sonya Erickson, a corporate attorney then at Venture Law Group (now at Cooley Godward Kronish in Seattle), helped Alder get incorporated in exchange for a “little bit” of equity, Schatzman says. And Paul Abrams, the CEO of Bothell, WA-based Ceptyr, set aside some lab space for Alder’s early experiments in exchange for a little equity.

“You had all these people who were accepting paper that was worthless,” Schatzman says. “People trusted us that there would be value here someday.”

During those early days, Siegall (who’s now a director of Alder) remembers how he got questions from VCs about why he would take this fledgling company under his wing. What did he really see in the business? “Randy tried to get them interested. I did too,” Siegall says.

But skepticism ran deep. Alder was trying to develop a platform technology that could give rise to many new drug opportunities, and platforms were out of fashion with investors in those days, says Thong Le, a managing director with WRF Capital in Seattle. Alder’s plan was to develop products, but they were still in their infancy, when the prevailing investment winds favored late-stage product candidates that appeared less risky. “Other people had played with yeast-derived antibodies for years but had never been able to make them work. Investors were very skeptical,” Le says.

Alder knocked on the doors of all the big players in Seattle venture capital who supported life sciences in those days—Arch Venture Partners, Frazier Healthcare Ventures, and Paul Allen’s Vulcan Capital. None of them invested in Alder.

Siegall knew all that, but he says he kept supporting Alder for three reasons. The guys knew their science, they had determination to do what it takes on the long road of drug development, and they were a cohesive group of people with complementary skills.

“What impressed me most was that these guys were top scientists,” Siegall says. “The best companies in this business, like Genentech, are built on a base of great science. Their development team is fabulous, but it has to start with great science.”

By August 2004, Alder caught a break. The early experimental results came in from Cregg’s lab at the Keck Institute. They suggested that the yeast-based process could produce functioning antibodies. That was when Seattle-based WRF Capital decided to take the leap, and lead an angel investment group that pumped in $500,000 of seed capital.

That round of financing took some of the pressure off, but there was still a huge amount of work to do. The founders offered up their next year’s budget without any line item for their own salaries.

“That was when we could start paying our RAs (research associates), and could start buying our own reagents,” Schatzman says.

Watching its pennies carefully, Alder continued to operate “lean and mean,” Schatzman says. The business office stayed inside Seattle Genetics.

Over the next 12 months, Alder stunned investors with its productivity, Le says. Alder showed that its antibodies made in yeast could be equivalent to those in mammalian cells; they could reproduce the result; they could do it in progressively larger quantities (a capability that often trips up biotech companies); and the antibodies were found safe and had attractive dosing properties in rabbits. Alder also found some outside support with a $100,000 grant from the U.S. Army.

“These guys weren’t drawing any salaries, they were working on 100 percent sweat equity. They were committed like no other group I’ve ever seen. They put their money where their mouth was,” Le says.

When Alder bundled together all of their data, it finally had enough evidence to graduate from bootstrap mode. In August 2005, the company nailed down an $11.1 million Series A venture round led by Dallas, TX-based Sevin Rosen Funds, Vancouver, BC-based Ventures West, another shot of investment from Seattle-based WRF Capital, and other private investors.

Two more rounds of venture capital pumped in another $56 million into Alder, at increasingly higher valuations, to continue its momentum. But despite the company’s good fortune, Alder hasn’t gone on a big spending or hiring binge since striking the Bristol deal. The company still has just 40 employees, and only lists two current openings on its website.

Of course, as the Alder team knows all too well, the company hasn’t really accomplished anything of lasting significance yet. There is still a huge amount left to prove, starting with presentations of the data for the company’s lead drug, and completing the final-stage clinical trials necessary to win regulatory approval. The lead Alder treatment, ALD518, might not reach the market until 2013.

But just to be in a position to offer a compelling product that relieves pain and suffering for rheumatoid arthritis patients, after being just six years removed from being a bootstrap effort is a rarity. The biotech and pharmaceutical industry is notorious for product development cycles that last a decade or more, cost hundreds of millions of dollars, and have very low odds of yielding an FDA approved drug.

Given the odds, Schatzman insists it has taken a village just to get Alder this far. It’s something that the founders knew from the beginning, and they wanted it to be reflected in the company name. It comes from Alder trees, which are part of a resilient and fast-growing genus that is common in the Northwest. They can grow well even in land that has been scarred by fires, clear-cutting, or drought.

That symbolism means something to a group of guys who remember what it’s like to have their hopes dashed with a massive round of pink slips.

“We try to never forget where we came from,” Schatzman says.

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