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What Seattle Needs (Part 1): “Semi-Successful” Biotech Companies

Opinion

Xconomy Seattle — 

I know what you’re thinking: that’s a pretty strange headline. Why would a city want to attract or build companies that are only “semi-successful?” Wouldn’t it want companies that are flourishing or expanding rapidly? Actually, here in Seattle, we don’t. Semi-successful companies are exactly what we need here as the river of economic change washes through the biopharmaceutical ecosystem. Why “semi-successful” companies? Because very successful companies get bought out as Big Phama retools its business models. These days it’s goodbye, internal R&D; hello acquisitions, collaborations, and contract research organizations.

So what’s my definition of a “semi-successful” biotech company? Essentially, it’s one whose product sales are too small to make it attractive enough to be swallowed by the bigger fish in the sea. The revenues earned by a “semi-successful” company simply won’t boost the earnings of a large pharmaceutical company enough to make the acquisition worthwhile. Big Pharma wants filling, tasty meals, not little snacks. When you have over 100,000 employees and 2013 sales in the $58 billion (Novartis) to $71 billion (Johnson & Johnson) range, it’s hard to find drugs that can significantly expand top line sales. Mergers and acquisitions accomplish this task via the miracle of “synergy,” a euphemism for “laying off large numbers of redundant employees to get the profits where they need to be.” The formula is simple: M&A = product acquisitions + synergy (– employees – empty buildings).

The current poster child of a “semi-successful” biotech company is Seattle Genetics (NASDAQ: SGEN), which has enjoyed meteoric job growth over the past few years. It has developed a terrific technology platform (antibodies that are specially coupled to cellular toxins) that led to its first drug, brentuximab vedotin (Adcetris). This medicine is used in the treatment of Hodgkin lymphoma. Sales have been ramping up nicely since it was approved in 2011 but are not yet near the level that would attract the interest of the big players. Dendreon (NASDAQ: DNDN) would have been counted as a “semi-successful” company a few years ago, but its reversal of fortune (as a result of mismanagement and product competition) has left its future cloudy with a strong chance of insolvency.

Other local biopharma companies with the potential to achieve “semi-successful” status include Omeros (NASDAQ: OMER), Alder Biopharmaceuticals (NASDAQ: ALDR), TapImmune (OTC: TPIV), and Immune Design (NASDAQ: IMDZ). All of these companies are publicly traded. Revenues will need to be large enough that the company can expand locally, continue hiring, and build on early successes. Publicly traded companies that already have Big Pharma partners, such as Acucela (TYO: 4589) and Oncothyreon (NASDAQ: ONTY), are less likely to achieve “semi-successful” status as a result of those relationships. Clinical success will likely lead to their rapid acquisition by those who have already invested in them.

Attracting “semi-successful” companies at any developmental stage is not an easy task. Even if we could identify such companies, what strategies could be used to recruit them here? Investors clearly don’t have a crystal ball that will help them predict which companies will be successful, for if they did they wouldn’t put so much money into startups that ultimately go bust. Is there a way to facilitate the growth of startups into “semi-successful” companies?

Anchor Companies Have Not Proven To Be Saviors Here

I’ve previously suggested, as have many others, that we should try to recruit branches of Big Pharma companies to Seattle. The rationale: as big, stable organizations, they should serve as “anchor” companies that can help absorb employees let go by startups that fail or are acquired. This approach has not worked out as well as hoped, with some of our “anchor” branches sinking under the weight of parent company financial shortcomings. The historical view of Big Pharma companies as stable turned out to be a mirage; they have collectively laid off around 300,000 of their own workers over the past dozen years. Along the way the strong gobbled up the weak, hoping the fiscal forces of “synergy” would work their miraculous effects. Biopharma remains in a state of flux, with its leading companies trying to reinvent their research and development programs as well as their overall business models. Some financial analysts have even suggested that Big Pharma companies should jettison their internal research programs and focus on developing molecules acquired from academia or smaller biotechs. Think small “r,” big “D.”

Amgen (NASDAQ: AMGN) recently announced it is shutting down its two Seattle area sites, which will eliminate a total of 660 jobs here (though an unspecified number of employees will be offered positions at other company locations). More dismal news followed: Novo Nordisk announced that it was ending its inflammation program and cutting 63 jobs in Seattle (leaving behind its 50 person diabetes workforce), and the dissolution of Accelerator graduate Allozyne was also reported. We still have branches of Gilead Sciences (NASDAQ: GILD) and Bristol-Myers Squibb (its ZymoGenetics subsidiary) here, but many of the industry dreadnoughts (e.g. Pfizer, Eli Lilly, Roche, GlaxoSmithKline, AstraZeneca, Novartis, J&J) have not come our way. Where do you think the Amgen/Novo Nordisk/Allozyne employees will go? A website listing current biopharma Washington jobs here showed only 120 positions available as of September 4th. By contrast, the MassBio website offered up 1,602 positions in Massachusetts.

Since different cities and states employ different types of job boards, I also looked at job listings on Monster.com to enable an apples-to-apples comparison. Part of the problem in doing this is that only the most generous interpretation imaginable would allow some of these jobs to be classified as biotech positions (e.g. a raw materials manager at Nordstrom?). With that caveat in mind, Seattle had 337 biotech jobs on the Monster.com website. By comparison, Boston listed 630 jobs, San Francisco 597 jobs, and San Diego 256 jobs. Whether there are good matches between the skill sets of those laid off and those seeking to hire new employees remains to be determined in all locations.

When Eli Lilly acquired ICOS in 2006, Bruce Carter, then the CEO of ZymoGenetics, remarked, “For the biotech industry in Seattle, it’s a very bad thing – it’s an industry where the bigger it gets, the bigger it gets.” Unfortunately, I think the converse is also true: the smaller it gets, the smaller it gets. And to me it feels like we are slowly diminishing year by year. It’s death by a thousand cuts, with a few deep gashes mixed in.

Recent Job Losses Are Only a “Blip”?

I’ve seen predictions that most of the laid off workers will find jobs here, as well as comments from others who characterize these layoffs as just a “blip” on the local biotech scene. I agree that most of these people will find jobs, but it won’t happen quickly, many won’t be in Washington state, and some may not even be in a traditional biotech setting. I’ve posted on my website a summary of Seattle area biotech layoffs starting in 2002 with Amgen’s acquisition of Immunex. Some of the figures are rough estimates since the companies wouldn’t release the actual number of displaced employees. The total number of biotech jobs lost in the Puget Sound region in the past dozen years: about 5,200. The numbers are actually a bit worse than that because final layoffs were not announced when many companies (e.g. Corixa, Targeted Genetics, Allozyne) shut their doors.

The Washington state life sciences industry just surpassed the $1 billion mark, which is great news. Unfortunately, tracking hiring is problematic in the biotech sector. Jobs are filled in drib and drabs, and many are ambiguously classified as “life science” positions. This term encompasses agricultural science, medical devices, academic faculty jobs, and a great many others. We can’t readily see how biotech is faring compared to other parts of the sector, such as medical devices or academic positions, which is why I’ve suggested the term “life sciences” should be retired. I believe there are fewer biotech jobs now than there were a dozen years ago, even as other bioscience sector employment has grown. Seattle does have a lot of biotech companies, but most of them could hold an all-employee meeting in your average sized living room without needing to rearrange the furniture. This is not likely to change substantially in the near future. If you didn’t find the layoff numbers convincing, take a look at Luke Timmerman’s national geographic analysis of biotech companies that had, as of December, at least $100 million in cash and short-term investments. Seattle was the only city on the list that had fewer such companies in 2013 than it did in 2003. Many of the other cities, such as Boston, San Diego, and San Francisco, have expanded their biotech sectors greatly during this time.

What Happens To The People When Biotechs Get Acquired?

There are some patterns that are repeatedly seen:
1) Keep all of the employees and add additional resources. This rarely seems to happen; I don’t recall seeing many (any?) examples of this in Seattle.
2) Keep “key” employees and send the rest packing (e.g. Immunex, ZymoGenetics).
3) Strip out the assets and close the doors (e.g. ICOS, Corixa).

The fate of the employees generally depends on the motives for the acquisition. These principally occur for the following reasons:
1) Acquire marketed drug(s) to expand offerings in an already strong product area, or a new pipeline of medicines in development to add revenue later.
2) Diversify the larger company into a new therapeutic area.
3) Control a key platform technology that can be used to build into new products as well as bring in licensing fees.
4) Acquire a company to keep its technology out of the hands of competitors.

How this all works out depends on the acquirer’s ability to accurately evaluate the assets of the company they’re buying. Sometimes this works out well, other times not so much. It often takes years to figure out if an acquisition was worthwhile, although sometimes these deals blow up quickly when diligence is not done as carefully as it should be.

There are three current outcomes for most young biopharma companies: they fold, get bought out, or live in the middle ground long enough until they drift one way or the other. This explains the appeal of “semi-successful” companies that survive and thrive. As noted above, there’s no practical way to identify companies that are going to be “semi-successful” at an early phase of their growth and development. I use the term to illustrate the somewhat idiosyncratic nature of the biopharmaceutical business. It may be hard to imagine how one could lure a “semi-successful” company into moving to Washington state, since most of its value is contained in the collective skillset of its employees, and not the revenues produced by its drugs. However, it can happen, as evidenced by Sarepta Therapeutics’s (NASDAQ: SRPT) move from the Puget Sound region to the Boston area. The announced rationale for that move was the unavailability of workers in the Washington state region with experience in developing drugs for orphan diseases. Why such individuals couldn’t be recruited here was left unexplained.

We do have a number of collective science skill sets here that are strong, including immunology, cancer research, diabetes, gene sequencing and genomics, and world health. These may be areas that we want to focus future investments on for competitive reasons. One issue that we need to come to terms with is dealing with Amgen’s departure from Washington state. What does it mean for our biotech community? I’ll share my thoughts on that in tomorrow’s post.

Stewart Lyman is Owner and Manager of Lyman BioPharma Consulting LLC in Seattle. He provides strategic advice to clients on their research programs, collaboration management issues, as well as preclinical data reviews. Follow @

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  • dnarich
  • I gave Seattle a good 12 years of my life but after getting laid off yet again I had to pack up and move to the Boston area…far more job opportunities and at least the impression of some degree of stability. I went from mid-size biotech (ICOS) to a consulting group, then private consulting, and finally a small biotech which had to dump 35% of its workforce when it lost a contract. I just got tired of the constant downturns in the region despite my love of the area. Just hope my friends at Novo and Amgen can figure out a way to keep the flame alive. Me…I have bills to pay.

  • David Miller

    You can actually lure biotechs to Washington, provided the Legislature is willing to play along. Texas is having a stream of biotechs move to their state via the rules of their CPRIT grants.

    The CPRIT program is something we could easily achieve here in WA if the Legislature gets on board. The grants are reviewed by expert teams.

    CPRIT grants are MATCHING grants, which adds another check & balance. If VCs/Angels aren’t going to invest alongside the state, the biotech doesn’t get the money. CPRIT grants are staged, with specific success milestones that must be achieved to unlock the next tranche of cash. Significantly, the funded company must move its management team and substantially all its operations to Texas to get the money.

    The CPRIT money is meaningful enough, especially with the match, to get companies to move from all over the US and Canada. It also fills a badly-neglected niche, namely cash for very early-stage companies. These are the companies least-served by traditional VC firms.

    I’ve been saying for years we focus to much on R&D biotechs in terms of creating “anchor” companies. Widening one’s view towards manufacturing — device or drug — would allow us to feel better about our entire biotech ecosystem here. Manufacturing plants do get bought all the time, but rarely are closed. They have location-specific assets that are not easily moved. So even if they are acquired, the jobs and companies tend to stay here.

    And these manufacturing companies, especially those who develop the ability to handle all sorts of manufacturing-related development from small biotechs who badly need such expertise, can be home to many of the same biotech/science jobs “at risk” for layoffs when pharma buys our smaller biotech companies. If we can attract a broad variety of thee manufacturing companies, we will develop a place for scientists to move laterally even if we can’t manage to retain large, successful biotech companies in the face of pharma’s desire to acquire. Almost every small biotech I review for our fund needs manufacturing/CMC expertise on an outsourced basis. Building a core “anchor” manufacturing base here in the state will pay many benefits for our entire biotech ecosystem. And we’re on our way already with some nicely growing manufacturing companies already here.

    Finally, don’t underestimate how buyouts and even layoffs contribute to our biotech economy. Our firm has certainly seen an uptick in inquiries from scientists looking for early-stage funding for their great ideas after the recent layoff announcements. We look forward to reviewing more and helping create the next generation of Washington-based biotechs — successfu, “semi”: or otherwise.