No matter where you are in creating or devel-oping a biotechnology company, you willundoubtedly have immediate and long-termgoals by which to measure your company’ssuccess. As your company grows, these goalswill vary: Whether it is securing venture cap-ital funding, entering into a collaborationwith a partner, floating a successful initialpublic offering or secondary issue, having aproduct candidate complete a successful clin-ical trial, or actually launching a product onthe market, the scale by which you measureyour company will change.

One measure of success that is often over-looked by beginning biotechnology compa-nies is the purchase of large blocks of stock byan institutional investment fund. These fundsmost often use pension funds, or in somecases limited partnership money, to invest inpublicly traded and emerging biotechnologycompanies1.

Beyond the fact that they can often deliv-er sums in excess of $20 million into abiotechnology company’s bank account,many times they are viewed by the financialcommunity as validators of a company’sproduct or platform technology. This canhelp attract other investors in your companyat transition points when funding may becritical—for example, moving into phase IIIclinical trials, or launching a new product.For these reasons, it is important from theoutset that you launch your biotechnologycompany with the full realization of what“success” means from the institutional in-vestor’s point of view as a way of strategizingyour business development.

The competitive landscapeIn trying to pick which biotechnology com-panies to invest in, how does an institutionalinvestor measure your potential for success?To begin with, the principal gatekeeperbehind our investment decisions is “ourbusiness model” based on the pharmaceuti-cal industry. We measure every biotechnolo-gy company as a business participating indrug development and want to see the 25%

operating margin achieved by the pharma-ceutical industry.

To pick out companies with this potential,we survey the competitive environment. Onthe basis of pharmaceutical data, about onein five of the products in clinical trials couldactually reach the market. However, withbiotechnology companies, there are twoother biotechnology-specific risk factors thatmust be considered in analyzing the potentialsuccess rate.

The first is the industry’s focus on thera-peutic voids as initial targets. These largelymultifactorial diseases such as amyotrophiclateral sclerosis (ALS), adult respiratory dis-tress syndrome (ARDS), septic shock, woundhealing, and psoriasis have no existing prod-ucts for a reason: They are extremely difficultto treat. This means that it will be extremelycostly and difficult to generate convincingclinical data that will meet with the US Foodand Drug Administration’s (Rockville, MD)approval.

Beyond that, the “one product nature” ofthe majority of biotechnology companiesmeans that the company’s chances are literal-ly hit or miss: They will either prosper or failbased on the results of their clinical trials. Forthese reasons, the biotechnology success rateis approximately one in eight or one in nine.Notwithstanding this relatively low successfactor, for the investor there is a substantialopportunity for superior capital appreciationover time.

Success will be determined largely by theability to allocate and control research anddevelopment risk. Our formula for success isthat we invest 65–75% of the fund’s assets incompanies in late-stage product develop-

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ment: Either their product is in phase III, anew drug application has been filed with theFDA, or the company has recently brought aproduct to market. Another 10–25% of thefund is invested in companies with productsin phase I/II clinical trials that look promisingbased on preclinical data that validates thebasic biology. The remaining 10–15% of thefund is invested in “enabling technology”companies—basic-research companies whoseplatform technology promises to transformsome aspect of drug discovery and/or devel-opment. These companies must be able togenerate repeat revenues and have “true”economies of scale.

Judging product riskSince we invest nearly 85% of the fund’sassets in product companies, if you are abiotechnology company trying to makedecisions about which therapeutic areas toenter, it is important that you understandhow we rate a product’s therapeutic poten-tial. Unlike the initial focus of the biotech-nology industry, we tend to avoid pioneer-ing therapeutics in new disease areas It was aconscious decision to avoid septic shock andARDS, as these diseases were multifactorialand had uncertain endpoints—in the case ofthe FDA, ARDS, for example, it was initiallymortality, then reduction in ventilator days,and then back again to mortality as the end-point. In short, it is too easy for the FDA tomove the goal posts to justify the risk inthese disease areas.

Rather, we tend to fund “known diseases”that have clearly defined regulatory pathwaysbut for which current treatments are inade-quate. For example, new product candidatesthat treat cancer, diabetes, Parkinson’s dis-ease, or stroke are actively sought out if theyare not merely “me-too” products in analready overcrowded niche. To differentiatethemselves they must be innovative, haveclear therapeutic superiority, and demon-strate cost effectiveness.

Our second criteria is the clinical viabilityof the drug candidate. Perhaps the most fre-quently broken rule of drug development inbiotechnology companies is that of the neces-sity of having a clear understanding of “thelabel” sought for a product at the earliest pos-sible point in the development process.

FINANCE

How do you measure “success”in a biotechnology company?The impact of the institutional investor on a company’s future is often overlooked.

Elizabeth M. Greetham

Elizabeth M. Greetham is a portfolio managerat Weiss Peck & Greer, One New York Plaza,30th Floor, New York, NY 10004 .

Biotechnology examplesare numerous. The simplelesson from all this is toknow that your business isdrug development and thatthe methodical approach ofputting one foot in front ofthe other carries the day.

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FINANCE

Without this information, it is difficult, ifnot impossible, to design trials that answerthe efficacy and statistical questions to thesatisfaction of the FDA. Moreover, withoutthis information, a realistic patient popula-tion cannot be identified, making competi-tive product positioning impossible. Thisobscures any realistic appreciation of a prod-uct’s potential, confuses management abouthow to allocate scarce resources for productdevelopment, and scares off a potential cor-porate partner.

What about products in the phase I/IIcategory for which the clinical data is not yetin? The first step here is to validate the sci-ence. For example, the biological need forthe GPIIb/IIIa inhibitors to bind greaterthan 80% of platelets to achieve a sufficientblockade and hence efficacy has been estab-lished by Centocor (Malvern, PA), CORTherapeutics (S. San Francisco, CA), andpossibly Merck (Whitehouse Station, NJ)through their clinical programs. A secondexample involves the need for a drug candi-date to work in animal models—whether ornot the specific pathway has been validated.Guilford Pharmaceutical’s (Baltimore, MD)positive primate data establishing the regen-erative properties of their lead neuroim-munophilins in Parkinson’s disease is a clas-sic example.

In this area of clinical development,Aesop’s fable of “the tortoise and the hare” isan apt example of strategies that producesuccess and those that end in failure. Thehare’s excessive confidence led him down apath that involved a “quick fix.” Biotech-nology examples are numerous. The simplelesson from all this is to know that your busi-ness is drug development and that themethodical approach of putting one foot infront of the other carries the day.

Tool technologiesFinally, what about the tool technologies?Although they represent a minor part of ourportfolios, their significant initial successesin the market recommend them for seriousconsideration. Tool technologies must bejudged initially on their ability to meet theircustomer’s needs. For biotechnology, thecustomer is the pharmaceutical industry,and to the degree that the tool is able toindustrialize basic research, it is valuable.Genomics, combinatorial chemistry, high-throughput screening, and proteomics are allexamples of tools that the pharmaceuticalcustomer perceives to be vital to their con-tinued growth.

Tool companies, in our opinion, are dif-ferentiated by their management teams. Onevalues the management in its ability to closedeals on highly favorable terms for itself withits customers. The basic strategy to accom-plish this is to create “repeat-revenue” sales.

In this regard, the managements of bothIncyte (Palo Alto, CA) and Millennium(Cambridge, MA) deserve high marks.Initially, most observers scoffed at the con-cept that a “Microsoft” for the pharmaceuti-cal industry could be created. Incyte’s “data-base model” for selling information tools topharmaceutical companies not only provedthat this is a possibility but soon became anindustry-wide business model mantra.

A key element to Incyte’s continued suc-cess in its $160 million plus already investedin technologies that will maintain its leader-ship in this area. The outstanding questionremains whether investors1 needs for earn-ings growth will detract from Incyte’s leadposition with this scale of R&D investment.

Millennium’s management has taken adifferent tack by developing a leveraged busi-ness model to maximize cash flow and near-term revenues while retaining significantdownstream rights. The company has takenits core gene-discovery platform and repack-aged it for various consumers. The small mol-ecule platform belongs to Millennium, whichis funded by major pharmaceutical partners.Millennium BioTherapeutics, funded by EliLilly (Indianapolis, IN), searches for proteinand peptide drugs; Millennium Plant Agri-culture, funded by Monsanto (St. Louis, MO)applies this technology to agricultural bio-technology.

From an investors standpoint, the jury isstill out on whether this business strategywill deliver long-term profits. I believe therewill be many “hares” strategies built on cor-porate partnerships that are short-termband-aids, as has been demonstrated bysome of the combinatorial chemistry com-panies. Success will equate with becomingan integral part of the discovery engine ofthe pharmaceutical company and taking thetortoise-like role of slowly but surely addingvalue.

Separating winners from losersThe three basic resources any company hasto add value are research, manufacturing,and marketing. For most biotechnologycompanies, research is the only viable focusbecause they do not have sufficient cashto initiate manufacturing and marketing.Amgen (Thousand Oaks, CA) stands out asthe exception to the rule, as it was able to cre-ate two back-to-back blockbuster drugs andthus fully exploit all three revenue resources.All the other major biotechnology compa-nies have required the outsourcing of at leastone of these variables. For example, Chiron(Emeryville, CA) and Genentech (S. SanFrancisco, CA) have major pharmaceuticalpartners supporting their R&D effort, Gen-zyme (Cambridge, MA) has created multiplespinoffs and relies on Wall Street to fund theR&D of each of these, Biogen (Cambridge,

MA) and Centocor both out-licensed theiroriginal technologies in order to use the roy-alty stream to fund their internal research.

Of these models for funding research, theoutlicensing of the first product has becomethe most popular. A word of warning is nec-essary here. Many times management tries toconvince itself that because there is a lowerrisk in taking this route, a lower operatingreturn would suffice as well. In my opinion,royalties or operating profits in the low tomid teens are insufficient for long-term sur-vival and merely represent short-term waysto pay the near-term bills. Given the popular-ity of this model, a valid question is, “What isthe alternative?”

This is where management must identifytheir company’s “differentiated value-addedskills” and find the means to raise sufficientfunds to maximize the successful commer-cialization of these resources. Alkermes(Cambridge, MA) is one example of a com-pany that chose to mortgage its firstborn,but then went on to find a way to generatethe profitability it needs for long-term sur-vival.

After deciding to mortgage their firstproduct, RMP-7, management identified asecond auxiliary technology, ProLease, thatwas part of their initial R&D effort. Theirstrategy was to set up manufacturing for thistechnology and sell it at an appropriate mar-gin to other drug developers. Alkermes’worldwide agreement to manufacturehuman growth hormone in a ProLease for-mulation for Genentech demonstrates thefirst fruits of this decision. Most importantly,this strategy has paid off by clearing the hur-dle for profitability by which we judge all bio-technology investments.

ConclusionsIn its recent history, biotechnology compa-nies have been a bit short-sighted in calculat-ing their definition of success. The low-dou-ble-digit, R&D funding milestone deal maypay the bills in the short term, but does notallow for reinvesting in R&D. The rush tophase III to create shareholder value is akin toa “teeter-totter,” not success.

For the industry as a whole, failure tomove beyond the IPO and create real valuethrough products that impact healthcarecan only result in the drying up of the fund-ing well. Investors need sustainable, rapidprofit growth. As you build your biotech-nology company, keeping your eye on thatgoal is perhaps the best way to assure its“success.”

1. The Weiss Peck & Greer Life Science Funds wereestablished in 1992. They primarily invest in publiclytraded biotechnology companies. In essence, theLife Science Funds are a business whose man-agement capitalizes on their value added skills:clinical development and product commercialization.

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