Life Science Entrepreneurship: Lessons from 26 Years and 8

Companies

Lew Shuster

August 29, 2009

Outline

• Case Studies:– MDL– Microbiological Associates– HGS– Pharmacopeia– Invitrogen– Kemia– Epitomics– Halozyme– WuXi

• Themes:– Business models– Sustainable competitive advantage– Facing and managing risk

Case Study #1: MDL

• Founded in 1979 by 4 PhD chemists intending to design new pharmaceutical and agricultural chemicals using proprietary computer software– First step was to write & copyright the software

• 1980: Initial software so powerful that large corporate customers asked to license-->$100,000

• 1981 to 1986 built a world-leading position in software for chemical research– Database management including substructure search and published

databases of chemicals and reactions

– Sales force--secured adoption by most leading pharma/chemical co.

– Customer service--user groups

• Today: After many owners, a subsidiary of Symmx

Case Study #2: Microbiological Associates

• Founded in the 1940s!– Produced bovine serum for NIH early cell culture research

• 1950s, 1960s, and 1970s– Polio vaccine research– Early NCI studies--cancer & viruses– NASA (first moon rocks returned to earth)

• 1980s--leveraged buyout from parent company– Merged with companion animal diagnostic company– Large cost-plus-fee NIH contracts– Toxicology services to ag chem and pharma– Leading lab animal “QC” testing service--virus, mycoplasma . .– Genentech contacted to discuss future FDA approval of CHO

cell manufactured therapeutic proteins

Case Study #2: ContinuedMicrobiological Associates

• 1986: Crisis!--Revenues nearing $10 mill./year, but losses of $2 mill./year, out of cash, loans in default

• Response: Rigorous financial and strategic analysis– Closed companion animal diagnostic business– Downsized from 200 to 160 staff--very painful but necessary

• Focused on strengths we could build a future on:– Genetic toxicology tests (Ames, etc.)– Lab animal QC (virus tests, etc.)– Biologicals QC (CHO cells, Genentech)– Selected NIH contracts funding R&D

• Strengthened customer and FDA relationships– Built pioneering lab information management system

• 1987--Profitable, growing! • Company acquired by Invitrogen in 2003 for $480 mil.

Case Study #3: Human Genome Sciences (HGS)

• 1992: Craig Venter at NIH identified hundreds of putative new human genes by cDNA sequencing– Lost political battle within NIH

• HGS formed by VCs to fund and commercialize Venter’s new TIGR--high throughput gene discovery

• Approach--Integration of molecular biology, sequencing equipment, and sophisticated information technology

• VCs initially invested $10 million, and HGS leased $9 million in sequencers & computers

• Then 1993--Smithkline Beecham $125 mil. contract• Late 1993 IPO!

Case Study #3 Continued: HGS

• 1994--early successes– Colon cancer gene (w/Bert Vogelstein)--cover of Science– Cathepsin “K”--key to bone osteoclast activity– New members of important gene families

• But challenges emerge– Full length gene ID, protein expression and characterization

expensive! Cash burn $$$– Human genes and their regulation more complex than anticipated

• Fortunately for HGS, stock stays “hot”. Company raises >$2 bill. in debt and equity through 2001--market value peaks >$10 bil.

• After the “internet/genomics bubble” bursts, HGS stock drops 99% from peak to early ‘09 low

• Summer ‘09--finally promise emerges!– Lupus drug Phase III trial successful! GSK into Phase III also

Case Study #4: Pharmacopeia

• Early 1990s high hopes for combinatorial chemistry and high throughput screening to dramatically accelerate small molecule drug discovery

• Cold Spring Harbor biologist conceived encoding solid phase synthesis beads– References led him to a prominent Columbia U. chemist

who designed superior chemical “tags”– Patent applied for and shopped to VCs

• Larry Bock (Avalon Ventures) won rights--formed Pharmacopeia

• Recruited prominent ex-Merck, BMS, SB, DuPont execs to lead

Case Study #4 Continued: Pharmacopeia

• 1994 and 1995--rapid expansion– Major $$$ big pharma collaborations--S-P, etc.– Late 1995 IPO--$16/share! – Staff grows from 40 to 100 and beyond

• 1998: Pharmacopeia acquires MSI (now Accelrys)--leading chemical software

• 1999: Profitability--revenues of >$100 million!• 2000: Stock bubble peaks--stock $90/share • But then stock market bubble burst, and . . . .

– Weaknesses emerge in combichem technology– Strategy flip-flops several times--contract services vs. internal drug

discovery/development– Excessive bid for acquisition rejected by shareholders

• 2003: Accelrys spun out--reversing 1998 merger• 2008: With stock at $1, Pharmacopeia acquired by Ligand

Case Study #5: Invitrogen

• 1987: Stratagene a leading provider of molecular biology enzymes, plasticware, and other supplies – Two employees conceived packaging reagents into “kits”--to

clone a gene, express a protein, or. .– Stratagene top execs vetoed

• Two employees left--formed Invitrogen– Rented 1,500 sq. ft. Sorrento Valley unit– Initial furniture--old doors on blocks as desks– Assembled and sold “kits”--profitable each year– Started acquiring/developing proprietary “tools”

• Expanded through 1990s--self-funded– Rewarded employees with stock options and ESOP plan

• By 1998, $25 mil./yr revenue, 30% growth, profits!

Case Study #5 Continued: Invitrogen

• 1999: IPO, acquires of Novex (gels), ResGen– Leading internet marketer, creative ads--now direct sales

• 2000: Stock bubble--market cap to $4 billion!– Revenues annualize >$125 million, profits grow rapidly– Employees/managers scrambled to keep up

• Summer 2000: Acquires Life Technologies--nearly 4X larger company!– “Merger integration madness”--severe internal infighting– Extensive management turnover; revenue growth slows from

30% to 3%. Stock price drops

• Mid-2000s, Greg Lucier CEO, “GE”, acquis. resume• Today “Life Technologies”--$3 bill. rev., $8 bil. cap.

Case Study #6: Kemia

• Created in 2002 by Forward Ventures to commercialize Yale chemistry-- alpha helix mimick– Hope that synthetic chemical scaffold could replace proteins

• Recruited aggressively, bought two NMRs, signed lease for big, new $$ lab,– But could not find even a 1 uM lead compound– Exhausted initial cash, defaulted on building

lease/equipment loan, VCs about to shut down

• But a lead chemist saw potential for allosteric kinase inhibitors; quickly identified initial lead series – Company strategy shifted, expensive building lease

renegotiated, CEO hired, VCs put more $ in

Case Study #6 Continued: Kemia

• Late 2003--clinical development candidate identified– Excellent animal efficacy data (p38a)– Good once daily oral PK

• Early 2004--$33.5 mil. Series B VC– Late 2004--favorable toxicology data

• 2005--Phase I clinical--favorable!– With encouraging ex-vivo human biomarker data– And surprise--drug raises HDL--“good” cholesterol!

• Late 2006--$31.5 mil. Series C VC– Started first two of 3 Phase II clinical studies

• 2007--Clinical trial results disappointed• 2008--Kemia liquidated

Case Study #6 Continued: Kemia “Lessons Learned”

• Don’t trust what you learn from rats and mice• Be wary of “the perfect molecular target”• The myth of “the validated target where you can still

be early to market”• We live in a post-Viox (FDA) world• Many diseases are heterogeneous; drug metabolism

varies dramatically among patients (CYPs, UGTs, etc.)• Your investors “call the shots”, and

– More heterogeneous today– Their views can change--sharply

Case Study #7: Epitomics

• 2002 Guo-Liang Yu identifies/licenses UCSF/Loyola rabbit monoclonal antibody (“RabMab”) technology

• Forms Epitomics with Series A angel investment• Unable to secure $$$ VC funding for a therapeutic business,

launches contract svcs.– “Intel” vs. “Dell” strategy

• Builds service business; secures Series B financing• 2004 opens production facility in China • 2005 Series C financing, launches own reagent product line,

advances RabMab technology• 2007 powerful animal data on first humanized therapeutic

antibodies derived from RabMab• 2008: Profitable business, revenue $$$, multiple activities, major

China operation achieving excellent results

Case Study #8: Halozyme• Deliatroph founded by two Sidney Kimmel Cancer Center

researchers w/“friends and family” money– Focus: in vivo imaging tumors, vasculature in mice/rats– One co-founder’s PhD thesis on a hyaluronidase

• 2002: Initial cash gone, new angel investors forced strategy change--focus on hyaluronidases– Licensed IP on members of gene family– Targeted initial an clinical opportunity with animal data

• 2003: Initial hyaluronidase development plan failed, so switched to back-up--a second hyaluronidase– A human enzyme where the bovine equivalent had been used

clinically for decades but was no longer made--FDA

• 2004 - 2009--Baxter, then Roche deals, IPO through reverse merger into “shell”. Today mkt cap $600 mil.

Case Study #9: WuXi Pharmatech

• 1994: Ge Li joins Pharmacopeia as chemist from Clark Still’s lab at Columbia

• 1998: Ge Li led 32 Pharmacopeia chemists dedicated to Schering-Plough (S-P) 5 year project– Demonstrated leadership and technical skills– Earned confidence of S-P mgmt. and ex-Merck execs

• End of 1999: Ge Li sees opportunity to do contract chemical synthesis in China--very low cost, high quality labs/chemists– Proposes idea to Pharmacopeia management; rejected

• 2000: Consulting closely with an ex-Merck exec and business consultant, forms WuXi Pharmatech

• 2001 - 2006: Builds WuXi initially with S-P and Merck contracts.– EXTREME attention to confidentiality, IP protection, – Delivered value, earned trust

• 2007--IPO. 2009--market capitalization >$800 million

“Themes”: Context

• “Change” is all around us, is always happening and creates multiple opportunities:– Technology advances

• Biology, chemistry, other sciences• Information technology

– Business environments evolve• China’s emergence--others• Financing sources• Outsourcing vs. vertical integration• Internet--2009 marketing different from 2000

• Creative opportunities can sometimes be found integrating across technologies/businesses

Business Planning: Foundations

• Clear, rigorous thinking/analysis required:– Who will your customers be--and what do they

really need/want? – How will you meet customers’ needs better than

existing (and foreseeable future) competitors? – How will you reach and convince your customers?– Creativity--is your approach really new? Better? – Can you execute--for the launch? For the long

term?

• The tough question--is your “vision” a brilliant insight--or simply a crazy idea!

Managing Risk

• Seek, and listen to, lots of advice from a variety of sources--different disciplines, backgrounds, experience– Listen carefully to the objections--are they truly reasons you should

give up, or are they identifying the critical next steps to success?

• Spend money very carefully– Used furniture, subleased space, etc. can save $$$– Think through alternative approaches--internet marketing, etc.

• But spend money where it counts:– Don’t short-cut patents and legal/business advice on contracts

• Think creatively and explore potential collaborators in technology, sales, marketing– Find ”win-win” opportunities to better meet customer needs

• Monitor and reassess as you learn, and be honest with yourself– If failure likely, be willing to change course– But be careful not to change course too often

The Successful Business Plan: Three Rules

• Create value--for your customers• Build sustainable competitive advantage:

– Patents/copyrights? Trade secrets?– Customer relationships/trust?– Economies of scale--low cost or other advantage?

• Evaluate your plan by multiplying the components of success--not adding them.– Mgmt X Technology X Financing X Proprietary X . . .– Important, because a “0” in any key area destroys the plan,

and investors are very good a quickly finding the “0”

Concluding Notes

• Keep an open mind and stay active– Read, listen– Talk, ask questions, explore widely– Challenge

• When an idea starts to gel into a potential business idea, do the “hard analysis”– Rigorous internal analysis plus– Broad external input

• Keep trying!• Thank you!!!