Just the Fax, Maam

Remember fax machines? They are those things we used to use before scanning and sending an email attachment. For the younger set, you put a document into your fax (short for "facsimile") machine, then dialed a number and the document was transmitted over phone lines to a receiving fax machine on the other end. In the early days, they required thermal paper, so receiving a fax was more akin to receiving something from The Holy Land. I have heard that some are still in use to this day.

There was, of course, a time when fax machines were ubiquitous. If you were important enough an executive, you even had one right in your office! These days, they're a bit less common, and have been reduced in size and importance to be on a tiny card in your computer. But at one time, they provided a critical function, and one would be foolish not to have embraced the technology. Looking back, we have the luxury of seeing them as quaint, but it's easy to forget that they were once the bleeding technological edge.

To me, this is a lot like ethanol. "What?!" you say. Yes, ethanol. In virtually any issue of the Biofuels Digest, articles discuss variously how ethanol will be a key fuel source, or why it won't work. (If you're in this space and not subscribing to the Biofuels Digest daily email digest, do it now.) Ethanol will certainly play a role in the world's fuel supply, but I believe it is the fax machine of the alternative energy space - it is not a long range solution. I won't debate the entire industry here, but let's just agree that there are good reasons why it makes sense to add it as a component of our supply, as well as excellent reasons why the infrastructure and other changes necessary provide significant barriers. In any event, and in case you haven't noticed, the industry is upon us. My view is that we should certainly keep working and researching and investing, but let's not lose sight of the long range view. Will we ever be a global society that runs on totally ethanol vehicles? I seriously doubt it. That doesn't mean we should stop developing the technology.

Entire companies were built on fax machine technology. The products improved, got faster, went to color -- all kinds of technological advances. Despite the fact that far fewer are in regular use today than even five years ago, I would not support an argument that we shouldn't have made the investment, or exploited the technology. Similarly, people who point out all the warts on ethanol are missing the point. No, I don't think it will be with us for the long haul, but that doesn't mean we won't learn anything by developing the technology.

More Tea Leaves

Just a quick one with no particular insight.

I mentioned a while ago how the question of whether or not we're coming out of the economic Dark Ages depends on whose tea leaves you choose to read. I just received a new datapoint and thought I would share it with you.

John Hession at Cooley just sent me a copy of their latest report on the state of early stage deal making. Some ups, some downs, some flats, but it's good reading. It's based on Cooley's impressive portfolio of 376 transactions in 2009 where they served as counsel to one of the two sides of the table. Despite an abysmal start to the year, Q4 ended up strong in many areas including deal flow, pre-money valuations and overall deal size.

It's only 6 pages. Take a look. I choose to see this as additional good news.

What a Difference a (non-alcoholic) Beer Makes

Sorry - Late again. It's snowboarding season. What can I say?

I attended a great event a few weeks ago put on by the Boston Irish Business Association  and hosted at Caturano, called “Biotech 2010 and Beyond,” and featuring MassBio President and CEO, Bob Coughlin. As an amateur chef, I was particularly pleased to have Caturano as the venue. A key employee benefit there is the full-service kitchen on premises. The evening of the event, Richie Caturano’s daughter was hard at work in the kitchen serving up delicious appetizers, and I was fortunate to get a tour of the kitchen (every now and then, they even get local celebrity chefs to come in and run the kitchen). But enough about food (not that I ever really get enough about food, but this isn’t a food blog).


The event was well attended and well organized. While there were plenty of beverages at the bar, Bob was completely abstinent. You never would have known it. It was a great pleasure to see Bob loosen up and speak very frankly about MassBio and the state of the industry on the heels of JP Morgan the prior month. Without re-hashing the entire preso, Bob was upbeat about what’s coming down the pike. Certainly, some of his enthusiasm comes from the passion associated with having a child with a medical condition that will only be addressed by the efforts of the biotech industry. Some is just Bob – an energetic, passionate leader.

What I was most impressed with, and frankly a bit surprised by, was his candor when I asked him what he saw as the biggest threat to the growth of the industry. The question wasn’t even out of my mouth and Bob dove on it. “Healthcare reform” was his immediate response.

Now, I promised to keep this blog apolitical, but I have to say that I agree with Bob. In my mind, the issue is to develop a system that provides access to reasonable basic healthcare. In this country, there will always be people who have the means to, and who are willing to pay a premium for, the top of the line. That’s why we have Toyota and Mercedes. We have somehow moved to a society where free, best-in-class healthcare has become an unalienable right. I’m not uncompassionate. Everyone should have access to reasonable care. But we seem to keep forgetting that it comes with a price, both in terms of dollars and in terms of expectations. In countries with universal healthcare, a 70 year old in end stage renal failure is told to make preparations. In this country, that person is sustained, and assuming there is a donor, given a transplant. All at outrageous cost.

Once again, I don’t claim to have the answer, but I do know this: The United States leads the world in biotech and pharma R&D. There’s a reason that Novartis chose to locate their global pharmaceutical R&D headquarters in Cambridge, MA. A proposal for universal healthcare that impedes the world’s best engine for drug innovation will seriously undermine not only our global competitiveness, but will also result in poorer healthcare overall.

Marriages Made in Heaven

Maybe it’s because we recently celebrated 23 years of marital bliss, but I’ve been thinking about all the recent discussion about M&A in the Biotech/Pharma space.

I had lunch a few weeks ago with a C-level executive at a major biotech in town. We were talking about the recent Pfizer-Wyeth deal, Biogen and Idec, Genzyme and GI, etc. He said something that I loved: “there are no mergers.” This seems particularly relevant as we are witnessing a “blizzard of new pacts” according to a recent FierceBiotech article. It seems that big Pharma once again has its collective eye on the biotech pipeline, and cash-strapped biotech is all too willing to acquiesce given the constipation in the VC community.

When I was starting out as a consultant with Kendall Strategies, we did a project for BBC (BASF Bioresearch Corp.), just after they had acquired Knoll. We pulled into the Knoll site in New Jersey and they were literally changing the sign at the entrance. Knoll had inherited a product from their prior Boots acquisition and we were doing a go/no-go analysis on the PhIII. We walked in and saw big banners proclaiming unity or announcing company-wide integration seminars, or the new logo being displayed on giant TV monitors (no flat screens in those days). I remember turning to my boss and saying, “they must be spending a million dollars on this BS! Why don’t they just tell everyone to get back to their desks and get back to work?”

Many years later I was at Elan headquarters in South San Francisco in my BD capacity for Athena Diagnostics (a subsidiary of Elan at the time). Elan in those days was on a buying spree and they had just acquired Neurex and made Paul Goddard, the Neurex CEO, President of Elan North America (the new name for the old Athena Neurosciences). I had been there many times, but this time, something was different. Walking through the halls, I saw people, but there wasn’t the customary “Hi, Chris!” or nods of acknowledgement. It was dead silent. In fact, you could cut the tension with a knife. Finally, I asked the Medical Director what was going on. I got a terse response: “we bought them and they’re running us?!” It instantly became clear to me why BASF had been spending so much money convincing people that the merger was a good idea.

My comment to my boss as a young associate at Kendall displayed my naïveté, but in the fullness of time I have learned that integration is no easy task. My lunch guest crystallized it, albeit somewhat harshly. I think mergers do happen, but they take waaaay more time and effort to accomplish than anyone anticipates. The efforts I saw at Knoll were not even the beginning of what needs to happen. Even sophisticated organizations have deep trouble integrating. Here’s what a Tuck School review of the failed Daimler-Chrysler merger had to say about the importance of aligning the views and sentiments of the people involved:

“Although DaimlerChrysler’s Post-Merger Integration Team spent several million dollars on cultural sensitivity workshops… the larger rifts in business practice and management sentiment remain unchanged.”

Last week the In Vivo blog announced their winner for the DOTY (Deal Of The Year). Of the three they discussed, Pfieth (Pfizer/Wyeth), Merck/Schering and Roche/Genentech, the prize went to Roche/Genentech not because of the size of the deal, but because “…the Roche/Genentech deal seems most likely--of the big three mergers at least--to actually work as advertised.” I would argue that the likelihood of its working is in no small measure a result of the close relationship the companies have had for the last 15 years. It was clearly not the result of a few banners in the hallways.

It’s the people, stupid. Mergers that are concocted because of a lust after another’s assets, without regard for cultural differences and true integration, are doomed. Even in the case of Roche/Genentech, there are ‘old-timers’ at Genentech who still resent the relationship and long for the days of the “DNA” ticker symbol. Only time will tell how the latest Pharma mergers will pan out, but I have a new appreciation for ‘post-merger integration teams,’ and suspect that they are actually understaffed and underappreciated by senior managers who are probably in their corner offices wondering why people aren’t just going back to their desks and getting back to work.

I'll take "potpourri" for $200, Alex

This one is just a bunch of observations I’ve made over the last few weeks. No priority; no order.

• I hate to say “I told you so,” but everyone is now setting to print what I said when this all started – we’re going to have an OK year in 2010. “Flat” seems to be the order of the day. Accounting Management Solutions just conducted a survey on the 2010 outlook. I’ll be very interested to see the results. They do have a Life Sciences practice headed up by Dan Davis, but the survey was more broadly based, so we’ll have to take that into account in interpreting what it means for Life Sciences.
  
  
• On a related note, Jack Derby in his monthly newsletter for December (worth subscribing to) talks about the changes taking shape in sales. He says:
  
  

  “My personal belief is that a couple of years from now, the most successful sales organizations will look back at 2010 as that time when they made the transition from the old, traditional, relationship sale to and demonstrated to their customers that they were no longer the approved vendors, but they had become their trusted partners.”
  

  Jack grew up as a sales guy, so views the world through that lens, and his focus is not exclusively Life Sciences. However, an interesting article from FiercePharma paints a similar picture from the Life Sciences perspective, suggesting that the old Pharma sales organizational model is in for massive change. Docs and regulators continue to raise barriers to Pharma reps detailing in their offices, and it turns out the formularies are the more important decision makers anyway. Since there are far fewer of them than there are docs, it doesn’t require the same field force.
  
  
  
• This week’s Mass High Tech (12/16/09) was the Life Sciences Issue and included the list of the region’s largest biotech employers. (I wish I could provide a link here, but they don’t appear to put “The List” on line – only in the print edition.) Genzyme tops the group at 11K total employees generating $4.6B. In second is BiogenIdec with a total of 4,700 employees, but generating $4.1B. That’s $418K/employee for Genzyme, $872K/employee for BiogenIdec. Seems to indicate that BiogenIdec is about twice as productive as Genzyme. Maybe that’s why Adam Feuerstein is calling for Henry Termeer’s resignation at TheStreet.com.
  
  
• I had breakfast with an unnamed VC last week and the discussion turned to the popular topic of the state of the VC industry. I have posted about that before, so won’t rehash it now, but as many who are far more literate on the topic than I have said, there’s trouble in River City (with a capital “T” and that rhymes with “C” and that stands for Capital). We were comparing notes on our respective forays into alternative occupations peri-college. We agreed: there are lots of really smart folks out there who, through a cosmic alignment of the stars, are not executives at biotechs. These are smart folks; solid business people; they understand costs and revenues and drivers just like any other executive. They just happened to choose their parents rather poorly. My experience in executive recruiting is similar. There are lots of rock stars out there who, for myriad reasons, are slogging it out at some small cubicle instead of the shiny offices of Kendall Square. Of course, one needs to be careful what one wishes for…

One Lump or Two?

Everyone now seems to be commenting on how everyone is commenting on the state of the economy. The latest craze is asking or being asked, “When do you think we’ll get out of this for good?” or, “Do you think the recession is over?” or, “Are the recent positive signs going to last?” For a while now, I’ve been fond of responding, “It depends on whose tea leaves you choose to read.”

About a month ago (ok, sorry - I’ve been busy), New York research firm, ChubbyBrain, produced a lengthy report, summarized in an Xconomy article, indicating that venture investing was turning a corner. They noted a 16% decrease in investment in Q3 from 08 to 09, but a 14% increase from 2Q09 to 3Q09. Sounds like a recovery in the making, right? Not so fast.

The next day, Dow Jones VentureSource reported a 6% decline from Q2 to Q3. So who to believe?

I find this quite amusing, particularly on the heels of a weekly newsletter from noted consultant, Alan Weiss. Ten days prior to these conflicting reports, Alan’s weekly “Monday Morning Memo” presciently anticipates it. Not the content, but the concept. I loved what he said there. To paraphrase, he notes that there are those who will profit from downturns in the economy, so it’s in their interest to propagate bad news. Most of us would rather see the pendulum swinging in the other direction.

Think it. Feel it. See it. Act it. So much of the ‘crisis’ is in our heads. I’ve said it here before – those of us with some grey hair have been through this and know we will not only come out of it, but we’ll be stronger! Don’t listen to those 28 year old CNN reporters who think the sky is falling. Think, feel, see and act on positive information. Find opportunities and capitalize on them. I’m having a pretty good year.

The View from Winter St.

On Wednesday night I attended another Xconomy event at Willmer Hale. As I’ve posted before, the folks at Xconomy do a great job, and the events are worth the entry fee. We were treated to a fireside chat with two leaders of the local investment community – Terry McGuire and Peter Brooke (although Terry was self deprecating in correcting Bob Buderi’s introduction of the two legends: “there’s only one legend on this stage, and it’s Peter Brooke!”). I’m normally not a big fan of the “fireside chat” format, but this was the exception. Terry did a fabulous job of keeping the discussion moving on many topics of great interest to the audience. Peter was affable, relaxed, candid and engaging. He shared some stories and insights in just the right balance.

A few key takeaways for me –

I share Peter’s dismay that so much investment money is going into consumer product projects like video games and other forms of entertainment. On one hand, it’s comforting to know that we have the privilege and wherewithal to devote time and effort to fun, but it’s more evidence of what I’m always complaining about – we focus too much on potential returns than on solving the world’s problems. I know, I know. As an investor, that’s precisely what one should be focusing on. But again, I wonder if we have our priorities in order.

I was intrigued by Peter’s comments about protectionism. He seemed very willing to share our ‘secret sauce’ with others in terms of investing, but I’ll bet he would not be in favor of diminishing the strength of our intellectual property system. The SACGHS (Secretary’s Advisory Committee on Genomics, Health and Society) recently released a draft recommendation exempting healthcare providers from infringement claims on DNA-based patents, and that no such patents be awarded in the future. Having served on the rare disease sub-committee of the predecessor organization (SACGT), I was incredulous that such a recommendation could be made, and it has in fact, stirred considerable debate. (By the way, how they could single out DNA patents as distinct from other diagnostic methodologies is beyond me, and will perhaps be the topic of another blog posting.) Strong IP protection is at the core of the innovation economy (which Terry proclaimed is alive, well, and working just fine, thank you). Thus, Peter’s comments against protectionism were intriguing.

I had a chat with Terry about the related issue of no-compete agreements. Massachusetts has been criticized for its enforcement of these agreements, in sharp contrast to California, where it is virtually impossible to enforce a no-compete. The approach in California has often been cited as one of the key success factors of Silicon Valley. Without naming names, Terry indicated that there is not universal agreement among his VC industry colleagues. This will be an interesting debate.

Terry cited a few key factors on the horizon that have the potential to have a severe impact on the VC industry, including the popular debate about capital gains vs. ordinary income treatment of management fees. Peter mentioned the need for banking reform (intermingling of commercial banking and investment banking in the same organization, for example). Well, if you’re looking for me to take sides on the treatment of management fees, forget it. On the other hand, I’ve posted here my thoughts on banking, and I agree wholeheartedly with Peter, who has forgotten more about investing than I will ever hope to know. Still, it’s nice to know that he agrees with me ;-)

The next Xconomy event is November 4 on Pharma’s Bet on Boston Innovation. I’m looking forward to it!