Virtually Everything

I just got back from a conference on “Optimizing Early-Stage Drug Development” sponsored by Cooley and Talaris Advisors. John Hession was his customary jocular, professional self as emcee. Well organized, well attended. The only issue was that the landlord at 500 Boylston seems to think that it’s OK to shut off the AC at 6:00. What? Do they think lawyers don’t work past 6? Well, I guess that wasn’t the only problem. The presenters all went over their alloted time, and combined with the rising temperature in the room, it put pressure on everyone to get out and get back to the wine and cheese. Thus, nobody was in the mood for asking any questions. Which was good, since everyone went so far over that they completely consumed the Q&A time, not to mention half of the networking time. I did have one burning question, though.

In any case, it was an interesting group and presentation:

• VC Perspective: Doug Onsi, Venture Partner, (HCV), Derek Lee, Chief Financial and Corporate Development Officer, Talaris Advisors
• Big Pharma Incubator: Wing Delatorre, MD, Head of Business Development, Biogen Idec Innovation Incubator
• Pre-clinical: Steven Richter, PhD, President and Scientific Director, Microtest World Class Life Sciences Services (streamlined non-clinical models)
• Pre-IND to Phase 2: Mark Hurtt, MD, Chief Medical Officer, Talaris Advisors (drug development efficiency)
• CMO Perspective: Patti Seymour, Senior Consultant, BioProcess Technology Consultants (innovations in contract manufacturing out-sourcing)
• IP Risks: Erich Veitenheimer, Partner, Patent Intellectual Property, Cooley, LLP 

Doug told us that the VC model is broken (despite yesterday’s Xconomy article to the contrary), and that the HCV investment thesis (as virtual as possible, ≤$15M to get to POC in 2 – 5 years, strong IP and products that Pharma wants) is the way to go. Wing told us that you want to be in her incubator because it reduces costs. Steve, Mark and Patti all made cases why an entrepreneur with a molecule should use their services to develop it into a product and manufacture it, and Erich told us to hire Cooley to do your IP work. Virtually everything is virtualized. (Doug even told us about an HCV investment with only one FTE!)

So what was my burning question? Well let’s assume that Doug is right and I can get some money put together for my drug. Then I go out and hire all these service providers and contract out all the work. What’s left for me to do? My job becomes the General Contractor on a construction project managing all the subs. We even heard from Patti that it can take as many company FTEs to manage the contractors as it does to do it yourself. So if we completely virtualize a development project, I wonder if it would end up costing more than just putting a reasonably sized company together. And wasn’t that the point of putting these companies together in the first place? That you could tap into the multiple expertises of the team? The old VC mantra – I’d rather fund an A team with a B idea than a B team with an A idea – seems to be turned on its head. The “team” is the list of contractors. As an investor, I’d be very concerned that they didn’t share my passion for success.

John promised more events this summer. If they’re as thought provoking as this one, I’m looking forward to them.

Keep Your Money

The MassBio Annual Meeting was held Wednesday and Thursday of this week in its new venue. For the second year, the meeting took place at The World Trade Center – a welcome change from the Sheraton, where it seems as if it has been since I was a green Senior Associate at Feinstein Partners (about 100 years ago). The format was pretty much the same as it has always been – plenary sessions and some breakouts.

Some of the panels were better than others. Deborah Dunsire moderated a fireside chat with Henri Tremeer and Jim Mullen. If you believe what they said, no entrepreneur and no investor would set foot near any biotech company. You’d be better off keeping your money.

The article in the Globe about the panel, which has been widely picked up by other outlets, latched onto the apparent major difference in their opinions about the effects of healthcare reform on the drug business. Maybe it depended on where you sat, but while I agree that they said different things, I didn’t see the great chasm that was described in the article. Here’s what I did hear:

• Henri, who is an expert in this regard, managed to not answer a single question that was asked of him. His preference is to wax on about how great Genzyme is, and to actually take pride in the fact that he has been at the helm for 35 years.
• He proclaimed that there is now an international marketplace for talent. That might be true if you’re Genzyme or Biogen, but try recruiting someone from overseas for a venture-backed startup in Cambridge.
• He told us that it's important to be sensitive to cultural differences while maintaining the organizational culture. In other words, get Asians to work in Asia, Germans to work in Germany. Thanks. Didn't we learn that lesson when Nissan (back when it was Datsun) sent Japanese managers to market their cars here in the US? In a culture where people take their shoes off before getting in their cars, they couldn't understand why the US cars' seat belt retractors were failing until they got them back to the lab in Japan and found a month's worth of french fries mangled inside them.
• It’s better to be lucky than smart. Henri’s sage advice? “Don’t work on things that don’t work.”

(ok, enough Henri bashing; there were some takeaways)

• Jim made the somewhat provocative statement that everyone is abandoning cardiovascular drug development because the agency has made it impossible.
• The old saw about “US = 60% and ex-US = 40% of sales” is no longer valid. Emerging markets (think India and China) will soon totally eclipse the US market in numbers of patients. However, I can’t believe they’ll all have the same diseases as us (think genetics, environment), which is good and bad. Bad for currently marketed drugs, good for R&D and discovery of new therapies (read: good for the industry).
• One of the best points was one made by Jim – don’t forget that no matter how big your company is, there is always more R&D happening outside your company than inside. Collaborations and partnerships are the lifeblood of this industry.

We may finally be at a point, as is said to be at hand during every economic downturn, where Big Pharma will finally see Biotech as providing its near term pipeline. Pfieth has cut nearly 20,000 jobs – 6 of 20 R&D sites worldwide. When Big Pharma starts cutting R&D, I start getting nervous. However, coupled with the constipation in the investment community, there may well finally be some early stage Biotech assets that will end up in Pharma and be carried through to market. On Michael Lytton’s panel, he aptly characterized the current Biotech venture capital community as project finance, and the current state of R&D as S&D (Search & Development). Good call.

There’s an old saying that if aspirin were discovered today, it wouldn’t be approved. I wanted to ask them if Cerezyme or Avonex were discovered today, would anyone invest? Oh, but silly me, there were no audience questions. I can only guess. First question: “So, what do you guys think of Carl Icahn?” Second question: “This is to Henri. Henri: what the hell is going on in Allston?” I guess the organizers didn’t want any bloodbaths in the meeting hall.

To add insult to injury, the morning after the meeting, Richard Pops writes a piece in Xconomy about PDUFA 5 – another disaster in the making.

On a different panel, Tim Coetzee, PhD, President of FastForward, part of the National MS Society that funds drug development projects (as opposed to never-ending academic research morasses), made a chilling observation. There are 200 compounds in development for MS. There are 2.5 million people with MS worldwide. Do the math. There aren’t enough patients to do the trials.

What’s an entrepreneur to do? There’s no money, no blockbusters left, the FDA won’t approve any drugs and there aren’t enough patients to do a trial.

The hopeful thing that I got out of all this is that all the assets that are not being funded now will be highly sought after in a few years. Arguments that the venture model for Biotech is broken appear to have more validity now than they used to. But that, to me, represents opportunity. I have confidence that Yankee ingenuity will drive the development of novel funding mechanisms. Look at the PXE story. An incredibly rare disease, the parents and other patient advocates took the bull by the horns and funded an investigator to identify the gene that causes the disease. What was so clever was that they pre-negotiated rights to the intellectual property coming out of the research. This and other novel funding mechanisms are what are going to have to be developed to get us out of this mess. The good news is that you can’t stop innovation, no matter what the economy.

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…