New Funding Models Emerge During Tough Times for Biotech

Theral Timpson

Is 2012 the bottom of the barrel for biotech business hopes? Or is it full of opportunity?

Steve Burrill's annual book on the biotech industry this year is titled, "Innovating in the New Austerity." The editors at Xconomy took that title as a challenge this week in producing their Bay Area event, Reinventing Biotech Business Models. Luke Timmerman, the national biotech editor for Xconomy, has been writing on the austerity side of late. One piece entitled Betting on Biotech to Catalyze U.S. Job Growth? Don’t Count On It took a look at the scant numbers of job postings at the leading biotechs. In another recent piece, Who’s Still Active Among Early-Stage Biotech VCs? Luke bemoans the trend that less money is going into the biotech industry today. It was with this downbeat news and the big question of who will fund early stage innovation that Timmerman opened up Xconomy’s latest biotech event.


Xconomy's "Reinventing Biotech Business Models" at Onyx in S. San Francisco

Onyx, Exelixis, and Cytokenetics

The Xconomy lineup focused on new funding models, and the day’s speakers, particularly the three CEOs on the first panel, chose to go the optimism route. According to Tony Coles of Onyx, Mike Morrisey of Exelixis and Robert Blum of Cytokenetics, their companies are doing quite well.

Each of the three CEOs claim that raising money has not been an issue for them. Onyx, who hosted the event, has had two FDA approvals this year. It doesn’t really get much better than that. Unless they come up with another Lipitor sometime soon. CEO Coles pointed out some of the positive trends that he believes will make biotech a healthy industry. The first is a new way of working with innovation sources, be they start-ups or university research centers.

“We are developing a new system for the efficient transfer of assets,” he said.

Second, Coles believes that genomic or personalized medicine will bring about better chances for success, citing the common example of Zelboraf. Coles doesn’t think that everyone should run to genomic medicine, though. He says that there are still a lot of opportunities for products where there are not specific genomic indicators.

Mike Morrisey of Exelixis and Robert Blum of Cytokenetics, both housed just down the street from Onyx in biotechlandia or So. San Francisco, sounded similarly positive.

Speaking of trends in biotech, Morissey said, “It’s totally Darwinian. Capital limitations drive efficiency. A flow of innovation will come-just differently.”

Blum of Cytokenetics talked about his company’s recent round of funding and suggested that the “financing model needs to adapt to the needs of the discovery industry.”

Versant Has an Idea

If talk of new funding models dominated the day, then Versant Ventures emerged as the star player. Versant, a VC firm focused on healthcare, has invested in three companies built on “option-based deals.” With this model, Versant teams up with big pharma from the get-go to create a drug development company with the goal that the pharma company will buy an asset at an agreed upon price. The startup gets an up front payment from a pharma who buys the option to license the product later on. This was the case with the recent deal between Roche, Versant and the new creation, Inception Sciences.

Brian Atwood was on hand to represent Versant Ventures and give more details. This is a new model for them, and he sees the firm doing more similar deals.

“Could one of these deals pay for a fund?” asked Timmerman, who sat on stage throughout the afternoon querying the speakers.

Atwood replied in the affirmative. What kind of returns, Luke went on. Well, we’re a 10x company Atwood said assuring Luke that that is what he expected from these new deals.

Versant is innovating by matching the cycles of drug discovery to the needs of VCs. But were there any attempts being made to create VC models that match the typical drug discovery timeline, as Robert Blum had earlier suggested. I asked Atwood.

“No.” Came his simple answer. Timmerman pressed him to say more. Atwood was firm. “It can’t be done. Our LPs want a return in 10 years and biotech is taking 17 or more years."

What About the Space?

Diego Miralles from Janssen added some life to the end of the event talking about Janssen Labs, J & J's new “innoavtion center” in San Diego. Referring to a model similar to San Jose Biocenter, Miralles pointed out that the project was lowering the bar for companies to get started.

“All a company needs is $100,000 and they are in business,” Miralles asserted.

Similar incubator models are being set up by Bayer and Pfizer as well as at research parks around the country. These new incubators are primarily focused on the “space” aspect of drug discovery. But, as Miralles suggested, the space can create new opportunities that aid with the money side of things.

Xconomy Events

Speaking of reinventing models, the Xconomy event had some nice interaction. As I mentioned, Luke was on stage with each speaker asking them questions and keeping them honest and on target. He also turned each guest to the audience for questions. I found it much more engaging than the typical long company presentations. It was as though Luke's office was on stage and we could participate in the discussion. Timmerman writes almost daily for Xconomy and is up to speed on not only the trends of the industry but also shows remarkable ease with all kinds of industry details.


Xconomy's National Biotech Editor, Luke Timmerman with Chief Correspondent, Wade Roush

Xconomy puts on six events each year in each of the major areas where they are based, according to their chief correspondent, Wade Roush. The events are part of Xconomy's business model. They are sponsored by the company's underwriters and cost attendees around $200. Timmerman is not ALL doom and gloom, and he acknowledged at the outset that the biotech NASDAQ index was outperforming the broader NASDAQ this year. One could add that a biotech drug is on track to be the best selling drug of the year. And the recent buyout by Gilead made Pharmasset the best performing stock ever. Times are tough. Financing is tight. Yet biotech is finding ways to fulfill the promise of some great new science.

For more on this topic, see our recent show with Bruce Jenett of DLA Piper, The Best of Times, The Worst of Times. See also our upcoming interview with Brian Atwood of Versant Ventures.

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