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To be or not to be: The Pros and Cons of the Virtual Biotech Company

It is more than a decade since the classical model of a biotech company ruled unchallenged: the glass-fronted building on the gleaming modern science park, with the best part of a hundred doctoral level scientists working seemingly double shifts to deliver an entire pipeline of high value product candidates.   The central principle underpinning the investment case for such a model was that a team of that kind, once assembled, could find and develop multiple assets that could be sold one after the other to big pharmaceutical companies.  The key word was ‘multiple’ – no single asset could justify the vast cash drain such a model demands.

Finding such opportunities, which can genuinely sustain this “company” model, has proven to be tricky.  Entrepreneurs would “pad out” a single high quality asset with several earlier stage opportunities that turn out to have considerably less value.   After all, it is virtually impossible for any asset owner or research institution to generate genuine pipelines – large pharmaceutical companies with billion dollar R&D budgets can hardly even manage that feat.

Experience has taught many investors that the only exception to this rule is the platform technology.  A few exceptional technological breakthroughs have the capability to act as the goose that lays a clutch of golden eggs (humanized antibody libraries have been an obvious example of such a technology).  Presented with such an opportunity, the glass-fronted building may still be the right solution – but you better be sure the platform is all it is promised to be and not a sterile goose with golden feathers.

For the rest, the answer is “project” financing, not “company” financing.   Instead of seeking to balance risk at the level of the individual portfolio company, larger investors are increasingly seeking to balance risk across their whole portfolio.   Provided each asset gets less money invested in it than would have been the case with the big, old fashioned “company” model, then a proportion of those assets can be allowed to fail.  Looking now from the perspective of the investor, the game has changed: the “fail early, fail cheap” mantra of big pharmaceutical companies has replaced the “more than one egg in the basket” mentality that underpinned the old “company” model of biotechnology investing.

Typically, these “project” financed companies look very different from their predecessors.  The liturgy now consists of capital efficiency and of an unswerving dedication to moving to the next value-creation milestone even if doing so exposes the asset to the risk of outright failure.

The other big difference is that progressing a single asset through the product development pipeline (and it doesn’t matter whether we are talking about a therapeutic, a diagnostic test or medical device) needs lots of different skillsets.  In a large company (even one the size of the old “company” model of biotechs) the majority of these competencies could be accommodated – the “reusability” of these capabilities was part of the justification for putting several assets through the same development pathway.  But with only a single asset incubating in each nest, less than a full “unit” of each capability is required.  Each skillset in turn is required, very intensively, but only for a relatively short period.  In therapeutics, for example, preclinical development of a single compound might take nine months, in which period expertise in safety pharmacology and toxicology will be heavily in demand.  Upon moving into the clinic, however, the emphasis quickly shifts to trial design, statistics and the like.

The solution is to out-source these functions.  The advantage of doing so is obvious: you only pay for the capability when you need it.  You can have three highly skilled and experienced individuals working on your regulatory toxicology studies while they are on-going, without wondering what you are going to with them once the study is finished and reported.   Even if the cost per unit time of accessing skills this way is higher (and it surely must be, since the contract provider has to secure a sufficient profit), the overall cost is lower because you are only paying for the amount of time and effort actually required.  Lower total cost, higher capital efficiency.

A less obvious, but equally relevant, advantage is the possibility of accessing better, more experienced and more capable, individuals on an out-sourced basis than would have been possible, let alone financially viable, on an employed basis.

What about the disadvantages?  Consultants by their very nature are more difficult to incentivize than employees.  Their association with the company is transient, and their recompense primarily consists of fees payable irrespective of the final outcome of the project.  Too often consultants have their focus divided between several (or, for the most in demand, many) projects and the quality can suffer.  Faced with two simultaneous demands for urgent attention, they will always have to choose one.  With employees, managers can do just that: manage.  They can decide which of two competing demands is the higher priority for the overall health of the business.

So for a modern, “project financed” biotech the question of the moment is simply this: just how virtual should I be?  Is being virtual, semi-virtual or fully staffed the “ideal” to be aimed for?

Virtual tech companies have proliferated in recent years.  Many are virtual through necessity – without sufficient cash to progress their assets, their virtual existence is tantamount to suspended animation.  These companies are often a single individual with an asset portraying themselves as a company either (in their view) to aid in raising finance or perhaps, where a group of individuals are involved, simply as a mechanism to divide up the ownership in a convenient and legally robust fashion.  But these are not really virtual operations – because they do little or no actual operating.

Largely virtual but nonetheless operationally aggressive companies, with financial muscle, are a much rarer beast.  One such company is Funxional Therapeutics (founded by the author, and where he is now Chief Scientific Officer). Funxional is a Cambridge (UK) based therapeutics company with a single product in clinical trials.  With only a handful of employees, mostly engaged in corporate management rather than operations, but nonetheless supported by significant investments from blue chip venture capital firms, Funxional is operating one of the purest forms of the virtual biotech model.  It is ‘”project financing” taken to its natural extreme.  And for the most part it has reaped the benefits of this virtual lifestyle.  It has advanced its lead candidate from research to the end of phase I at a remarkably low cost and at a speed to match the industry’s best.  Whether or not the product actual works, allowing a profitable exit, or not is in a sense neither here nor there – that simply reflects the quality of the founding asset.  From a purely operational perspective, it has been a resounding success already, by reaching the value-inflection points as quickly and cheaply as possible.

What has been the key to such success?  And how were the pitfalls avoided?  The single most important factor is the management team, and the management structure.  Ensuring every part of the project is managed by an “inside” consultant whose job it is to manage the contractor responsible for delivery provides the ability to be an expert customer while being almost entirely virtual.  In one sense, it doubles the management overhead – contractors are so keen to provide project management as part of the deal that, on the face of it, it can seem difficult to justify adding another layer: with the senior management overseeing an expert consultant directing a contractor’s project manager who is managing the work.  But convoluted as it sounds, this is one of the secrets to successful virtualisation.

Our own experience, in TCP Innovations, has shown  the importance of these “expert customer” roles.  We have witnessed a massive rise in requests for the provision of domain experts to perform exactly these kind of roles for a wide range of companies.  With experts covering CMC, toxicology, chemistry, pharmacology, statistics, intellectual property and more, the right people are out there to make sure the ultimate virtual model can deliver success, more cheaply, more quickly and more flexibly than ever before.

There is still some way to go before all but the most avante garde investors regularly go all the way to this level of virtual project management.  One limitation is their own internal benchmarks: years of analysing more conventional, less virtual businesses has engrained certain expectations.  Most seasoned investors expect management and administrative expenses (that is, everything but the value-creating operations themselves) to be less than a certain fraction (perhaps 30%) of the total spend.  Yet highly efficient virtual models may not reach this benchmark.  Their failure to do so comes from several sources: out-sourcing saves money, so the operational costs are lower than with a conventional employed operations team.  At the same time, management gets more expensive, particularly with this extra layer of “expert customer” consultants managing every aspect of the operations.   So even though a “project financed” lean and mean, virtual company spends less overall building its value, for superior capital efficiency and better returns for every stakeholder, the fraction of the expenditure going on (what has previously been considered relative unproductive) management and administration has risen sharply.

Until investors gain enough experience to see that a rising fraction of expenditure on management can (though clearly is not always) be a sign of an efficient model, it will be difficult to win them round with a business plan for a fully virtual biotech.  Worse still, asked to cut the management expenses back to a more traditional level risks surgically removing the “expert customer” capability which is so key to successful virtual operations in the first place.

Virtualisation is here to stay.  Investors and managers alike have to learn new benchmarks, new practices and above all a greater trust and closer relationship with each other.   Doing so exploits the cost savings of out-sourcing, retains the ability to do things well, and, in the end, this new model of a “project financed” virtual biotech may be the only show in town.

 

This article was written by David Grainger. David is a scientist directing an internationally recognized research laboratory in the Department of Medicine at Cambridge University, focused on inflammation. David is a biotech entrepreneur and investor, having founded several biotech companies, including Funxional Therapeutics, and he runs a successful consultancy business, TCP Innovations. He is also a Senior Partner at Total Medical Ventures, a life sciences boutique investment group, and a Principal at ATPBio.

 

Creative Financing - in a brave new world

This month we were invited to participate on a panel at UK Trade and Investment (UK TI) in Boston looking at issues affecting life sciences companies across both sides of the Atlantic. Several of the interesting presentations focused on experiences of companies in the US and UK, each carrying out some form of corporate or R&D activity in the reciprocal location, to try and gain local advantages.

ATPBio presented, alongside Canaccord Adams, thoughts on Creative Financing - a subject of extremely high relevance in the new economic climate to life science companies everywhere. One of the key issues to come out of the presentation and ensuing discussion, was the importance of running parallel tracks of multiple financing avenues, both conventional and creative; you don't know what will work until it does.

Other issues covered included: investors wanting to take more of a step-wise approach, with validation points in between; the requirement for focus and defining value-drivers; and the importance of driving forward quality assets and quality operating teams (more timely than ever). Also covered were a range of potential creative financing alternatives companies can take, with case studies of several.

Here is the presentation as is from October 7th. Please get in touch with any questions.

Download Boston Oct7 ATPBio 10-07-09

This post was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry. Thanks to David Schechner, Managing Director of Canaccord Adams in Boston, with whom we co-presented. And thanks to UK TI for the invitation to speak, and K&L Gates for hosting the event.This session was part of a broader set of events running over 3 days to help foster more collaboration between innovative and entrepreneurial life sciences clusters in the UK (the UK Golden Triangle Partnership, incorporating the bio-clusters of Cambridge, Oxford and London) and Boston and Massachusetts (MassBIO).

M&A Trials: Importing a Culture

In March this year, Roche and Genentech agreed to a friendly acquisition of Genentech, in a deal valued at $46.8 billion. Obvious attractions for the deal included access to Genentech's lead cancer drugs and a highly regarded and innovative biotech pipeline.

In terms of background, the two organizations had quite different heritages: Roche Holding AG, the Swiss pharma giant started in 1896 by its eponymous founder, with some 80,000 employees and revenues of $44 billion (2008 figures); and Genentech, a San Francisco biotech leader and haven for scientists, founded in 1976 by a VC and a biochemist, and with 11,000 employees and revenues of $13 billion (2008). So, as soon as the deal was announced, the question on everyone's lips was would Roche be able to maintain Genentech's culture? Genentech was deemed as both inventive and entrepreneurial - and the challenge for Roche was even termed by some as a fight to keep Genentech's genius.

Now, Roche had clearly done their homework, having acquired a controlling stake in Genentech originally in 1990 for $2.1 billion. 18 years is a good stretch of time to "live together" before deciding to get married. Though while co-habiting, Roche left full and independent control to the leadership team within Genentech. This was sheer brilliance - leaving the entrepreneurial scientists to get on with what they knew best. Though now, post acquisition, things are changing. Roche was always going to struggle to keep hold of the top talent at Genentech. Their stock options often ran into millions or tens of millions of dollars - such talented people could well go off and do something new. But we now see a fuller extent of such changes by considering moves at the top at Roche. 

The two appointments that particularly stand out to us are:

Pascal Soriot (50), currently CEO Genentech and Member of the Corporate Executive Committee, is appointed Chief Operating Officer (COO) Pharma Division and assumes global responsibility for Pharma operations. These include commercial operations worldwide, global marketing, production, development and registration.

Ian Clark (49), currently Head Global Product Strategy Pharma, will succeed Pascal Soriot as CEO Genentech. He will report to Pascal Soriot and will be based in South San Francisco.

Interestingly, Pascal Soriot was only appointed CEO of Genentech post-merger, to lead the integration, and replacing the revered pre-merger CEO Arthur Levinson. (Levinson was also credited for creating much of the culture and environment that enabled Genentech to create the biotech drug hits it has). Previously, Soriot was in charge of commercial operations for Roche's pharma division. So, clearly a very capable individual, but essentially from the Roche big pharma camp.

Ian Clark's appointment seems a bit closer to the mark. Clark is from the Genentech camp, and in 2003 was appointed Senior VP and General Manager of Genentech's bio-oncology business - very much a strategic and sales and marketing role. Before that he had a sales and marketing background from Novartis. So, potentially a great candidate to help the transition from Genentech's business into a pharma mould, but certainly not the rare combination of scientist and manager of Levinson inspiring the Genentech team since the mid-1990s.  

Meanwhile, Levinson clearly did not stay on as CEO of Genentech. If Roche wanted to maintain the culture that had led to the development of Avastin, Raptiva, Tarceva and Lucentis, surely keeping the existing leadership team in place was key? There may have of course been other issues (perhaps Levinson was ready for a different challenge?) and indeed Levinson was appointed as Chairman of Genentech with talk of appointment to the Roche board at a later date. So, his influence would still be present, but not at the same "coal-face" level that one would need to maintain the pre-merger culture.

And what of other key staff? Susan Desmond-Hellman, as the highly vaunted head of development at Genentech and key in the advancement of several of the lead cancer drugs, moved to the Genentech Scientific Resource Board, shortly after the merger. Again, Roche would still have the benefit of her experience, but loose her highly valued and hands-on focused input of the pre-merger Genentech.

Or as aptly put by Stephen Burrill in an interview with Bloomberg:

“By and large, the Genentech leadership will move on, staying as long as their golden handcuffs require them to,” Burrill said yesterday in a telephone interview. “The spirit of entrepreneurship won’t be the same. People who were excited by entrepreneurship will find new homes and those that are comfortable with a large corporate structure will stay.”

This leads us to perhaps the most interesting contradiction of all in Roche's actions post-merger. The changes mentioned above seem to reflect incorporating a entrepreneurial growth phase company into a more stable steady pharma business (e.g. fully exploiting Genentech's product line by appointing commercial managers to run the units). And if Roche was essentially building on its rich pharma heritage this would make sense. However, Roche is working very hard loose it's pharma title and re-brand itself as a biotech company. This is seen most clearly in dropping its PhRMA membership (the pharma trade body, Pharmaceutical Research and Manufacturers Association)  and joining instead biotech's key industry group, BIO.

Why does this change in industry groups matter? Well, in and of itself, probably not much. The reported rationale is that BIO more closely resembles the interests of the newly merged company. Fair enough. But on a wider level, what Roche is trying to do is send out a very clear signal to the market that it is now a biotech company and not a pharma. And as such, it should be valued more in line with its biotech peers (i.e. richly, based on future potential) rather than its pharma brethren (currently at low valuations, due in no small part to threats from patent expirations). How could this affect valuation. Well, pre-merger, Roche's valuation was based on an earnings multiple (or price earnings ratio, PE) of around 16x. Meanwhile, Genentech carried a much richer PE of nearly 30x (and histortically has even been over 40x).

So, if the newly biotech-anointed Roche could garner even a small uplift in earnings multiple, what a great way that would be to increase valuation - no new products, just a new label, and a new earnings multiple. Will the market award this? Who knows, only time will tell. And to truly justify it, Roche would need to develop new hit biotech drugs arising out of the post-merger group, rather than from the pipeline of pre-merger Genentech. But what is clear is that Roche is not the same biotech company as Genentech was, and the magic of Genentech's culture is already being diluted. 

This article was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.

Creative financing - the Vertex way

Does the current pain of financing just affect small underfunded companies, with weak pipelines? It seems not. Last month, Vertex announced it was selling its European milestone payments for its ph III program, Telaprevir for hepatitis C. Key points in the release, regarding the value of these milestones and likely timing, state that:

The milestones anticipated for telaprevir in Europe include $100 million related to regulatory filing and approval and $150 million related to launch of telaprevir.

Vertex anticipates, based on projected development and commercial timelines for telaprevir, and assuming successful development, that it will earn these milestones prior to April 2012. If the intended sale of the future milestone payments announced today is successful, Vertex would receive a one-time cash payment that reflects a substantial percentage of these future milestones payable by Janssen.

We don't know what the value would be of the "potential one-time cash payment", but it has to be significant. And this isn't the first time Vertex has engineered such a deal to realize some future milestone payments in return for cash today - it did a similar deal with its two HIV drugs, under its 1993 license deal with Glaxo, in 2008 for a one-time payment of $160 million.

Now, Vertex could be considered one of biotech's major success stories. The company was founded in 1989, listed in 1991 (NASDAQ: VRTX), with as high a profile as any biotech (being the subject of the fascinating true life account of founding and building a biotech - The Billion Dollar Molecule, by Barry Werth).

Vertex has a current market cap of $6.4 billion, and a strong balance sheet with $754 million in cash and equivalents. (Even if you discount the convertible notes due 2013 of $144 million, this still leaves just over $600 million net cash). And in July it also announced an additional upfront license payment of $105 million from Mitsubishi Tanabe, with future potential milestones, to develop and commercialize Telaprevir in Japan. However, late stage drug development is very expensive, and the current run rate of cash burn is over $650 million (based on Q2 financial results). So, Vertex has just over 1 yr of cash, and is bolstering its balance sheet by judiciously selling off assets which will ultimately support its own drive for Telaprevir in the US and North America.

The moral? As unprofitable and cash burn companies, no biotech can ever rest on its laurels. Cash will always be king, and find any which way you can to fund key value drivers within a portfolio: sell the family silver to save the house.

This comment was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.

Tough medicine: Schwarzenegger plan to slash $26 billion deficit

How do governments get out the growing mountain of debt, balance their budget deficits, and avoid crippling their own economies going forward? SImple: spend less and earn more.

Arnold Schwarzenegger, Governor of California has taken it one step further and provides a solution to California's $26 billion deficit which cuts to the heart of the matter:

July 21 (Bloomberg) -- California lawmakers reached an agreement with Governor Arnold Schwarzenegger over how to close a $26 billion budget deficit that pushed the most-populous U.S. state to the brink of insolvency.

The deal, reached by legislative leaders after two months of frequently acrimonious negotiations, would slash spending for schools, public works and welfare programs amid the longest recession since the 1930s. If approved by the full Senate and Assembly, the agreement will also siphon money from municipalities, force companies and individuals to pay income taxes sooner and make it more difficult to receive state aid.

“We came to a basic agreement, a budget agreement,” Schwarzenegger told reporters outside his office last evening. “This is a budget that has no tax increases and this is a budget that is cutting spending and it deals with the entire $26 billion deficit.”

The last sentence says it all - "...no tax increases...cutting spending....and it deals with the entire $26 billion deficit." Wow - this really is tough medicine, but not overdue.

National governments in the developed world would do well to follow the same example. Is it likely to happen? Well, the measures may not win many votes, but given that California would be the world's eighth largest economy, if it were an independent state, it's big enough and with a deficit to match that others may have to take notice.

And although national governments can stall the problem somewhat (e.g. by printing more even debt), this only leads to greater problems in store for the future - leading to currency devaluation, a weakened global position, inflation and ultimately a downgrading of government debt. Left unchecked, results could range from a crippled economy at best to potential default and economic collapse.

Admittedly, such cuts would lead to less spending on healthcare too, with short term challenges for our industry. But what would you rather have....struggle now and develop business models that are leaner, fitter and stronger, or have a broader economy and industry that are shot on a global basis? You decide.

Looks like the Terminator has kept his promise...."I'll be back".

This comment was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.

Hard times, Harder times

No-one is any doubt that these are hard times for life sciences companies. Some commentators have even suggested that these are the hardest times. The cause is obvious enough: the paucity of capital that has blighted the ‘real’ economy has been felt even harder in the cash-hungry world of technology companies that lack any kind of revenue stream to help weather the storm.

But to attribute all the woes of the biotech industry to the credit crunch would be too simplistic. Even as access to capital increases, and investors’ appetite for risk  returns towards the long-term average, the troubles for life sciences companies may ease slightly but they will not go away. The baseline has changed for good, and there will be no quick route back to the gold rush days of the 1990s. Learning to play by the new rules will be an essential factor in the survival of the fittest life science companies.

Leaving aside the current (and hopefully transient) shortage of investment capital, which is a problem not restricted to biotech, there are at least four factors which contribute to the distinctly chilly climate for healthcare commercialization in the next decade.

The first is payor pressure.  As far away as preclinical drug discovery is from real paying customers (and there is no industry on earth which is further removed from its consumers), the entire healthcare value creation chain is affected by the change in attitudes of the big healthcare providers, be they governments or private insurance behemoths. A seismic change in the balance of power between the drug companies and their customers has taken place in the last few years, and the pace of that change is only accelerating.  If purchasers are prepared to pay less, then the ripples will be felt right down to the owners of early stage healthcare technologies. Large pharmaceutical companies are adapting as fast as they are able, focusing on delivering value for money rather than small incremental benefits that have, in the past, attracted a scarcely-earned premium in the market place.

For the biotech industry, whose real customers in almost every case have always been the large pharmaceutical companies, this represents a big challenge (and for the lucky minority, something of an opportunity).  The shopping list of big pharma executives has shifted faster than the biotech life cycle – so if the product you are developing no longer meets the elevated “value for money” hurdle, the challenging but plausible exit you once sought may rapidly be turning into mission impossible.  As a result, a mountain of relatively late stage technologies are accumulating that will never see the marketplace, despite “working” at least by the measuring stick of the last decade.

This process will only continue, and biotech entrepreneurs selecting early stage assets for development can no longer do so without due regard for the demands of the final customer – the healthcare provider.   And far less early stage technologies have that potential, which means a smaller, leaner healthcare sector developing a smaller number of higher value products will surely begin to emerge.

And the opportunity?  For those fortunate enough to hold assets with real potential to provide “must have” products offering stepwise rather than incremental healthcare benefit may see the value of those assets rise (or at least fall more slowly) compared with the bulk of what is being peddled at the present time.

The second factor is the biotech business model, which has seen the sector as a whole yield disappointing returns to investors not just in bad years, but over an extended period.  For a while (perhaps for too long) the inferior returns of the sector have been disguised by some very visible successes – individual companies returning ten-fold or higher returns on their initial investment.   This allows investors to believe that it is possible to substantially outperform the disappointing average ‘simply’ by being smarter than the rest, and spotting the winners at an earlier stage.  But even the most optimistic investors are beginning to doubt their ability to pack their portfolios with the solid gold companies.  There are easier ways to beat the biotech sector average – simply go invest in something (almost anything) else with better company fundamentals.

What lies behind these systemically poor returns?  To a degree, it’s the same thing that underlies the many woes of free market economics: markets are only efficient at setting prices over the short term – the longer the gap between value realization and price setting, the greater the errors in market valuation.  These distortions are everywhere.  Long-term damage to the environment is not factored into the price of natural resources and increasing longevity is factored into pension costs too slowly.   Similarly, too high a proportion of the value created by developing innovative healthcare products is captured by the entities that bring those products to the marketplace.  Late-stage developers have to invest larger sums of money, but they do so at lower risk than the early stage investors, yet the price of early stage assets in the marketplace does not provide a sufficient return to account for the risk taken by those early investors, with the price kept low by the power of the purchasers.

As a result a funding chasm has opened up.  Research, supported by governments and private backers such as medical charities, continues to spew out opportunities while at the other end, large pharmaceutical companies are increasingly desperate to acquire revenue-generating products.  But while the returns are so poor, fewer and fewer investors are prepared to take the risk of backing the transition from promising idea to commercial product candidate.

Once again, therefore, this is leading to a much more careful selection of the research opportunities that are going to receive investment backing.  Entrepreneurs using the old rule-book to identify fundable opportunities are likely to be disappointed, and companies left holding part-developed or tarnished early-stage assets will find new investment impossible to attract (at least on terms that attribute any value to past efforts) even when capital is once more freely available.

Today, we are seeing the few remaining investors in this area attempting to cherry-pick the best early stage assets to move them through the value creation chain much more cheaply than in the past.  Virtual early-stage development companies are proliferating and the 1990’s grand glass-fronted biotech headquarters may never return.  If this results in higher quality assets being selected and moved forward quickly and at lower cost than in the past, these investors will see returns that exceed past disappointments, and a leaner, meaner biotech sector will emerge.  If it proves impossible to pick the better opportunities despite the input of a new breed of experienced, entrepreneurial high-caliber scientists, then life sciences commercialization will meet its Armageddon, and who knows what will emerge on the other side.

The role of these two factors in shaping the new biotech landscape have been widely recognized and discussed.  The other two factors are just emerging, and while they have the potential to be equally damaging as the first two, investors and entrepreneurs alike are only just beginning to consider their impact.

The first of these ‘new’ factors is the changes in the procedures for obtaining patent protection.  Intellectual property lies at the heart of the therapeutics value chain because it represents the tradable commodity.  Investment adds value to the core intellectual property, usually in the form of patents or (for early stage technologies) patent applications, which is then sold on (hopefully for a higher price than the cost of building the asset) to the next player in the chain.

For a couple of decades, the patenting landscape was relatively benign, as a system designed to protect widgets was exploited to protect complex pharmaceutical “knowledge”.  The number of granted patents covering technological innovations grew exponentially providing the fuel to power the golden-age of technology investing.

Rightly, however, this patent “land grab” has gradually come to be perceived as having gone too far.  Granted claims have often been poorly reduced to practice across their entire scope, and have served to inhibit genuine innovations in broad, and very promising, areas rather than serving to simply protect the interests of the genuine innovators for inventions that have really made.

In addition to this tendency to grant broad claims too readily, the applications process itself has also been criticized.  It takes too long to resolve the validity of claims during the applications phase, and the process is open to manipulation by inventors who keep unpromising claims pending for years or even decades preventing third parties from having a clear view of the future playing field in those areas the big players see as most likely to be important.  The presence of unfeasibly broad claims pending in a given area is often sufficient to scare off potential investors in competitive technology.

The result has been a quiet revolution in the whole process of intellectual property protection at all levels of the system, from the political masters to the patent offices and even the courts ruling on the interpretation of patent law.  For example, in Europe we have seen the changes associated with the aptly named “Raising the Bar” initiative.  It is easy to dismiss the changes in the rule regarding the filing of divisionals as esoteric, but from 2010 it will be markedly harder to keep applications pending, and inventors will be forced to narrow their applications to tightly defined claims round their invention quicker and more severely than before.  The aim, and to a degree the likely result, of these changes is to allow third parties to know much earlier where the “free space” around and between inventions really lies.

In the strategically pivotal US jurisdiction, the political will is fixed on reducing the number and breadth of granted technology patents.  A number of recent judgments have strengthened the hand of examiners in rejecting broad (and sometimes not-so-broad) claims, including KSR v Teleflex 550 U.S. 398 (2007), a judgment of the US Supreme Court relating to a disputed patent claim for an electronic throttle control.  At the heart of the judgment is a new interpretation of 35 U.S.C. §103 relating to obviousness.  In essence, the ruling suggests that many combinations of what was previously known are obvious, and therefore unpatentable.  This in turn has led to a dramatic increase in examiners at the USPTO throwing out applications that might previously have been allowed, on the basis of sometimes tenuous combinations of the prior art.

If you research life sciences technologies and rely on patents to protect your inventions so that they can attract investment, or if you routinely evaluate technologies for investment that are “protected” by pending applications, and you skimmed over the last paragraph assuming the finer points of specific US Supreme Court judgments were too detailed for you to bother with (all the more so, since it ostensibly related to automotive engineering), then its time for you to talk to specialists in patent strategy.  The consequences of the KSR judgment are still working through the system, but it is not too doom-laden to suggest that this and not payor pressure or the biotech business model (and certainly not the credit crunch) is the greatest long-term threat to technology investing as we currently know it.  Certainly, those who understand it and plan for it have the greatest chance of emerging unscathed a decade from now.

All three of these factors discussed to date have something in common: they all favour survival of the fittest, and promote a leaner model with fewer, carefully selected opportunities being developed.  If you invent, or invest in, a technology which is genuinely new, exciting, scientifically sound and offers real patient benefits then you will likely be as successful as you have always been.  If, on the other hand, you seek to peddle inferior science dressed up for the ball, swathed in smoke and mirrors, which offers only incremental patient benefit and poor value for money (and we all know there have been plenty of these “golden herrings” sold for substantial sums in the last two decades) then these changes will put you out of business for good.

The fourth factor, however, is rather different and while on the face of it is sensible and well-meaning, it actually benefits no-one: a tighter regulatory environment.   As with the patent landscape, the tectonic plates are still moving, and it is not clear where the new equilibrium will eventually lie.  In the shorter term, the Obama White House has pushed the FDA towards a still more conservative approach, and the word on the ground is that, as far as the details are concerned, things that were allowable 12 months ago are now triggering resistance from the Agency.

But this short-term trend is only part of a multi-decadal shift towards increasing regulation, and a higher and higher bar to get over in terms of safety and, increasingly, efficacy.  On the face of it, such regulation is intended to protect the user (all of us, that is), and it would seem to be self-serving for the drugs industry to call for lighter touch regulation.  ‘How can more stringent safety testing possibly be bad?’ cries public opinion.

The answer, of course, is the hidden cost of complying with the regulations, both in terms of cash cost for additional studies, but also in terms of otherwise promising new drugs for unmet medical needs which are abandoned because of equivocal data in a particular, often imperfectly predictive, safety testing regimen.  These loses add to the attrition rate that weighs down biotech investment returns.

In addition, ever increasingly vigilant post-marketing surveillance can identify rare but dangerous side-effects associated with a particular product or use.  Identifying these issues can only be good, as improved knowledge can drive improved use of available medications.  But the current system, which leaves financial liability with drug developers even when the particular side-effect was so rare or so unusual it could never have been predicted during the state-sponsored regulatory pathway, can result in ruin for a developer who has done everything required of them diligently and honestly and delivered a drug whose benefit far outweighs its risks.  This has to change.  Not, of course, by relaxing our vigil for drug-induced harm but by agreeing a new contract between private enterprise and the state where, in return for diligently following the regulatory guidelines and disclosing all data (a situation we are moving towards but have certainly not yet reached), the state assumes post-marketing liability.  It will be enough penalty to the developer that if sufficiently severe side-effects emerge that the market for their product will evaporate, without also facing the prospect of lengthy litigation with their supposed victims leaving the guillotine of unlimited financial liability (particularly in the US) hanging over them.

In the end, regulation that is too onerous, which seeks to eliminate all risk from pharmaceutical use, will drive the development of new drugs to zero.  Even the current position, one could argue, is harming rather than improving public health by restricting the flow of new medicines in order to, at least theoretically, reduce the risk of any harm to even a single individual.  Until we “grow out of” the current democratic vogue of ‘government by tabloid headlines’ where policy is irrationally modified in response to rare but catastrophic events, while giving insufficient weight to the smaller but still important benefits gained by millions of others (or at the very least underestimating the hidden costs of increased regulatory burden), then there is little hope for reversing the decade-long decline in new drug registrations.

If new drug registrations continue to decline, we are all losers.  Not just the biotech sector (which would become a historical quirk), but all of us who rely on pharmaceuticals for a longer, healthier life.  Ultimately, even the inventors and investors behind really good products will be forced into submission.  Heavier regulation takes survival of the fittest to the irrational limit, where none are fit enough to survive.

So if times are hard at present, in large part due to low capital availability, then my glimpse through the crystal ball suggests that things will get harder still, even as the credit crunch eases.  For the best prepared, like all seismic transformations, this will be an opportunity rather than a threat as the chaff is blown away revealing the wheat in all its splendour.  But for some, maybe even the majority, a radical change in approach is going to be required – after all, wheat and chaff share a common origin in the ear of corn, and there is still time to influence where you end up. 

This article was written by David Grainger. David is a scientist directing an internationally recognized research laboratory in the Department of Medicine at Cambridge University, focused on inflammation. David is a biotech entrepreneur and investor, having founded several biotech companies, and he runs a successful consultancy business, TCP Innovations. He is also a Senior Partner at Total Medical Ventures, a life sciences boutique investment group, and a Principal at ATPBio.

Is India still shining?

A recent report by the Centennial Group, highlighted in a FT columnist article discusses "What India must do if it is to be an affluent country". Findings in the report, and my own observations from recent trips, have three quite significant implications for the life sciences and healthcare sectors. Before highlighting these implications, let's take a quick look at the FT article discussing the report and what is causing the basis for future growth and prosperity.

Encouraging progress has already occurred in the last 30 years (even when compared to China's blistering rate of growth) which forms the basis for future growth:

"Since 1980 the average living standards of Chinese and Indians have, for the first time in the histories of these two ancient civilisations, experienced a sustained and rapid rise. In one generation, India’s gross domestic product per head rose by 230 per cent – a trend rate of 4 per cent a year. This would seem a fine accomplishment if China’s had not increased by 1,090 per cent – a trend rate of 8.7 per cent. Yet even if India has lagged behind, the change has been large enough for aspiration to replace resignation as the ethos of a large and rising proportion of Indians.

The recent past offers at least four further reasons for optimism. First, the rate of growth has been accelerating: over the five years up to and including 2008, the average annual rate of economic growth was 8.7 per cent, up from 6.5 per cent at the previous peak in 1999. Second, vastly higher savings and investment underpin this acceleration, with gross domestic savings up to 38 per cent of GDP in the financial year 2007-08. Third, India’s economy has globalised, with the ratio of trade in goods and services up to 51 per cent of GDP in the last quarter of 2008, up from 24 per cent a decade before. This was not far behind China’s 59 per cent of GDP."

Challenges which would need to be overcome to achieve this would include the "seven intergenerational issues":

"...first, tackling disparities, not least among social groupings, but without further entrenching group-based entitlements and group-based politics; second, improving the environment, including the global environment; third, eliminating India’s pervasive infrastructure bottlenecks; fourth, transforming the delivery of public services, particularly in India’s ill-served cities; fifth, renewing education, technological development and innovation; sixth, revolutionising energy production and consumption; and, finally, fostering a prosperous south Asia and becoming a responsible global power."

And although these are very real challenges to achieve such affluence, the world has changed:

"What I take for the world is that India, for all the huge challenges it confronts, is likely to continue its rise, if more slowly than the report assumes. The job of adjusting the familiar western ways of thinking about the world to the new realities has hardly begun. Within a decade a world in which the UK is on the United Nations Security Council and India is not will seem beyond laughable. The old order passes. The sooner the world adjusts, the better."

Turning to personal experience, I have recently witnessed the local population's growing aspiration on two trips to India in 2008 and 2009. In 2008, I travelled through some of the public railways systems from Delhi to Rajasthan. The railway systems in India are true mass transport, serving some 18 million passengers and 2 million tonnes of freight daily. And getting on and off the trains with all your luggage and traveling party in-tact, is an act of wonder and defiance in itself!

What was most surprising on these journeys was the grass roots level at which aspirations are growing.The railway kiosks and street vendors, as well as selling mango juice, fresh oranges and "kachori" (a spicy snack filled with lentils), were also selling copies of "Think and Grow Rich" by Napoleon Hill, "How to Win Friends and Influence People" by Dale Carnegie, and "The Magic of Thinking Big" by David Schwartz. Very American you may say, but exactly the type of "can-do" attitude and ambition that has long supported growth in the US.

And earlier this year, on a trip to Punjab and Delhi, again I was struck by the local wealth and progress being made by local entrepreneurs. Thinking of somewhat crude but indicative barometers, while traveling as a child some 25 years ago, I noticed most cars were the "Hindustan Ambassador", a local remake of the Morris Oxford III and in production since 1957. Now, when traveling through Delhi and affluent suburbs of Mohali and Chandigarh, I found that top of the range Mercedes, $1+ million new homes, and very smart world class hotels were not unusual. Admittedly, some of this wealth is ex-pats returning home after building successful careers and businesses in the West, but increasingly it is home grown and re-invested locally.

Interestingly, I also found the ethos of investing in local (Indian company) equities to be growing. This can partly be evidenced by the rapidly growing availability of websites assisting private investors with in depth information, and from anecdotal conversations with local investors. I will be visiting again later in 2009 and look forward to observing other changes and signs of progress.

Turning to our opening statement, what are the three significant implications for the life sciences and healthcare industries?

Firstly, as affluence within India grows and the associated middle class, there is a growing market for healthcare provision, with massive potential. This is for both local provision of healthcare services (e.g. private hospitals, clinics) but also a growing market who demand the best of worldwide available pharmaceuticals, and who as private payors will be willing and able to purchase such.

Secondly, the entrepreneurial spirit has been unleashed and has positively leaped out of the box. This is exactly the kind of leadership that is required to help build new and world class companies - developing new drugs, new medtech solutions, new healthcare service provision and advancement into higher tech of the existing mainstay of service companies and generics businesses. 

Thirdly, growing interest in an equity and investor culture is healthy for all tech based industries. Ultimately, retail and generalist institutional investor support is necessary to build support for companies as they develop and move out of private holdings into the public realm. Again, this model seems to take more from the US than anywhere else, and has been essential in fostering a market where dollars (or rupees!) can be recycled into new investment.

So, is India still shining? Well, the sheen may have come off over the last couple of years as markets worldwide have suffered. But the race has just begun.

This article was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.

Better ways to spend £150 million

A recent Lex article (see below) from the FT highlights why the UK government's new £150 million venture fund is unlikely to stimulate much new venture creation or entrepreneurial spirit. A useful suggestion in the article is to concentrate on attracting and retaining the best talent to help drive such ventures forward, and specifically that a 50% top tax rate will not help.

Another suggestion we would make would be to take a serious look at the current UK taxation of options. Given the punitive levels of dilution that can occur through subsequent investment rounds, a positively incentivising option structure (as occurs in the US) may be one of the few real ways to reward entrepreneurs, managers and high-net-worth investors for risking their time and money. The alternative is to stand by and watch the talent asses its opportunity cost....and go elsewhere.

UK venture capital

FT.com, Lex. July 3 2009

Nothing ventured, nothing gained. The UK government’s recent decision to invest £150m in a new venture fund is the latest attempt to help British start-ups navigate a death zone formed by a lack of mid- to late-stage funding. Its goal – to drum up £1bn of public and private funding for start-ups over 10 years – is laudable. But it is unlikely to make much difference.

Anyone familiar with the reality show Dragons’ Den can attest that the UK does not suffer from a lack of boffins with interesting ideas. Yet in spite of decades of government-backed schemes, the UK has yet to develop the vibrant start-up ecosystem of the US or, more recently, Israel. The problem goes well beyond the financial crisis, which has hit start-ups and their backers everywhere.

One reason may be entrepreneurial energy tends to feed off itself. In Silicon Valley, successful start-ups – think Google, Amazon, Microsoft – have gone on to acquire the next generation of minnows, giving risk capital an incentive to enter the market. Founders become serial entrepreneurs, or join venture capital groups, helping to attract yet more talent. In the UK, start-ups are more likely to sell to a global powerhouse than to become one. Acquisitive venture-backed successes, such as Autonomy, the business software company, are the exception.

A modestly sized VC fund would have to turn £300m into £1.5bn over its 10-year life to make the returns limited partners want. That needs good ideas and seasoned managers with experience of turning start-ups into thriving, stand-alone companies. If government is serious about nurturing a UK start-up culture, to attract such talent should be a priority. A 50p top tax rate will not help.

This comment was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.

Sharpen your axe...and daydream!

In these challenging times how can we get more out of less? Here are some interesting tips on improving productivity, and the value of daydreaming:

In his book, "The Seven Habbits of Highly Effective People", Steven Covery relays an old fable about a woodcutter:

Once upon a time a very strong woodcutter asked for a job with a lumber company, and he got it. The pay was really good and so were the work conditions. For that reason, the woodcutter was determined to do his best. His boss gave him an ax and showed him the area where he was supposed to work. The first day, the woodcutter brought 18 trees. "Congratulations," the boss said. "Continue what you were doing!" Very motivated by the boss’ words, the woodcutter tried harder the next day, but he only could bring 15 trees. The third day he tried even harder, but he only could bring 10 trees. Day after day he was bringing less and less trees. "I must be losing my strength", the woodcutter thought. He went to the boss and apologized, saying that he could not understand what was going on. "When was the last time you sharpened your ax?" the boss asked. "Sharpen? I had no time to sharpen my ax. I have been too busy trying to cut trees..."

In a recent article in the Wall Street Journal, Robert Lee Hotz reveals some fascinating work into brain mapping, indicating what we should do more of to reach "Eureka" moments:

A Wandering Mind Heads Straight Toward Insight
Researchers Map the Anatomy of the Brain's Breakthrough Moments and Reveal the Payoff of Daydreaming

It happened to Archimedes in the bath. To Descartes it took place in bed while watching flies on his ceiling. And to Newton it occurred in an orchard, when he saw an apple fall. Each had a moment of insight. To Archimedes came a way to calculate density and volume; to Descartes, the idea of coordinate geometry; and to Newton, the law of universal gravity.

Eureka Moments

Five light-bulb moments of understanding that revolutionized science.

In our fables of science and discovery, the crucial role of insight is a cherished theme. To these epiphanies, we owe the concept of alternating electrical current, the discovery of penicillin, and on a less lofty note, the invention of Post-its, ice-cream cones, and Velcro. The burst of mental clarity can be so powerful that, as legend would have it, Archimedes jumped out of his tub and ran naked through the streets, shouting to his startled neighbors: "Eureka! I've got it."

In today's innovation economy, engineers, economists and policy makers are eager to foster creative thinking among knowledge workers. Until recently, these sorts of revelations were too elusive for serious scientific study. Scholars suspect the story of Archimedes isn't even entirely true. Lately, though, researchers have been able to document the brain's behavior during Eureka moments by recording brain-wave patterns and imaging the neural circuits that become active as volunteers struggle to solve anagrams, riddles and other brain teasers.

Following the brain as it rises to a mental challenge, scientists are seeking their own insights into these light-bulb flashes of understanding, but they are as hard to define clinically as they are to study in a lab.

To be sure, we've all had our "Aha" moments. They materialize without warning, often through an unconscious shift in mental perspective that can abruptly alter how we perceive a problem. "An 'aha' moment is any sudden comprehension that allows you to see something in a different light," says psychologist John Kounios at Drexel University in Philadelphia. "It could be the solution to a problem; it could be getting a joke; or suddenly recognizing a face. It could be realizing that a friend of yours is not really a friend."

These sudden insights, they found, are the culmination of an intense and complex series of brain states that require more neural resources than methodical reasoning. People who solve problems through insight generate different patterns of brain waves than those who solve problems analytically. "Your brain is really working quite hard before this moment of insight," says psychologist Mark Wheeler at the University of Pittsburgh. "There is a lot going on behind the scenes."

In fact, our brain may be most actively engaged when our mind is wandering and we've actually lost track of our thoughts, a new brain-scanning study suggests. "Solving a problem with insight is fundamentally different from solving a problem analytically," Dr. Kounios says. "There really are different brain mechanisms involved."

By most measures, we spend about a third of our time daydreaming, yet our brain is unusually active during these seemingly idle moments. Left to its own devices, our brain activates several areas associated with complex problem solving, which researchers had previously assumed were dormant during daydreams. Moreover, it appears to be the only time these areas work in unison.

"People assumed that when your mind wandered it was empty," says cognitive neuroscientist Kalina Christoff at the University of British Columbia in Vancouver, who reported the findings last month in the Proceedings of the National Academy of Sciences. As measured by brain activity, however, "mind wandering is a much more active state than we ever imagined, much more active than during reasoning with a complex problem."

She suspects that the flypaper of an unfocused mind may trap new ideas and unexpected associations more effectively than methodical reasoning. That may create the mental framework for new ideas. "You can see regions of these networks becoming active just prior to people arriving at an insight," she says.

In a series of experiments over the past five years, Dr. Kounios and his collaborator Mark Jung-Beeman at Northwestern University used brain scanners and EEG sensors to study insights taking form below the surface of self-awareness. They recorded the neural activity of volunteers wrestling with word puzzles and scanned their brains as they sought solutions.

Some volunteers found answers by methodically working through the possibilities. Some were stumped. For others, even though the solution seemed to come out of nowhere, they had no doubt it was correct.

In those cases, the EEG recordings revealed a distinctive flash of gamma waves emanating from the brain's right hemisphere, which is involved in handling associations and assembling elements of a problem. The brain broadcast that signal one-third of a second before a volunteer experienced their conscious moment of insight -- an eternity at the speed of thought.

The scientists may have recorded the first snapshots of a Eureka moment. "It almost certainly reflects the popping into awareness of a solution," says Dr. Kounios.

In addition, they found that tell-tale burst of gamma waves was almost always preceded by a change in alpha brain-wave intensity in the visual cortex, which controls what we see. They took it as evidence that the brain was dampening the neurons there similar to the way we consciously close our eyes to concentrate.

"You want to quiet the noise in your head to solidify that fragile germ of an idea," says Dr. Jung-Beeman at Northwestern.

At the University of London's Goldsmith College, psychologist Joydeep Bhattacharya also has been probing for insight moments by peppering people with verbal puzzles.

By monitoring their brain waves, he saw a pattern of high frequency neural activity in the right frontal cortex that identified in advance who would solve a puzzle through insight and who would not. It appeared up to eight seconds before the answer to a problem dawned on the test subject, Dr. Bhattacharya reported in the current edition of the Journal of Cognitive Neuroscience.

"It's unsettling," says Dr. Bhattacharya. "The brain knows but we don't."

So far, no one knows why problems sometimes trigger an insight or what makes us more inclined to the Eureka experience at some moments but not at others. Insight does favor a prepared mind, researchers determined.

Even before we are presented with a problem, our state of mind can affect whether or not we will likely resort to insightful thinking. People in a positive mood were more likely to experience an insight, researchers at Drexel and Northwestern found. "How you are thinking beforehand is going to affect what you do with the problems you get," Dr. Jung-Beeman says.

By probing the anatomy of 'aha,' researchers hope for clues to how brain tissue can manufacture a new idea. "Insight is crucial to intellect," Dr. Bhattacharya says.

Taken together, these findings highlight a paradox of mental life. They remind us that much of our creative thought is the product of neurons and nerve chemistry outside our awareness and beyond our direct control.

"We often assume that if we don't notice our thoughts they don't exist," says Dr. Christoff in Vancouver, "When we don't notice them is when we may be thinking most creatively."

Is Silicon Valley the Best Global Entrepreneurial Region: Fact or Myth?

The US is inspiring and pioneered Venture Capital. Often, non-Americans (and even some Americans) believe that Silicon Valley is the role model to follow for new venture creation and a location that provides the best entrepreneurial experience. However, nowadays everyone can easily glean lessons from all around the world about entrepreneurship and business financing, etc. This has accelerated in the last ten years due to the growth of the Internet, social networks, blogs and the proliferation of business schools worldwide. Also, Governments have invested heavily into regional development of innovation clusters all across the world and provision of basic business skills and information to early-stage businesses.

My philosophy is that, no matter what you do, companies end up performing in a regional environment with set culture and behaviours - so the Silicon Valley model does not fully translate to e.g. Paris, Tokyo or Cambridge (UK or US)! Entrepreneurs will do what they do by mainly using their "national" knowledge to build a company and get things done in their local business and legal environment. International development will come later but the management team will probably still maintain a national or regional-centric view of the world. 

To underline the point, the financial returns of the investment funds of Venture Capitalists in the rest of America and Europe have been stated by some to be identical to those in Silicon Valley! A logical conclusion which may back up this view is that American VCs do invest in Europe and vice versa – an activity they would only do if their firms got the same or improved financial returns – not worse? The national or regional Venture Capitalists invest in the best entrepreneurs within their locality who have knowledge of national business infrastructure and an international understanding of their industry to enable them to generate rapid sales from large industry players. With the law of averages, entrepreneurial talent should emerge fairly evenly across the world so investors will always be able to find excellent opportunities and management.

There are many paths to success: Silicon Valley's is no longer the sole route. Let's all of us have more faith in our native entrepreneurial population and their ability to do things in whatever style is prevalent in whatever region or country they live. Diversity is natural and not conformity in most of the world. Entrepreneurs by their nature tend to be innovators who break the mould with new products, services and business models – so “copycats” will likely not be the most successful, in any case.

In today’s world, business productivity is perhaps not by emulation - but by adaptation of global information to your national location to enhance your innovation? From that synergy, comes success. Go glocal (global and local)!

 

This article was written by Dr Frank F Craig MBA. Frank is a successful entrepreneur who has (co-)Founded several biotechnology companies which grew to have a market capitalisation of almost £2 billion. He has worked internationally and performed business development in Europe, Asia and North America. He is a Principal at ATPBio and also manages his own consultancy business, Life Sciences Consultancy Limited.