Monthly Archives: July 2011

Five Day Filter

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In the news this week: a start-up success story in India and acknowledging a need to do better in Kenya. Comments and questions are, of course, appreciated.

Michael Francisco

New Bioentrepreneur article

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We’ve published a new article on the Bioentrepreneur site: The Isis manifesto, written by Isis founder and CEO Stan Crooke.

Any conversation on antisense should heavily feature Isis and Crooke: Isis is responsible for the first antisense product approval, Vitravene, in 1998, and Crooke has been at the helm for more than 20 years. He’s known as a loyal, fair and dynamic leader, and we flagged him in our ’Who’s Who in Biotech’ feature in 2006.

In his article, Dr. Crooke ruminates on the state of the biotech industry and gives his advice on leadership. You can read the piece here. (For the PDF, go here.)

Brady Huggett

Demystifying China: Funding sources for startups

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During lunch the other day, Walter Lau and I tackled a question raised by a Trade Secrets reader: “How can a small biotech raise funding in China, after having biological proof of concept?” Walter is a managing partner of Cenova Ventures, one of the few healthcare-focused VC funds in China.

The question really needs to be answered in two parts: one for the Chinese biotech companies, the other for international biotech companies hoping to get funding in China.

For typical Chinese biotech companies, the first and main source is most often the government. The funding comes from national as well as local levels, and goes not only for research, but also to commercialize the research from the labs. The national funding comes through a variety of ministries via different programs. Two of the biggest biotech funding sources are the Ministry of Science and Technology and the Natural Science Foundation. Some of the highest profile programs, such as the 863 program, the 973 program and the Torch Initiative, are under the Ministry of Science and Technology.

Local governments usually offer support through industry parks. Science and technology parks in large cities give incentives to scientists to start companies in their city, and offer lab space, startup funds, tax rebates, and administrative support in return. It is said that local government spending on biotech R&D is about 65% that of central government funding.

For international biotech startups hoping to get funding in China, the options, unfortunately, are limited. Government programs mostly do not fund foreign companies. Local industry parks do offer incentives, but hardly in meaningful startup funds. The typical VC funding path familiar to the US biotech startup is almost nonexistent here, despite the fact that there are many VCs and a lot of money in China.

“Few of the VC funds in China are focused on life science and healthcare,” Walter noted. “And the ones that are in life sciences tend to invest in areas of faster return, such as healthcare services, medical devices and diagnostics, and in companies in the growth and pre-IPO stages (For more on this topic, click here).

While “early ” in the US may mean biological proof of concept straight from the lab, “early” in China means just beginning to have revenue. A company with revenue of tens of millions of renminbi and a profit of several millions of renminbi can still be considered an early stage company. “So ‘early’ in China translates to early growth-stage in America,” Walter pointed out.

Another possible funding option is domestic angel investors. “Coal boss and real estate” as people like to refer to them collectively, are individual investors who made their wealth in more traditional ventures, and look for new investment frontiers. Biotechnology has at times been deemed a trendy investment, but when it becomes clear that it does not have a six-month investment time frame, enthusiasm wanes.

So I pointed out that startups outside China don’t qualify for government funding, are considered too early for VC money, and that private money is quite elusive. I asked, “Have we concluded that there is not a lot of hope?”

“There are certainly viable business models for drug development startups,’’ Walter replied, “There are money and resources in China, but one has to be creative.”

We talked about Lead Therapeutics as an example. It was a preclinical-stage drug development company. The company’s business model was to generate improved leads on clinically validated targets, and take them through to pre-IND candidates for partnership, licensing or acquisition. To enable this model, all the discovery and preclinical studies were conducted in their China lab for the cost advantage. Lead Therapeutics was started April 2007 with initial US and China VC funding, discovered a promising PARP-inhibitor November 2009, and was acquired by BioMarin February 2010.

So another way of financing is by way of saving. It is said that one can do three preclinical programs in China for the cost of one in the US. That figure is roughly 2:1 on the clinical side – this is the same as raising two to three times as much money.

As the Chinese put it: when money is tight, spend a penny twice.

Chloe Liu

Pharma as Shareholder

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A funny thing happened in the stock market last week. Signals for what eventually became an acquisition of a small cap biotech company Icagen (ICGN) were disclosed in an SEC filing because the acquirer, Pfizer (PFE), was a large shareholder. The events struck me as unusual because, a) it’s rare to see pharma publicly tipping their hand regarding business development activities, and b) it seems as though there are very few instances in which a pharma takes an equity position in a public company.

How rare is it? The chart below shows an analysis of public equities holdings of the top 15 pharma companies by revenues. I should note that the list excludes Roche’s large equity stake in Chugai, a Japanese pharmaceutical company, as well as Novartis’s large equity stake in Roche. That said, what I found is that the top 15 pharma hold equity in 40 public biotechs worldwide. To put that in context, in an industry with approximately 650 public biotechs globally, fewer than 10% have pharma as a shareholder.

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Notably, only TWO companies in my analysis had more than one pharma shareholder, those being Morphosys (MOR), a Germany-based antibody company (Novartis and Astrazeneca) and Intercell (ICLL), an Austria-based vaccine company (Novartis and GSK). The size of the pharma equity holdings ranged from the clearly de minimus ($1M or less) to the substantial; Sanofi’s stake in Regeneron (REGN) is now valued above $850 million and Eli Lilly’s holdings in United Therapeutics (UTHR) is worth about $340 million.

Perhaps we shouldn’t be surprised that GSK is an outlier among its peers. Known as a creative deal-maker, GSK holds equity in 15 public biotech companies, the largest position being in Theravance (THRX). It recently increased its stake late last year.

The majority of deals between biotech and pharma are licensing transactions, discovery alliances, or acquisitions that involve cash payments with no equity involved. Why does pharma take equity in public biotechs, and how might investors interpret this? When I categorized the 40 companies as either platform-based (discovery platform or specific domain expertise) or assets-based (no clear platform, pipeline of market products or diverse compounds), I found that the vast majority fell into the platform category, suggesting that pharma is taking equity in companies that have more to offer than a single lead drug candidate or a basket of assets. Icagen fit squarely in this camp, as the biotech was focused on a broad ion channel drug discovery platform. As for Morphosys and Intercell, the companies with multiple pharma shareholders? Both platform companies.

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Looking through pharma’s equity positions, I found many that were small (<5% positions), longstanding, and unchanged since the original position was established as part of a licensing or collaboration deal. These data raise many interesting questions (Does this subset of biotechs outperform? Are they more likely to be acquired by the shareholder? When does pharma buy and sell?). My sense is that having Pharma shareholders is certainly not a bad thing, but I wouldn’t say that it foreshadows a takeover anymore than a rich, late-stage licensing deal or a broad discovery alliance that does not involve equity.

Adam Bristol

Five Day Filter

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A hot week in biotech (literally, if you live in the Eastern half of the US) ends, as always, with the Filter. Here’s a little weekend catch-up reading.

Michael Francisco

The Future of Startups in Brazil

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I’ve already written about Brazil as an emerging power in the area of science. A remaining challenge for the country is to move from science to industry in major areas, including biotech. I’ve also written about the laws surrounding biotech, but these laws mostly affect medium and large-size companies, because those can demonstrate incomes from which fiscal incentives can be applied and deducted from income tax.

But what happens to small, start-up biotech companies? Do they have a future? Brazil has launched a system called “subvenção economica,” which is inserted in the law previously mentioned.

Since 2006, there has been an annual call for proposals, inviting companies to apply for funds that don’t need to be paid back. Last year the “subvenção” offered about $300 million in reais (US$190 million) and the demand was four times that amount. Two hundred and fifty-two companies qualified for funds, and a majority will receive some. Biotechnology and health together totaled 25% (67 companies). Overall, small companies asked for 72% of the funds, which is remarkable.

Still, these small startups get an initial push but do not have a mechanism to scale up their business later. The two laws mentioned previously do not apply to small biotech companies because they do not have incomes from which to deduct incentives, and also they cannot offer guarantees to back up bank loans. One component of the Innovation Law provides tax deduction for entrepreneurs that invest in technological innovation and as such could give rise to funds from entrepreneurs to small business companies.

However, biotech does not stimulate the immediate economy because the projects are long term. So the only attractive factor coming from these small companies is IPR to be offered to larger companies as a means to assure that investments can be made under the protection of the Brazilian Patent Law – Law No 9726/96. The Patent Law in Brazil is restrictive to innovations related to biology, but I’ll talk about that later.

In order to establish an innovation center in the northeast of Brazil, we concluded that a non-profit association should be established, much like the Wisconsin Alumni Association, to deal with patents generated by the biotechnology network called RENORBIO.

RENORBIO in four short years accumulated more than 60 patents, deposited in Brazil and abroad. Funds are needed to assure that these patents will be of use for the industry, so we invited six entrepreneurs to be part of a management council in hopes of bringing together the private and the public sectors.

It’s too early to say if they will advance risk capital. If it doesn’t work, Brazil will attempt a tax deduction from Northern States and Counties. Nine Northern States in Brazil will collect an estimated US$25 billion in taxes in 2011. If that holds, 0.1% would be enough to establish an Innovation Pole in the Northeast of Brazil and small startup biotech companies would then have a future.

Luiz Antonio Barreto de Castro

Your questions, answered (or at least discussed)

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A Trade Secrets reader recently emailed me to ask if we might supply a post on this question: “How would an entrepreneur or small biotech raise funding, after having biological proof of concept?”

I put that to our authors. I received a handful of answers (pasted below), and also a few promises to tackle that question in coming posts. As always, feel free to direct remarks or further questions to the authors in the comments section.

David Wilson, whose experience is from China and the US, said: On the surface I have witnessed all types of financing vehicles, from traditional banking to self-financing through personal credit cards. The short answer is that financing is available, and you have to pursue all avenues if you are passionate about your business.

Fahd Al-Mulla said he’d take up the topic in a future post, but also said: In Kuwait we have a governmental agency that funds small businesses and entrepreneurs. If you work in Kuwait University, there are business incubators, etc., available.

He pointed to this post as useful information.

Chris Hillier said: It is a straight-forward question but perhaps not as simple to answer. From my experience in Scotland, proof of concept is a direct step out from the laboratory science. The science has been developed, usually by an academic, and has been tested at the PoC stage with the market potential already in mind.

At this stage, often the entrepreneur/start-up is still not investor-ready and probably has an embryonic business plan and an incomplete view of the market. Often this is accompanied by an over-confidence in the potential of the product and an over-valuation of its worth. So, there needs to be a period of commercial due diligence that should be honest, highly critical and realistic. Assumptions must be justified and any supporting case histories or comparators used must be truly analogous. It is vital that the entrepreneur himself/herself challenges his/her own assumptions at this stage prior to approaching the angel or VC investor. If affordable, independent diligence would be a good investment.

In Scotland there are a number of government-sponsored initiatives that would support these activities. These are incredibly helpful and provide young start-ups with a great support at this stage.

Then it is a matter of using all and any means to get onto the radar of funding opportunities. Depending on a number of factors (cash requirement, time to market, management experience, market need, level of disruptiveness) this can take a long time and a lot of work. Though if you are in the right space, at the right time, with the right technology, this might be rapid.

The process of interacting with the VC is a whole story on its own, though I personally have presented 52 times over the last 15 years with different ventures, and yes, I was counting!

Viren Conde: From the Indian perspective, see Financing Know-Hows for Biotech Start-ups in India.

Prashanth Bagali: My experience is as an entrepreneur in Malaysia since 2005, and I’ve successfully incorporated two biotech/bioinformatics companies, raised Phase 1 and 2 fundings, as well as public grants.

He’s also launched products in the local and ASEAN markets, so he’s able to offer advice to fellow scientists, technologists and researchers.

Luiz Antonio Barreto de Castro: He’s blogged on this topic for us already.

John McCulloch offered his thoughts from the MaRS Centre in Toronto, Canada:

A. If the innovator is an Ontario start-up company they would likely qualify for the full range of services provided by MaRS Discovery District, i.e. access to advisory services from a panel of >20 life sciences industry veterans (pharma, biotech, VC, legal, regulatory), eligibility for a program to bring in an experienced executive to assist in fundraising, access to incubator space, eligibility to apply to the MaRS Investment Accelerator Fund ($500-1000K seed funding), investment pitch training, business plan assistance and inclusion in angel investor, VC and strategic partner events hosted by MaRS.

B. If the innovator is a Greater Toronto Area academic, the process would be a bit different. The technology would first be disclosed to the appropriate technology transfer office, who would then pass it on to MaRS Innovation – a federally funded group that has first-look rights to all academic IP in this region. If MaRS Innovation decides the data is compelling and the market need is sufficiently strong, it will fund additional de-risking studies (up to early clinical studies) and the development of a robust IP estate. The goal is either to use the technology to create a spin-out company (usually a portfolio of related technologies in each company) or license to a strategic partner. MaRS Innovation is also staffed by industry experts and they are responsible for the development of each sponsored technology.

Simply put, both MaRS initiatives are intended to increase the odds of successful development of strong innovations whether academic or private in origin. Go here for more.

Others should be weighing in on this coming up. Stay tuned.

Brady Huggett

A Tale of Two Countries

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I have had reason of late to consider the nature of targeted economic development in two disparate countries on either side of the globe. Both are awash with excellent science, have free and highly regarded educational systems, and provide exceptional healthcare to their populations. One is the home of whisky and soccer, the other the home of rum and cricket.

Scotland has experienced two decades of intensive public support via its economic development organisation Scottish Enterprise, which has initiated a plethora of programs, including early stage Proof of Concept schemes, educational fellowships to nurture and mentor budding entrepreneurs (the Royal Society of Edinburgh’s Enterprise Fellowship scheme), and later-stage government supported investment vehicles (e.g., the Scottish Co-Investment Fund).

Barbados, on the other hand, is at a much earlier stage of development, as far as its life sciences industry is concerned, though growing rapidly. Only a few years ago they set out to grow their bioscience base and to develop their biotech credentials by attracting world-class clinical and academic scientists to join their growing cohort of home-grown, ambitious, forward-thinking nascent entrepreneurs. Now, it seems they have sufficient substrate and expertise to move to the next level, and thus seem about to embark on their next stage of evolution. That evolution includes proposals for the development of a world-class biotech park and the implementation of a series of commercial strategies designed to leverage their educated workforce and their unique geographical location, as a natural distribution hub between South America, North America, and Europe.

This is an exciting journey for Barbados, and there is a lot it can learn from Scotland’s experience. The science base and the inventiveness of Scotland are strong assets. This is evident by any number of statistics, including the world’s highest number of bioinformatics research groups per head of population, a single University (University of Dundee) producing more life science citations than Cambridge and Oxford, more medical research per head of population than anywhere else in Europe, and a ranking as No. 1 in the world for stem cell research-based citations.

However, from an entrepreneurial perspective, these have not translated into commercial opportunities at a level that you might expect. For example, in 2010, Scotland’s life sciences companies attracted only £36 million of equity investment. This compares poorly with other biotech hubs, including England, and pales into insignificance against the large hubs of the US.

The reason, often mooted, for this situation is a lack of significant venture capital in Scotland. The fact is, even though early stage companies in Scotland are supported by the aforementioned government initiatives as well as by a vibrant angel network, the funding outlook for early stage biotech companies tends to hit a wall when searching for significant late-stage funding.

As a nation, Scotland has prided itself for its distinctive approach to health care, most recently seen in abolishing prescription charges at a time when England increased its cost. Within the biotech industry, Scotland has also focused most of its life sciences economic development resources on the healthcare sector, including drug discovery, clinical trials, and medical devices. However, we now know that biotech has a ubiquitous role to play in a diverse range of industries. An excessive focus on healthcare can be disadvantageous to those other markets and may steal resources away from overall innovation. This has left Scotland with a perceived narrower portfolio of investment opportunities, of interest to a narrower range of venture funders, and ultimately, addressing a narrower market opportunity. There is evidence now that Scotland is altering its course and developing a wider range of bio-based commercial opportunities, including biofuels.

Barbados, at an earlier stage of development, could learn from Scotland, and ensure that its nascent biotech industry is not overly narrow. It already seems to be committing early to engagement with non-health markets, particularly alternative energy and the environment. This is especially important, since Barbados is endowed with rich and untapped natural resources and biodiversity.

A strategic concerted approach by Barbados Bioscience, the country’s development agency Invest Barbados, and the University of the West Indies (UWI), could carefully position the island as leaders within the Caribbean. Ambitious proposals in the works include those for the new bioscience park, new bioscience regulation and new technology transfer systems.

And deal activity is also ramping up. Earlier this month, a lucrative commercial partnership was announced between the UWI and BioJet International, a leading global supplier of renewable jet fuel for aviation and transportation industries. Under the agreement, UWI and BioJet will jointly develop biofuels IP under the canopy of a proposed UWI/Biojet International Biofuel Research Institute. Deals such as this, which build important strategic relationships with industry and neighbours, are extending Barbados’ reach and influence in the region and wider afield.

If it was to achieve a fraction of the £3.1 billion that the life sciences sector contributes to the Scottish economy annually, then it could be very well pleased with itself indeed.

Chris Hillier

Five Day Filter

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The Filter ends the week with an update on agbiotech in China and an OpEd on using prizes to spur innovation. As always, feel free to comment or ask a question below.

Michael Francisco

Israeli Biotech Merges With Devices

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Israeli Companies Like CollPlant Apply Sophisticated Biotechnologies to Device Industry

The Israeli life sciences industry has shifted its focus from drugs to devices even though many of the underlying technologies have more in common with bio-pharma than with bio-med.

Israeli researchers made their mark on the global scene early, through several blockbuster biopharmaceuticals, including the cancer drug Doxil, (invented at the Hebrew University) and multiple sclerosis drugs like beta-interferon (commercialized by Serono) and copaxone (commercialized by Teva Pharmaceuticals).

Until about 15 years ago, VC investment, and the R&D talent that accompanied it, was drawn to developing biopharmaceuticals, while the medical devices sector was very much the poor cousin of the life sciences industry.

But in recent years, investors, seeking faster regulatory approval and a quicker return on their investment, have funneled a majority of their cash into the medical device sector. During the past decade nearly two-thirds of VC investment has been in medical devices, with about a third in biopharma, a reversal of the American trend.

About 400 companies, 57% of the total number of the country’s life science companies, according to the Israel Life Science Industry trade association, are now classified as medical device companies.

Yet, at a scientific or industrial level, sometimes the distinction between biotech and medical device is blurry. Often, it’s just a matter of how the FDA categorizes a product.

A good example is CollPlant, a developer of recombinant collagen products, and the innovator of a platform technology that is in many ways more sophisticated than those used in the development of many drugs. Because collagen is a structural protein without biological activity, the FDA recognizes collagen as a medical device.

CollPlant’s platform technology, however, involves the use of a very advanced type of genetic engineering: the human collagen is produced in tobacco plants through a transgenic process involving the insertion of five different human genes.

The technology is believed to be the first protein product derived from such a large number of genes (EPO by comparison involves only a single gene) and earned its inventor, Professor Oded Shoseyov, a company co-founder and CSO, the prestigious Hebrew University of Jerusalem Kay Award for Innovation.

As CollPlant’s collagen is grown in and extracted from plants, it offers clear safety advantages over conventional collagen products that are either derived from animals or human cadavers. In addition, because CollPlant’s collagen remains human in content, it is believed to be more easily integrated into the body and less likely to be rejected, thereby speeding up the healing process when used as a wound dressing, bone void filler or for the repair of other tissues.

Even more promising are the advantages of CollPlant’s recombinant collagen’s improved biofunctionality and enhanced physical properties such as tensile strength and extensibility: these qualities are enabling the company’s R&D team to design novel products not possible to be manufactured from animal-derived collagen.

With this goal in mind, CollPlant is co-developing orthopedics products with Pfizer as well as cardio products with Edwards Lifesciences. The company expects to find large untapped markets in Japan and China where consumers are reluctant to use animal-derived collagen products.

Financially, the company has received investments from leading life science VC funds and is now publicly traded on the Tel Aviv Stock Exchange.

The poor cousin has come of age.

Bernard Dichek