[Via Xconomy ]
Yesterday, we provided a rundown of the six hallmarks of a successful biotech company, according to Christopher Henney, the biotech pioneer who co-founded three of Seattle’s top biotechs—Immunex, Icos, and Dendreon. He made his remarks to an audience of about 100 investing professionals at the CFA Society meeting on Oct. 8 in Seattle.
Today, we follow up with the five red flags Henney advised investors to watch for when they evaluate biotech investments. Here’s what he singled out as warning signs:
—Top management without a scientific background. It’s not impossible for a biotech to succeed with a non-scientist at the helm, Henney said, but a smart investor must ask this non-scientific manager where the science comes from at the company. “The good answer would be, ‘It comes from my team of wonderful scientists who I recruited.’” A bad answer would be something like, “It comes from my scientific advisory board, which has two Nobel Laureates.” Henney added, “If you need to make an appointment to meet the guy who’s bringing you your science, then you don’t have much of a business.”
Henney wanted to make sure he wasn’t making a broadside attack against all non-scientific managers. One of his favorite biotech CEOs isn’t a scientist, but he adds, “You wouldn’t know it from talking to him.”
—No worries. An investor should ask what the management loses sleep over. “If they say, ‘I sleep like a baby,’ that’s a big red flag,” Henney said. All companies have their problems, and top management had better know them inside out.
—Hard-to-understand science. Ask the management to explain the science of their product in detail. “If they say something like the science is hard to explain, they can’t really explain it to you, that’s a big red flag.”
—Geographic remoteness. This provides some insight into Henney’s thinking on why two of the companies for whom he serves as chairman—Oncothyreon and AVI Biopharma—recently moved their headquarters from Edmonton, Canada, and Portland, OR, respectively, to the Seattle area. “You need a quorum of players,” Henney said. “You need access to talent, you need to be able to recruit people.” Seattle has more talent than the other places, and an ability to recruit more people, he said.
—Too many VCs. The board should be loaded with people that have experience running companies. “You shouldn’t have a board full of venture capitalists,” Henney said.
—Family members in key roles. “These aren’t family businesses. If you see a board dominated by siblings, or a couple of siblings in key management roles, I’d run, not walk.”
I have always had a soft spot in my heart for Chris Henney. Those of us at Immunex in the early days all have our hilarious Chris stories, often involving his confusion with our very weird phone system.
But when I first started at Immunex, it took a month to get our house closed. Because of the situation, I ended up staying in a fairly cheap hotel out in Issaquah (perhaps 15 miles away from downtown Seattle). This was an unexpected expense of moving and caused a little bit of hardship paying for before my first paychecks arrived.
So I talked with Chris and he got Immunex to pay for some of the cost as part of my moving expenses. It told me a lot about the culture at the company when a newly hired scientist could walk up to one of the founders and ask for money. And get it.
Most of his red flags deal with the inability to communicate the scientific reasons for the existence of the company. No science in the management’s background, no worries and nonsensical science all indicate a fatal lack of understanding.
If you do not understand the fundamental science in a deep way, you can not tell the story. An inability to tell the story in a way that resonates will make it impossible to shake some money loose.
This is not about hype, which is a snake-oil salesman’s approach to selling anything. In fact, hype indicates a total misunderstanding of the science because most biotechs are founded more on hope and strong egos than anything really solid. That is, often the company must begin development of the science for commercialization before the complete knowledge of the system is extant.
This means that the path to a commercial product will be littered with false starts and the company’s management had better understand the science enough to surmount these roadblocks.
I’m now going to tell a story. Perhaps some of the details may be a little off but it does illustrate why having a deep understanding of the science can be so important.
For example, Immunex, in large part, was started based on the hope that a molecule called interleukin-2 would be very important for medical protocols. See, IL-2 was also known as T-cell Growth factor and had been shown by some of Henney and Gillis’ work, to be absolutely required for the growth of T-cells in culture.
Now, T-cells are incredibly important in fighting off a whole slew of diseases, including cancer. So being able to manipulate T-cell levels seems like it would be a very good thing to be able to do. So, let’s clone IL-2 and produce it in large amounts. The we can sell it a s a therapeutic for a wide range of illnesses.
Turns out the IL-2 is not as useful as originally hoped. Not to say it does not have important uses, even commercial ones. But at the time, it seems like a critical molecule, one that would be core to our repertoire of tools.
Yet, when mice are bred which have no functional IL-2, they actually appear relatively normal. That is, the lack of any IL-2 is not fatal to the mice. There are some interesting immunological irregularities that have led to some interesting observations. But IL-2 is not absolutely required for a viable mouse. The mouse and its immune system find some other way to deal with T-cells.
Luckily for Immunex, our founders, and the scientists they recruited, had a deep understanding of the science and this allowed us to delve quite quickly into other aspects of the immune system as we worked on IL-2. For the same technologies that could clone IL-2 could be used to clone a wide range of immunoregulatory proteins.
By the time it could be shown that IL-2, while an important molecule, would not be the huge commercial product originally envisioned, we had a handful of other proteins cloned which presented even greater possible riches than IL-2. This deep understanding of the science eventually led to Enbrel.
Thus, a critical reason to have a deep understanding of the science is that no research venture, especially commercial ones, goes according to plan. But, if you understand the science, you can often be adaptable enough to find a successful solution.
Those that do not fundamentally understand the science will just be stuck when the inevitable roadblock appears. Then everyone, including the investors, are just stuck.