The Morning Report
Get the news and information you need to take on the day.
Sunday, Jan. 25, 2009 | If there was any doubt before the great economic meltdown of 2008, there isn’t now: the long-ball era in biotech is over. And emerging in its place is a more efficient — and less dramatic — way of funding new drug discoveries.
While this may be good news to deep-pocketed investors who have lost big betting on biotech over the years, it remains to be seen whether the new model bodes well for the region’s economy.
San Diego’s biotech industry was built on the idea of the blockbuster, or so-called homerun drug. For decades, venture capitalists loaded with billions of dollars chased revolutionary discoveries coming out of laboratories at the University of California, San Diego and the Scripps and Salk institutes.
A company would be formed, and its entire fate would be hitched to the success of one innovation. Facilities would be built, and scores of people hired. Hundreds of millions, if not billions, of dollars would be raised and spent. After a decade or more, the drug resulting from the discovery might clear all the fences put up by the U.S. Food and Drug Administration, and earn investors 10 times their original investment. More often, it wouldn’t.
“You had to hit it out of the park first time at bat, over the fence, score the runs,” said Duane Roth, chief executive of Connect, the local trade association for high-tech and biotech companies of the old model. “If you missed it, it would be lethal.”
In the 1980s and 1990s, there was so much money and so much hope that the inefficiencies could be tolerated. But the flow of money slowed considerably after the 2000 stock market crash, and pretty much dried up altogether last year. The result: a reinvention of the funding model, a new paradigm that relies heavily on outsourcing and spreads the risk of a drug failing among more players.
It is replacing a model that was an inefficient way to invest money, but a good way to ensure innovation and grow the region’s economy. Over 30 years, the local industry grew to 700 companies, 44,000 workers and a $9 billion annual impact on the economy, according to the San Diego Association of Governments estimates.
The success stories include Amylin Pharmaceuticals, which grew to be a billion-dollar company with hundreds of employees in part because it developed a successful diabetes drug from the saliva of a Gila monster. Failures include Favrille, Inc., a company that hired many and built a large manufacturing facility based on hopes for a cancer drug. The drug turned out not to be successful, and the company last year had to lay off 132 of its 144 employees.
In today’s economy, no one has the money, or the appetite for risk, to take a shot at being the next Amylin.
“It is much more difficult for the scientist that has a breakthrough technology to get funded,” said Ivor Royston, the scientist/entrepreneur who started Hybritech, San Diego’s first biotech in 1978, and is now the managing member of the venture capital firm Forward Ventures. “I see a lot of really strong early opportunities not getting funded at all. It is a real crisis.”
Royston and other industry watchers are expecting 2009 to be one of the most challenging years for early-stage funding in the industry’s history. The so-called “valley of death” — the hugely expensive and usually decades-long clinical trials process following a drug discovery — has become too perilous to go alone. And there is widespread agreement that the traditional funding model will not come back, even when the economy eventually emerges from its current wreckage.
“The industry has to reinvent itself,” said Ian Wisenberg, a San Diego-based consultant for biotech companies. “The days of pumping gobs of money into biotechs are gone.”
A big reason those days are gone is outsourcing. It used to be that getting a drug through the valley of death required major upfront investment in research facilities and staff. But over the past decade, an industry has been formed around contract research organizations, companies that do nothing but clinical testing.
So instead of having to sink billions into people and bricks and mortar, early stage work on a discovery can begin with a small staff and 1,000 square feet in an office park. And if the potential drug looks promising after early-stage testing, then the company can enter into a series of licensing agreements with a large pharmaceutical company for the rights to develop and distribute the drug. And if the drug fails, there is not an expensive facility to shutter and a large staff to layoff.
“You have the founder and a CEO who knows the business, that could be it,” said Wisenberg of these so-called virtual companies. “Everything else is contracted out. There is one company I work with that has three employees and 12 consultants.”
But, in minimizing its risk in the early stages, the company is reducing its ultimate reward. A best case scenario coming out of a licensing agreement will net in the hundreds of millions of dollars, not the billions that the company could reap if it shouldered all the initial risk. But a couple hundred million looks good these days.
Under such a scenario, the virtual companies can be working on 10 or 20 discoveries at once. It is, in baseball terms, small ball — scoring with a flurry of singles and doubles. “This is the new biotech,” Roth said. “Not trying to hit homeruns, just trying to bump it on down the road, move the base runner.”
One of these tiny companies is San Diego-based Lithera, which is developing a fat-reducing drug. “The mantra is ‘get to no quickly,’” said CEO John Dobak. “You would rather fail fast than drag things out. And that mantra is going to become even more powerful, given the economic environment.”
While this is a much more efficient model for investors, it might not be as good for the local labor force as the outgoing model. A lot of people — researchers, lab technicians, human resource professionals — earn paychecks during the journey through the valley of death. And it is safe to assume that most of the outsourcing will go to China and other places with lower labor costs.
Wisenberg, and his business partner, Greg Scott, acknowledge that the local biotech job market might be in for a rough ride. “I would say that certainly in the short-term there will be a net job loss, and it will take a number of years to recover from that,” Scott said.
Roth said that won’t necessarily be the case. Undoubtedly, biotech companies with hundreds of employees will become scarcer under this new paradigm. But, he said, San Diego will only grow as a hub for drug discovery. And jobs will be created as these companies hustle to license discoveries made by talent at UCSD and the other institutions.
“You can drive up and down street (around University City) and see how many signs have the Scripps research logo, or the Salk or the UCSD,” Roth said. “Look at the research labs that have blown up because we are winning so many more grants. That is where our employment will come from.”