Wednesday, March 25, 2009 | The tanking economy and all its bad tidings have sped up a trend in the San Diego biotechnology industry toward the virtual company — an outfit that employs a few executives who oversee the outsourcing of the research and development of a drug or medical device.

With credit nearly impossible to get, and venture capital investment slowing to a trickle, contract research organizations, as they are called in the industry, are becoming bigger parts of business plans.

“This is the right environment today for the virtual company — a difficult lean environment,” said Joe Panetta, the CEO of Biocom, San Diego’s life sciences industry association, Wednesday after a panel discussion on the topic hosted by Biocom.

But what might be right for the moment might hurt the industry and the San Diego economy in the long run. The region’s world-famous biotech sector grew up around fully integrated companies that spent heavily on laboratories, manufacturing plants and the dozens, if not hundreds, of people needed to run them.

This model is hugely expensive, and makes the long and uncertain path of drug discovery an even harder sell to investors. But it has been in many respects the lifeblood of the local economy since the aerospace industry essentially picked up and left in the early 1990s. San Diego biotech has grown from a few start-ups in the 1980s to about 600 companies that pump as much as $9 billion annually into the local economy.

Even the executives who might profit from more outsourcing don’t want to see the integrated-company model fall by the wayside. “I hope there is a place for a blend of companies, otherwise it will be a bleak future,” said Stephen Kaldor, one of the Biocom panelists and CEO of Ambrx, a locally based biotech that focuses on drugs for cancer, diabetes and multiple sclerosis, among other diseases.

The bleak future Kaldor is worried about is one where San Diego’s biotech sector stops being the jobs and innovation driver that it has been over the past two decades.

Outsourcing has always been a big part of the biotech industry. Clinical trials, for example, have to be conducted by a third party. And when San Diego companies outsource, they often are sending work to other San Diego companies. Hundreds of companies that fall under the umbrella of biotech are considered service providers, meaning that they don’t produce a product, according to Biocom.

By using the virtual company model, entrepreneurs are attempting to avoid the so-called “valley of death,” the decades-long path from the discovery of a molecule that has the potential to be a drug to an actual drug. Historically, undertaking this walk meant building an expensive laboratory and hiring a large staff to run it.

But with a virtual company, investors can avoid these expenses — which can reach into the billions of dollars. 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.

But if the industry goes too far with outsourcing, Kaldor and other executives say it would not only hurt job creation, but could also stifle innovation. They say this because employees of contract research organizations only do the specific job they are paid to do, they don’t have a vested interest in the company’s success.

Jeffrey Stein, CEO of Trius Therapeutics, said the virtual model does not take into account that drug discovery is a dynamic, creative process, which is not necessarily amenable to the way contract research organizations work.

“When you work with a [contract research organization], you asked them what would you like to get done, and you would get precisely what you asked for,” Stein said. “The downside is the when you are dealing with external companies you don’t have good visibility into the organization and how they operate.”

And it might not even be the money-saver it’s made out to be — professional people still have to be paid to do the work. And people have to be paid to monitor the work of the contractors. “I’m not sure that a business is less capital intensive just because it is virtual,” said John Dobak, CEO of San Diego-based biotech Lithera.

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