No matter where you are in creating or developing a biotechnology company,you will undoubtedly have immediate and long–term goals by which tomeasure your company's success. As your company grows, these goals will vary:Whether it is securing venture capital funding, entering into a collaborationwith a partner, floating a successful initial public offering or secondaryissue, having a product candidate complete a successful clinical trial, oractually launching a product on the market, the scale by which you measureyour company will change.

One measure of success that is often overlooked by beginning biotechnologycompanies is the purchase of large blocks of stock by an institutional investmentfund. These funds most often use pension funds, or in some cases limited partnershipmoney, to invest in publicly traded and emerging biotechnology companies1.

Beyond the fact that they can often deliver sums in excess of $20 millioninto a biotechnology company's bank account, many times they are viewed bythe financial community as validators of a company's product or platform technology.This can help attract other investors in your company at transition pointswhen funding may be critical—for example, moving into phase III clinicaltrials, or launching a new product. For these reasons, it is important fromthe outset that you launch your biotechnology company with the full realizationof what "success" means from the institutional investor's point of view asa way of strategizing your business development.

The competitive landscape

In trying to pick which biotechnology companies to invest in, how doesan institutional investor measure your potential for success? To begin with,the principal gatekeeper behind our investment decisions is "our businessmodel" based on the pharmaceutical industry. We measure every biotechnologycompany as a business participating in drug development and want to see the25% operating margin achieved by the pharmaceutical industry.

To pick out companies with this potential, we survey the competitive environment.On the basis of pharmaceutical data, about one in five of the products inclinical trials could actually reach the market. However, with biotechnologycompanies, there are two other biotechnology–specific risk factors thatmust be considered in analyzing the potential success rate.

The first is the industry's focus on therapeutic voids as initial targets.These largely multifactorial diseases such as amyotrophic lateral sclerosis(ALS), adult respiratory distress syndrome (ARDS), septic shock, wound healing,and psoriasis have no existing products for a reason: They are extremely difficultto treat. This means that it will be extremely costly and difficult to generateconvincing clinical data that will meet with the US Food and Drug Administration's(Rockville, MD) approval.

Beyond that, the "one product nature" of the majority of biotechnologycompanies means that the company's chances are literally hit or miss: Theywill either prosper or fail based on the results of their clinical trials.For these reasons, the biotechnology success rate is approximately one ineight or one in nine. Notwithstanding this relatively low success factor,for the investor there is a substantial opportunity for superior capital appreciationover time.

Success will be determined largely by the ability to allocate and controlresearch and development risk. Our formula for success is that we invest 65–75%of the fund's assets in companies in late–stage product development:Either their product is in phase III, a new drug application has been filedwith the FDA, or the company has recently brought a product to market. Another10–25% of the fund is invested in companies with products in phase I/IIclinical trials that look promising based on preclinical data that validatesthe basic biology. The remaining 10–15% of the fund is invested in "enablingtechnology" companies—basic–research companies whose platformtechnology promises to transform some aspect of drug discovery and/or development.These companies must be able to generate repeat revenues and have "true" economiesof scale.

Judging product risk

Since we invest nearly 85% of the fund's assets in product companies, ifyou are a biotechnology company trying to make decisions about which therapeuticareas to enter, it is important that you understand how we rate a product'stherapeutic potential. Unlike the initial focus of the biotechnology industry,we tend to avoid pioneering therapeutics in new disease areas It was a consciousdecision to avoid septic shock and ARDS, as these diseases were multifactorialand had uncertain endpoints—in the case of the FDA, ARDS, for example,it was initially mortality, then reduction in ventilator days, and then backagain to mortality as the endpoint. In short, it is too easy for the FDA tomove the goal posts to justify the risk in these disease areas.

Rather, we tend to fund "known diseases" that have clearly defined regulatorypathways but for which current treatments are inadequate. For example, newproduct candidates that treat cancer, diabetes, Parkinson's disease, or strokeare actively sought out if they are not merely "me–too" products inan already overcrowded niche. To differentiate themselves they must be innovative,have clear therapeutic superiority, and demonstrate cost effectiveness.

Our second criteria is the clinical viability of the drug candidate. Perhapsthe most frequently broken rule of drug development in biotechnology companiesis that of the necessity of having a clear understanding of "the label" soughtfor a product at the earliest possible point in the development process.

Without this information, it is difficult, if not impossible, to designtrials that answer the efficacy and statistical questions to the satisfactionof the FDA. Moreover, without this information, a realistic patient populationcannot be identified, making competitive product positioning impossible. Thisobscures any realistic appreciation of a product's potential, confuses managementabout how to allocate scarce resources for product development, and scaresoff a potential corporate partner.

What about products in the phase I/II category for which the clinical datais not yet in? The first step here is to validate the science. For example,the biological need for the GPIIb/IIIa inhibitors to bind greater than 80%of platelets to achieve a sufficient blockade and hence efficacy has beenestablished by Centocor (Malvern, PA), COR Therapeutics (S. San Francisco,CA), and possibly Merck (Whitehouse Station, NJ) through their clinical programs.A second example involves the need for a drug candidate to work in animalmodels—whether or not the specific pathway has been validated. GuilfordPharmaceutical's (Baltimore, MD) positive primate data establishing the regenerativeproperties of their lead neuroimmunophilins in Parkinson's disease is a classicexample.

In this area of clinical development, Aesop's fable of "the tortoise andthe hare" is an apt example of strategies that produce success and those thatend in failure. The hare's excessive confidence led him down a path that involveda "quick fix." Biotechnology examples are numerous. The simple lesson fromall this is to know that your business is drug development and that the methodicalapproach of putting one foot in front of the other carries the day.

Tool technologies

Finally, what about the tool technologies? Although they represent a minorpart of our portfolios, their significant initial successes in the marketrecommend them for serious consideration. Tool technologies must be judgedinitially on their ability to meet their customer's needs. For biotechnology,the customer is the pharmaceutical industry, and to the degree that the toolis able to industrialize basic research, it is valuable. Genomics, combinatorialchemistry, high–throughput screening, and proteomics are all examplesof tools that the pharmaceutical customer perceives to be vital to their continuedgrowth.

Tool companies, in our opinion, are differentiated by their managementteams. One values the management in its ability to close deals on highly favorableterms for itself with its customers. The basic strategy to accomplish thisis to create "repeat–revenue" sales. In this regard, the managementsof both Incyte (Palo Alto, CA) and Millennium (Cambridge, MA) deserve highmarks. Initially, most observers scoffed at the concept that a "Microsoft"for the pharmaceutical industry could be created. Incyte's "database model"for selling information tools to pharmaceutical companies not only provedthat this is a possibility but soon became an industry–wide businessmodel mantra.

A key element to Incyte's continued success in its $160 million plus alreadyinvested in technologies that will maintain its leadership in this area. Theoutstanding question remains whether investors1 needs for earningsgrowth will detract from Incyte's lead position with this scale of R&Dinvestment.

Millennium's management has taken a different tack by developing a leveragedbusiness model to maximize cash flow and near–term revenues while retainingsignificant downstream rights. The company has taken its core gene–discoveryplatform and repackaged it for various consumers. The small molecule platformbelongs to Millennium, which is funded by major pharmaceutical partners. MillenniumBioTherapeutics, funded by Eli Lilly (Indianapolis, IN), searches for proteinand peptide drugs; Millennium Plant Agriculture, funded by Monsanto (St. Louis,MO) applies this technology to agricultural biotechnology.

From an investors standpoint, the jury is still out on whether this businessstrategy will deliver long–term profits. I believe there will be many"hares" strategies built on corporate partnerships that are short–termband–aids, as has been demonstrated by some of the combinatorial chemistrycompanies. Success will equate with becoming an integral part of the discoveryengine of the pharmaceutical company and taking the tortoise–like roleof slowly but surely adding value.

Separating winners from losers

The three basic resources any company has to add value are research, manufacturing,and marketing. For most biotechnology companies, research is the only viablefocus because they do not have sufficient cash to initiate manufacturingand marketing. Amgen (Thousand Oaks, CA) stands out as the exception to therule, as it was able to create two back–to–back blockbuster drugsand thus fully exploit all three revenue resources. All the other major biotechnologycompanies have required the outsourcing of at least one of these variables.For example, Chiron (Emeryville, CA) and Genentech (S. San Francisco, CA)have major pharmaceutical partners supporting their R&D effort, Genzyme(Cambridge, MA) has created multiple spinoffs and relies on Wall Street tofund the R&D of each of these, Biogen (Cambridge, MA) and Centocor bothout–licensed their original technologies in order to use the royaltystream to fund their internal research.

Of these models for funding research, the outlicensing of the first producthas become the most popular. A word of warning is necessary here. Many timesmanagement tries to convince itself that because there is a lower risk intaking this route, a lower operating return would suffice as well. In my opinion,royalties or operating profits in the low to mid teens are insufficient forlong–term survival and merely represent short–term ways to paythe near–term bills. Given the popularity of this model, a valid questionis, "What is the alternative?"

This is where management must identify their company's "differentiatedvalue–added skills" and find the means to raise sufficient funds tomaximize the successful commercialization of these resources. Alkermes (Cambridge,MA) is one example of a company that chose to mortgage its firstborn, butthen went on to find a way to generate the profitability it needs for long–termsurvival.

After deciding to mortgage their first product, RMP–7, managementidentified a second auxiliary technology, ProLease, that was part of theirinitial R&D effort. Their strategy was to set up manufacturing for thistechnology and sell it at an appropriate margin to other drug developers.Alkermes' worldwide agreement to manufacture human growth hormone in a ProLeaseformulation for Genentech demonstrates the first fruits of this decision.Most importantly, this strategy has paid off by clearing the hurdle for profitabilityby which we judge all biotechnology investments.


In its recent history, biotechnology companies have been a bit short–sightedin calculating their definition of success. The low–double–digit,R&D funding milestone deal may pay the bills in the short term, but doesnot allow for reinvesting in R&D. The rush to phase III to create shareholdervalue is akin to a "teeter–totter," not success.

For the industry as a whole, failure to move beyond the IPO and createreal value through products that impact healthcare can only result in thedrying up of the funding well. Investors need sustainable, rapid profit growth.As you build your biotechnology company, keeping your eye on that goal isperhaps the best way to assure its "success."

1The Weiss Peck & Greer Life Science Funds were establishedin 1992. They primarily invest in publicly traded biotechnology companies.In essence, the Life Science Funds are a business whose management capitalizeson their value added skills: clinical development and product commercialization.