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Thursday, March 27, 2003

By Steven N. Czetli

With more than $800 million being spent for every new drug brought to market -- and the process taking more than a decade to complete -- large pharmaceutical companies are increasingly turning to strategic alliances with smaller, more agile biotech companies to cut costs and shorten time to market. But who do these companies pick to align with -- what are their criteria?

That was the topic of last week's MIT Enterprise Forum that was timed to coincide with the Engineering Tissue Growth International Conference and Exposition. The panel consisted of Edward John Allera from Buchanan Ingersoll; Herbert Bresler from the nonprofit R&D think tank Battelle; Scott Bruder, worldwide vice president at DePuy (a Johnson & Johnson Co.); and Bill Tawill, senior research scientist at Baxter BioScience.

The panel moderator was Christina Gabriel, vice provost and chief technology officer at Carnegie Mellon University.

Alliances are much like a marriage, according to Allera. "You can't go in with preconceived notions, and you have to be flexible."

The reasons for entering an alliance vary, but such a partnership should benefit both parties equally. For a biotech company, that may mean being able to get a drug or idea to market. For the pharmaceutical company, the partnership may result in cash flow from a drug they didn't have in their pipeline.

Allera said some biotech companies enter alliances with unrealistic expectations of their technology.

"Does anybody remember the Betamax player, or how many people use an Apple computer?" Allera asked. "The better technology doesn't always win. You can't go into a partnership with preconceived notions of what you're worth and what you have."

Having unrealistic expectations or believing your own hype is seen as one of the major reasons partnerships can eventually fail, said Batelle's Bresler.

"I have also seen partnerships fail when there has been some kind of misrepresentation," Bresler said. "And usually it is not on purpose. The biotech company thinks their technology has broader uses than it really does."

Very few biotechs that have not already worked in an alliance have a working knowledge of the process, a handicap that extends from who to partner with to understanding the entire process. That means aspiring biotech companies have a learning curve to mount before they start.

"People need to understand the process," Bruder said. "Probably the best way to learn is looking at case studies that have been published, talking to people at universities or talking to venture capitalists. ... Learning what not to do is as important as learning what to do."

Biotech funding at bottom?

When it comes to raising money for almost any new technology, the market has been a hard sell and is short on signs of improving anytime soon. On the other hand, biotech investment isn't completely dead, according to Linda Powers, managing director of Bethesda, Md.-based Toucan Capital Corp., which continues to invest in tissue and cell technology-based companies.

Powers, who spoke at the Engineering Tissue Growth International Conference held in The Westin Convention Center, Pittsburgh hotel, Downtown, last week, said total VC funding in the sector had held steady over the past two years -- $2.9 billion in 2001 vs. $2.8 billion in 2002 -- indicating that this may be the nadir.

However, "Cell therapy and tissue companies peaked during the Internet bubble, and they have all followed the same downward trajectory ever since," Powers said.

Those tissue engineering companies able to raise funds will find their options limited. Backers are looking for more mature companies with markets of at least $1 billion.

"Companies seeing how tough it is to raise money are combining their A and B rounds and trying to raise substantially more in that first round," Powers said.

The losses experienced when the bubble burst in 2000 have left a lot of investors wary. Powers said the lack of exit strategies (IPO offerings or acquisitions) have left venture capitalists shunning early stage companies.

Despite the general gloom, some bright spots exist.

Because the markets have been so depressed, there is hope that they will eventually bounce back. Evidence of just such a deal was an announcement last week of a funding arrangement between Osiris and Boston Scientific.

"That announcement had an almost immediate ripple effect," Powers said, noting that it doesn't take much to create a stir.

"But this is just a fraction of the amount being invested in other sectors," Powers cautioned, adding that virtually all of the money went into more established technologies and not emerging or seed level companies.

Yet another ray of hope is government grants, particularly those awarded by the National Institutes of Health and the Small Business Innovation Research program.