Seeding Early-Stage Research

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Denise Myshko

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Future success in the pharmaceutical industry will hinge on the ability of companies to deliver novel products that meet patient needs. To do that, pharma companies are teaming up with biotech companies, launching their own biotech divisions, investing in genetics, and acquiring other companies, all in an attempt to leverage innovation. Now, a few companies are trying one more, albeit still uncommon, way to fill their pipelines: they are launching their own business incubators as a way to fund early discovery research. Certainly, business incubation isn’t a new concept. Business incubators, acceleration programs, and economic development programs have existed for years. States and regional organizations established research parks and labs and have provided grants and operational support services to startup companies as a way to foster business development and job growth in their regions. Universities and academic institutions have also sponsored such programs. Corporate involvement, however, adds a whole new dimension to the incubator concept with different objectives. So far, a couple of biopharmaceutical companies have implement ed such initiatives. The goals of two such companies, Pfizer and Biogen Idec, are to feed their pipelines and access new technologies. “From Biogen Idec’s perspective, it’s all about helping to keep the pipeline filled,” says Rainer Fuchs, Ph.D., VP of Biogen Idec and executive director of Biogen Idec Innovation Incubator (BI3). “It’s not a financial incentive. We don’t expect to make money from our ini tial investment into these companies. The measure of success is when these companies can deliver products that feed the Biogen Idec pipeline. We have the option to acquire the com pany upon successful completion of the program and that means that it will have input to our discovery pipeline.” BI3 is designed to put scientific founders in the best position to successfully demonstrate the therapeutic potential of a drug candidate and realize significant economic benefits with in timelines as short as two to three years. THE NEED FOR CORPORATE INCUBATION Pharmaceutical research and development productivity in the United States is in a state of decline. According to the Tufts Center for the Study of Drug Development (CSDD), although U.S. approvals of new molecular entities increased 29% from 2001 to 2004, large pharma’s share of these products dropped by more than half — from 67% of total approvals to 29%. BY DENISE MYSHKO Seeding EarlyStage RESEARCH Business incubators have been around for some time as a way to provide funding and business expertise to startup biotech companies.Now, large biopharmaceutical companies are getting in on the act as a way to fill their pipelines. Source:National Business Incubation Association, Athens,Ohio. For more information, visit nbia.org. NORTH AMERICAN BUSINESS INCUBATORS BY PROGRAM 2006 Mixed use Technology Manufacturing Service Other 64% 38% 1% 3% 4% F PV0508 Issue FINAL2 4/23/08 10:36 AM Page 20 21 PharmaVOICE M a y 20 08 BUSINESS incubators Tufts researchers found that the number of new drugs entering clinical testing from the top 10 firms increased by 52% in the first part of this decade. New product development at small and midtier pharma and biotechnolo gy companies is increasingly filling the prod uct gap that large pharmaceutical firms have been experiencing. America’s pharmaceutical and biotechnolo gy research companies invested a record $58.8 billion last year in the research and develop ment of new lifechanging medicines and vac cines, an increase of almost $3 billion from 2006, according to analyses by the Pharma ceutical Research and Manufacturers of Amer ica (PhRMA) and Burrill & Company. PhRMAmember companies alone spent an estimated $44.5 billion on pharmaceutical R&D last year, up from $43.4 billion in 2006, according to the PhRMA survey. The Burrill & Company analysis shows that nonPhRMA pharmaceutical research companies in the United States spent an estimated $14.3 billion on R&D last year, compared with $12.7 bil lion in 2006. Sometimes funding through an incubator is the only way to move a technology or product forward, says Susan Shows, VP of Georgia Research Alliance (GRA). “We come in when the discovery is too mature for the federal agen cies to fund, but not mature enough to gain interest from investors,” she says. “True venture capital and even institutional investors are looking at later and later stage companies. In early stages, it’s grueling for companies to get funding.” “We fill the gaps of early stage funding and then the market takes over,” says Steve Clark, VP of business incuba tion services at TechColum bus, an incubator in Colum bus, Ohio. “Either they find a strategic partner or more sophisticated dollars. To us, a success is attracting customers, new smart investments, or a new strategic partner. We are not the end all to many of the bioscience companies. Ulti mately, their success will most likely be through license agreements with bigger play ers that have salesforces to distribute their products.” THE BENEFITS OF INCUBATION Business incubation is a support process that provides entrepreneurs with services through its network of contacts. Incubators vary in the way they deliver their services, in their organizational structure, and in the types of clients they serve. The incubators are not just research parks, which often promote community economic development and technology transfer. Incuba tors provide grants and loans, as well as con sultation around business operations, human resources, other funding sources, and offer assistance with equipment. As of October 2006, there were more than 1,400 incubators in North America, com pared with only 12 in 1980, according to the National Business Incubation Association (NBIA). Of those, 1,115 were in the United States, 191 were in Mexico, and 120 were in Canada. NBIA estimates that there are about 5,000 business incubators worldwide. Most North American business incubators (about 94%) are nonprofit organizations focused on economic development. The remaining North American incubators are forprofit entities that are usually set up to obtain returns on shareholders’ investments. Among all incubators, 54% are “mixeduse,” assisting a range of earlystage companies; 39% focus on technology businesses; 4% focus on service businesses, serve niche markets, or assist other types of businesses; and 3% serve manufac turing firms. Experts say one of the biggest benefits of funding through an incubator is the access to business expertise. “These startup companies have limited management,” says Barbara Schilberg, CEO and managing director of BioAdvance, The Biotechnology Greenhouse Corporation of Southeastern Pennsylvania. “They may have one or two people early on. Often, they don’t have research space or even an office. They don’t know which contract research groups to use. We help them get started and we help them find board members. We help them find employees. It’s not just about writing a check.” TechColumbus provides coaching and mentoring to help companies becomes sus tainable commercial entities. “We have a business consultant on staff who helps each company under stand its value proposition, its tar get market, its growth path, what resources it needs, and where it might find them,” Mr. Clark says. “He is consulting with all the com panies to streamline their commer cialization path. Many of these com panies have entrepreneurs who are very technically focused and who are BUSINESS INCUBATION is a support process that provides entrepreneurs with services through its network of contacts. Barbara Schilberg BIOADVANCE Hybrid incubators provide funding for earlystage companies so they CAN GET IT TO THE POINT WHERE AN INSTITUTIONAL INVESTOR WILL BE INTERESTED. WE’RE NOT EXPECTING TO MAKE MONEY FROM OUR INITIAL INVESTMENT INTO THESE COMPANIES. The measure of success is when these companies can deliver products that feed the Biogen Idec pipeline. Dr. Rainer Fuchs BIOGEN IDEC PV0508 Issue FINAL2 4/23/08 10:36 AM Page 21 22 M a y 20 08 PharmaVOICE BUSINESS incubators very good on the technical side but may need help when it comes to the business.” TechColumbus is home to more than 25 incubating companies, and in the last five years companies in the incubator have created more than 265 jobs, raised $53.4 million, and generated $87.4 million in revenue. TechColumbus evaluates about 400 opportunities a year and engages in about 20% of them. About 60% of the bioscience projects that are provided funds are in the device arena, between 20% and 30% involve diagnostics, and the rest focus on therapeu tics, Mr. Clark says. TechColumbus provides grants between $20,000 and $90,000 to produce a prototype and to conduct market studies. It also offers convertible notes of between $200,000 and $500,000. The money, $22 million in total, that is used to support the programs comes from the state and private sources, Mr. Clark says. “We are just the operators of the funds,” he says. “This is a rigorous process, and we have a lot of people from the venture capital world who sit on our advisory boards to evaluate the various projects.” One of TechColumbus’ incubated compa nies is InVasc Therapeutics. InVasc has a vast pipeline and is currently focusing on two com pounds that treat hypertension, diabetes, and atherosclerosis. Company officials say they expect to file an IND in the next 15 months, thereby allowing clinical trials to begin. One advantage of being at an incubator is that InVasc Therapeutics is surrounded by other emerging companies, thereby facilitat ing an exchange of ideas, says Nadya Mer chant, Ph.D., chief commercialization officer, InVasc Therapeutics. “For InVasc scientists, there is the oppor tunity to be in a lively work environment with likeminded neighbors instead of in a solitary lab,” she says. “In my mind, this is an incredible morale booster for our employees. InVasc has received significant mentoring from the TechColumbus team. This includes services such as providing feedback on the business plan, and introductions to industry consultants and investor groups.” Dr. Merchant says InVasc has been fortu nate to have had some great networking opportunities, which are essential for the growth of any earlystage company. At the Georgia Research Alliance, Ms. Shows says her group works to team up the technology and product inventors with sea soned entrepreneurs. “We know enough entrepreneurs who know how to raise that first million dollars,” she says. “We’re starting to find ways to link those people to specific projects. We find peo ple who are just coming off a project or their company has just been acquired. We have even given entrepreneurs an office and administra tive support and have provided them with access to various projects to see if there is a fit.” GRA has provided research grants — as well as noncollateralized loans of up to $250,000 — for more than 100 projects and has helped to create 70 companies through the preincubator services part of the program, called VentureLab. Combined, those compa nies have 430 employees. Twentyseven of the companies have graduated from VentureLab, which means they are either in an incubator or, in some cases, have moved beyond incubator status: eight of them stand on their own. Combined, the 70 companies assisted by GRA have attracted $275 million in private equity investment. Ms. Shows says her group also works to team up technology and product inventors with seasoned entrepreneurs. “We find entrepreneurs who know how to raise that first milliondollar amount,” she says. “We’re starting to find ways to link those people to specific projects. We identify people who are just coming off another project or their company has just been acquired, we give them an office and administrative support — if needed — and provide them with access to various projects to see if there is a fit.” The alliance’s corporate operations are funded 100% by private resources; the group also receives $40 million from the state, which is used for grants, as well as for invest ments in infrastructure at the six universities that are part of the organizational network. One of GRA’s incubated companies is MedShape Solutions, which develops devices for use in minimally invasive surgery. The company has three products in the pipeline that company officials expect to be cleared late in 2009. “We’ve been lucky enough to receive a phaseone and two phasetwo grants from the GRA of $25,000 and $100,000,” says Kurt Jacobus, Ph.D., president and CEO of Med Shape Solutions. “That may not sound like a lot, but for us, especially in our early days, it equated to several months of burn rate — and it’s nondilutive financing. We also received a $100,000 match from GRA when we secured external funding. GRA also has helped us with equipment support grants.” Dr. Jacobus says GRA has provided intan gible benefits as well. “In our earliest days, GRA provided access to a seasoned earlystage company executive — what they call a `venture catalyst’ — to advise the company,” Dr. Jacobus says. “He provided excellent guidance on business planning, fund raising, general management of an earlystage BUSINESS INCUBATOR SPONSORS INCUBATOR SPONSORS — ORGANIZATIONS OR INDIVIDUALSWHO SUPPORT AN INCUBATION PROGRAM FINANCIALLY — MAY SERVE AS AN INCUBATOR’S PARENT ORHOSTORGANIZATION ORMAY SIMPLY MAKE FINANCIAL CONTRIBU TIONSTOTHE INCUBATOR. # About 31% of North American business incuba tors are sponsored by economic development organizations # 21% are sponsored by government entities # 20% are sponsored by academic institutions # 8% are sponsored by other types of organizations # 8% of business incubators are “hybrids”with more than one sponsor # 8% of incubators have no sponsor or host organi zation # 4% are sponsored by forprofit entities TYPES OFBUSINESS INCUBATORS INCUBATION PROGRAMSCOME IN MANY SHAPES AND SIZES AND SERVE AVARIETY OFCOMMUNI TIES ANDMARKETS: # MostNorthAmericanbusiness incubators (about 94%) are nonprofit organizations focused on eco nomic development # 54% are “mixeduse,” assisting a range of early stage companies # 39% focus on technology businesses # About 6% of North American incubators are for profit entities, usually set up to obtain returns on shareholders investments. # About4% focus on service businesses,serve niche markets,or assist other types of businesses # 3% serve manufacturing firms # About 53% of business incubators operate in urban areas,28% operate in rural areas,and about 19% operate in suburban areas Source:National Business Incubation Association, Athens,Ohio. For more information, visit nbia.org. INCUBATOR FAST FACTS PV0508 Issue FINAL2 4/23/08 10:36 AM Page 22

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