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Biotech firms go virtual

18 July 2010 No Comment

By Helen Kaiao Chang

See original story on SDNN

Wednesday, March 25, 2009

San Diego biotech companies are moving towards a “virtual” model as a way to compete in the current economic downturn.

“It’s the trend of today,” said Joe Panetta, chief executive officer of Biocom, a biotech industry association. “The virtual model is a model that fits well in today’s funding environment and today’s economy… a difficult, lean environment.”

Panetta spoke at the conclusion of a panel discussion on Wednesday, entitled, “Are Virtual Biotech Companies the Future of the Life Science Industry?” The event, held at the La Jolla Marriot hotel, was organized by Biocom.

The capital-intensive biotech industry has experienced a severe funding drop over the past year, as venture capitalists and private investors have pulled back.

The Obama administration has approved $10 billion in funds to the National Institutes of Health for scientific research. But San Diego’s biotech companies are still looking for new ways to stretch those funding dollars.

Biotech company leaders speaking on the panel said the trend towards virtual companies presented opportunities and challenges. Opportunities include more business focus, cost-effectiveness and investor appeal. Challenges include close management, intellectual ownership and long-term stability.

Throughout the discussion, “virtualization” was used interchangeably with the term “outsourcing.” But the general discussion centered on how biotech firms can use subcontractors and consultants, as a way to streamline efficiencies. This cuts the overall development costs, as a product moves from research to clinical trials to market.

Two key advantages of outsourcing are business focus and cost-effectiveness, said the panelists. Ambrx chief executive officer Steve Kaldor said that outsourcing allowed the company to focus on its “strategic advantage.” Ambrx is a biopharma company creating therapeutics for multiple sclerosis.

Ambrx keeps in-house its chief medical officer, regulatory expert and manufacturing experts. But Ambrx outsources parts of its chemical manufacturing, as a way to use capital effectively.

“We’ve been treading cautiously, in terms of putting steel in the ground, capital expenditures, until we have sufficient work in progress to warrant some internalization of that,” he said.

A chief ingredient of successful outsourcing is strong management, said Charles Theuer, CEO of Tracon Pharma, a developer of cancer medicines focused on clinical and regulatory processes. The company outsources “high ticket” data management systems and manufacturing, while obtaining licenses from academic labs.

“The key is having people that can manage the operations in-house and also manage the vendors really carefully,” Theuer said.

San Diego’s strong network of clinical and regulatory teams supports that model.

“You can have a small team that has access to almost the same resources as you had when you worked in big pharma,” Theuer said.

Using an outsourcing model also enhances shareholder value, said John Dobak, CEO of Lithera, which is developing products for tissue fat reduction.

“We have to think about what we’re building the company for, and we’re about producing shareholder value – whether that be for the employees, the non-employee shareholder in the company, or arguably the patient,” he said.

In order to prepare for various exit strategies, “I’m continually analyzing what I need to sell in those contexts,” he said. “We’re definitely selling the people and capabilities, as much as products in our pipeline.”

Outsourcing models appeal to venture capitalists, said Jeff Stein, CEO of Trius Therapeutics, a skin anti-infection developer.

“A lot of VCs are looking hard at the virtual model,” he said, noting that initial public offerings are no longer viable exits. “It’s very attractive to get an asset that’s a later stage, get a minimal team around it and advance it as far as possible.”

Challenges to outsourcing include management, intellectual ownership and long-term stability issues.
Lithera’s Dobak designates in-house managers to work with subcontracting groups.

“I never turn anything over to a consultant or contracting group and just let them run with it,” he said. “I think you’re risking too much to expect someone who’s not vested in taking a paycheck and having stock in the company and expect them to do the same quality of work as someone in the company.”

Having an experienced team is essential to selecting good subcontractors, said Tracon’s Theuer. They will know which subcontractors are reliable and trustworthy, thus avoiding useless results.

“You don’t want to go down a path where you lose two years and have nothing to show for it,” Theur said.

Air-tight agreements with subcontractors will help a contracting company keep its intellectual property , said Trius’ Stein. Ambrx also does studies the business models of potential subcontractors to be sure they do not turn into future competitors. Working with a subcontractor that’s also developing its own products can be a “double-edged sword,” said Kolder.

A subcontractor’s long-term stability is also important, said Kolder. “We definitely look to relationships we can build on, where there’s scalability, reproducability,” he said. “We can’t afford for them to go belly up.”

In San Diego, biotech companies span large, fully-integrated operations with as many as 10,000 employees to small companies comprising five employees, said Biocom’s Panetta.

“I think virtualization is just good practice. I don’t know why you even need the term,” Dobak said. “Maybe it’s pharma (pharmaceutical companies) just getting a little real about how they spend their money. ”

Follow Helen on Twitter @HelenChang.

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