Biotech after the bust

Five new Yale-affiliated biotech companies started up last year, but the industry sees problems ahead.

Rakefet Kenaan

After the U.S. and world economies faltered in the fall of 2008, it became clear that future plans for Yale’s various activities were going to change. The signs around the country and the world were not auspicious. On September 15, 2008, the New York financial services firm Lehman Brothers filed for Chapter 11 bankruptcy protection. The next day, the insurance giant American International Group (AIG) suffered a liquidity crisis after its credit rating was downgraded. AIG’s stock had already dropped 60 percent before the market’s opening that day. The nation’s GDP then fell at a pace not seen since the 1950s. The unemployment rate in the United States more than doubled, from 4.9 percent at the end of 2007 to 10.2 percent in October 2009. Outside Yale, layoffs and bankruptcies were taking place en masse. The ensuing $700 billion bailout package softened the blow but did not prevent belt tightening in boardrooms around the world and rising global unemployment.

Whatever immunity universities may have had to previous swings in financial markets, Yale couldn’t dodge the 2008 bullet. On December 16 Yale President Richard C. Levin gave faculty and staff the bad news: all departments and offices at the university must find ways to cut costs. By June 2009, Yale’s endowment had lost 29 percent of its value, from $22.9 billion to $16.3 billion. The air—off campus and on—was filled with uncertainty. But in the Temple Street office of Jon Soderstrom, Ph.D., it was business as usual.

The view from Temple Street

“In terms of new deals, we haven’t seen the downturn,” says Soderstrom, director of Yale’s Office of Cooperative Research (OCR), which helps Yale scientists found businesses based on promising discoveries. “Hardly a week goes by when we don’t get venture capitalists calling up to talk to us about what new things we have. … If you were to look at our performance last year, and you didn’t know anything about the economic downturn, you wouldn’t have guessed it.”

Last year, for example, saw five Yale startups. One of them, Kolltan Pharmaceuticals, launched by Joseph Schlessinger, Ph.D., chair and William H. Prusoff Professor of Pharmacology, working in partnership with OCR, raised more than $35 million despite lean times. “Five is actually above our average,” Soderstrom says. “We’re [usually] in the three-to-four range. In terms of financing, we didn’t see a significant downtick in any of our numbers—licenses, royalties, revenue-generating technology, startups.”

The number of new startups is not the only sign that New Haven biotech is on the rise. Office occupancy rates in New Haven are up, laboratory space is tight, and developers are racing to keep up, notes John Puziss, Ph.D., OCR’s director of technology licensing. “Hopefully, with the economic crisis sort of easing and more money being available for investing in technologies, we’ll see more startups coming out of Yale,” he said.

But the increase in the number of new deals, Soderstrom notes, is only one side of the coin. Companies that are already up and running have seen some problems. “Although the number of new deals was steady, we were all too aware of the struggles of many existing ventures to attract new capital or stretch what they had to bridge the downturn.” And forces around the country appear to be limiting the growth in biotech. According to the MoneyTree report from the accounting firm PricewaterhouseCoopers, only seven companies went public in the United States in January 2010 via initial public offerings (IPOs)—a big drop from the monthly average of 22.6 in 2007. In the United States, investment from venture capital dropped from $4.4 billion in 2008 to $3.5 billion in 2009. The number of biotech deals also fell, from 501 in 2008 to 406 in 2009. (By contrast, 2007 saw 494 deals and $5.3 billion in venture capital invested.)

“The state of biotech nationally, even internationally, is in a difficult time right now because venture capital dollars have dried up. [The economic downturn] makes everybody, on paper, feel poorer. It makes [venture capitalists] more risk-averse,” says Paul R. Pescatello, J.D., Ph.D., president and CEO of Connecticut United for Research Excellence (CURE), a nonprofit organization that supports bioscience in the state.

But Pescatello adds that other factors have taken a toll on investment in biotech. The Sarbanes-Oxley Act of 2002, enacted to combat corporate corruption, accounting fraud, and mismanagement by extending government oversight of public (though not of privately held) companies, makes it more expensive to go public—especially for small companies. It’s not always feasible, says Pescatello, “to go public and incur the annual ongoing costs, the accounting costs, the auditing costs, the disclosure costs. … You see fewer companies going public to avoid that kind of regulatory and administrative burden.”

The debate over health care reform has also caused tension over patent life: the generic drug industry and lawmakers like Rep. Henry A. Waxman, a California Democrat who chairs the House’s Energy and Commerce Committee, are calling for a five-year patent limit on biologics (medicinal products that are made from living organisms) instead of the 12 years allowed for pharmaceuticals. “If you only have five years to recoup your investment,” Pescatello says, “no one’s going to invest in biotech.”

Another poorly defined area in health care reform has been reimbursement. How would biologics, pharmaceuticals, and other drugs and devices be reimbursed under health care reform? “That’s a big deal,” Pescatello says, because it’s impossible to establish price points without knowing what the system will allow. “Investors hate uncertainty.”

William Wiesler, Ph.D., director of new ventures at OCR, agrees that uncertainty about pending legislation leads to caution among investors. It happened in 1993: “When everybody was worried that Hillary Clinton was going to nationalize medicine, all the pharma companies were down, and venture capitalists got a little sour on biotechs. But that didn’t last too long, and [investment] popped back up,” Wiesler says. “Some industries have a cyclicality that’s a little bit different than the rest of the market. And I am quite certain if the economy finally turns around and picks up, and unemployment drops ... and the NASDAQ picks up that we’ll have another banner year with the venture capitalists.”

Nurturing a young industry

Few people know New Haven biotech better than venture capitalist David Scheer, whose New Haven-based firm, Scheer & Company, has helped to launch more than 10 biotech companies. His latest partnership with Yale is Axerion Therapeutics, a company formed in 2009 in partnership with OCR and Yale neurobiologist Stephen M. Strittmatter, M.D., Ph.D. The company’s research efforts will focus on stimulation and regeneration of axons in the brain and central nervous system, with the hope of reversing damage caused by traumas like spinal cord injury and stroke.

But Scheer & Company does more than launch biotech companies. “We’ve helped them in a variety of ways—recruiting, fundraising, taking them through the usual rounds of private financing, IPOs, mergers and acquisitions transactions, business development, partnerships,” Scheer says. He has served on the boards and as chair of all the New Haven-based companies he’s helped to launch. “It used to be easier to raise money,” says Scheer. “The capital markets are tighter.” In the current economic climate, he says, venture capitalists need to support their existing portfolios. As a result less money is available for new investments in the life sciences. “Only the strongest companies are in a position these days to raise capital,” Scheer says.

A reputation in science

Just as Scheer nurtures his companies to success, Yale’s OCR has learned over the years to shepherd biotech firms from a notion in the lab to a full-fledged company with investors. OCR was created in 1982 after Congress enacted the Bayh-Dole Act of 1980, which allows universities to retain title to inventions resulting from federally supported research. The office got a boost in 1995 when the university tripled its budget and staff; hired a new director; and charged the office with founding and building local companies based on technology licensed from Yale. In the last 10 years, OCR has helped Yale scientists to found more than 40 companies that have in turn attracted more than $450 million in financing. The university earns between $10 and $20 million per year in royalties from the commercialization of licensed patents. (OCR has tracked patent applications since 1987. Since then, there have been 5,897 applications filed and 1,483 patents issued in 54 countries.) “We are actively pursuing a portfolio of 1,306 applications worldwide,” says Diane K. Harmon, OCR’s director of intellectual property administration.

To Soderstrom, Yale’s reputation and strength in the sciences is paramount. “Without quality science and technology,” he says, “you don’t have a whole lot to trade on. Yale is a 300-year-old institution, it’s considered to be one of the premier research institutions in the world, [and it] has a faculty that bespeaks that reputation.” Soderstrom cites the number of Yale faculty belonging to the National Academy of Sciences—59 as of this writing—as a testament to the medical school’s depth and excellence. “Particularly from the perspective of the medical school, the quality of the technology, the quality of the science that’s performed at the medical school, continues to attract attention from investors and companies,” he says. “And I think we’ve gained a pretty good reputation for identifying good ideas that people find worth investing in.”

Although the New Haven region—home to about 50 biotech companies—enjoys a collaborative spirit, Connecticut faces particular challenges. “We’re part of a growing community that sees a very strong need to help each other and build out the economy of the area by investing in biotech,” says Susan Froshauer, Ph.D., FW ’88, founding CEO and currently chief scientific officer of Rib-X Pharmaceuticals. The company aims to bring to market small-molecule antibiotics based on the work of 2009 Nobel laureate Thomas A. Steitz, Ph.D., Sterling Professor of Molecular Biophysics and Biochemistry and professor of chemistry; Peter B. Moore, Ph.D., Sterling Professor of Chemistry and professor of molecular biophysics and biochemistry; and William L. Jorgensen, Ph.D., Sterling Professor of Chemistry. “In environments such as San Diego or Boston, there’s a larger critical mass,” Froshauer says, “and so there’s more of a momentum that has been sustainable, even through hard times.”

Whether Connecticut has a pool of talent large enough to meet the local need is a sticking point. In Connecticut and at Yale, says Scheer, “there is absolutely no dearth of great technology. But one of the critical issues that we have found over the years is recruiting CEO talent. Some of the more business-oriented pharmaceutical executives tend to be in other places. They have their families, kids, et cetera, in places like Princeton or Boston or New Jersey or the Bay Area, and they just don’t want to move.”

But New Haven’s biotech economy is also a young one. “When you’re talking about size, we’re never going to be that [large],” says Soderstrom, referring to more established biotech centers around the country. “What we can do is be really good at what we have.” Soderstrom says the local market has begun to sustain itself, so OCR no longer needs to be chiefly responsible for all new ventures. “There was a time when we were putting together the PowerPoint presentations, making the calls to the investors, doing the pitch with investors, helping to recruit the talent, actually negotiating leases on space. We don’t have to do a lot of that stuff anymore, because there’s already talent stepping in and doing those kinds of things.” YM

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  • Yale’s Office of Cooperative Research (OCR)