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Friday, August 22, 2008
Mass High Tech All-Stars Thought Leadership Roundtable
What’s a billion buy these days in biotech?
Flash Slideshow: Mass High Tech All-Stars Thought Leadership Roundtable
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Last month, Mass High Tech hosted our first-ever All Stars Thought Leadership Roundtable in our downtown offices. Moderated by Les Fagen, a partner at law firm Cooley Godward, the breakfast event focused on the state’s Life Sciences Initiative, and featured Massachusetts Life Sciences Center president and CEO Susan Windham-Bannister, Polaris Ventures partner Amir Nashat, Sirtris Pharmaceuticals CEO Christoph Westphal and University of Massachusetts president Jack Wilson. This is an edited excerpt from that morning’s conversation, which tackled the formidable question:
What does a billion dollars buy these days in biotechnology?
LESTER FAGEN: Today’s conversation is going to focus on the Mass. Life Sciences Center and the new legislation that was passed. Do we all think that Massachusetts is the leading cluster in the United States when it comes to life sciences?
JACK WILSON: As we’ve traveled around the world and done partnerships in China and in India, and so on, the perception is that this place is obviously one of the world’s great places in the life sciences. Looking at the concentration of our universities and the companies that have formed here, I think in terms of the density of the population involved in the biotech industry and the life sciences, this would have to be one of the great places. Obviously I’m biased, but I think it’s because of the great universities that we have here.
CHRISTOPH WESTPHAL: I’ll take a different tack than Jack, but I agree with him. I think that San Francisco’s probably the most successful place for biotechs — for the large biotechs. I think the New Jersey area’s probably the most successful for pharma, but I think what Boston has is that it is world-class in biotech. It’s got a lot of the most important pharma moving here and I’d also echo what Jack says: I think it is definitely the pre-eminent place in terms of MIT, Harvard and UMass, and the hospitals. I think most of the really exciting, new science ideas tend to come out of Boston and Massachusetts lately. It’s pretty interesting to watch.
SUSAN WINDHAM-BANNISTER: I would disagree. I think that one of the real strengths for us is innovation. In my travels, I agree with Chris, that Massachusetts is seen as a source of tremendous innovation.
FAGEN: And Amir, in terms of the companies that you see — Polaris is bicoastal?
AMIR NASHAT: We are bicoastal. But I think Christoph and Susan are right. For innovation, the biotech companies that Massachusetts is known for, you know, kind of broad concepts, broad biology — very innovative.
FAGEN: What do you see as the greatest sort of challenges at this point to maintain Massachusetts’ dominance in the life sciences?
WILSON: Our strengths go right to the reason we have to play some defense and why there are some challenges. Because of the fact that we are kind of a leader in market share in the research that comes here to the hospitals, to the universities — other places see that and they don’t think it’s fair. They would prefer that at their place. Getting people to move to Boston, because of the high cost of doing business, is very tough. We’re doing very well at the research level. Can we do manufacturing? And that comes to another reason for this bill — regional economic development. Although it may not be so easy to do manufacturing in the Boston/Cambridge area, why not Fall River?
WINDHAM-BANNISTER: I want to really pick up on Jack’s point. One of the things that the legislation is intended to do, in a very proactive way, is to say here’s an industry, and here’s a sector that’s very strong in Massachusetts, and let’s invest in it now; let’s support it now; let’s be proactive; let’s continue to make this a good environment for life sciences. That means thinking farther down the supply chain.
WESTPHAL: Jack and Susan seem to have a broader, more strategic perspective. I run 50-, 60-, 80-person companies. I look at Sirtris and there two interesting things to me. First of all, more than half the people are driving more than 35 miles a day each way because they can’t afford the housing close to Boston. But the second thing is we’ve always had about half of our employees in Shanghai, so that’s a pretty interesting statement about what’s happening. Maybe one of the models is going to be leveraging this fantastic research here and building great companies that do have some additional leverage outside of Massachusetts, or maybe it’s going to be figuring out a way to capture more of those jobs.
NASHAT: To me, in the short-term there are financial challenges and there’s a certain amount of uncertainty about regulatory issues. Over the short-term, my hope is that bills like the Life Sciences bill will help bridge capital crunches that we’re all going to have to work through. Long term, you look in California and they will explore putting companies in many different places. They’ll back CEOs who have never been CEOs before. We tend to be more conservative on the east coast, and we should always challenge ourselves to make a few mistakes.
WINDHAM-BANNISTER: May I ask, do you think that that’s the flip side of the coin, about our stellar university systems and our very academic and intellectual mind-set in Massachusetts — that we tend to be very conservative and less risk-takers?
NASHAT: I think on the university side it’s the exact opposite. I think the work that’s being done in the universities is far more innovative as it relates to university systems as a whole. And it’s deep too. It’s not just at MIT, Harvard. It’s at BU and Northeastern — they all feed off each other.
FAGEN: The “valley of death” is now becoming a bigger and bigger valley. How do people perceive that?
NASHAT: The perception is there. But we at Polaris have done a lot of preclinical investing, and actually that pace has gone up. As our funds have gotten bigger, the percent of each fund that we dedicate both in terms of the number of dollars and the number of investments, to seed-stage companies, primarily on the biotech and medical device side, but also on the IT side and on the clean tech side, is increasing. So we continue to actually, for good or for bad, fund into the “valley of death.”
WESTPHAL: The pessimistic answer is that it costs $1.2 billion to develop a drug, so that’s $1.2 billion of cash flow negativity before you make a drug. That’s a pretty bad proposition if I ask any of you to give me money to fund that — “Give me $1.2 billion and maybe, if I’m lucky, I’ll return some money at the end of the day.” And then the second thing is, look at the pharma industry. They’ve gone from PE multiples of, you know, 20, 25, 30 down to — I think Merck’s PE now is down to 9 or 9 1/2. It’s basically a low-growth industry because very few drugs are getting approved. I think the optimistic part is, I don’t think Amir or I have ever run into a great idea out of Harvard/MIT/UMass with a reasonable entrepreneur that hasn’t gotten funded. I actually don’t really think there’s a valley of death. I think folks are still investing in it and it’s just a little bit of calorie restriction for some of these early stage companies. They’re still doing well; they just have a little bit less money than they used to.
NASHAT: We have companies in our portfolio — and Christoph will remember some of these; where they’ve been on three months of cash for two years — that have the ability to find opportunity and keep turning over cards and, eventually, the moment comes.
WILSON: I think universities also have recognized the need to walk a little further into the valley of death, instead of just expecting that it’s a great idea and somehow it’s going to get funded.
FAGEN: Susan, give us a general outline on the legislation.
WINDHAM-BANNISTER: This is basically a 10-year, $1 billion investment — of that, about $500 million will be in capital funding, and just under $300 million is for targeted investments. ... About $250 million — $25 million a year — will go to a life sciences investment fund over which the Mass. Life Sciences Center has quite a bit of discretionary authority. We also are empowered each year to award $25 million in tax incentives to certified life sciences projects.
WESTPHAL: I’m sure you’re thinking a lot about trying to support the best entrepreneurs and the best companies and the best science versus a kind of adverse selection procedure?
WINDHAM-BANNISTER: I want very much to get out and really engage the investment community, because together with our board of directors and the scientific board, I would like to have a good strategy for selecting the companies, the investigators, the programs in which and whom we invest. That’s got to be a combination of criteria: It’s obviously got to be good science, but it also has to have good commercial potential.
NASHAT: I run a bunch of small companies and the SBIR grants ended up in a situation over the last few years where people believed that the only people who could get SBIR grants, when you look closely at the rules, were those companies who had not received venture funding, which is my example of an adverse selection. I’d rather put money, as a selection criteria, behind great venture-backed companies. ... If there’s a means in which the qualification for the grants and what really triggers the institute to grant these companies capital can be less structured so that lines of breakdown versus what it can do to a community, I think that can really help, because the more flexible it is, the more you’ll find that interesting companies that you hadn’t thought about suddenly apply for these things and create success. We also are looking at the world through a very simple lens, and it is possible that there are some ideas that venture capitalists wouldn’t support but that if we had, two, three years from now — a big idea. So one has to be a little bit careful about having too careful of a screening.
FAGEN: Okay, so let’s say I’m a company... when might I see dollars coming to actually help the company, and what’s the process to get to that point?
WINDHAM-BANNISTER: Our goal is to be a fully functioning entity as quickly as we can, but the challenge is that we’ve got to go about the business of organization-building and doing the business of being the center. I would like by September to have really settled on what our funding priorities will be, how we will really be using our tax credits (and) what the criteria are going to be.
FAGEN: To wrap up, give one recommendation of something that could produce the biggest bang for the buck through what is a tough period of time.
WESTPHAL: I’ll give Jack advice: Just make deals easier when you start companies. Don’t make us make us go through 12 months of negotiating.
WILSON: I’ve been on both sides, as you know. As an entrepreneur, I was a hundred times worse than the way you just said it. I was just adamant about negotiations, and now I find myself on the other side having to enforce all of the rules and polices that I railed against as an entrepreneur.
WINDHAM-BANNISTER: The first is, again, we just have to continue to promote strong collaboration among all parts of the super cluster, if you will excuse the term, so that we’re just getting the best leverage. And secondly, I know we value our global leadership in Massachusetts, but let’s make sure that we’re also thinking of ourselves as global partners. There’s a lot that’s going on that I think we should actively be a part of, in an open and welcoming way.
NASHAT: I do think this is a great opportunity — this life science initiative. I would just say flexibility and open-mindedness. I think the next couple of years will be a little bit tough. If we’re all optimistic and work hard at it and be flexible about the kinds of things we invest in and the kind of deals we give to small companies when we outlicense technology, we’re going to work our way through it and continue to promote a really wonderful unique area of partnership between academia and industry and entrepreneurs, which Massachusetts has become.
WILSON: And talent. Attract it, grow it, retain it. It’s really about talent, both for entrepreneurs, scientists, engineers, all the aspects of talent. It’s become a talent economy and the places where there’s talent — whether it’s Bangalore or Beijing or Shanghai or Boston — are the places where it happens.
ATTENDEE QUESTION: One thing that I hear about Massachusetts is that we’re not developing enough good CEOs to lead large technology companies.
NASHAT: Actually, that’s one of the things we do very well in Massachusetts. These incredibly talented individuals who have a lot of job security jump off and decide that that’s actually the starting point for changing the world. I think we just build slightly more platform-based visionary companies in Massachusetts because our academia feeds it. A lot of RNAi was started here, a lot of stem cells were. nano-tech. This is kind of the epicenter for a lot of that really far-out work, and these very talented individuals decide to try and industrialize things well ahead of their time.
WESTPHAL: It takes 20 years from the beginning of a (biotech) company to actually make it cash-flow positive, so I think one of the problems with biotech is there’s not a lot of people who have been successful and want to do it again. It’s just a tough thing in the biotech industry.
WILSON: We’re tougher on our CEOs, too, aren’t we? The reputation of many of my friends, some of whom have left for California, is that if you go out there and you can roll them big and it doesn’t work out, you’re still going to get a pat on the back. But here if you take a risk, it’s really hard to get back on the horse again. Is that true?
NASHAT: I think a little bit more than the West Coast. I think the West Coast folks just kind of go for it. So I do think that we’re a little bit more conservative, but I do think that the folks that sign up for our companies are incredibly talented and our hit rates are very high. WINDHAM-BANNISTER: I agree. I don’t think there’s necessarily a problem, but I will say we are finding that a number of the universities across the state are putting together multidisciplinary programs so individuals in the sciences are getting an MBA at the same time or getting other exposure. So to the extent that multidisciplinary training will enhance the ability of our young entrepreneurs to be even more successful, that’s great.
NASHAT: The other thing that’s helping is clean tech, partly because it is a new industry, kind of like biotech was two, three decades ago. So the profile of the ideal CEO of a new energy (company) doesn’t exist in many ways because that whole industry’s growing up. I think that a lot of investors, especially on the East Coast, are opening up their minds to what makes an ideal leader for one of these companies because that resume isn’t there right now. I think you are seeing some creative thinking on that side as to who the leadership is of these companies.
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